There will always be two major ways to pay for content: with your hard-earned cash or by enduring advertisement.  Advertising creeps into everything and always has.  As soon as the Internet opened its doors beyond government and universities, there were ads.  But in the early 90s, it was probably hard to imagine that a company could become a multi-billion dollar empire using that model alone. But sure enough Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO), Facebook and countless others have done just that. 

The ad model is a very powerful one: you can market yourself as a business giving away free stuff and make a lot of money doing it… and it’s hard to beat free. But it takes its toll on the consumer base.  Have you ever watched 2 seasons of a show on DVD and then caught the 3rd on live cable as it was airing?  If so you were probably horrified by the commercial breaks and by how much it took away from your enjoyment of the content.  I think that more and more, customers will be willing to pay a small fee to avoid ads. The success of TiVo (NASDAQ:TIVO) illustrates this point perfectly. Have we reached the point where customers have been bombarded with ads enough to be willing to pay?  Maybe.

For the second quarter in a row, web-based ad revenues have gone down.  I have a hard time believing that this is just a ripple effect from the economic crunch that is beating the country down.  When you have less money and tighten your belt, I think it’s natural to go and watch more ‘free’ content, not the other way around.  I would actually expect ad revenues to increase during tough economic times and subscription-based services to increase during prosperous times.  Even Google is starting to look at other ways to generate revenue, and is adopting an affiliate model with its popular YouTube.

Now I am not saying that the ad model is going to go away.  There will always be advertising and there will always be loads of money to be made from it.  As a matter of fact, Google is also coming up with new ways to expand its ad footprint by tapping into the web-based videogame space.  But I do believe that it will now be harder than it used to be to build a whole business based on the ad model alone.  I do believe that more and more cable companies like ABC and NBC will be coming up with new ways for you to have access to their content, including small monthly subscription fees.  Time will tell.

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