Trying to understand the now

Last year I wrote 3 (rather long) thought experiments I pretentiously called ‘The human factor in Social media’. You can find part 1, part 2, and part 3 here. I was reading them back recently and thought about what came true of them so far. They weren’t meant to be future predictions, the thought experiment then was to understand the ‘now’.

Let’s see if we can make up the balance now.

1. Everything will connect with everything, walled gardens will be torn down -> But we will still need a destination

Is there an end thinkable to the growth of ‘walled gardens’? I argued then that at some point these walls will be torn down and the service would become a utility instead of a destination.

OpenID is taking off now, allowing you to log into services without creating yet another identity. Twitter gets more traffic from clients than from its main web site. Facebook is fiercely fighting to become the ‘de facto’ social platform.

However, Google is the only company that got this from the start. See for example their stealth social network. A Google account is something you can take along to almost anywhere. And now with Android exploding, Google will take your “home” into the mobile web. Google doesn’t lock you in, and by doing that they become more and more valuable to us. It’s the main reason why I think Android will eventually overtake the iPhone. Entrapment is a long-term failing strategy.

2. “Always on” will have a huge social impact -> But it will lead to a need to disconnect

I noticed last year that there was an imbalance between ‘on’ and ‘off’. I personally have felt the need to slow down and spent less time emerged in social networks and with the ‘biggest Internet invention’ the status update. The magic is gone.

I’ve seen more people doing that, but in essence I feel now that we haven’t reached a tipping point yet. More and more time is spend on short bursts of communications (often in the form of sending, instead of receiving), less time is spend on depth interactions. We seem to have forgotten that the basis for any good interaction is the ability to listen.

3. Information will be available anytime, anywhere, anyhow -> But the real value lies in people

This is a very actual problem we are facing now. the noise that we now have access to is immense. Following quantity has overtaken quality. Publishing quantity has overtaken sharing intentionally. Finding the right people or knowledge is a hard problem to solve. Friendfeed tried it with friend recommendations and failed. Twitter is overtaken by its addiction to growth instead of quality.

Instead of choosing the obvious solution the tech industry is already looking  for tech solutions (reputation, trust based algorithms). It’s a nice exercise but not as effective as the most obvious solution. Just scale down the nr of people you follow or interact with. There are tons of examples available of people stating that their Twitter experience and value increased considerably when they stopped auto following people, and started following people they had met in real-life. We can decide for ourselves who is important and who is not. You don’t really need a smart algorithm for that.

4. Public interaction using social media is exciting now -> But highly localized immersed interaction will be more important

Do I need to say FourSquare, Yelp, Loopt? The trend is obvious. There is much more value to be gained from highly localized networks and interactions. I said then:

Communities connected by location, interest, expertise, immersed into the physical world that surrounds them. We will see the same behavior there as we see now in the public, but the real value for the individual user will be obtained from these smaller communities. It will lead to less information and more knowledge. And this trend or effect will be driven by the most personal interaction device we have, the mobile phone.

5. Social media makes us all public figures -> This will lead to an accompanying need for privacy

This is a tricky one. It is something I feel strongly about. It’s not that everything needs to be private. I just want people to be in control of their own privacy. It’s a conversation that keeps popping up. We need a single place where we can store our identity online and from that decide what parts of it can be made available to other people or services.

Current practice shows that privacy is loosing ground quickly. Over 300M users on Facebook show that they either don’t understand or care about their privacy. Privacy is translated to the small domain of user – user interactions. I want it to cover service provider – user interactions as well. You can set your privacy to maximum on Facebook, but you can’t find a switch that protects you, your friends, your interactions from Facebook itself. You and your data are commercially exploited and no one knows or cares enough to do something about it. I have to be realistic about this and realize this is not a problem for most people.

What do you think about all of this? Does it make any sense? Let me know.

people

Recommendations are a powerful feature on the social web. They represent real value, just look at the king of recommendations Amazon.com making huge revenues with it. And while I do look at them at times, I am always a bit reluctant to use them for the really important stuff. Same goes for Facebook, Yelp, Foursquare, Twitter and many other services like that. From a business perspective they offer a new and unique way to be connected to potential customers. From a customer perspective they offer me the value of the views of other customers. It’s big, and there is value all around!

So why am I reluctant to use them? I have 3 primary reasons:

1. The interaction leading to a recommendation makes it more valuable

When I am looking for a recommendation I tend to turn to friends and use 1-on-1 channels to get information. I call my brother, I e-mail a friend, I talk to a colleague. Why? Because I know them, I trust them, and the exchange of chit-chat serves a social need. Although this process has been copied to the web, it tends to deteriorate in quality fast. I think mostly because the recommendation has overtaken the process of interaction itself (chit-chat) and we underestimate the importance of that interaction.

