I generally agree with the direction that Chris Anderson sees things going. The marginal cost of a web service is getting smaller. The freemium business model makes sense and there are several successful examples of this. And yes, without a doubt, consumers have become accustomed to not paying for web services.
But there’s something missing to this story that I just have to highlight (or someone please correct me):
Most of today’s free web services are subsidized -not by a few paying customers, but- by optimistic (delusional?) venture capital and corporate investors.
It seems that in just the last few years, there has been hundreds of millions (billions?) of dollars invested in web services that either have no business model or planned to rely on advertising alone.
With millions of dollars, startups like Twitter, Pandora, Digg and Facebook have created some really compelling products that have attracted millions of users. These are the darlings of the internet that experts point to as examples of success.
But, NONE of them are profitable today. Fueled by the optimism of their investors and the bubble network of bloggers/users/experts, these companies are able to continue raising money to support their free services. As subsidized startup competes against subsidized startup, prices continue to fall, advertising inventory continues to increase, millions of dollars of investment are lost and consumer expectations for “free” increase.
At some point, internet startups are going to be forced to stand on their own feet. When that time comes they will have to scale down their teams and optimize their pricing. I wonder how many are going to realize that they’ve spent $50M building a company that can’t generate more than $1M/year in profit, or $5M building a company that can barely support a single founder?
Free is just NOT a sustainable business model.