Freemium is better than Free

A few interesting posts drew my attention this morning. First there was Dave Winer who predicts that on-line advertisement will be dead. Not because it will completely disappear, or that it’s growth will slow down considerable. But because it will be replaced by something more valuable, commercial information. Interesting thought. I’ve always felt that on-line advertisement only makes sense when the advertisement itself has value to its user. Dave takes that thought one step further and explains why commercial information is more relevant.

Erik Schonfeld at Techcrucnh shows statistics that advertisement growth is grinding to a halt. He uses the results of the 4 major advertisers (Google, Yahoo, Microsoft, AOL) to show that growth is slowing down considerably. Together they still create a staggering $ 8,2 Bln revenues per quarter, but what would interest me is to know the total market value right now. It would most likely show that more than 90% of all advertisement revenues are generated by these four companies. Why there are so many startups still executing the free advertisement based business model is beyond me.

Chris Anderson explains about the metrics behind a business model I like a whole lot better, Freemium. In this business model you provide most of your service for free and generate revenues from a small part. The model works only in cases transaction costs are nearly zero. You can have a huge distribution at near-zero costs and at the same time convert some of your users to paying customers. As your user base grows and you become more effective converting some users to paying customers you can have a successful business model.

Chris provides some market statistcs on this:

But that was just a hypothetical percentage split, to make a point. In the real world, what’s the right balance? The answer varies from market to market, but some of the best data is in the games world.

In online free-to-play games, companies aim to structure their costs so they can break even if as little as 5-10% of the users pay. Anything above that is profit. Which is why these numbers from Nabeel Hyatt are so impressive:

• Club Penguin: 25% monthly uniques pay, $5/mo per paying user
• Habbo: 10% monthly players pay, $10.30/mo per paying user
• Runescape: 16.6% monthly uniques pay, $5/mo per paying user
• Puzzle Pirates: 22% monthly players pay, $7.95/mo per paying user

As the blog notes, that compares very well to the 2% of the casual downloadable game market that pays, or a 3-5% that a lot of “penny gap” free trial web startups get. Estimates for the number of free Flickr users that convert to paid Flickr Pro range from 5-10%. Ning says 3% of its 500,000 social network creators pay for the premium version. And shareware software programs often see less than 0.5% of users paying up.

If you can get 5% of your user converted to paying customers then your business case can become profitable. As your business keeps scaling (due to the FREE component), 5% quickly becomes an interesting number of paying customers and a healthy stream of revenues.

What I like best bout Freemium is that it combines the best of both worlds. You have excellent distribution possibilities while at the same time you ask customers to pay for the value they receive . It is the most straightforward business model there is. So those of you that are thinking about starting a new business, why not forget about the FREE advertisement based business model and concentrate on Freemium instead. not only is it a proven business model. But it will force you to think and act in terms of user value instead of network value. And that strategy is better for your customers and therefore better for your business. To me, Fremium is better than Free advertisment based business.

Google proves that everyone else executes online advertisement strategies poorly

A few posts drew my attention this morning. First, Nick Carr points out that Google is changing the way the web appears, depending on whether or not you are using the Google search engine:

First Click Free allows publishers that restrict access to their sites (to paying or registered customers) to give privileged access to visitors who arrive via a Google search. In essence, if you click on a Google search result you’ll see the entire page of content (your first click is free) and you will only come up against the pay wall or registration screen if you try to look at a second page on the site.

[stuf deleted..]

At the very least, First Click Free provides another boost to the web’s centripetal force, as Google further strengthens the advantage that its dominance of search provides. Google doesn’t like to think of itself as locking in users to its search engine, but if you get a privileged view of the web when you go through Google, isn’t that, as Lenssen suggests, a subtle form of lock-in? Isn’t Google’s web just a little bit better than the traditional unmediated web?

