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Thoughts and ideas as they occur to me.


Permanent link to archive for 01/01/06. Saturday, January 6, 2001
 

The Emperor has no clothes. (01/06/2001 09:11 EST) I've been thinking a lot about pricing, Internet marketing, the collapse of the "Dot.Com" business model, stock price implosions in that particular market, and other related issues for the last few days. I've come to the conclusion that the Emperor has no clothes and more and more people are starting to become aware of it.

One good article by Paul Andrews (linked to in the title of this article) points to a critical decision made by Microsoft that to him (and to me) seems to be the start of the whole idea of commercial products being free on the Internet.

Of course, before 1995, the Internet was a commercial-free zone, subsidized by our tax monies, and commercial enterprises were neither allowed nor welcomed on the Internet. All of that changed when the backbone was handed off to commercial telecommunications firms and people started migrating their businesses to the Web.

I was reading Paul Andrews' Technology column: Was 'free' such a good idea?, this morning. Here's a short quote from that article:

"For software vendors, the message also was clear: to compete with Microsoft, the price had to start at 'free.' Build it and get them to come. Worry about charging later. It worked throughout the dot-com euphoria. It made lots of people rich on paper. It created a competitive fever unseen since the Gold Rush, meriting its own lexicon based on 'Internet Time.'

"Through the cold eye of today's market lens, 'free' does not seem so strategic. Everyone talks about software as a service, including Microsoft with its .NET initiative. But no one knows when, or even if, consumers will want to pay for software over the Internet as a service.

"Moreover, 'free' gave software makers an excuse to ship incompletely tested, bug-ridden, half-done products. Why should we bullet-proof, the argument went. It's not like we're charging for anything here. "

This points to two main issues in last years euphoric "Dot.Com" boom and this year's "Dot.Com" bust. The first issue is the strange idea that you can build a business around losing money to attract customers with the goal of "monetizing" those customers at a future time. "Lose money to gain market share" was one of the strategies frequently espoused.

We've seen the result of that. Euphoric investment (gambling and speculation is more like what actually happened) drove stock prices of companies that never made a profit into stratospheric heights. Companies with no assets whatsoever other than investors' money, flashy advertisements, and a web site were trading at cap values higher than 100-year-old corporations with real physical assets and a business model that was proven to work.

Now, just a few short months later, over 200 of those companies have imploded and they've taken hundreds of millions of dollars gambled by "investors" who were looking to get rich. Where is that money now?

"Dot.Com" fallout in the real world

We have a clear indication of this boom and bust here in Cherokee County, North Carolina. In early December, 2000, Outboard Motor Corporation (OMC) laid off all of the 300 plus workers at the Andrews, NC plant for a month. Then, just after Christmas, they announced that the company was going bankrupt and all employees were permanently laid off, and not just at that one plant, but at many plants. With no warning whatsoever these employees lost some of the best-paying jobs in this poor mountain county.

The reason OMC used for this? They had lost money which had been invested in one of the "Dot.Coms." They had, in fact, lost so much money that the company went out of business and thousands of jobs were lost as a result.

Was this just a problem with a financial downturn, or was it the result of negligence and greed? Instead of investing their money in making OMC a better, healthier, and long-lived company, the officers of this corporation bet their assets on making quick money in a boom market and then they lost their gamble. This was no investment, it was mere gambling. They should have known better.

Now, real hard-working people are suffering the results of their employers' stupidity. And, this is just one example. Thousands of people have lost jobs because of the implosion of the "Dot.Coms." Hundreds of millions of dollars have evaporated. The problems are just starting to appear.

Now, Microsoft had a reason to offer Internet Explorer free. They were afraid that the new combination of the World Wide Web, Netscape's Navigator, and Java would undermine sales of their Windows product. So, they did what they always do. If you can't beat 'em with a better product, either buy the competition or destroy them. They chose to destroy Netscape. They gave away Internet Explorer for free.

(This attitude is pervasive at Microsoft, and many other companies. I have no respect for the people who run the company, their business practices, nor most of their products. It's why I quit upgrading any of their products in 1995. Well, let's be honest here. I haven't quit upgrading their products, I still get the new and free versions of Internet Explorer, but I haven't paid them one penny to upgrade any of their other products. Perhaps this makes me a hypocrite. I'm still trying to deal with all the ethics of this.)

