Think of every user as having a maximum price that their willing to pay. This is not known to us, but we know there's a distribution. You may be willing to pay $10/mo for Google but your rich cousin would happily pay $100/mo.

The cost for producing the marginal digital media is roughly the same, regardless of willingness to pay.

So,how do we maximize revenue? Ideally we would charge everyone exactly what they are willing to pay. Except, that's often illegal (discriminatory pricing) and infeasible.

But, there's a very good proxy: ads! With ads, the proportion of revenue from a given user correlates with its willingness to pay, especially for entertainment. Why? Because willingness to pay correlates with purchasing power and so does online purchasing. So, if you can serve the right ads to the right eyes, you could approximate that optimal pricing strategy.

And that's where the bonus kicks in: the more users you have the better you get at serving ads. This means that users whose willingness to pay is negligible are actually still valuable to the service because they improve your ability to monetize the richer users!

Contrast this to setups where you have to pay directly: subscriptions by being flat end up being too expensive for a big chunk of potential users and too cheap for the rest, pay per use is too much friction and again ends up leaving money on the table.

Every business that can do effectively, will do them. It's just such an attractive model.

This is a good explanation of “price discovery” on the consumer side.

The added benefit is also that there is price discovery on the Advertiser side. A bulk of advertising is auction based, which allows the advertiser to express their willingness to pay for a given audience.

So in theory, both sides of the transaction can be optimally priced.

Rightly or wrongly, people (in general) have been conditioned to believe that digital information is free and thus will not actively pay for it. There are some notable subscription based consumer services (mostly entertainment based) that have convinced people to semi-actively pay for content but they are (in general) the exceptions. Even then, many (most) subscription services can't resist leaving money on the floor and will also ultimately run ads in addition to the subscription.

>people (in general) have been conditioned to believe that digital information is free and thus will not actively pay for it.

I think this dates back to when the internet was better to begin with, and people first had to be conditioned to pay monthly to an ISP and that was enough. Everything else on the internet was supposed to be there for no additional payments. With that foundation it was plain to see this was a medium where ads were not necessary, there were so few of them it was inconsequential by comparison, things worked great with faster page loads even on dial-up.

If I'm paying $100 a month already for internet services, the problem (if there is one) is one of distribution, not of payment.

How would have things been different if people never had this notion of free digital stuff? I can't help but think that the tech giants would have still found a way to mess that up.

I don't actually think it will change all that much. Ad-supported media existed long before the Internet became mainstream.

In the good old days when we paid for newspapers and newspaper deliveries, newspapers made money off of selling ad space and classified ads. The cost of buying that newspaper barely covered the cost of the paper used to print the newspaper.

The only real difference nowadays is the fact that we can offer content for free at all, because the distribution costs are close to $0.

To be honest, a big part of it is likely because every other publication also uses ads for monetisation, and users have been trained to expect content for free with ads.

So you then have an issue; if you charge for your work in some other way, and people can find roughly the same information elsewhere on an ad supported website...

Then most of them will go with the ad supported free option instead. Likely enough of them in fact that your work isn't sustainable.

It's the same issue as with mobile apps and games; because most of those are 'free' and supported by ads and microtransactions, consumers have come to expect all apps to be free and supported by ads and microtransactions. Anyone who tries to actually build a paying audience finds its not enough to make a difference, like Nintendo did with Super Mario Run.

To add to this, it's also likely because the level of competition is so high, and free options are so high quality. For 99% of topics you could originally cover in a paid for magazine or book, there are wikis, volunteer run websites and YouTube channels covering said topic. To justify a paid publication about a topic like this, you'd have to do better than them in a meaningful way, which is not exactly an easy task.

Ads are shitty now, but the idea that they're evil in principle is a bit extremist and misplaced.

The best concert I ever saw was one that I wouldn't have known about until I saw an ad for it. I've seen many good movies I wouldn't have been aware of if there weren't TV commercials for them. And if there's a new restaurant in town that's something I'd like to know because I may want to try it. I don't go out of my way to follow concert, movie, or restaurant news.

And I'm not likely to do so but if I was ever to open my own business, it would be nice if people could become aware of it so that I'd have any chance to survive against incumbents.

