How can we build a successful electronic economy on the Web?
Originally it was thought that advertising would support free Web sites in the same way that advertising supports free TV stations and free radio stations. Almost all commercial Web sites therefore adopted the "free content with paid advertising" model. Unfortunately, this business model ended up being completely wrong for the Web, and a huge number of sites went out of business by using this model.
The reason that advertising does not work very well on the Web is because the Web is nothing like TV or radio. TV and radio are linear, and with a linear medium you can force the viewer/listener to pay attention to an ad that interrupts the program. The Web is nothing like that. Instead, the Web is much more like a book or a magazine. People come to the Web primarily to read and see pictures, and they can flip to a new page or to a completely different site whenever they feel like it.
For small sites, the reason that advertising does not work is because you have to hire a sales staff to sell advertising. In addition, advertisers are not particularly interested in small sites. For small sites, advertising is not an option. [See this letter from the President of StockCharts.com for an interesting discussion of the situation faced by small and intermediate-sized Web sites.]
When you go to the book store, you never see free books. It is also very rare to find books containing advertising. Instead, people pay directly for the information that books contain because the information is valuable to them.
The challenge facing the Web today is that the Web is using the wrong business model. The Web needs to adopt a new business model in order to be successful -- in order to reach its full potential. The Web's revenue model needs to involve payment like the book revenue model, but it also needs to accomodate the completely infinite and fluid nature of the Web.