Users on the internet have been spoilt. They expect everything for free and when something is not free, it’s an “annoyance” rather than the norm. There are two issues:

1. Someone has to pay for these services
2. If you don’t give it for free, your competition will

For (1), the resolution is found in what most service providers already do: have sponsors pay for the service. The primary revenue model for internet services is subscriptions (users pay a montly or annual fee for the service) and ad-based model, where users click on an ad and the sponsors pay the orignal service provider a per-click fee. For e-marketers this is a great opportunity. As the number of free services go up, those free service providors will want to collect money through sponsors and the more they want to collect the better it is for e-marketers because it gives them better opportunity for marketing.

As for (2), the competition is only deferring the cost of free service. They will have to make profits sooner or later. This means that it is inevitable that these new competitors will also start charging or engage in rigorous ad-based revenue models themselves.

The idea of a free service is simple. New competitors as well as existing ones want to grow or retain their customer base — essentially locking them in. People don’t want to change their email alias every 10 months. Once users are locked there is a better likelihood of them upgrading to a premium service.

This is most apparent with the hotmail/gmail/yahoo saga. Hotmail offered 2MB which was good at the time. Then Google came along.

Google quoted 5X analyst estimates for revenues and has implemented a very successful “targetted” ad-based system by giving the users exactly the kind of ads that are appropriate to their current sentiment (what they are searching or what mails they are reading). Google Inc. reported a record revenue of $1.03 billion for the quarter ended Dec. 31, up 101% year over year, and 28% over its previous quarter. Of this, $490 million was from their adsense program (ads you see on Google search). [1]

Ofcourse, Hotmail and Yahoo followed suit and upgraded their service as well. They are currently both investing in better ad targetting. That is where the war will be fought. Hotmail currently has over 200 million users, of which there are 2 million paid users [2]. That’s a lot of potential revenue and it’s plain to see why they would be investing heavily in better ad-targetting.

All in all users will expect subscription based models to be replaced with ad-based revenue models provided ads don’t act as an annoyance. As data mining technologies and methodologies evolve, ad-targetting will improve. At present some sites have resorted to obtrusive ads — the kind that users must click to proceed to the site content.

My guess is that advertising will get more intelligent and e-marketers will gain the most. Value Click [VCLK] is one company to watch out for in terms of online marketing. [3]