The internet has poisoned advertising with surveillance and tackiness and excess, but before ad tech I think we had it pretty good. You could mute TV commercials, there were fewer, longer breaks of several at once. Once there were DVRs, you could skip them. They weren't unskippable like streaming can now make them.

It is true, advertisements can be helpful, if done well.

If there is a concert, they can advertise them in the building with the concert (or on a sign outside it). If there is a movie, it can be advertised inside of the building with the movie (or outside of it). If there is a new restaurant, it will have a sign, and you can see it if you are over there. A new restaurant may also be visible on a map. Any of these things will also be visible in search systems.

In the case of movies, you might want to see a movie trailer, so showing them on TV is one way, but advertisements on displays within the movie theatre (or the same building as the movie theatre) can also do. However, some people will not want to see movie trailers for whatever reason, and would rather read reviews, or ask someone else they know who has seen it (or wait for them to tell you), or just go to see the movie if you like to see a movie (without considering trailers, reviews, recommendations, etc), etc; and movie trailers also can be deceptive, anyways.

For other things, advertisements on TV, etc also might show them.

There is also, consideration of advertising specifically of local businesses (and events); for some kind of things, such a thing is helpful. (For advertising TV shows, the physical location isn't as important, but advertising them on the same TV channel, may be helpful (although a TV guide would probably be more helpful than advertisements).)

However, none of this justifies interrupting the shows to display advertisements (they could be displayed between shows), making them unskippable, wasting your power to display them to you against your intention, making avertisements deceptive, displaying too many advertisements (especially those with bright light outside), wasting power and light and sound on advertisements (especially outside), trying to put advertisements everywhere, surveillance, dishonest business practices, etc.

The internet seems to largely followed other media. Newspaper, radio, and TV all have ads. Some things like newspapers and cable also require payment. The internet seems to follow most of these models in one area or another. You'll still have minor players producing stuff without sponsorship/ads, but it's rare (just like the other media).

Paper books don't usually have many ads.

eBooks on Kindle, though...

Paper books generally cost money. This would be akin to an online journal article purchase, or some sort of pay per download.

The point is that different forms of print media vary greatly in terms of advertising:

Magazines and newspapers - lots of ads.

Comic books - some ads. Graphic novels and manga - few if any ads.

Books and academic journals - usually few if any ads. (Magazine type journals do feature ads however.)

The engine behind the modern Western economy is consumerism, and ads are both the lubricant and effuse of that engine. They eventually permeate everything they can because they always bring more money on top of whatever other revenue is made.

Escaping ads means escaping consumerism. Individuals can step away from consumerism and those that do can avoid ads, but society as a whole is not going to give up on consumerism until some crisis makes it do so.

Ads are not going anywhere. If you're sick of them, your escape doesn't come by innovation or revolution -- it comes by logging off and focusing on people and nature and community instead of media and markets and goods.

It's not just consumerism. It's selfism, of which consumerism is a subspecies. As I wrote nine (9!) years ago on this site:

Advertising is our C8. It pollutes nearly every corner of the web with deception and manipulation. It is the cause of the cancer called click-bait. It is so profitable it has given rise to factories that pump out cheap junk "content", overwhelming anything of merit on the web[1][2]. Then, to extract even more from the devil in this Faustian bargain, we invade our very customer's privacy, selling our soul twice over.

Most of us avert our eyes from this moral abdication because it funds our high salaries and our get-rich-quick startup schemes[3]. Everyone seems happy with their "free" non-stick pans and waterproof boots, so why spoil the party?

    It is difficult to get a man to understand
    something when his salary depends upon his
    not understanding it.” 
    
    - Upton Sinclair

[1] Most people will miss this article about C8 because it doesn't stand a chance against all the ad-supported garbage. The Intercept doesn't do click-bait. Journalism, a cornerstone of democracy, is dying. This toxin analogy is sadly too accurate.

[2] https://news.ycombinator.com/item?id=8585237

[3] https://news.ycombinator.com/item?id=9961761

It's a longer comment, with a lot of replies.

Advertising is not the major form of revenue on every form of content. Not on TV-formats like Netflix, for example, even if it has started there as well.

