• by David Koretz , February 14, 2008

Henry Ford said "If I'd asked my customers what they wanted, they'd have said a faster horse." In this new world of Web-based applications, advertisers and application developers alike are mistakenly searching for a faster horse.

I stumbled onto the advertising world by accident. I am a software guy, and have been building Web-based applications since the mid ‘90s. In 2006, I began studying how Web-based applications were being monetized. Our customers, large ISPs and Web publishers, were asking us to build advertising support into our Web-based email and calendaring application to help them turn email into a profit center.

Admittedly, I hated the idea. To me, advertising was always something you had to tolerate in exchange for free content. It interrupts TV shows, it flashes annoyingly on Web sites, and it shouts used car deals on the radio. The last thing I wanted to do was ruin the elegance of an application by filling the screen with ads.

But our customers had spoken, and so I began researching how Yahoo Mail, Gmail, Facebook, and other Web-based applications are monetized. I learned they all took advertising paradigms from the world of content, and shoved them into applications. 

Display ads inside an application take up valuable screen real estate that could be used to make the application more useful. Worse, if you click on an ad, it breaks the application and takes you to a third-party Web site.  Contextual ads are no better. Often, as is the case with Gmail, context is achieved by scanning the user's personal data. This is a major privacy invasion, and a non-starter for any business user. Like banner ads, they also consume screen real estate.

Perhaps the privacy invasion and detriment to the user experience could be tolerated if they were highly profitable, but the numbers don't agree. Display ads in applications have lower click-throughs, and a negative brand experience for the advertiser. As a result, they sell at lower CPMs. For example, even at a 30-cent CPM (a lot of social networking inventory is sold at a fraction of this), the average email application generates 100 page views per month, so each ad only generates 3 cents per user, per month. Even if you squeeze two ads on every single page, you still only earn 72 cents per user, per year.

The secret to monetization of Web applications starts with throwing existing ad models out the window. They simply are not designed for applications.  Applications are all about workflow. A user of an application is trying to perform a given task.  Whether you are sending an email, scheduling an appointment, or posting to a blog, the last thing you want is distraction or interruption.

As users perform tasks, opportunities are created. You can actually enhance the workflow by understanding what your users are trying to accomplish, and making it easier for them to do so. A few examples:

·         Enable users in a calendar to book concert tickets, flights, or movies without leaving the application -- saving time, and letting them select based on their schedule.

·         Let a social networking user invite a few friends to a movie or dinner and make reservations in the process.

·         Give email users the ability to send their attachments to a photo printing service, or send them as a fax automatically based on the type of content.

If integrated properly, advertising will feel like a feature.

Application developers have a huge opportunity to rethink their applications in terms of workflow. Integrating features into workflow better aligns the interests of advertisers and application developers by incentivizing them to create the most useful features to maximize transactions.

Advertising in Web-based applications will be the next $20-billion opportunity, but only once application developers and advertisers agree to throw 80 years of wisdom out the window.