An example to explain. Chris Brogan or Robert Scoble can be seen as professional and great recommenders. They share stuff that matters and they bring along a lot of trust, experience and expertise along, so the things they share are valuable to whoever receives it. But what is more valuable? Chris or Robert publishing relevant links and tips, or you sitting down with either one and in that conversation you obtain recommendations for something that is important to you. The first situation is great, the second may be priceless.

2. It’s difficult to determine if a recommendation can be trusted

Many recommendation systems have been played by the business or brand. Looking for a new book? Who knows who actually wrote the recommendation? For all I know the recommendation was written by the author or a competitor author. It reduces trust and makes me rely less on these ‘reviews’. I know there is technology to help us here, but it is still a tough problem to resolve. I don’t care about 100 great reviews from people I don’t know, I care about talking to someone about it and then making up my own mind about it. And given point 1) I’m a bit reluctant to use services like Yelp, Facebook or Foursquare to see what my friends are saying about some topic. It will provide value, but will not replace 1-1 interaction. And I don’t need those services to connect to these people. They are my friends.

3. The world becomes a ‘Lonely Planet’

I don’t like the Lonely Planetization’ of the world that we live in. When I go on holiday and use the Lonely Planet as my guide I know one thing. I’ll be visiting places that millions of other tourists have visited too. That is not so bad, but the real killer is that it takes away the adventure and surprise of discovering things yourself. in other words, it isn’t so important to me to discover new places (that’s nearly impossible), but it is important to me that I do most of the discovery myself! The surprise is what makes life fun and valuable. Knowing beforehand that 100 people liked or disliked the place takes away the opportunity for me to make up my own mind.

The social web is quickly turning into a peer recommendation, wisdom of the crowds type of marketplace. It’s a logical next step and we will gain value from it. But besides this inevitability  I’ll try to keep holding on to meeting people in real-life and gaining insight from that interaction for as long a I can.

Freedom

You’re meeting someone at a party for the first time. He introduces himself to you.

“Hi. I’m Tim Eastwood. I’m 29 years old, live in San Francisco. I’m married to Laura, have 3 children Joe, James, and Jenny.”

During the conversation you have with Tim you learn that he votes Republican, that he isn’t a religious person, that his wife and him got into several near-break up fights in the past. That he got fired recently and is now looking for a job. Yesterday he was at the Starbucks at 1390 Market Street. He loved the cappuccino but didn’t like the sandwich. His best friend Joe is gay, Tim is ok with that. Tim’s e-mail address is tim.eastwood@gmail.com, he has a bank account with the Bank of America, and uses as Visa credit card which he happened to use yesterday when he bought the book “The Bush tragedy” at Amazon. You’ve seen ton’s of pictures of Tim, his wife, and their three children. You know what schools the children visit, and what movies they like to watch. That is just for starters. Before you know it, all of Tim’s friends pass by with descriptions, believes, quotes, photos, things they are doing right now.

Triggered by his enthusiasm you tell  Tim a lot about yourself too. You are engaging in an open conversation and it feels great.

While you are talking, you begin to notice that people surrounding you have stopped their conversations and are clearly listening in to your conversation with Tim. To make matters worse, you then realize that the host of the party is filming the entire conversation, projecting it on a big screen.

Sounds crazy? It’s exactly what we are doing right now on the web. In real life we would never disclose so much about ourselves, family, friends, believes etc. to someone we just met.  In the real world repercussions of disclosing personal information tends to be contained within the group of people listening in and gossiping about it. Online things are different. Once recorded, it never disappears. And yet when we get online we disclose it all.

It’s a topic that keeps fascinating me. It’s hard to understand why people tend to feel that their online lives somehow are disconnected from real-life. Almost to a point that their online profile or identity is an alter ego, it feels like someone else. While we may pretend that when we go online it isn’t really us, the reality is that our identity, interactions and data are collected, stored, and commercially exploited. Do we know? Do we care? Hard to say. All we know is that there are hundreds of millions of people joining in this ‘global conversation’ via social networks like Facebook, Twitter, MySpace etc.

Facebook revenues

There is a clear responsibility for a user to stay in control of his privacy, but at the same time we can safely say that most are lured into this conversation by companies that offer substantial benefits without disclosing what the user is giving up for it in return. Facebook takes privacy seriously, it provides the user complex and hard to use privacy settings. While this sounds great, it’s a hoax. When Facebook talks about privacy it means the privacy of the user towards other users. It doesn’t talk about the privacy of the user with respect to Facebook and it’s business model. Facebook doesn’t provide the user with a switch that prevents Facebook itself from exploiting the user commercially. And it provides 3rd parties simple means to extract your entire profile without consent.