Then, they offered free copies of Internet Explorer to ISPs to give to their customers, but it came with a little-publicized hook. In order to be able to do this, the ISP had to agree not to distribute Netscape Navigator or to promote it to their customers. I know this for a fact, because I received one of these offers from Microsoft when I was the SysAdmin for grove.net. I refused to sign it or participate in their scheme (and quit buying any more of their products from that moment). Most others didn't.

Months later, Netscape was destroyed as a company, and now well over 80% of people on the Internet use Internet Explorer as their browser. Even I do it. I have several versions of Navigator (which I was buying for real money before Microsoft got into the act), a copy of CyberDog, and a copy of iCab. Each of these programs has features that make it better for certain things. The only reason I use IE is because it is, for better or worse, the industry standard. And, it uses less memory on my Mac so that I can run more programs at the same time, and I regularly work with my Eudora client for email, Radio Userland's database program, and sometimes one or two other programs all running at the same time as I'm running Internet Explorer. If iCab could do secure connections, I'd switch to it, and I'd pay for it, but it's not ready, yet.

So, Microsoft won. Why? Because they had the clout and the lack of ethics to do it. And they're probably going to get away with it now that we have a Republican President.

Why do Internet services have no value?

The second issue the article points to is the perception that services on the Internet have no monetary value. Everything should be offered for free. This is not a viable way to run any business. There are costs involved in producing anything, and those costs must be covered or the business will close its doors.

I've spent much of my time over the last six months looking at how companies can market their products over the Internet and I believe it is the way most companies will market for the foreseeable future. But, it's not the only way. The web is a good way to present your products at much less cost than traditional methods of printing on paper and distributing physical catalogs, brochures, and other marketing devices. It's here to stay and it's going to be more important as time goes by.

However, there are companies who had viable businesses that have been impacted by the perception that information should be free. Every major magazine and many newspapers have put out free online versions that provide at least a portion of what's in their printed editions. Some provide all the information that's in their paid, printed editions. They're shooting themselves in the foot. They have to find a way to pay for the cost of production of that information. Why is the online edition less valuable than the printed edition?

Will free services remain free?

I'm seeing advice from people all over the web that advises people to provide "stickiness" to their web sites by providing free services. Free community forums, free email addresses, free ebooks, free newsletters, free this and free that.

Don't get me wrong, as a marketing method and as a service to your customers, at least some of these are probably a good idea and I'm going to continue exploring and trying some of them. But, they won't earn you any money. You must have a line of products that you can sell to cover your investment in time and money to give away free things.

I'm as cheap as anyone. I will use free services as much as I can. All of my websites are hosted for free. All of my forums are hosted for free. All of my email groups are hosted for free. If they're going to offer the service, I'm going to use it.

But, I think we're going to see the end of the free services era in a few short months. I don't think the advertising and affiliate model is the way of earning a sustainable income from the web. It will work for some large portals with hundreds of thousands of visitors every week, but it won't work for most others.

Is affiliate marketing viable for low-traffic web sites?

I'm on several affiliate and affiliate managers lists, and they're all saying the same thing. 99% of affiliates never make any money, or make very little money. A substantial portion of all affiliates never even post links. It's too easy to sign up as an affiliate and it can become overwhelming in a short time. I've researched this for months -- and while I'm no expert -- I know how much time it can take up. For very little return.

(Of course, I know I'm developing new sites and I haven't even started trying to bring targeted traffic to my sites, yet. I am continuing to test the waters, and I'll be reporting my experiences whenever I have something useful to say about these advertising and affiliate models.)

I still, think, however, that there is enough potential in affiliate marketing that I'm going to continue working it.

I've learned through joining over 400 affiliate programs that the vast majority of the merchants do little to help their affiliates earn an income. Mostly, this is about helping the merchants get free or nearly free advertising on thousands of websites with little effort on their part. Most only make a few dozen links (banners, half-banners, and text links) available. Then they say you can make thousands of dollars by doing nothing but putting the link on your site.

Nonsense.

Studies have shown that banner links actually hurt your site. The only affiliate links that consistently seem to be worthwhile are text links, and the only ones that really convert into dollars are links that are part of a personal testimony or endorsement.

That's why I've cancelled most of the programs I'd previously joined. I'm still looking for merchants who'll offer my readers good products at good prices. I'll continue to advertise those products and I'll personally endorse the ones I use and value.

