Saturday, September 29, 2007

Fooled by Advertising

Is high technology subsidized by taking money from the rich and foolish?

Let's consider the internet.

Almost all the libraries, databases, services and knowledge banks on the net are available for free. How come? Who is paying for all the bandwidth, hardware, data centers, programmers, content creators etc.?

Let's consider three cases: Google Inc., The New York Times and Wikipedia.

Google:

Google (like Yahoo and MSN) offers a bunch of services, including free email, discussion forums, social networking platforms, blogs, research tools, maps, and so on.

All free!

Google employes thousands of very highly paid engineers, and still manages to make a huge profit every year. How so? Its main revenue stream is from displaying targeted ads on millions of websites. As of now ads from Google are relatively low-bandwidth and unobtrusive whereas those from Yahoo and MSN's advertising arms are flashy and hard to ignore.

So the digerati surf on the net and see the ads. The ads are an art in themselves, employing various tactics to make the user click on them. Some of the users (probably 2-5%) click on the ads and some of them even buy the advertised product or service. So Google (as well as Yahoo or MSN) makes its money.

And it generously offers its free services to anyone who cares to sign up. All the free services also come with targeted ads. So fools keep clicking on ads and buy things or sign up for services and sites that they don't need, and freeloaders have a field day.

The New York Times:

Till recently, one needed a low-priced subscription in order to view the NY Times columnns and its archives. Now it is all free. How come?

Read Here.

Advertising comes to the rescue once again. Make your site free, and populate it with advertisements. The fools will click on the ads and make you your money, and hopefully they will be numerous enough to make you a huge windfall. The strategy seems to work for most online portals, so why not with NY Times?

Once again, the clever just read the content, and the clueless pay for them, not directly but indirectly with their time and energy (brand recognition, word of mouth and visibility are still worth something even if someone doesn't buy the advertised product but just notices the ad) and money. The geeks don't even see the ads (see the epilogue of this article).

Wikipedia:

Wikipedia is run with donations from foundations and individuals. An outstanding repository of information, it still is running without any advertisements or subscription fees. In fact, its quality of information is directly dependant on the number of participants in its community.

I have benefitted so much from Wikipedia that I have no qualms at all about donating to it. Since the Wikimedia foundation is non-profit, and it is serving such a eminently worthwhile group of websites, most people who are regular users will not mind paying a little bit to help it out. But the fact of the matter is, sites like wikipedia do not need much money to run. They need very little.

The software is written by free software volunteers from around the world, the hardware needed is not much and is easy to get from big retailers, the database can fit on a single hard disk. However, due to extremely heavy usage, wikipedia uses caching servers in Japan and in Europe.

Wikipedia is running on a comparatively old platform (LAMP), which does not require much computing resources.

Suppose a person was to start a small site, with easily available open source software (such as the OpenACS Platform). The site hosting with a dedicated server costs around $100 per month for 100s of gigabytes of traffic allowed and multiple gigabytes of databases. How come the hardware and bandwidth is so cheap?

Technology is getting cheaper due to the large scale of manufacturing, global competition between labor markets and constant advancements in technology and production process. But mostly, via research into new technologies which make the old technologies cheap and obsolete.

And who is paying for the research? Organizations like IBM, Microsoft, Canon, Intel, AMD, Cisco, Toshiba, and so on. Governments too, but usually university research takes a few years to reach a finished product. And how come the organizations can invest so much in research? Because they are making a killing introducing and selling new, overpriced products in the market (Vista, HDDVD, iPhone, quad-core CPUs, 12MP digital cameras, high-end laptops). The rich and greedy pay for the latest gadgets and research, and the poor and patient reap the benefits after a few years when prices fall drastically as the technology becomes commonplace.

The rich and impatient are paying for a constant stream of new technologies, products and gadgets. No matter how powerful one's computer is, there will always be an overpriced game, productivity app or a latest bloated operating system to take the wind out of its sails. People realize it only after spending tens of thousands of dollars chasing the gadgets.

And in this way, technology is being "subsidized" for the poor. Consider the following: A VCR used to cost Rs 22000 twenty years back in India. Today a DVD player costs Rs 2200. Adjusted for 5% annual inflation, a DVD player's cost in 1987 terms is close to Rs 800 only. So a much much better quality product costs 27 times cheaper over a period of 20 years. This is the effect of rapid technological change driven by the desire for better and more powerful gadgets, with the cost of change mostly paid for by the rich. An HD-DVD player costs around $800 today (Rs 32000), and it is indeed being bought at this price. After five years, the HD-DVD player cost will also be $50 and it will see mass adoption in the third world. And then we will probably see an even more fantastic media platform.

