What the Underpants Gnomes can teach you about business on the web.

I’ve been thinking a lot about the kinds of businesses that will start and thrive in this economy. The bulk of web 2.0 companies were built (and bought) based on the thought that they would aggregate and re-sell people’s attention. As we moved through the business cycle, some companies developed exotic ways of targeting their users (Facebook), others used AdSense to generate a trickle of revenue, others based their businesses on driving search revenue (AVG, w3i, Conduit, Dynamic Toolbar, Freecause) and still others just left the problem for their future owners to solve.

As the economy slowed, AdSense yields plummeted and publishers became frustrated with the quality of the ads. Advertisers became more conservative, cut their “experimental” budgets, and avoided new targeting techniques. Folks like AVG became more aggressive and successful, and have spent the last few years creating new toolbars, virus scanners, and other tools to drive search distribution. But outside of search distribution, the “attention” businesses have been getting creamed.

On the supply side, you’ve got dozens of new channels (mobile ad platforms, dozens of new ad networks, Facebook, and so on) generating record levels of ad inventory. On the demand side, all of the major brand advertisers have pulled back, and two of the biggest categories - autos and financials - have slashed or eliminated budgets. I shudder to think of what will happen if the U.S. pharmaceutical industry is finally subjected to price controls.

Dharmesh Shah wrote a great post a couple months back about the challenges of building a business for the attention economy. The crux of the problem is that people only have a finite amount of time - and attention. On the other hand, people can always - at least in theory - make more money. Shah goes on to list out three major difficulties with building a business for the attention economy:

“1. Attention Is A Scarce Resource: Attention is a bit limited and fragmented. I’d argue that it’s getting increasingly harder to get people’s attention…

2. Battle of User and Advertiser: There’s a conflict between getting monetizable attention and solving the user’s problem…

3. Advertisers Make Lousy Customers: Even with all the fancy content-matching algorithms that pair up a given ad to a given context, I still don’t like advertising. I really don’t. I can see why it’s important in a lot of industries — but I don’t know that software is one of them. Given the choice between solving a user’s problem (which I understand, and hopefully care about) and an advertiser’s problem — I’d choose solving the user’s problem…”

Selling attention is hard - but everyone accepts that it’s hard. So they just include it in their business plan as the second step of the “Underpants Gnome Business Model.” For those who haven’t heard, the model is:

Step 1: Steal Underpants Step 2: ??? Step 3: Profit http://media.mtvnservices.com/mgid:cms:item:southparkstudios.com:151037

Unless you have some very deep pockets, and have a multi-year technology or science problem to solve, this just shouldn’t fly. That’s one of the reasons I’m spending more time looking at wallet-based (as opposed to attention-based) business models over the next few months. Amazon and ebay are big, but they’re not everywhere - yet.

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