You’ve probably already read Chris Anderson’s new article The Economics of Giving it Away. A nice summary was put also put together by Dharmesh Shah at OnStartups.
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.
Tagged: Business Model, Chris Anderson, Economics, Free, Profitable, Startups, Sustainable
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2 Comments
Hi Seph.. interesting post. My take (or suspicion) on Twtitter, Facebook, Digg, etc. is that they can’t reveal to the wide public what their actual business model is. These networks essentially have plenty of information of user’s interests and can sell that data to any advertising/research agency in the world. But they haven’t been very straightforward with that model, so in the meantime they struggle to find alternative sources of revenues so they can go public with them.
That said.. what I can tell you about us, good ol’ Popego, is that we are focusing on selling our algorithms and API access to third parties, and these get trained by the inputs our users do on our consumer app. It seems that we might have a sexy business model afterall… Yet, you know quite well that for us, it took a while until we could figure out which way to go.. Innovation is a risky game indeed.
Santi, I think you give them too much credit. Regardless, assume all these players have the same business model (sell data to advertising/research agencies), then won’t the value and willingness to pay for this consumer data also fall? Isn’t this what happened with online advertising already?
I’m concerned your plan assumes you will be able to sell algorithms/data in 2 years for their market value today. Remember the startups funded 5 years ago with business plans assuming they’d get $20 CPM’s today?