Mathew Ingram disagrees with Nick and takes quite a different stance:

As Matt Cutts notes in his comment, there’s nothing preventing publishers and websites from providing exactly the same service to anyone who comes in via search, whether it’s through Google or not. There’s nothing proprietary about it, nothing restrictive or exclusive. In fact, publishers would be dumb not to extend the same policy to anyone who arrives from a search engine. It’s an easy way to give someone a sample of what you’re offering to entice them to pay. I think Nick was just looking for a nice, fat stick to beat Google with, and First Click Free seemed to fit the bill.

I agree with Mathew on this one. Google has already changed the way we use the web. We browse less and search more. The web has already been Googlified as it is the most dominant search engine. We look at what Google presents us. What First Click Free does is provide publishers a nice way of providing potential customers a first glance at what is available in a paid environment.

It’s a smart business model, and resembles Freemium. Google is executing the advertisement model really well. They will, unlike other web services that try to leverage advertisement in their on business model not be hit as hard by the financial crisis. Henry Blodget has a good article on that. He writes about the current financial crisis and concludes that online advertisement will take a hit.

It’s time we woke up and faced reality. Online display-ad spending will fall in 2009, probably sharply. It will probably fall again in 2010. Hundreds of startups counting on advertising as a business model will be flattened. Yahoo, CNET, AOL, and other big display-ad properties will  get hammered. Legions of me-too video sites will croak.  Ad networks, the “hey, let’s just start an Internet company!” flavor of this second dotcom boom, will get decimated.

The reason for this is not just the current financial crisis. Henry shows that the slowdown has already started before the crisis. The underlying reason is that the advertisement business model is severely flawed. In most cases it adds no value to the user experience. I already mentioned this in many different posts, the latest one entitled “How 475Bln customer views can lead to ZERO value”, and another one called “A shakeout of unhealthy advertisement sponsored web 2.0 businesses”.

I do not object to advertisement or a business model based upon advertisement revenues. But this model is misused in a way that doesn’t add value to the end user. And I only believe in business models that provide the end user value. The FREE ads based business model has become a “standard” in web 2.0 thinking, but it hardly ever pays off, not for the startup or the user.

Google continuously proves to be an exception, but they have taken care of the most important aspect to make advertisement work. They have provided a context in which the advertisement itself contains value to the user. The context being search of course. But advertisement as a means to sponsor free services hardly ever provide the user value. They have to put up with the advertisement in order to get a free service. Hardly a sustainable or value adding model. It’s a lose-lose scenario at best.

This business model only has one purpose and that is to attract old school media companies to invest in it as they don’t have a clue of on-line value either. If anything the current financial crisis will force advertisers and media companies to rethink their strategy and simply look at the value that is being generated with online advertisement. And while the transaction and distribution costs are near-zero they will have to conclude that their value and the value for the end-user is also zero. There are better ways to spend your money. And honestly, Google may have startd once without a clue of a business model. But now they are simply so much smarter than anyone in this advertisement business. They keep on innovating the whole model making it better all the time. Working on the context to make sure there is value. Who is going to beat that?

Free is not dead. It’s the accompanying advertisment model that needs to be killed

[disclaimer: this post is both personal and work related]

Tim O’Reilly (finally) challenges current web 2.0 practice, providing free ad based services. In a post here he is quoted:

“(These are) pretty depressing times in a lot of ways,” O’Reilly said in an address that first had looked like it would simply be a starry-eyed discussion of enterprise opportunities for Web 2.0. “And you have to conclude, if you look at the focus of a lot of what you call ‘Web 2.0,’ the relentless focus on advertising-based consumer models, lightweight applications, we may be living in somewhat of a bubble, and I’m not talking about an investment bubble. (It’s) a reality bubble.”

If you are a regular reader of this blog then you know that this has been my stance from the start. Free is just a cleverly concealed trap. It doesn’t focus on user value. It focuses on having a large user base and ensuring the value is monetized on size. It’s an indirect business model that by default makes it hard for the service provider to provide real user value to the user. It might give a service provider distribution because teh service is free. But the advantage of distribution is diminished by the lack of revenues. There is only one company that has succeeded in the advertisement business model, and that’s Google. They take up over 75% of ALL ad revenues in the on-line market. The rest is taken y the thousands of free ad based initiatives leaving most with bread crumbs.