Why is it so widespread? Because advertising is relatively simple to explain, to add to a website and to sell.

Also, try selling subscriptions to a news website 20 years ago…

Does it make sense to sell ads? Not everywhere. Not on Ebay, for example — they started some 20+ years ago, and it was dumb and painful to see.

I have no idea if Ebay still sell banner ads or not — I really could not use the web without Ublock Origin, sorry.

Do ads actually work? For Google and Facebook, who sell a huge percentage of online advertising, they sure do.

Other companies have had a much harder time — just look at the company formerly named Twitter.

Do they work for companies who buy ads? IMHO they do (sometimes) for startups or small firms that are testing out whatever it is they are trying to do or sell. They usually don’t for large companies, like giants selling mainstream products. These people should stick to teevee, but some of their marketing people want to try something new, or change jobs, or acquire experience in a new field (on company money) and so they unwisely waste tons of money.

If you disagree, please name a few major brands that were created thanks to Internet ads. No, Amazon, Google, Facebook, Netflix etc were not.

eBay is a poor example, they sell prominent placement in search results, just like Amazon. Since they both act as search engines for products, this means that you as the seller can buy influence on those results. They aren't banner ads, that idea for e-commerce marketplace sites is outdated.

Selling prominent placement makes suppliers fight each other for eyeballs and increases the revenue cut that goes to eBay/Amazon.

They deleted my account years ago for no reason (other than me not using it anymore) and I haven’t used Ebay in more than 10 years.

Good to know dumb banner ads are gone on Ebay.

Selling placement in search unfortunately seems to work well, I agree.

Marketing is just dominoes falling. The first domino is reach, then attention, then it hits interest, then research, then desire, then purchase, then onboarding, then retention, then advocacy. Fill in these blanks depending on your biz model.

Ads, sadly, do work. You might live your life never thinking about Brazil nuts. I hit you with an ad for DeezBrazilNuts™. Whether you wanted to store this information in your head rent free or not doesn’t matter. Right now you are indeed familiar with the DeezBrazilNuts brand. If I showed you 10 Brazil Nut brands on a sheet of paper, mine would stand out and be familiar.

Sadly, the ad worked. I don’t need you to go out and buy the nuts right away. But the marketing dominoes are now falling.

With this in mind, it’s all funnels and dominoes. Mass reach wins and gets the dominoes tipping. Media is the perfect way to get that first domino: mass reach. You have people sitting with attention clued in. You have their eyes and ears. It’s too perfect.

I would say the one remedy to this is a substack model. Subscriptions are the antidote. This is obviously already happening with Netflix, Max, and all the ad-free streaming services. Same with Spotify, etc. News is the last industry, and will occur with X, Substack, and the like.

I believe this is because of three underlying truths: 1. These businesses need a lot of money to keep running. 2. Most of their value comes from the volume of other people using the same platform. (They aren't useful if you are the only one using them). 3. The general public does not value their offerings enough to want to pay.

There are examples where products have tried to bypass one or more of these truths. But they didn't do so well.

Well… Netflix, The New York Times…

The New York Times makes most of its money from ads.

Netflix is a good contradiction that you have provided. I'm wondering how they were able to solve the volume issue without offering their service for free.

My current theory is that, since they transitioned from being a movie rental business: 1. they already had a lot of content for new customers to pay for. 2. they already had a paying audience that was big enough for creators to care about.

^ This might not be a reproducible scenario for most products and businesses.

Not sure the NY Times online operations make more money with ads vs subscriptions, and I’m pretty sure subscriptions are growing much faster.

Do you have data or do you know where to find data?

This source seems to capture the answer to our questions: https://www.visualcapitalist.com/cp/new-york-times-revenue-c...

Even though advertising revenue makes a significant chunk of their revenues, they are pushing for "digital subscription" more and more. Digital subscriptions seems to have become their main source of revenue now.

But that doesn't negate the fact that they had leveraged ads to get the significant audience that content creators would care about. And my point still holds in the case of NYT.

The case with OTT services, like Netflix, is different here. They either already had, or bought, a lot of content that they know is in demand from the box office history. They then focus on attracting audience to that content. And once they have the audience, they can then attract creators to create exclusive movies and shows for their platform.

