Denizens of the blogosphere, including those of a technical bent, have been known to indulge in triumphalism re the impact of the net on the mainstream media. As no conflict - military or business - proceeds without effects on both sides, it's worth looking at how an upswing in media-related revenue and business logic will impact the erstwhile software industry. As a starter, here's a back-of-the-envelope level look at relative market sizing.
For the sake of consistency, I'm going to work from figures given by Microsoft's Blake Irving in this Fortune article. He sized the current worldwide software market at $120 billion. (Microsoft has give-or-take 30+% of that.)
That market has been turning in percentage growth rates averaging in the mid-teens for over two decades. Along the way, the nature of the business has been changing. Depending on when you joined the game, you may remember proprietary hardware and vertically integrated software for word processing, artificial intelligence applications, high end graphics, or other markets. One by one, they have been overwhelmed by the scale economies (and capital intensity) of Moore's Law driven silicon, and the economic benefits of standardized software platforms.
The de facto standard platform marketplace has been a sort of rolling, growing snowball. Markets that appeared unassailable eventually became victims of the magic of compounded growth. (For a historical perspective, imagine how the word processor monoliths Wang and IBM must have first regarded competition from home computer software partially written in a jail cell.) Sooner or later, the scale and logic of platform competition overwhelmed the specialty markets. You can ask the folks at Sun just where that process stands these days.
Is it about to happen again? Will the media market be overwhelmed by software industry dynamics? I don't think so. Consider some more numbers. Microsoft's Irving gives a good round number of a half trillion dollars for annual global advertising spend. He gives 3.6% for the online share; I've seen other shares around 4%. As the total online share of media 'viewership' of all kinds is now about 20% of all available exposure opportunities, the situation is unstable, let's say. For comparison, here are Advertising Age's (US only) spend numbers, drawn from their annual Top 100 study.
So how high is the sky? What could the eventual size of online advertising become? Here's where some hand-waving comes in:
Let's suppose that half of the total exposure opportunities ('viewership') eventually end up online in some way. I'll justify this one by an appeal to Chris 'Long Tail' Anderson's findings that a number of net-based businesses draw roughly half their revenues from products that are uneconomic to offer in a physical store. The net has already put some serious hurt on magazine and newspaper revenues, but the game is really just starting in radio and video, so it does feel like there's more room to run, perhaps the needed 2.5x multiple on online's current attention share of 20%.
OK, a nice round $250b. Maybe not. That's assuming that attention share translates directly to revenue share. At least anecdotally, some categories seem to diminish their spend as they transition to online. Perhaps advertisers find out which proverbial half of their spend they are wasting, and eliminate it. So let's cut the number in half again. $125 billion.
That's probably conservative. Historically, about a third of overall media revenue is subscription and other pay-for-content. I've totally neglected that. I've assumed that podcasts, YouTube, RSS feeds and the like don't become efficient enough to meaningfully invade the top end of the power law curve of attention. And I've further assumed that online advertising's value scales down from mere exposure media, and we know that's not true.
So the software market snowball is in the process of smacking into an advertising market that's likely to be of equal or greater size. This will not be a roll-you-over; there will be breakage all round. Jeff Jarvis has a nice starter discussion on how the ad business will change in the collision. What's the flip side of that?
The competitive logics of traditional software and net-borne media are at right angles. Standardized software feeds off scale and one-size-fits-most design. The differential power of online advertising rests on understanding of niches down to the individual level, and patterns of behavior and motivation there. There's all the difference in the world between the crystalline logic of a Microsoft API, crafted for both technical utility and strategic impact, and a decision that one's business lies in a deep understanding of a messy inhabited dataspace..
If the strategic core of the old market was in competing layers and designs of APIs, then the core of the new market lives in the back room analytics shops, the search engine marketers at Google, Yahoo, MSN, and the (legitimate) search engine marketers. If that's created a bit of an over-hyped, sometimes arrogant scramble, just recall what Willy Sutton said. There's the odd hundred billion lying around out there, for those who can figure out how to cannibalize the MSM and exploit the software market at the same time.
What categories of software are the best candidates for this? Its hard to get my head around people who want to use say photoshop using an ad-supported clone. Because they want the best app, not the second-best cheapo one. I guess you could point to say ad-supported free email as an app thats done really well. But are people really going to go after say Salesforce or Basecamp type apps with the ad model??? Maybe 2 years from now google & co will start rolling up the enterprise apps space in the never-ending search for ad inventory.
Posted by: chad | July 13, 2006 at 23:08
Photoshop is likely a good example of a category of software that will be the least affected. A few disqualifiers: Very high effective user interface bandwidth, large files used, sophisticated user base with high willingness to pay for flexibility and productivity.
OTOH, if you relax some of those constraints, you get a consumerized 'Photoshop' in the form of things like snapfish and iPhoto, and there we have already evolved into a mixture of conventional apps and online editing and composition software, that are effectively 'paid' by facilitating sales of photo and album prints and other services. Tradeoff points: Limited, conventional edits versus fully customizable interface; effective limits on file sizes (no RAW that I'm aware of), consumer horizontal market vs. professional vertical market.
BTW, the next post in this theme is going to be a first stab at which areas are most and least affected.
Posted by: Tim Oren | July 17, 2006 at 17:25