I prefer a business model where the user gets value, and you monetize on that value. It’s the cleanest and best business model there is. Ask yourself this. Would you prefer a few hundred thousand enthusiastic customers that pay for the value that they receive, or would you prefer millions of users that get a free service, aren’t really getting the value they deserve and end up with advertisement too because you need to make a living?

If you are an investor or fast web 2.0 entrepreneur  you will likely choose the second model. It’s makes you feel you can rule the world, beat Google, Facebook and the likes. The model is meant for that. Great distribution (it’s free), and revenues are created by enlarging the user base. A win-win situation right? Well, not for the customer. Because the focus of that model is on growth, not on user value. If you are an entrepreneur that is concerned with his customers, you will never choose that model. It’s that simple.

That doesn’t mean FREE isn’t a great business model. Just don’t mix it up with advertisement, especially if you are in the social media or social networking business.

I’m currently preparing a consumer launch for Glubble. We’re about to release Glubble for Families, a great set of on-line activities that involve the entire family. Glubble provides parents convenient tools to help their children discover the web and social networking without worrying if they are safe. It makes the web change from an individual activity into an experience that connecting the entire family.

This is an example where FREE ads based business models would never work. For this simple reason social networks such as Facebook or MySpace can never target the family market. When you are in that market, you need to be on the side of the parent and the family. You need to provide them value and ensure their experience is both fun and safe, without advertisement.

It’s for this reason we have chosen for a business model in which there will always be a fully functional safe and fun service for free. At the same time we will offer great premium services that will provide families even more value. This model allows us to focus on one thing only, to provide customer value. With Glubble the Family Social Network has arrived.

ps. if you want to join our preview of Glubble for Families, drop me a line and I’ll send you an invite.

My Social Media saturation could be caused by a poor business model

The past few weeks I have been in a crazy roller coaster preparing a public launch for a new service. It’s a lot of work, there are so many little and big details to take care of, a team of people working day and night to get things done. It’s a lot of fun too.

Last night, while I was finishing of some work, I looked back a little and found that my on-line behavior of the past weeks has changed a lot. I’ve spent less time on (social media) services that I am subscribed to. I haven’t been in Friendfeed discussions, Twittered less, Google reader is hopelessly out of control, and services like social median, twine, Facebook (I rarely use it, but people do try to friend me all the time) and many more that ping me for my attention haven’t gotten any attention at all.

The funny thing is that I have been interacting more than ever in this period. I have met and talked with many people spread around different time zones. But the way we met was very traditional. I used physical meetings, phone, skype, and (god forbid) old-fashioned e-mail. These weren’t all work related meetings. Actually, I’m thinking half of them had nothing to do with the work we’re facing. But because I’m spending a lot of hours working I find I spent less time on-line talking to “friends” in all kinds of social networks.

It looks like I have reached a social media saturation point. Balancing life and work, pleasure and profession, off-line and on-line, I find that many of the web 2.0 services we early adaptors boast about aren’t all that important. It seems to me that, unless you are making a living in this tech world as a blogger, tech evangelist or whatever, many of these services do not provide enough value to justify using them all the time. There isn’t a need for me to enroll in yet another Twitter variant called Yammer. Even if they did win some prize in some tech meeting. There isn’t really a need for me to check all tech discussions going on over at Friendfeed as these discussions rarely bring something new. There isn’t a need to follow TechMeme and other popular tech aggregation news sites as the news echoes its way into our lives.

That doesn’t mean that web 2.0 services are a waist of time. But at the same time, a lot of those services do not add real value to my personal life. If they did, I’d sure be spending more time on them. It might be great to be able to meet up with thousands of friends over on any social networking site. But I find meeting people I respect, family, friends, and professional colleagues more important. If I have to choose, due to time constraints for example, I notice now that I choose to narrow the circle of people that I interact with. And that is opposite to what social networks want us to do. They want us to widen our circle, as having a large network is more important to the service provider than providing value to the individual user.