Maybe a model like that could be applied at other places too (although, I am not able to imagine this in a social networking website).

Paying for something was hard when the internet got started, so things were free and paid for by the website's owner. Ads were a way to offset the cost a bit. People got used to everything on the internet being free, also when paying got a lot simpler. The ads stuck as well though, as paying for a website is still not zero friction.

People have tried to get Micro-transactions off the ground many times - and failed every time (so far) - because Visa/MasterCard aren't interested - and getting people to change payment provider to use your thing is an impossible barrier to entry.

So, no micro payments per page/episode/content chunk - that just leaves subscriptions. You pay a weekly/monthly/whatever fee for access to the thing. Getting people to subscribe to things is _also_ a huge barrier to entry. Getting people to subscribe to _lots_ of individual things is impossible (there's only so many subscriptions people are willing to have), so you get bundling & centralization - i.e. cable/netflix/patreon.

Or you run ads.

Yeah, micro transaction just doesn't sound sustainable. There's a cost associated for making these transactions (computing for gateway, bank servers and everything and everyone in between) and that would never make sense for micro transactions.

All the ads and tracking have a massive cost. On a newspaper article, about 90% of the traffic is not content. Micro transactions are not limited by compute.

The biggest costs to online transactions, I believe, are related to fraud and fraud detection.

There is no “internet”, there are thousands of digital media outlets and digital products, each following their own business model. Ads is not the only model available, but is the most popular one, by far.

So another question can be asked: why advertisement is the most popular business model for digital media?

Personally, I think the reason is simple: because it is the easiest business model to apply. Other models require customer research, market segmentation, solving technology barriers to capture payments, and many other things you need to solve just to start getting any revenue. With ads you can monetise pretty much anything that gets the eye traffic, all using super simple plugins and little to no investments.

According to BLS, the average American consumer spends about $6000 per month. 5-10% of a B2C company's budget goes into advertising, so each person may be generating $300-600/month in ad spend.

Discretionary income left over after spending is a much smaller number. Consumers can't allocate their ad dollars to digital content instead, because they've already given those dollars to the advertisers (by buying food, toiletries, housing, insurance, etc).

This isn't something app developers can change by making microtransactions easier or something. Businesses get their money from the advertisers and not from consumers because the advertisers have much more money to spend.

From a nine-year-old HN comment and a reply to it[0]

$12.70/month, according to that Mozilla research, is the total value of advertising per user.

> The news and other content we all enjoy on the open web is mostly underwritten by ads, as are the social networks activists use to coordinate.

And who underwrites the underwriters? We do! It's a lie that ads give people content and services for free (explained below). If Mozilla truly wants to fight for users, it needs to end its reliance on advertising revenue, and help invent honest ways for content and service creators to get paid by end users. We are a creative industry. We can find ways to do this while also keeping access open to the fraction of the population that can't afford to pay (which per below would only be people who don't buy advertised products).

I know this truth is hard to swallow for an industry that has grown so dependent on ads. As Upton Sinclair said, "It is difficult to get a man to understand something when his salary depends upon his not understanding it." But if we are to do the right thing, we have to really think about the truth:

1. The advertisers who pay web providers get their money from us, added to the prices of other things we consume. There is no free lunch.

2. The overhead cost of advertising is huge and we pay for that too.

3. We pay the opportunity cost of a product that cannot put users first because ad-supported web providers live or die by giving advertisers what they want (and what we want indirectly and secondarily). This includes both the cost of lost privacy as well as business, editorial and design decisions that optimize for advertising revenue. As has been said, they are using us as products more than treating us as their paying customers. Let me restate to be extra clear: WE are the paying customer, but we don't look like that to their finance department.

4. We pay for all the collateral damage of advertising, such as the tremendous amount of link-bait and other garbage that advertising perversely incentivizes.

5. We pay the social costs. Whether or not you agree with the social costs laid out in the above article, I'm sure most can agree democracy and the free market assume people make voting and purchasing decisions based on facts and reason. Advertising undermines democracy[1] and the free market[2]. Advertising is predominantly about manipulation and deceit. I believe the social costs are the most expensive.