This schizophrenic behavior is caused by the underlying business model. Web 2.0 is driven by the network effect. Value is created by those that own the largest networks (social graphs) and hog the most data. Data is the currency on the web. Evangelists like Tim O’Reilly have been telling us this for a long time now. In my opinion the biggest tragedy of the success of web 2.0 is its failure to put the user in control of his identity and privacy.

[update] TechCrunch writes about the latest Facebook plans. It’s consistent with their strategy of becoming the de facto social web. And the Next web talks about plans of Facebook to share your e-mail address with 3rd party developers. These are again not user-driven but network driven plans.

Don’t get me wrong. I do not object by default to commercial exploitation of user data. I do object to the fact that a user isn’t opting in on it and that he really has no control over his privacy or identity whatsoever. Robert Scoble has said many times he doesn’t mind giving up privacy because he gets more value in return. The upside of talking in public about a disease might be that you will find others in the same position sharing their experiences with you. The downside may be that you won’t be hired for a next job because the company has access to your medical condition. How many of those hundreds of millions have made that same conscious choice? Do people really understand that when they join a service like Facebook they are exposing themselves, their children, their family and friends to a company that exploits their interactions?

A new balancing act

There is only one way out of this. We need to get out of this confining web 2.0 definition and build new business models. Business models that are not based upon network effects and hogging user data. We need user-centric business models. And with that we will see user-centric services appear. Services that have a clear and transparent business model. Services that generate revenue by delivering user value. Services that do not depend on customer lock-in but on user freedom. Services in which the balance of power has shifted from the company that exploits to the user that receives value. A new balancing act.

In the ecology that is build around the user-value principle users can manage their online identity and privacy tools. And they can make a conscious decision to share relevant personal information in return for value. The big difference is that the user will be in control. And that may very well be the scariest thing for companies to get used to.

If we want to be free, we need to break free of web 2.0 thinking.

The iPhone is a pretty walled garden

Entrapment can be an effective strategy when you are building up a business. Marketers tend to call that customer lock-in. From the perspective of the business this sounds like a great thing to do. Hook the customer to your business and dont let go. From the perspective of the customer it sounds exactly what it is, an entrapment.

There are many examples where entrapment has proven itself as a successful strategy. Think AOL, Facebook, any advertisement driven business, newspapers, banks, cable, insurance or telephone companies. Entrapment works because joining is easy and leaving is nearly impossible. But in most cases these companies haven’t read their history books. Entrapment is a short term winning strategy, but it’s bound to fail in the long term.

It’s human nature they are up against. Sure, we are all lazy, naive, and let things happen for a while. But in the end we don’t like to be trapped. We don’t like it when our freedom (choice!) is limited by the thing that entraps us. And this desire to be free is what drives competition in. Someone creates a monopoly? It’s bound to attract newcomers that blow up that business by doing things differently (remember the innovator’s dilemma?).

The most recent success story wrt entrapment is the iPhone. It revolutionized the mobile space. It showed that a market that was dominated by hardware manufacturers and operators couldn’t really innovate anymore. Apple proved that there were HUGE improvements possible in the user experience of a mobile device. And it has become a huge success.

With the iPhone came entrapment, a strategy Apple has mastered like no one else. Apple dictates every aspect of the iPhone. It has the sole power to decide what app makes it to its store and becomes successful. There are countless stories (here’s one) available by now of developers getting stuck in the horror and randomness of the Apple approval process for their app store.

It doesn’t end there. From the initial launch Apple has even dictates what carrier the end user has to call with. I’ve been using the same mobile operator for years and I am very satisfied with it. And Apple has the audacity to decide that I must change to another operator in order to be able to use their product? For me that was a bridge too far. I do not want to be restricted or entrapped. I want choice.

I’m writing this because I feel it is time to remind Apple of history. Entrapment may be a short term winning tactic, but it’s a long term failing strategy. You can already see the moles digging through this carefully constructed walled garden. Palm has changed it’s app store policy entirely, giving freedom to developers to publish apps. And now there is Android. Where Apple has focussed on building the perfect mobile device, luring people into their trap like sirens, Google has worked with the industry on a new open standard. Where the tech industry initially laughed at their first attempt, I think everyone will now fall silent with the ecology that Google and partners are now creating.

TechCrunch counts an avalanche of 24(!) new android phones in the market. The tech purist will now argue that none of these phone can match the awesomeness of the iPhone. I say BS. The awesomeness of the iPhone will be copied, changed, improved, matched/not matched. It doesn’t matter. Let me repeat that. It doesn’t matter!

The one thing that Apple can’t do and Google just did is offer choice. The empire Apple just started to build up using their dictatorial and proprietary strategy just got blown to pieces by choice. Who do you think will win this battle? Android will flood the mobile market with hundreds of new phones, thousands of apps to go along with it, and presence with every hardware manufacturer and mobile carrier.