It turns out I ended up using services that provide me, the individual user, value. It’s the problem of most social networks. As they all seem to choose the path of free ad-based business models they end up providing me less value and having a focus on enlarging the network. Most web 2.0 services have turned into a playground that way. They are fun to visit, but really not all that important. I love amusement parks, but I don’t need to spend every day or hour there. Maybe that is why “old fashioned” e-mail, or Skype, the place where I store my family photo’s, and my mobile phone are so much more important to me.

It’s because these services were build to provide me value, and monetize that value. Instead of web 2.0 services that offer me everything for free to lower the threshold of joining. Those services monetize the network with ads, not the value they provide me. That’s a bad choice. The threshold to join is low, but the threshold to ignore or leave is even lower. And because of that the service provider needs to focus even more on enlarging the network, making it easy on me to ignore the service. A catch 22 I’d rather not be in if I was a service provider.

Why you would pay for a great web service

I read a good post over the weekend of one of my favorite bloggers, Kevin Kelley. The post is entitled “People want to pay”. Kevin has written a number of posts on the FREE business model and good alternatives for it and has argued before that it takes only 1000 fans to have a good living on the web. In this post Kevin refers to a survey in the UK where music lovers have indicated to want an unlimited download service of DRM-free music for a monthly fee.

Kevin provides us a few reasons why people do want to pay for web services:

Yes, everything will be free, but in my experience people want to pay. They really do! People, mobs of them, will grab stuff that is free. They will try stuff for free that they would never touch if they had to pay. They will always gravitate, on average, to the lowest price, and what is lower than free?But, but, if people have resources they prefer to pay the creators of products and services they like. Payment is

1) A way of connecting.
2) A sign of approval.
3) A vote.
4) It indicates an alligence with the maker.
5) It feels good to the payer, to support.

I have written a lot about the FREE business model. While I do understand it has many advantages for  the investor, advertiser, the entrepreneur and even the user , it also comes at a cost. Kevin Kelly and Chris Anderson (the king of the long tail) inspired me once to write a post “Would you be willing to pay for a web 2.0 service that provides value?”. The reactions were mixed. Most would pay and do so already, some won’t. But those that do used the arguments Kevin mentioned above often. I miss the value reason. People will pay if they are provided with value. It’s that simple.

Why does the FREE business model come at a cost? If poorly executed it leads to:

1. Destination sites and Walled Gardens
2. The network being more important than the user
3. Forced attention on advertisement
4. Customer lock-in instead of Customer freedom

The success of web 2.0 is the FREE business model, but it’s also it’s failure. Every social service seeks to be a new “Facebook” or “MySpace”. Every new web 2.0 service goes after world domination. In order to accomplish that the entrepreneur focuses on the great advantages of the FREE business model without taking into considerations its disadvantages (hence the poor execution). They go for the quick, free, penetrating distribution strategy, but then harass the user with things like advertisement or walls around the service. The numbers are quickly more important than the individual customer. How many downloads? Page Views? Traffic? Usage? Click through? Can we make it viral? There isn’t a single user value parameter in that. Advertisement holds web 2.0 is being held in a death grip.

But if you are willing to be successful on the web and not just strive for world domination I believe that it is possible to generate a lot of revenue directly from the user. In other words, make the user pay for the value you provide him. This strategy has one major benefit. it forces the entrepreneur to think only about user value. If he continues to provide value he earns a living. If he fails at it he won’t. An argument often provided against this is that someone is bound to copy your service and provide it for FREE. That may be so, but if your brand, business model, and innovation is aimed at providing the user with value then you simply ensure you evolve and keep that value flowing towards the user. You can leverage FREE tactics and still create direct revenues from your customers. And users will continue to pay for value.

Chris Anderson provides a nice example of how Freemium can be executed well and create excellent revenues. A good recipe from his post:

Build a community around free information and advice on a particular topic.

With that community’s help, design some products that people want, and return the favor by making the products free in raw form.

