Why the Internet Still Doesn’t Have a Business Model For Content

Boston Globe TruckTimes are tough for media companies. One newspaper after the other slides into bankruptcy, and most other sectors of the media industry are suffering too. This recession seems to hit media companies harder than expected as consumers migrate to the Internet and advertisers are cutting their budgets more than ever.
Most media companies still hope that revenues from their new digital channels will replace much of the lost sales volume in their traditional businesses. But so far, digital revenues have stayed far below expectations. It looks like “digital pennies” are replacing “analog dollars”, as NBC CEO Jeff Zucker recently put it.

Why is there still no really viable business model for content on the Internet? All the big Internet success stories — Google, Amazon, eBay, Facebook … — are based either on commercial transactions or on context-creating technologies, i.e. services that help users make sense of the vast jungle of information on the web. There are a few somewhat successful web-only content plays — the Huffington Post comes to mind — but their size and profitability is very modest compared to the kings of the Internet.

I think the biggest misconception in this discussion is that traditional media companies are all about content. They’re not.

The most important (and expensive) asset that a media company has is its distribution channel(s). It costs hundreds of millions to build and run the production and distribution infrastructure of a major newspaper. TV networks are even more expensive, and even somewhat simpler media like radio require very large investments.

It’s actually interesting to talk to owners of regional newspapers after a glass of wine or two. Many still see their companies primarily as a printing business. Their newspaper is just a monetization strategy, and the content they distribute is just an input factor they need to attract advertising. But the core of the business and the real pride of its owner is typically the printing press and the capability to bring printed matter into every household in their area.
The huge capital outlay for distribution is the main barrier to entry in the media industry and the reason why so many traditional media companies enjoy a cushy oligopoly or even a regional monopoly. Of course there are some companies that produce content independently of a distribution network — independent movie producers or record labels for instance. But these smaller companies often struggle to survive or have to enter into agreements with a big distributor.

In other words: For traditional media companies, content is just the bait. The real, defendable and profitable business is in distribution.

The Internet is fundamentally different. There are no comparable barriers to entry for content producers. Content distribution on the Internet is almost free. Sure, the infrastructure in the background still costs many billions, but this cost is shared by so many participants that access to the net is affordable for everybody. Every Internet user is not only a consumer, but can be a producer of content, even if it’s just one Tweet at a time.

The result is a huge abundance of readily available content. Of course, much of it is of terrible quality, as you can immediately tell from a brief visit to Youtube. But there’s more great stuff out there — literally just one mouse click away — than a single human being could possibly ever consume.

Since distribution is not a barrier anymore in the digital age, the only way for a media company to differentiate itself is through the superior quality of its content (and maybe through its brand, but that’s secondary). Unfortunately, that’s not necessarily the core competence of old media. Let’s be honest: How much of the stuff that you get on TV or read in a newspaper is really, truly great? Exactly. Not that much. The main reason we put up with inferior content in old media is because it’s more complicated or expensive to get to the really good stuff. That’s not the case anymore on the web.

But even for producers of really great online content, it’s difficult to stand out and get compensated for their work. For several reasons, both cultural and technical, it’s difficult to charge people directly for web content. And the volume of Internet advertising still hasn’t reached the level it would deserve given today’s consumer behavior. There’s another simple reason for this: Advertising agencies (in particular their media arms) don’t have a real incentive to sell Internet advertising. They make far more money pushing TV and newspaper ads.

Media agencies are a bit like financial advisors: Theoretically, they only have the best interest of their clients in mind, but in reality they will of course always prefer to sell the products that give them the highest commission. At some point, online advertising could grow to a point where it can finance many more content sites, but it will take a lot of time to overcome the ad industry’s inertia.

Until then, the way to profitability will be to try to control content distribution even under the particularly difficult circumstances of the digital world. Interestingly, a technology company (not a media conglomerate) has managed to do this for music: Apple with its iTunes store. And another tech company is trying the same for e-books: Amazon with its Kindle e-book reader. Both companies are following a similar strategy: Control the whole chain from content licensing to the end-user device — not the content itself, but its distribution. Old media companies have failed with similar projects because rivaling conglomerates were never able to agree on a common platform. Old rivalries sometimes destroy new opportunities.