Added together, we end users are paying a lot more for "free" product than if we could just straight up pay for it. And even we non-users are paying the social costs and collateral damage.

Ads are simply a sneaky and dishonest way to get at end users' money without them realizing it.

-

[0] https://news.ycombinator.com/item?id=9961761

[This is a condensed version of a more detailed case with reference links that I made here: https://news.ycombinator.com/item?id=7485773]

[1] You don't need me to explain. We all know that money often overwhelmingly decides who gets to run in an election, plays a big part in who wins, and influences what legislation they introduce, support or fight.

[2] http://www.chaosisgood.com/2013/03/how-advertising-undermine...

tl;dr Ad-driven revenue models let you distribute your content to the widest possible audience while still making money.

The marginal cost of digital distribution is (basically) zero. As a result, you have an incentive to chase the widest possible audience. This is going to drive your pricing downward to reach as wide a market as possible. The math is like this: A 1000x audience size is worth it even if you lower prices 99%.

At the same time, advertisers would like to reach as large an audience as possible as well. And, in many cases, you can charge _more_ for selling ads to a larger audience. (Either the ad goes to a huge number of people, as in traditional brand advertising, or you have more niches to target.)

So you simultaneously have incentives to drive your own prices to zero, because it drives up your audience size, and that simultaneously increases the prices you can charge for ads.

From an on-paper business perspective, it's simply the best model. It's why TV, Newspapers, and Magazines all did this before the Internet, and it's why the incentives are bent even more towards ads in a zero-marginal-cost-distribution environment today.

Yes, in the real world there are tradeoffs to all of this, but these are the major incentives at play.

I'd wager it's because most content is not that valuable in itself.

It's always a question of value. I'm supporting two cycling medias because i value their content even if i can (somewhat) find it somewhere else. If I'm not mistaken, in the past, the Economist even saw their subscribers numbers increase even after a price increase.

Also another interesting facts I noticed is that ads actually cause the price of the product to increase! I constantly come across articles that explain how a significant part of the cost of a product is dedicated for ads. I can't help but see this as a treacherous cycle.

Consider the counterfactual - no ads and lower distribution. This might make some products unviable (due to high fixed costs) or cause others to be viable only at higher prices (again, due to fixed costs).

I'd rather have ads than pay. Better get money from some inept company marketing budget than from my own pocket.

To each their own - except thanks to the EU we're all forced to choose cookie banner popups and get less ads revenue -> pushing more paid products.

the problem with ad is that no matter what other revenue stream you have (e.g. if we could get micropayments to work across the web), ads would still make the number go brrrr on the balance sheet and thus affect the CEO's bonus. it's an attractor.

First: do you mean digital media or the Internet? I would argue that most Internet revenue does not run on advertisements when you think about products like e-commerce of physical products or business software that dominate total internet-driven revenue.

Second: regarding digital media, consumers have had the greatest break in advertising since the advent of cable. Well under half of streaming subscribers choose ad-supported plans. Back in the cable days it was impossible to opt out of advertisements.

https://www.emarketer.com/content/peacock-hulu-subscribers-o...

> Do ads actually work? Personally I rarely buy/subscribe to stuff I see on an ad.

Yes, they work. And they even work on people like you who make this statement. Remember that half the battle of a marketing campaign is to make you aware that a product exists at all. For well-established brands like Coca-Cola, their ads are designed to keep their mindshare widespread. It doesn't matter that you hated the ad, that you actively ignored the product, you still saw that ad and if you ever do change your mind on whether you want a soda today you'll have an idea of what to get.

Because people have always paid to know what they really think.

Money.

Why is Netflix offering an ad-supported product when people pay for it? Because it turns out they make more money from advertisers per person than from charging directly.

There’s no such thing as a free internet because everything connected to it costs money: the electricity, the equipment, the wires, the software for routing, the maintenance. And for a real short time we had a system where everyone paid for their own part and occasionally there’d be something so popular that the server would fall apart. Someone’s university IT would knock on the door and say “what on earth are you doing?”

The only way we get to a free internet is to: a) fix global economics b) start a new one and don’t let the capitalists in*

*mostly a joke