Can Google get smart without the free-with-advertising model?

I love thinking forward, and being an ENTJ, can imagine all sorts of possibilities that others not only do not see, but when presented with them, say, “Hogwash!” Nonetheless, I have for better and for worse been an early adopter, in the vanguard, ahead of my time (choose your phraseology) most of my life.

So I was very curious when I read this article by Don Reisinger of cnet: If it can’t find a solution, Google should kill YouTube. Thanks to my colleague Heath Parks for pointing me to this post.

He was discussing this quote from Google CEO Eric Schmidt, gave to Ken Auletta and posted in the New Yorker, discussing the struggle Google is having making money off their $1.65B purchase of YouTube.

The goal for YouTube is to build a tremendous community….In the case of YouTube we might be wrong. We have enough leverage that we have the leverage of time. We can invest for scale and not have to make money right now, he said. Hopefully our system and judgment is good enough if something is not going to pay out, we can change it.

Let’s forget those temporary accounting tricks that indicated Google actually made money off the expenditure (October 6, 2006) because the price was offset by an increase in the stock price theoretically resulting from the purchase. (October 2, 2006: $420.50. October 16, 2006: $459.67.) Lemmings do not a sustainable model make, though they can drive up a stock price.

What matters is can Google continue to make money, and if it can’t how does it reconcile what it owes its shareholders vs. what the marketplace of millions is demanding?

Schmidt goes on to say:

There is a tremendous amount of use of social networks…the traffic is phenomenal…and there will be advertising products in that context…it’s taken longer for the industry to find those devices but they are clearly there…. Our primary success was in the direct marketing piece that is quite measurable and tactical. The mobile case is just an extension of that. As mobile devices get more powerful you can do click to play ads. Mobile devices will be able to do powerful narratives…cameras, GPS…it will tell you need new pants.

It remains to be seen how much advertising in how many places people will be willing to tolerate for free content. Movie theaters added it, and attendance continues to decline year after year (link has expired) though video rentals and ticket price increases are keeping that industry afloat.

Many professional early adopters blog regularly about people’s willingness to pay for ad-free and premium services. But there’s a catch right – because it is the smarter richer people (who would pay) that advertisers generally want to reach, so there is a built-in catch 22 for startups who are creating their business models. There may not be enough paying customers whereas advertisers still seem willing to spend. Read the comments on this post to see the skepticism people hold for how many would actually signup to pay. As a result, companies (like Twitter) appear to be dragging their feet on implementing for-fee channels. We don’t get much chance to either test this or build this over time.

Right now there is fascination and wonder in having these wide open spaces where anything goes and anyone can show up. Advertising per se certainly is facing as large a challenge as Detroit’s auto industry. It’s tough to see the gates unlocked and people running all over the field; making cars in Japan, Germany, and now India that are good enough or better than most. To see people telling each other what to buy and where to buy it instead of being captives of marketplace manipulation.

Schmidt says, Frankly, the free service model with free advertising is still the best model. Do you agree? I think younger people are seeing through advertising and we have a revolt of some sort in the making. They may be wiring their brains to ignore it more than ever, while others may be forming a basis for radical rejection of the manipulation of advertising, along the lines of the 60′s radical rejection of the Vietnam War.

Check out this 10th Grade Project on Persuasion or Manipulation: Thinking About Advertising

Would not Google be a great company (who has the brains and the cash) to start building some innovative business models that allow people to pay for improved user experience? Might the early adopters then be able to help shape a new economy? Might we actually develop beyond the lowest common denominators of free, advertising-sponsored and advertising-despised models of transacting with each other?

Calling all forward thinkers to weigh in on this with me.