To summarize: The Internet doesn’t have a business model for content because the world of old media didn’t have one either. The media industry has always extracted its profits from the control of distribution channels, not content itself. And it’s unfortunately not clear yet what will replace this model on the open Internet.

Entrepreneurship: It’s the Value System, Stupid

As a Swiss entrepreneur who lives in the United States, I often get asked about the differences between Europe and the U.S. for entrepreneurs. Or more specifically, why the U.S. seems to produce so many successful technology startups, while Europe still lags badly.

Hint: It’s not about technology parks or labor laws or tax incentives for investors — the stuff that politicians tend to discuss most frequently.

I think the many differences boil down to two aspects: Market size and the value system of society. And both are unfortunately hard or impossible to copy.

Market size is easy to explain: The U.S. is the only country in the world that has a domestic market of over 300 million people who speak the same language, use the same currency, follow the same legal system and typically have a middle class income. Europe on contrast is very fragmented by its many languages and cultures. India and China, while significantly larger than the U.S., are still relatively poor. The result is that the U.S. market alone represents consistently about 40-50% of the global market for most advanced technologies. So it’s simply a great (although very competitive) place to start a tech company because you can immediately access so many domestic customers.

The second aspect, the value system of each society is probably even more imporant and certainly more complex to analyze.

In each society, the smartest and most ambitious people tend to be attracted by the occupations and careers that are most highly regarded by society. I think that’s fairly obvious from history and our current world. In medieval Europe, being a high-ranking member of the clergy was a great career that brought access to power (and in many cases even wealth). In the old dynasties of China, a smart person probably wanted to be a mandarin at the court of the emperor.

In today’s modern, open societies these preferences are not quite so clear, but obviously there are still occupations that enjoy a much higher status than others. There is a connection to material rewards too, but it’s not a perfect correlation. It’s really all about what society holds in high esteem.

Psychological research has found out that money — or to be more precise, the power of money to buy material things — is only a motivating force up to a certain point. After that, acquiring more money mainly provides advantages in terms of social status. Let’s be honest: nobody really needs a fancy sports car, and getting from A to B in a Ferrari might even be less comfortable (though probably more interesting) than in a Toyota Corolla. Most material status symbols have only one single purpose: To impress others.

What we seek in the end is social status. The question therefore is of course how societies differ in their value system to assign status to certain occupations, and in particular to entrepreneurship. We hear all the time from politicians that we need more entrepreneurs to get us out of the economic slump that the financial services industry got us into. So which societies are best prepared to encourage entrepreneurs?

From observing the countries that I know relatively well (Switzerland, Germany, the U.S.), I think I can say that none has a value system that perfectly favors entrepreneurial activity over other, maybe less productive activities. But there are clearly huge differences.

The United States of course seems to have almost a cult of entrepreneurship. It’s difficult to find an American who has never considered starting his or her own business. Entrepreneurs are generally admired. The pioneering spirit is clearly alive and well in this nation of immigrants.

But there is also dark side to this American ambition: Making money seems to be more important than making useful stuff that really adds long-term value to society. Of course people admire Bill Gates or Steve Jobs, but just as much they admire Warren Buffet who — let’s face it — is more of a speculator than an entrepreneur. The current financial crisis was only possible because the smartest people were attracted by financial services firms that don’t really add value to society, but simply trade it. Somebody who made his money by building a company, inventing things, and creating jobs does not necessarily enjoy a higher status in American society than somebody who just buys and sells assets.

This could be a fundamental problem in the long run, and it probably already is. Over the last two decades, U.S. companies have systematically outsourced not only many manufacturing jobs, but also the engineering and design of many advanced products. Almost all of the work that goes into the production of a HP or Apple notebook is now done in Taiwan and mainland China. Sure, the U.S. companies still provide their brilliant marketing, but is that really enough? It’s not terribly surprising that the latest wave in PCs, the cheap laptops referred to as “netbooks”, was started and is completely dominated by Taiwanese companies under their own brands. The outsourcers are already eating their customers’ lunch.

I don’t think a society can survive just by providing financial services, bold marketing ideas and pure speculation. But that’s what American society rewards. Hopefully the current recession will help to change this.