(That's why I'm so happy to recommend Ken Evoy's book, Make You Site Sell! It's filled with great information and advice. It sells for a reasonable price. It offers great value for the money. And, mainly, because Ken has invested lots of time and effort to help not only the readers of his products, but the folks who choose to join his affiliate program. He's produced over a thousand pages of information on how to succeed in the affiliate marketing arena, and much of that information is just as valuable to folks who want to sell their products on the Internet. I can't give a higher recommendation for any product I explored in the last year. Every page on every site I manage has a link to Make Your Site Sell! because I think it's the best money I spent in the last year, and I'm still learning from it. And, again, if you don't want to buy the book and learn from it, at least sign up for the Affiliate Masters free five-day email course he offers. It provides valuable information about how to sell on the Internet -- information that other folks charge upwards of $100 for. Of course, he provides it at no charge because it is an effective sales mechanism for his other products, but that doesn't lessen it's value all by itself. To try it for yourself, just send a blank email to tamssellmoreonline@sitesell.net and you'll receive the first lesson in just a few minutes, followed by one lesson per day for the next four days. If you decide you're not interested, you can unsubscribe -- instructions are on each email he sends -- and his unsubscribe system works. There's no cost or obligation, and I've taken this course twice and I'm still learning.)

Other affiliate programs are linked into my directories. If I have any sense that a company isn't providing a top-notch product, I'll pull the ad or directory link in a heartbeat. For example, I won't carry any advertisements for credit cards, even though they pay good commissions if you click on one of the link and subsequently get a card from the company. I won't do it, because I know from personal experience the problems associated with credit cards and the debt load they encourage you to carry. You simply can't arrive at financial stability by continuing to borrow yourself deeper into debt. You have to learn to live within your means and quit paying lenders, if you want to take control of your life, again.

It's not always about the money.

Not all of us do what we do because we're trying to get rich.

I have skills and experience for which I can charge over $100 per hour, if I wanted to do it. Last year, I turned down two jobs that were better-paying than any job I've ever had. Both were for over $100,000 per year, but I didn't want to move back to a city and work on computer programming any more.

What I want to do is become a better metalsmith and make quality products for people who appreciate them. I want to learn to sculpt and cast limited-edition replicas of those sculptures. I want to make a steel rose for anyone who wants one and is willing to pay for it.

I want to use my skills and experience to help promote arts and crafts in general. I want to help people who make quality products sell those products to a wider market. I want to promote what's available here in western North Carolina, especially in Cherokee and Clay counties in the very western-most part of this state. I want to help you make money doing what you love to do.

And I want to make enough money to be able to afford continuing to do this. I'm not looking to get rich. I don't want to inconvenience or annoy anyone. I just want to earn a simple living, pay my bills, and be able to continue devoting my efforts in these directions.

There ain't no such thing as a free lunch

I truly think the free-ride era of the Internet is coming to an end. I think we'll see more and more of the free services disappearing. Already, Yahoo is charging to be listed in their directory if you sell a product on your site. What was free for the last several years now costs $199. They just announced that they're going to start charging a fee to list items on their auctions, just as their competitors (eBay, Amazon, and others) have been doing for some time.

Several companies that offer free websites and servers for other services are now finding it nearly impossible to continue adding hardware and bandwidth since they don't have the cash flow from new investors and advertisers to keep their businesses open that they had just a few months ago when money was flowing fast and furiously to anyone who had an idea for making a fortune on the Internet.

Some of these services will disappear and some will convert to a pay for services model. Some will be worth paying for, others won't. We'll have to make the determinations with each product as it attempts to change-over.

As I've frequently said before, my crystal ball is awfully cloudy. I don't know that things are going to develop in these directions, but I have strong suspicions that they will.

If you plan to have a viable presence on the Internet, you should be thinking about paying for web hosting with a company that can continue in business because they're making a profit. You may want to consider paying for services such as auto responders and email lists. For now, there are still viable free services, but I don't expect these to be available for the long term.

If you're testing the waters, do as much as you can for free. Learn what works for you. Learn how to price your products on the web. Learn how to use the different services efficiently. Then, when you know what you're doing and you're making a profit, I think you should seriously consider finding a company that will offer you great service for a reasonable fee. This builds a relationship that is sustainable, and isn't subject to the latest trends, booms, busts, or fads.

Other's have gambled and lost

The management at a company such as OMC should have known better. They were greedy. They lost.

Don't fall into the same trap.

The Emperor is naked.

** JD **    12:03:19 PM


© Copyright 2001 John L. Dilbeck, jd@johndilbeck.com.