Let those with more money than time/skill/risk-tolerance buy the more polished version of those products. (That may turn out to be almost everyone)

Do it again and again, building a 40% margin into the products to pay the bills.

There are so many ways to create user value based business models. But it takes courage from both the entrepreneur and a possible investor. There may be easy money in FREE, but let’s face it. There are few companies that can create a sustainable business case  based upon advertisement revenues. Why not try to do the opposite. Try to provide your customer instead of an advertiser with value? You will find that there are enough people willing to pay for it. Remeber, Free is just a clever disguise for a concealed trap.

Friendfeed may be the early adopter RSS king, but Twitter is king of 140 characters

Already in 2006 Time Magazine voted the most important person on the planet to be YOU. They were dead wrong of course. In that year it wasn’t YOU that was important, it was THEM. Them meaning all of your friends you brought along to the different social networks that rose like volcano’s in a flat landscape. 2006 might have been the break through of many social networks and their FREE business models. These business models didn’t make YOU important, it made the network important (or social graph, only they didn’t use that terminology then).

Advertising networks gained momentum too. Everyone trying to get a piece of the Social Networking Walhalla harassing the user (that’s you) with advertisement. $ BLN dollar valuations of companies who’s main objective is to get those advertisement dollars rolling. The user gets his service for free, but as a result he has to put up with advertisement. That has got to be by far the worst nightmare of any Marketeer right? You have a potential customer, according to all of the semantic and contextual data the Social Networking site has collected for you. You show this potential customer an advertisement, making sure it fits the profile. Only to discover that this potential customer does the same thing he did in more traditional media, he ignores it. It is the catch 22 of web 2.0. Everyone trapped in the FREE business model where advertisement money is pumped around but the only one paying the bill is the advertiser who doesn’t get much value for his dear advertisement budgets. The social networking site is the laughing third party who collects the dollars. It’s a business model that can’t hold up much longer. At some point the advertiser should be doing his math and discover that he is paying an awful lot of money for social experiments that aren’t very effective. The nature of the business model is what is wrong with it. It is a business model based upon lock-in, upon force instead of freedom. You get a free service so you MUST put up with advertisement.

There is no end to the optimism of both web entrepreneurs and advertisers when it comes to the promises of web 2.0. Advertising, uhm I mean engaging with you customers, being able to use contextual and semantic information to serve him even better. The Über social graph is already being build by Facebook and the likes. And once the user is being tracked and traced across every destination he goes, the exploitation of that data surely will lead to the promised land.

The data collection going on on the web is immense. It is nearly impossible to visualise the amounts of data being collected by Google and everyone else. I’m betting the actual web and it’s data is probably an infinite small fraction of what is being stored on data hogging servers around the world. I can understand why it is being done (given what I just said above). But I can’t help but feel that it’s a rush to fool’s gold. I haven’t seen a computer algorithm yet that has mastered free choice. I don’t know any data profiling scheme that can make people behave like their profiles suggest.  Human nature isn’t that simple. That doesn’t mean no one is going to make a lot of money on this. I’m just saying that I doubt that all of this profiling will provide the advertisement world much benefits. You can’t make me like your message, just because the data says so.

We see this behavior now already. Even though this data analysis is in it’s infancy and much better algorithms will be thought of. Ever clicked on a Facebook ad served to you? Well, not many have. Ever bought some product because when it got in the way of you interacting with a friend, you thought, “hey, that’s convenient, gotta get me one of those”. It just doesn’t work that way.

I tried out the Friendfeed recommendation that has just launched and the Friendfeed community is wild about. It will serve you the “best” of Friendfeed of the last day, week or month. Using it brought me 2 important lessons:

1. I gotta get me some friends that aren’t Friendfeed fanatics. Almost every recommendation was a piece of content or discussion concerning this tool. Man these early adapters aren’t doing Friendfeed any favor with it. Hailing their trumpets, predicting the conquering of the entire world with a tool. Idiots in my opinion. Friendfeed is just a tool, and a nice one. But they are on to the same data collection I talked about earlier. Instead of just computer alogrithms, they try to use friends recommendations and discussions to filter out the important stuff. Too bad 90% of the discussion on Frienfeed is about Friendfeed itself. That data collection isn’t going anywhere for a while (Crossing the chasm is pretty difficult isn’t it). Or maybe it’s just me and my Friendfeed friends, I don’t know.
2. I gotta get me some friends that aren’t discussing the “downfall” of Twitter. Yep, that is where the other pieces of content were talking about. Same early adopters. Same boring stuff. Morons of course. The early adopters might have jumped the Friendfeed wagon,  Twitter is king of 140 characters. They don’t have to come up with noise filters, ranking algorithms, friends recommendations, semantic data collectors, or anything of the sort. They aren’t in the business of data collection and serving advertisement on that data. They are in the field of interaction. And interaction is the only thing that matters in web 2.0. Social Media consumption, creation, participation, it is all interaction. Sure they have stability issues and an angry early adapters mob against them. But they rule the 140 character world, and given the $ 1Bln spent in mobile SMS in 2007 I say Twitter has a better chance of becoming a successful social utility than Friendfeed.

I don’t like the sitting back and let the feeds come to you mechanism anyway. RSS has brought us really great ways to distribute content. But it has also killed the adventuring sprrit of the web user. Instead of wandering around this marvelous world of content and people waiting to interact, we sit back and let the feeds bring it to us. Such a waist of creative processes, of discovery. And such an incredible noise generator. We are screaming for noise filters, ranking algorithms, trust filters (who the hell thinks up this stuff), all to get a grip on the never stopping river of information flowing to us via RSS feeds.

Honestly, I don’t need filters to trust people, to know who ranks high or low, to know who is producing great content or noise. And I have serious doubts that ANY consumer outside the top web elite is dealing with that problem either. RSS is convenient but lazy. It brings you everything you always wanted, and a whole lot of noise with it. It needs noise filters, raking algorithms and all that other stuff. Computer algorithms telling me what to like or not. RSS is unintentional, it is sharing because we can. If there is no intent in sharing it pretty quickly becomes less valuable. That is why we all still love it to get an old fashioned letter or postcard in the mail. It is intentional and therefore so much more valuable. Try subscribing to less RSS feeds if you keep complaining about noise. It will solve your problem instantly.

I always have felt the Internet should evolve around you. Making you and the things you want to do most important. Not the data hogging, or the social graph. But that doesn’t mean that you can sit back and enjoy the ride. It also implies that you have a responsibility in this. You have to be willing to look around, to discover, to make choices. Not just let that RSS juice flow to you. I’m convinced it will work out in the end.

The way RSS is used now is a bit like us reading great books on well known museums. It’s fine.  But actually discovering a new museum, going there, seeing the things that are there, engaging, talking about it, that is where the value really is. And that is more valuable than any RSS feed I could possibly imagine. Friendfeed may be the early adopter king of RSS feeds for now. They are there to collect data, to see if a new kind of “Google” can arise out of social media. And I suspect they will be digging in the same hole where all social networks are digging into. But it’s content right now is a museum we have all seen already. And the discussions of the early adopters are running around in circles right now.

But Twitter is the king of 140 characters. They don’t need all that. They support a basic human need. They need more stability and a well executed business plan. But these 140 characters will be infinitely more valuable to us than any RSS feed with comments and likes will ever be.

Would you be willing to pay for a web 2.0 service that provides value?

The dominant web 2.0 business model is the FREE business model. It comes in many different variants, but the most widely used are the freemium business model (I always thought Fred Wilson came up with that term, but he says it was Jarid Lukin) and the free with ads based business model. With freemium you get a service for fee, but for the real cool features you need to upgrade and pay a subscription. Flickr uses that business model. The free with ads based business model lets you use a service for free, but in return you get advertisement. Facebook is the most obvious example, but many other services use that model as well. For a much more complete overview of the many different forms of the FREE business model I recommend you read the extensive list compiled by Chris Anderson here.