In German-speaking Europe on the other hand, high-quality engineering and the creation of jobs still enjoy the highest status, often at the expense of financial success. When a German entrepreneur wants to boast about his success, you are more likely to hear about the number of jobs he created or the outstanding quality of his company’s products than about things like net worth, market value or profitability.

These are useful priorities up to a certain point. It’s not surprising that European companies dominate many high-tech niches. The famous German “Mittelstand” companies — medium-sized, typically family owned corporations — often have a 80%+ market share in their particular narrow niche. Germany is the largest exporter in the world, and Switzerland and Austria have very high export quotas relative to the size of their economies. The most important industries all make high value-added products such as luxury cars, pharmaceuticals or high-tech machinery.

The problem with the European mentality is that it promotes risk aversion and a radical focus on quality at the expense of agility and aggressive marketing. Many of the building blocks of the Internet — the Web itself, MP3, Linux, MySQL, Skype, and so on — were invented by Europeans, but commercialized by American companies. Europeans seem to be very reluctant to bring anything to market that is not yet perfect. That’s why they often miss the best opportunities.

But the biggest obstacle for European entrepreneurs is probably the stigma that is still associated with failure. The failure of a company is often seen as a catastrophic event, not (as in the U.S.) an unfortunate, but ultimately useful learning experience. The concept of serial entrepreneurship — starting multiple companies over the course of career, some of which succeed and some of which fail — is completely alien to most Europeans. Many European entrepreneurs have a dynastic view of company creation: A company is something that you start, that you control for the rest of your life and that you want to pass on to your children. That’s great for certain types of companies, but not helpful in rapidly moving markets.

Europeans also have a very inconsistent attitude towards wealth: In most countries, there’s an equivalent to the Forbes 400 list of the richest people, and Europeans are no less fascinated by these lists than Americans. But at the same time, openly displayed wealth is frowned upon.

This puts successful European enterpreneurs in a difficult balancing position: They enjoy a high status in society if they continue to be successful and are a “good boss” who creates a lot of jobs. But if their company becomes too profitable or if their lifestyle seems too frivolous, they can rapidly lose support. And if they take large risks and fail, they can be sure to get mocked. It’s not a coincidence that “schadenfreude” is a German word.

It’s therefore not very surprising that many European entrepreneurs and managers try to copy American values and behavior patterns — in the hope of moving their own countries’ cultures into a more entrepreneurial direction. Unfortunately, this often ends in disaster. The latest example: European banks and the real estate markets in some countries are suffering much more from the financial crisis than their American counterparts. Why? Because European companies tried to imitate aggressive American business concepts, without really understanding them. But a bad copy often ends up with a far worse outcome than the already bad original.

OK, so obviously no country has a really perfect environment for entrepreneurs that also sets the right incentives for “useful” companies. But I think the good thing that could come out of the current recession is that people on both sides of the Atlantic rediscover what made Western societies so wealthy in the first place: A healthy, open attitude towards risk taking and entrepreneurship, but also a focus on the creation of real value. Maybe even a bit of nostalgia is in order: the 1950s and 1960s were probably the times when Western societies really created the foundation for their wealth. Sometimes a crisis helps to dust off the best aspects of some solid, old values.

The Real-Time Web Is Here. So What’s Next?

FastThe last few months brought a trend into the mainstream that has been developing for quite a while: The real-time web. Twitter, the new Facebook, FriendFeed, Google, push services on your mobile device … the web is speeding up wherever you look.

Remember the good old times when Google’s index was updated only every few weeks? It could take months to get a new page into the major search engines. This leisurely pace is gone forever. You will find this blog article on Google only minutes after I published it.

Oh, and if you’re like most people, you got here because you saw a link to this article on your Twitter or Facebook feed. By the time you read the article to the end (which I hope you’ll do), the message that brought you here probably will have disappeared from the first page of updates on either of these services. That’s the pace of the real-time web. So much to see, so little mental bandwidth.
The web was originally designed as a digital library, a system where scientists could exchange their research papers in a more efficient way. Almost by definition, progress was measured in weeks or months, not days or hours. Even during the wild days of the dot-com bubble, most people dialed into the Internet a few times a day at most. Connecting to the web was something you did consciously, and the rhythm of all updates was restricted by this. E-mail was the natural medium of that era.

