The notion that advertising revenue can save content is looking increasingly untenable. Jason Fried explains why drug dealers and bakeries may have had the best business model all along.

Question: What is wrong with free content?

Jason Fried: You know, you walk into a bakery and get a free sample because they want to sell you a muffin. That makes sense. But you go online and use a website for free and there’s nothing to sell you, that doesn’t make sense. So, I think free is a great model as long as you have something to sell also. Free should be an incentive. We like to say that you could be emulating drug dealers, basically. You know, drug dealers give you a little sprinkle or a little taste and get you hooked, and then you buy from them. They don’t just give you more free drugs all day, you buy something from them. So, we’re a big fan of emulating drug dealers, basically, or bakeries. That might be a better way to put it.

But anyway, that model works. But the open source world, that’s kind of a different thing. There are some companies that opens source software and then sell support on top of it, so that’s one way to make money off of open source. For us, we think that the opens source thing works for us because, first of all, the product is better and we get to use Rails, and so if other people are improving it, that’s good for us, we can use that in our pay products. Secondly, whenever people mention Rails, they mention 37signals, they mention Basecamp or High Rise, or us in some way. And that indirectly benefits us as well. So, that’s kind of the guiding principle for us. So, some stuff is free, most stuff is pay.

Question: What is your outlook on the ad model?

Jason Fried: Well ads do make sense in some cases, but people look at Google and they go, “Well, Google is making billions on ads, they’re putting ads next to search results, like we should put ads next to everything too because it worked for Google.” Well it works for Google because, if you think about it, if you’re going to Google to search for something, you want to find something, then advertisers are pitching their wares that are relevant, it makes sense because I’m looking to find something and they have something for me that I could find and use. That makes sense. But throwing ads up along side content that doesn’t – I’m not going in there to find and search to buy something. I’m just going in there to read an article, that doesn’t work at all. So, you see a lot of companies in software like – if I’m using software to do something, I’m not using software to do something to find an ad, I’m using software to do something to do something. So, it works for Google’s model because that’s what I’m going in there to do, to discover, to learn, to purchase something.

But in most cases, if that’s not the case I don’t think ads work all that well unless you have a tremendous amount of traffic and that’s really, really hard. There’s also a problem with a disconnect between ads and users. My belief is that you can build a better business if the people that use your product are the same people who pay for your product. In the ad supported model, the people who pay for your product are not people who use it. People paid for the advertisers, and the people who use it are the users, so there’s a disconnect. So, who are you building it for? Who do you really have to make happy.

In many cases, it ends up being the advertisers which is why you see in a lot of news sites especially, there are ads everywhere. And that’s a pretty crappy experience, I think. So, I’m not a big fan of that model. I think that some people could make it work, but I’m not a big fan of it and I think the default idea of, we’ll just put ads on it. That’s what will support it, we’ll just put ads on it is a terrible idea. And it’s much, much, much easier to get people to pay for your product or your content, or whatever than it is to throw ads up.

And the last thing I will say about this is putting a price on something forces you to make it good, and that is like, those are the constraints you need on you; a force that forces you to make something good. Because if something is free and ad supported, it doesn’t have to be that good, it’s free. I’ll use it, it’s free. I don’t care. But the moment I start paying you for it, that’s the moment it forces you to be good and give me a service that’s worth paying for and that to me is the right pressure to have on a company.

Question: What companies are now deriving value in interesting ways?

Jason Fried: I like some of the more interesting. Like, one of the things I like today is, there is a company called Twilio, I think that’s how it is pronounced. T-W-I-L-I-O. And they are basically a new type of company that’s selling, I don’t’ want to get technical, but selling API access. Basically what they let you do is they let you create conference calls and/or voice mail systems, or phone trees with really simple programming language. And what they do is they sit in between you. So, if I’m a company who wants to make a conference calling system, I might use their technology, and then I might pay per minute for their technology instead of subscribing to them on a monthly basis, or whatever, I pay as I go. And I think that model is pretty interesting. It’s similar to the way Amazon is doing with the Amazon Web Services, where I can rent a server by the minute, instead of having to buy a server or pay upfront. So, I like this like pay per true use thing. I like that model a lot. So, I think that’s kind of a cool innovation that’s coming up right now and I think that those are interesting companies to watch.