The driving force behind the FREE business model is the (web) technology that enabled us to copy and distribute digital information at almost no cost. Don’t assume something is not valuable just because it’s free. But the effort to copy and distribute have dropped to zero.

Free has a lot of great advantages. It lowers the threshold for a user to try out your service. It lets you distribute easily and helps you create a user community much quicker than with a paid service. Free lets you provide value to a user while the costs for it are paid by someone else, for example an advertiser. Because of this 3-way relationship it becomes easier to distribute your service, making it visible for you potential user groups on all kinds of advertisement networks. And perhaps most important, most entrepreneurs delivers web 2.0 services for free now, so why charge your users for your service?

How does all of this work? On the web there are currently two main value drivers, attention and reputation. Attention is measured in page views, how many people looked at this advertisement, how many clicked on them etc. Reputation is based upon links. The more links the more value, Google Pagerank uses that measure (amongst many others). The on-line FREE business model is often executed in a 3-way relationship. The user, the service provider, and the 3rd party who pays for the costs of the service, in order to get attention.

But FREE comes at a cost too. The sun rises every day for free, but for all the other stuff happening on our planet, someone is paying the bill. In web 2.0 free leads to several related effects which occur due to the way value is calculated right now, attention and reputation.

FREE leads to destination sites with walled gardens

In the FREE business model attention is the most important currency. The focus of the user needs to be on the service. The more attention it gets, the more value is generated. As a result of this a service provider is not likely to let a user leave once he is in. The service is surrounded by large walls ensuring that the user and the data he produces can’t leave the premises. The user needs to go to the service instead of the service coming to him. Attention is measured in pageviews, so if you aren’t there, no value is created. Reputation is also important. That is probably why most web 2.0 services try to attract top tech bloggers on their network. It provides them with credibility for the service.

FREE makes the network more important than the user

Attention is key. You get more attention if you get more users. The focus of most free web services isn’t on user value. It’s on user addition. A service need gazillions of users and if you don’t have at least a few million users on board, you aren’t execution your business model right. But a service that is driven by new users tends to think less about the current user. It isn’t the user that is important, its all of his friends, his social graph, his interactions with others that is important. That is where the value lies. It also leads to API’s, third party development and dilution of the original value proposition of the service. Facebook is an example of that. While the original value of Facebook was to connect to your friends, it has now become a platform that seems to be driven for advertisers and 3^rd party developers. In other words, the network or social graph has become more important than the individual user. I’m not suggesting these services don’t provide the user with value, there has to be some. But the main focus isn’t to improve on that, it’s on user addition.

FREE leads to forced attention on advertisement

FREE can lead to a lot of things (see the overview at the beginning) but it often leads to advertisement. It sounds like a great deal. You get the service for free, and the costs are covered by the advertisers. Although it might work well in some cases I believe that in most cases this type of forced attention doesn’t provide the user or the advertiser any value. The click through rates of advertisement are not that high in social networks. And that is pretty obvious, social networks are for interaction. And when I interact with friends there is simply no room for advertisement. Its trespassing. There is of course one great counterexample to this. Advertisement does work in search. It is what made Google the mightiest company on the web. When I am looking for something advertisement can help. For this very reason Facebook doesn’t perform well on advertisement, while LinkedIn performs much better. Can you spot the difference? The first platform is about interaction, the second is about search, about business. A subtle but in my opinion important difference.

FREE leads to customer lock in instead of customer freedom

If I would have to sum it all up then to me FREE leads to customer lock-in. Instead of setting me free, the business model forces me to come to a destination site, to stay there, to leave my data, to expose my friends to the same mantra. The service isn’t coming to me, I can’t go where I want. FREE locks us in, and often we don’t know about it. I often hear that users don’t care (there are millions of people on Facebook right), but I refuse to believe that. There currently simply isn’t a viable alternative to those FREE walled gardens. If there was and people knew they had a choice, I am betting that a lot would choose a service where the user is more important than the network. A service that is entirely focused on user value and doesn’t enforce walls or attention.

What do you think?