The always-on availability of broadband and the mobile Internet on our BlackBerries and iPhones have changed this forever. Most of us now have almost constant, immediate access to the Internet, and that’s the key enabler for a much higher speed of interaction. A service like Twitter can only exist under these conditions. Social networking sites like Facebook or Myspace only make real sense in a broadband world. Only when you’re constanly connected can you really enjoy the many little emotional kicks of getting updates about what your friends are doing just now. No wonder that many social network users are literally spending hours per day on these sites.

The most extreme example of the real-time web is probably Twitter’s search function. Theoretically, it helps you to search for relevant tweets about a certain topic. But for most popular topics, it’s actually more of a firehose of information — or, to be more precise, of unfiltered utterings from random invidivuals. Just try following Twitter Search’s constantly updated feed during the airing of any popular TV show. There are typically dozens of new tweets per minute about that show. You can either watch the show or follow all the tweets about it, doing both at the same time is almost impossible. But the tweets are typically more entertaining.

Like every new medium — and the real-time web is a new medium, not just a faster version of the old web — this rapid stream of information shapes the perception and behavior patterns of its users. Scientists are already worrying (like with every new medium in history) about the negative consequences this might have. And most users I know still somehow feel that Twitter, Facebook etc. are actually a waste of time. Why would you suspect yourself to this constant stream of mundane details about other people’s lifes? OK, occcasionally there might be a witty insight or interesting piece of information, but does that really justify having to deal with all this noise?

If you look at the growth rates that these services are currently experiencing, the answer seems to be yes. That’s not really surprising. Humans have always been hungry for information and entertaining distractions, and like with tasty food, most people can’t seem to get enough of it.

The result from eating too much is obesity. But we still don’t really know what consequences we face from too much fast information. Twitter is to information what potato chips are to food: It’s a snack that’s probably unhealthy, but it’s very difficult to stop once you started consuming it. People who are not on Twitter probably are instead addicted to e-mail or texting or Facebook or real-time stock quotes. Most people I know have some kind of real-time information addiction. We are all very impatient, and the real-time web in its many forms accommodates the craving for instant gratification through information.

So the real-time web is definitely a reality. It will need some time to develop further, to mature and to conquer even more users, but it’s clearly here to stay. The big question is of course: What’s next after the real-time web? It’s somehow hard to imagine that the stream of information can get any more abundant and flow any faster.

I think there are two possible directions this could take: Maybe we will see a major backlash against all this information overload. Maybe people will suddenly start questioning if all this noise really makes their life better. It would certainly resonate with the recession-driven sense of weariness that many people are feeling. Several authors — Timothy Ferris of “Four Hour Workweek” fame is an example –recently became popular by promoting a “low information diet” and a general slowdown. Ironically, most of these authors of course promote their ideas through books, blogs, videos, and, yes, on Twitter.

The other possible (and, I suspect, more probable) direction is that the torrent of information will find new ways to its consumers. The boom in the smartphone market is a first sign of what this may look like: The traditional computer screen has probably reached a point of saturation as an information channel, but other devices still have room for growth. BlackBerry user were the pioneers of mobile information overflow, and all the new buyers of iPhones and similar products are now following suit. And there’s of course the living room and its underutilized big screen: LG recently introduced a TV set that can show information from the Internet in the form of on-screen widgets. It’s probably just a question of time before many other TVs and set-top boxes will offer something similar.

Although there have been occasional backlashes in the history of media, people in the end always opted for more and faster information. When a new medium with higher information density appears, it takes people a while to get used to it , but after some time, there’s appetite for even more information. And most probably, the real-time web is just another milestone in this long-term trend.

(Picture: NathanFromDeVryEET, CC)

The Oracle/Sun Deal: The End of Open Source As We Know It?

Oraclesun-1The news that software giant Oracle will buy Sun Microsystems came as a surprise to most industry observers. Apparently, Oracle made its first offer on Thursday and had a signed deal by Sunday night. Larry Ellison and his team are clearly the masters of IT M&A.

This deal clearly has the potential to re-shape the IT industry. Or maybe it’s more accurate to say that it will complete a trend that has been going on for several years. Oracle is now the third conglomerate next to IBM and HP that can offer a complete technology stack, from server hardware to client software, plus implementation services.