(I sometimes wonder what will happen once technology reaches its perceivable quality limit. I don't think a naked eye can see any difference between a 12MP digital picture or a 24MP one, even when enlarged to the size of a poster. I don't think even audiophiles can detect any difference between 384kbps and 512kbps VBR MP3. I don't think even discerning moviegoers can detect any visible difference between the image quality of an RSDL Dual Layer DVD and an HD-DVD. So maybe demand for new products will be generated by advertising alone, not by the promise of something objectively better (see the current crop of mobile phones, for example). Then both the advertising agencies like Google and marketers like Nokia will have ingenious new strategies for making money from fools, but the biggest winners will be the ignorant poor who will suddenly be able to afford a mobile phone for $10).

This kind of price reduction driven by planned obsoloscence is what makes technology so cheap and sites like wikipedia so inexpensive to run.

...

Epilogue:

If you don't want to ever see the vast majority of ads while surfing the net, and therefore increase the SNR (signal-noise ratio) of what you see on your computer, I heartily recommend the following software:

- Mozilla Firefox web browser
- Ad Block Plus (Firefox extension)
- Ad Block Plus filterset.G updater (Firefox extension)
- Flashblock (Firefox extension)

Not only will Mozilla Firefox with the above extensions make your internet experience better and more productive, it will also save you money in case your bandwidth is limited or if your bandwidth usage is metered (as is very common in a third world country like India).

In any case, most of the adverts on the web sites are not applicable for a country like India (they are for local products and services in the US/Europe etc.)

If you are even more adventurous, you can try CustomizeGoogle.

There is a lot of controversy about this approach.

See this Slashdot thread, for example.

8 comments:

Umang said...

Aah, but one may argue that these ads often augment the content on the website and thus are an information channel by themselves. Especially given the emphasis on contextual relevancy of ads today.

A very good point about planned obsolescence.

N Sriram said...

As usual, your argument is irrefutable. I wrote an article on 'aspiration gap' in the personal finance section of Times of India sometime ago. Mailed it to you. You may find it to be of some interest.

Sharad said...

'fool' is the word for the day, it seems! Yes, it is amazing how much money exists in advertising. Most of the people I know would probably never even pay attention to the ads, let alone click on them. Probably this goes to show how narrow my social circle is!

I am a big Firefox proponent from the days of it's initial release. And Adblock is a big USP I use to "sell" it to friends/colleagues. Of course, as some comments in the slashdot article suggest, one can argue that this is theft.

But it is often difficult/presumptuous to identify nature ("fool", "thief") from behavior ("clicking on ads", "masking ads"). Is it not?

harmanjit said...

I consider being mesmerized by advertising into believing one needs the latest gadget or product as definitely foolish.

Susceptibility to advertising and psychological programming is one of the factors I consider being the hallmark of an un-evolved (and hence foolish) person.

Advertisers have to lie by omission or commission and the most widely advertised products (aerated beverages, anti-dandruff shampoos, anti aging or fairness creams) are the most useless.

An evolved person just needs yellow pages and a comparative price search engine in case he needs something.

Maybe I am of the medieval ages, but I refuse to let my needs be programmed into me by others.

Sharad said...

I agree to some of your points, yet find the stand a little extreme. It lends to most "normal" people being termed foolish.

For instance - what would you say for users of the mentioned useless products (aerated beverages, anti-dandruff shampoos, anti aging or fairness creams). Fools?

Guess your use of the term is 'softer' than my interpretation.

harmanjit said...

What word would you suggest?

Impressionable? Easily Fooled? Unintelligent?

Sharad said...

"Fool" works fine for me. I mask the ads and do not use any of the mentioned products personally ;-) Having shared an apartment with me for a reasonably long period, you know that for a fact.

The issue is really not the word, but the alacrity with which judgment has been passed.

Lets agree to disagree.

If you can find an article/paper that profiles users that click on ads, it might be an interesting read. I am sure these big companies do a lot of research on these things.

ashish said...

Well, if eveyone become intelligent as you are, we have to pay for every search we do on google and in a poor country like India where as you rightly say bandwidth is metered, how many of us will be able to afford to pay for each search we make everyday.
In my opinion, there is no harm to us if these companies think we are "FOOLS" by showing ads to us and we smartly keep ignoring them and let them offer these services free for life.
As compared to 5 years back when hotmail offered 2 MB space for email we are still better ignoring those ads and availing virtually unlimited email space on gmail etc free of cost.