Advertising is dead. Deal with it.

Have you ever had the feeling that you were a fly buzzing against a window, not knowing that you could escape if you just moved a few inches to one side? That's how I've felt recently, thinking about how to build an advertising-supported Internet site. I've come to the conclusion that, for all but a handful of sites, it's impossible to build a successful business by depending on advertising.

The classical advertising model was based on an economy with few media outlets and many media consumers. In the U.S., for decades there were three broadcast television networks and three commercial television stations in most markets. In most cities, there were one, or at most two, newspapers. The scarcity of media outlets meant that each outlet had a large audience, and that audience attracted advertisers, who were willing to pay enough to turn the outlets into viable businesses.

The Internet turned the classical model on its head: Instead of having a small number of media outlets, each with large audiences, we have a huge number of outlets, each with small audiences. Only a handful of sites and services on the Internet have been able to attract the audiences necessary to make an advertising-based revenue model work. The cost of setting up an Internet site is tending toward zero, especially if you can convince people to create content for you for free. Operators of these kinds of sites can run them profitably, or at least not at a large loss, right up to the point where they have to pay people for their content and services. That's why The Huffington Post has pushed back so hard against bloggers who want to be paid for the content that they provide to the site. If the HuffPo had to pay for all its content at market rates, it would go bust.

The problem goes beyond the Internet--cable television networks, in the aggregate, have a bigger audience than the broadcast networks, but few cable networks attract a big enough audience on their own to be viable without fees paid by cable, satellite and IPTV services. That's why cable networks and service providers fight so hard against "a la carte" pricing that would allow subscribers to pick and choose channels.

So, what should you do? If you're thinking about starting a business, pick a business and a business model that allows you to charge users. If you're running a business that is advertising-supported, or that you hope to run on advertising revenues in the future, pivot to a business and business model that can be profitable on user fees. If you're an investor and someone comes to you with a business plan that depends on advertising revenues, walk away. In short, if you can't get your users to pay for your service, you're in the wrong business.

TWiT, Revision 3 and...Keith Olbermann? Television networks on the cheap

Update, February 8, 2011: In a teleconference this morning, Keith Olbermann and Current TV announced that Olbermann will do a nightly news and commentary show on Current beginning in Spring 2011, become the company's Chief News Officer and have an equity stake in Current Media.

Update, February 2, 2011: I fixed all of the capitalization errors for Leo Laporte's name (it's Laporte, not LaPorte, although he's known as "The Door" to his friends). In addition, NewTeeVee reported today that Revision3 reached profitability in the last quarter of 2010 and claims that it's the number one "over the top" television network in terms of viewers.

Last week, TWiT Network owner Leo Laporte signed a lease to move his operations from his farmhouse in Petaluma, CA to a 9,400 square foot building formerly occupied by the audio software company Bias. TWiT will turn it into multiple television studios, a radio studio and business offices. The TWiT Network is entirely Internet-based, although Laporte also does conventional radio and television shows for other outlets.

TWiT didn't arise out of a vacuum. Laporte was one of the central figures in the creation of ZDTV, which originally started by producing programming for MSNBC and became a 24-hour cable network focused on technology news and information in 1998. ZDTV immediately ran into problems getting (and paying for) cable carriage, as well as advertising, and in 2000, it sold out to Paul Allen's Vulcan Ventures and changed its name to TechTV.

Allen and the programming team he put in place at TechTV tried a variety of programming approaches, but nothing worked to make the business profitable (and no one approach stayed in place long enough to build and sustain an audience). In 2004, Allen sold TechTV to Comcast, which merged the channel with its G4 games-oriented cable network and renamed or eliminated most of TechTV's programs. Today, only two of TechTV's on-air hosts remains at G4.

Laporte didn't make the move to G4; he stayed in Northern California and started the "This Week in Tech" podcast, from which TWiT gets its name. Laporte added more podcasts, then began simulcasting some of the podcasts with video, and eventually added some video-only shows. Last August, the Los Angeles Times reported that TWiT's revenues were $2.25 million in 2009 and were on track to reach $3 million in 2010, with 10 full-time employees and 30 to 40 contractors. Not a huge business, but profitable, according to LaPorte.

One key to TWiT's success is that Laporte has scaled its growth to fit its revenues. He still runs it out of his Petaluma farmhouse, and he's kept the operation "bare-bones". Even with the move to a larger facility and Laporte's intention to eventually offer programming 24/7, it's still operating on a much smaller scale than ZDTV or TechTV ever did, and that's essential to its success.

Another ZDTV veteran, Jim Louderback, runs Revision3, a spin-off of Digg (which was co-founded by yet another TechTV survivor, Kevin Rose). Revision3 is also an Internet-based news and entertainment video network, and in addition to his duties there, Louderback is a columnist for Advertising Age. He recently wrote about cable network WealthTV's decision to create a channel for the Roku set-top box, and in a follow-up article, suggested that cable networks that have been unable to get much carriage from U.S. cable, IPTV and satellite operators could follow WealthTV and create their own over-the-top Internet video channels.

The problem for these cable networks (Louderback calls them "zombies") is that the can't simply move their operations to the Internet and hope for a better outcome. Instead, they have to scale their operations to the revenues that they can generate from the Internet. They don't have to pay for carriage, but they're going to have an uphill climb to earn any significant subscription revenue. (TWiT gets the vast majority of its revenue from advertising.) That means that they're going to have to dramatically lower both their costs and their expectations.

That brings us to Keith Olbermann. Keith Olbermann? U.S. readers probably know that Olbermann anchored the most popular program on MSNBC, "Countdown with Keith Olbermann", until last Friday. Initially, it was thought that NBC, the owner of MSNBC, fired Olbermann, or that Comcast, the soon-to-be owner of NBC Universal, had played a role in the decision. However, it now appears that Olbermann wanted to leave the network and NBC wanted to get rid of him, so they worked out a mutually-convenient settlement.

Olbermann spent eight years at MSNBC, but he's bounced around among many networks for years, including CNN, ESPN, Fox Sports and a short previous stint at MSNBC. The only option he's had over the years has been to go to work for a different network, but the Internet offers him another option. The Huffington Post and The Daily Beast have both built large, profitable audiences on the Internet from nothing in just a few years (The Huffington Post, in less than six years, and a little over two years for The Daily Beast). Olbermann could create his own Internet video network, operating at low cost (like TWiT) while providing a forum for a variety of outside contributors (like the Huffington Post). Whether it would make enough money to keep Olbermann interested is a separate issue, but it would enable him to work as he wants without answering to a phalanx of corporate management.

The wheels keep turning: Dan Rather went to HDNet and Conan went to TBS. Could Olbermann go to the Internet?