On top of that, Oracle has a rich portfolio of application software and of course its market-leading database. It competes not only against IBM and HP, but also against SAP and Microsoft. No other company comes even close to these top 5 of the IT world. In just a decade, the IT industry has morphed from the innovation explosion of the dot-com era into an oligopolistic structure that is typical for mature industries.

But maybe more importantly, Oracle’s acquisition of Sun probably marks the end of Open Source Software (OSS) as a business model. Sun was one of the most active promoters of OSS and saw this focus as a strategic advantage to gain credibility in the tech scene. The company not only open-sourced its Java programming language three years ago, but also acquired several stars of the OSS industry, including office suite OpenOffice and most recently the world’s dominant free database (and thorn in Oracle’s side), MySQL.

Contrary to the romantic Robin Hood-type image that the OSS movement still has, most really complex OSS packages are not predominately developed by independent programmers in their basement, but sponsored (with money and human resources) by actual companies. MySQL was mostly developed by MySQL AB, a Swedish company that made money from support services and commercial licenses for enterprise customers. Without this cross-subsidy, it would probably be very hard for hobbyists to maintain and support such a complex software package.

MySQL AB was acquired by Sun for $1 billion a few months ago and will now become part of Oracle — which is not exactly one of the OSS movement’s favorite companies. You don’t have to be a fan of conspiracy theories to expect that Oracle will certainly not go out of its way to keep MySQL well supported as a free OSS product. I don’t think that Oracle will kill MySQL, but it will probably pressure its current users to buy enterprise support contracts and, you know, just maybe look at a really cheap upgrade to a full Oracle database product.

So finally the by far most successful OSS database ended up in the huge product portfolio of the very company that MySQL primarily tried to compete with. Facebook, Twitter, Yahoo and many other Internet companies are now suddenly proud owners of technical architectures that are based to a large part on the latest Oracle product…

Pretty much the only major independent open source software company left standing is Red Hat, the dominant provider of commerical Linux versions. There have been rumours that Oracle is interested in buying this company too, and at Red Hat’s current market valuation of $3.3 billion, Oracle could easily afford it.

It’s by now unfortunately fairly obvious that commercial open source has largely failed as a stand-alone business model. There are still some smaller OSS companies — e.g. SugarCRM, Alfresco, Pentaho, WordPress — that have a respectable position and could develop into profitable growth companies. But most complex high-profile OSS packages are now part of huge companies, often used as bait to sell hardware, services or commercial software products.

And for the IT industry in general, it looks like we’re going back to a vertically integrated model that we last saw in the 1970s. Customers can now — and many will — buy most of their IT components from one single vendor. It will be interesting to see how Microsoft and SAP will react to this. And another potential competitor, Cisco, is already extending its portfolio from networking to servers and software.

Where will innovation come from in this new world of vertical integration and huge IT conglomerates? Clearly, Internet-based software companies (such as Salesforce.com, 37signals) are the potential disruptors: They currently offer products that are far inferior to the large-scale solutions that Oracle and friends can provide, but they satisfy the needs of a certain customer group at a very low price point. We will see if that’s enough to keep innovation alive and compete against the giants.

The Complexity Challenge of Social Media Marketing

Advertising on social networks continues to struggle. But whose fault is this? Are advertisers simply too ignorant and conservative? Are the advertising opportunities that social networks are offering not attractive enough? Or is there maybe a much more complex reason?

There’s little doubt that the social web (formerly known as “Web 2.0”, and often called “social media”) is the media phenomenon of our decade. Hundreds of millions of Internet users spend unbelievable amounts of time on Facebook, Youtube, Twitter, countless blogs, discussion forums and other social media sites.

But even though these Web 2.0 sites are amazingly successful in terms of usage hours, their financial success is modest. Facebook’s costs seem to rise siginificantly faster than its ad sales. Youtube is still losing money, to the tune of hundreds of millions of dollars per year (according to some analysts). Big advertisers such as Procter & Gamble are openly saying that they’re unhappy with the success of their social network campaigns. Many companies dabble in social media marketing, but real success stories are rare. For example, Dell sold PCs for $1 million through Twitter. That’s nice — but Dell needs less than nine minutes through their traditional channels to make that kind of money.

So what’s going wrong here? Are advertisers too conservative? Or are Web 2.0 sites simply not innovative enough when it comes to monetization?