I asked the following question on both Twitter and Friendfeed: “Would you pay for a web service that provides you value?”. It was not the best of questions (too open), but I still got a lot of great responses. The twitter responses were short and to the point. Erwin Blom thought it was a strange question, since he pays for many services (Flickr, Nozbe, Basecamp, Highrise, Mindmeister, Box.net). Many responded that they already pay for services like last.fm, iTunes, Flickr, Dreamhost, Blockbuster. Tokerud would pay for Twitter as much as for a professional Flickr account ($25 a year). MarkDykeman, jcvangent and sndrspk would pay for a web service, but only if it would provide significant value.

On Friendfeed there was a bit more discussion (it allows messages larger than 140 chars). You can find the entire discussion here. Most people are willing to pay for value, but the value needs to be significant. The freemium model seems to dominate thinking here A lot of people also mentioned that once a service with a subscription fee is up, it is likely copied by a free with ads version. Ran has a good point when he says that he would be more demanding if he paid for a service (A twitter outage of a few days would not be acceptable).

Are there possibly viable alternatives to FREE?

Sure there are. Kevin Kelly offers a range of great posts on this subject. I love his 1000 fan post in which he analyzes the long tail and argues that you only need 1000 true fans to make a good living on the web. He later wonders whether or not 1000 fans is enough, but he believes that its possible with a relative small number. If you want to conquer the entire world, you will probably need the FREE approach. But there is a great living to be made that doesn’t involve world domination.

Kevin Kelly provides in a post entitled “Better than Free” 8 generatives to the FREE model, a must read for anyone interested. An summary from his article (but read it, its really good):

Immediacy: Getting a copy of something you want immediately, even though it might be free later. Examples: go to movie theaters to see films on the opening night and pay a premium price for it, access to Beta releases, Hardcover books.

Personalization: A product or service tailored to your personal needs. Examples: A generic version of a concert recording may be free, but if you want a copy that has been tweaked to sound perfect in your particular living room — as if it were preformed in your room — you may be willing to pay a lot.

Interpretation: The content may be free, but the interpretation of it not. Examples As the old joke goes: software, free. The manual, $10,000.

Authenticity: You might be able to grab a key software application for free, but even if you don’t need a manual, you might like to be sure it is bug free, reliable, and warranted. You’ll pay for authenticity. Graphic reproductions such as photographs and lithographs often come with the artist’s stamp of authenticity — a signature — to raise the price of the copy.

Accessibility: Having access to your possession (data for example), tidy, up-to-date, orderly, backed up, provides us value that we are willing to pay for. The fact that most of this material will be available free, if we want to tend it, back it up, keep adding to it, and organize it, will be less and less appealing as time goes on.

Embodiment: The most obvious example. A book may be for free, but a presentation by the author is expensive.

Patronage: Kevin believes that audiences WANT to pay creators. Fans like to reward artists, musicians, authors and the like with the tokens of their appreciation, because it allows them to connect. But they will only pay if it is very easy to do, a reasonable amount, and they feel certain the money will directly benefit the creators.

Findability — Where as the previous generative qualities reside within creative digital works, findability is an asset that occurs at a higher level in the aggregate of many works. A zero price does not help direct attention to a work, and in fact may sometimes hinder it. But no matter what its price, a work has no value unless it is seen; unfound masterpieces are worthless. When there are millions of books, millions of songs, millions of films, millions of applications, millions of everything requesting our attention — and most of it free — being found is valuable.

Conclusion

It is my believe that in general users are always willing to pay for value. If you can find a proposition that provides true value, then a payed business model is to prefer over a FREE model. Why? because it forces you to think in user value. It forces you to provide the user the best experience he can get. It forces you not just to get new users but to keep providing the users you already have with value. And you don’t have to be affraid of a competitor offering the same service for free. You can use the trust and long-term relationship with the customer to innnovate and create new value that your competitors don’t offer. In other words, the business model makes the user and delivering value to this user much more important than the network.

This post has become longer than I expected. Thank you all for the willingness to respond to my question. Let me know what you think. Would you be willing to pay for a web service that provides you value?