This article wants to make a different case: The social web is so fundamentally different from traditional media that we will need decades to really understand it and find the right way to commercialize it. We are at the very beginning of a long development path because social media is structured so differently from everything else that we know.

Until recently, we’ve known two types of media:

First of all, there are media that enable a 1:1 communication between two people. Examples are the telephone or e-mail.

Communication in 1:1 media is closed, which means that no third party (under normal circumstances) can listen in. This secrecy is explicitely guaranteed by postal and telecommunications laws. This intimacy is the reason that 1:1 media don’t really work as advertising channels. Unsolicited telemarketing calls and spam e-mail are the least popular forms of marketing and are often even illegal.

The second form of media are 1:n media. A single sender (for instance a newspaper, a TV or radio station, a traditional website) broadcasts its content to many receivers who typically can’t (or don’t want to) react directly to this communication.


It’s of course well known how to use 1:n media for marketing: Advertisers pay a media company to insert their ad message in the context of the normal media content.


The advertising company basically injects its message into the normal communication stream between the media provider and its customers. The spectrum ranges from a subtle presence with small ads to intrusive interstitials that completely interrupt the flow of content.

MerrillbootsadAll of this seems natural enough. But historically these “classic” forms of advertising needed a surprisingly long time to emerge. Almost 150 years passed from the invention of the printed newspaper (around the year 1600) to the first publication of paid advertising in a paper. The modern ad agency, and with it the professionalization of advertising, emerged around the middle of the 19th century. Modern TV advertising was only invented in the mid-1950s, almost a quarter of a century after the first TV broadcasts. And modern advertising in general, with its strongly focused, typically very emotional messages, packaged more or less creatively, was first developed in the 1960s.

The media industry obviously needed many years to “monetize” 1:n media in the modern sense. It’s therefore maybe not surprising that after only 15 years of the Web as a mass medium and five years of Web 2.0, we have not yet found the ideal form for advertising in these new types of media.

But back to the social web: The specific new quality of this form of media is that it connects many senders with many receivers in a mostly open way. The social web, in other words, is an open n:n medium.


That sounds pretty mundane, but it isn’t. We all understand intuitively how n:n communication in the physical world works. A discussion at the familiy dinner table is n:n, and on a bigger scale a classroom discussion or a town hall meeting would be typical examples.

But when n:n communication suddenly occurs over an open, global, technical medium with persistent storage of all communications, we don’t understand the consequences at all. There is no equivalent in the physical world for an interaction between people that can be accessed by pretty much every person in the world, instantly and (thanks to search engines) with high precision.

Because we have such a limited understanding of this phenomenon, it’s not surprising that ugly social media scandals happen all the time. The recent Youtube scandal around two Domino’s Pizza employees is a typical example. Very obviously, these two people didn’t grasp the consequences of uploading a disgusting video that could signifcantly hurt their employer (not to mention their own future) to a globally accessible platform. But they’re not alone — most Internet users probably don’t fully understand what happens with the content they put on social web sites.

If this is difficult for individuals, it is even more complicated for companies. Big organizations are structured for 1:n communications. Traditional advertising is 1:n. So is customer service: When a consumer tries to contact a company, for instance by calling a 1-800 number to complain, it is a case of 1:n communication. Other customers of the same company don’t learn about that customer’s complaint.

callcenterTraditional market research works in 1:n mode too. A company surveys customers, conducts focus group studies or sells its new products in test markets. The company thereby receives information about what customers think, but the other customers typically don’t get any insight about each other’s opinions, and they don’t influence each other.

Modern corporations master 1:n communications on a very high level of sophistication. They invest significant resources to standardize their communication processes, to push a consistent marketing message and to react to customer contacts in a clearly defined manner. A call center script is a typical part of these standardized communication processes.

All of this works very differently in a n:n medium, and that’s something that completely perplexes most marketers. In a n:n medium, there’s inherently no way to push a marketing message in a controlled and consistent way to a big audience. Consumers can simply ignore the message, can react to it directly or will even come up with parodies or adversarial messages. Advertising in the social web can’t be intrusive, or else it will trigger very negative reactions.

How and where marketers should position their ad message under these conditions is obviously a difficult question. Should they just put ad banners on social media sites? Is sponsoring the right tool? Viral marketing? Direct engagement with users? Or should companies build their own online communities?


The diversity of platforms, formats, interaction modes and ad vehicles in today’s online media is confusing even to experts. Most marketers grew up in a world with a manageable number of different ad channels — TV, radio, newspapers, magazines, direct mail. So it’s no surprise that they are completely helpless when they face the overwhelming complexity of the online world.

Even worse: Consumers are now suddenly able to react to ads, in a very public way. They can also describe and publish their (often negative) experience with a particular product, and this opinion is — on Twitter for instance — made available to a significant number of people, but not necessarily to the actual manufacturer of the product. Some users now even think that it’s the manufacturer’s job to actively get all this feedback. There’s a growing number of people who expect that companies read their tweets and react to complaints automatically. And some companies already do this. Over time, customer service could change from a push to a pull medium.

This rich feedback loop is highly dynamic and impossible to control. Many a well-intentioned viral campaign turned into a marketing disaster, simply because the blogosphere or twittersphere reacted in unexpected ways. A recent example is the “Motrin Moms” Twitter storm. A pharma company put a somewhat unconventional commercial for a pain reliever on its website. It was intended to be ironic and funny. Unfortunately, some female bloggers perceived the video as insulting and started online protests, which in the end forced the company to cancel the campaign. In the world of old media, a campaign stop would have silenced critics very rapidly, but in the echo chamber of online media, the waves of outrage continued for weeks. This is a real nightmare for any old-school marketer.


So what about all the advisors that big companies pay to develop marketing strategies? Unfortunately, they’re not much help either. Most traditional ad and PR agencies are masters of 1:n communication, but are not less confused about social media than their clients. The frequently outright negative opinions about social media expressed by ad executives are easy to explain: Somebody here feels threatened, and rightfully so. Not even most interactive agencies are strongly positioned when it comes to social media. Let’s be honest: Most corporate websites that are produced by these agencies are just traditional 1:n advertising in a digital form. Real interaction is not their strength.

Traditional companies, particularly large corporations, are fundamentally badly equipped to deal with the open, complex communication processes in n:n media. Their carefully cultivated marketing skills from a 1:n world are actually a detriment to success in a n:n medium, because the discipline of strongly focused 1:n communication directly prevents real interaction with users in social media.

Blogosphere luminaries like Robert Scoble tell companies to simply start very, very transparent “conversations” on social media and to interact with consumers in an authentic and unscripted way. But that’s like telling an elephant to increase its speed by simply starting to fly — great idea, but almost impossible to implement.

So what’s the conclusion?

First of all: The problems of insufficient monetization of social media platforms can’t be solved simply by finding better ad formats or by hiring more competent sales teams. This is a fundamentally different medium, and the biggest and most professional advertisers in the world — large corporations and their ad agencies — are structurally badly prepared to take advantage of this new channel.

A lot of time and many bold experiments will be necessary to find the best way to commercialize social media. Of course, coincidences will play a role, as they have in the development of traditional media. For instance, legend has it that the modern 30 second TV commercial was only invented because TV stations were not able to find enough customers for the sponsoring of a whole show.

Who will be the winners? In the short to medium term, social media is a great marketing opportunity for smaller companies that can interact with their customers in a flexible and personal way. This is a great way to build a loyal customer base without huge resources, just through authenticity and focus.

Larger corporations will need years to adapt to the new reality of 1:n social media, and many will fail. The more Internet users participate in social media (and since even Oprah is now twittering, it’s definitely mainstream), the more important social media will be as a channel to reach customers — just not with the mechanisms of traditional, hierarchically structured advertising, but with new, networked structures that have more in common with real marketplaces.

This is a step of the same magnitude as the invention of mass marketing at the beginning of the 20th century. Mass marketing became possible through 1:n mass media, and it changed the structure of the economy fundamentally. The modern corporation would not be possible without it. It is conceivable that we will see new forms of corporate organization that are driven by the new media that are shaping our private and commercial communication.

In all the daily noise around new social media apps, platform wars or industry scandals, it’s easy to forget that we are experiencing the birth of an entirely new, unusually complex medium. It will take decades to find stable structures and explore viable business models. And we are in for a lot of surprises.

(This is a translated and updated version of an article that I wrote for netzwertig.com, the leading tech blog in German-speaking Europe.)