Entrapment is great at start. It probably give a lot of adrenaline to dictate what the world looks like. But what Apple and so many others fail to realize is that it’s all short term tactics. In the long term the only winning strategy is a customer that wants to be with you, not one that is trapped into your service. And for that reason the iPhone will be marginalized by its competitors. History already taught us that.

conversation

So, Google Wave makes people unproductive? Says Robert Scoble in a good post where he writes down his first impressions with the new service. Robert says:

It is noisy, but the noise often happens way down in a wave deep in your inbox.

This is far far worse than email. (New email always shows up at the top of my inbox, where Google Wave can bring me new stuff deep down at the bottom of my inbox).

It’s far far worse than Twitter (where new stuff ALWAYS shows up at top). It’s even far worse than FriendFeed, which my friends always said was too noisy. At least there when you write a comment on an item it pops to the top of the page.

And, worse, when I look at my Google Wave page I see dozens of people all typing to me in real time. I don’t know where to look and keeping up with this real time noise is less like email, which is like tennis (hit one ball at a time) and more like dodging a machine gun of tennis balls. Much more mentally challenging

This doesn’t come as a real surprise. Making a conversation real-time can create an overflow of information. But I think it is too soon to assume that Wave will crash on a beach. I once wrote down 10 reasons why Google Wave would change the way we communicate. Google Wave will become far more important than the first demo/service we see people struggling with now. It’s a bit odd to quote myself in a post, but I still like what I’ve written about this earlier:

Whereas services like e-mail, instant messaging and social networks always have been build on the premise of a walled garden business model, Google Wave can become the new communication structure services can develop upon. It is set up from the start as an open source project with a clear focus on development API’s. I’m sure that Google will launch a Google Wave service at some point that will attract many users. But it also allows any other service to use that same paradigm to implement unified online communication.

Google has not only spent time and energy making sure Wave can suck content into the platform, it has spent as much time and energy making sure it can get out too! Farewell destination based business models. Farewell walled gardens. If Wave gets adapted, it will put the user in control, and that is exactly what we need to do to break out of our current web 2.0 boundaries. That is what makes this development so remarkable.

Robert runs into the problem that online conversations, the way he currently runs them, aren’t really possible in real-time. It’s just too much input that needs to be processed, even when you have a 30 inch screen in front of you. That is not a real problem though. Google Wave is a technology that can be decentralized. It doesn’t need to be used in a public ‘conversation’ with thousands of people. Google Wave will help us scale down the conversation, which btw is the most obvious way to get rid of noise. It helps us move away from destiny based web services. And,  Google Wave has taken as much effort to allow you to export data out of the service, as you can bring in.

Robert ends his post with tips to scale down the noise, fitting perfectly.

Google Wave is a plumbing project for the web. We need to start using it for what it is or can become. It has the potential to add a new communication layer on top that will not limit our conversations to a single service. I think that is the biggest win for the web in quite a while.

Update: While I pressed the publish button, I came across this good post that is making a similar point.

moron (image taken from http://www.blippitt.com)

If a woman is raped, do you feel it’s her fault because she was dressed sexy and flirting a bit? If a tourist gets mugged on the streets of New York, would you agree that it’s his own fault because he shouldn’t be carrying an expensive camera around? If a person gets ripped off on eBay do you feel it’s his fault because he should know that people can’t be trusted?

According to a post by SiliconAngle, responding to a Forbes post,  this type of reasoning justifies that companies use uploaded photos from social networks in advertisement, without the user knowing. It’s all the fault of the user, he or she should know better. Uploading and sharing personal info on the web is dangerous, and we shouldn’t be surprised that the data might get (mis-)used commercially.

The author doesn’t agree to these practices, but does point to the user first. It ’seems’ the user’s responsibility fault.

Bullshit.

People do not share information about themselves because they want to be commercially exploited. Sure there are lots of social media ‘fanatics’ that share as much as possible about themselves and are always looking to be in the spotlight. And yes, people do stupid things. And they are incredibly naive. All of that is true, but that doesn’t make this practice right!

‘The responsibility for your online privacy lies with you’. It’s a dream waiting to happen. We can only be responsible if we actually have any control over our privacy. We can decide not to join Facebook, but we can’t force others not to publish anything about us. We can turn on every privacy switch there is on Facebook, but where is the privacy switch that protects us from Facebook itself? We can carefully select our friends in social networks and then never realize that our data is exploited commercially. The truth is, social interaction and sponsoring that interaction with advertisement is simply a bad idea leading to bad commercial practices.

It’s true. People need to be careful about sharing personal information on the web. Once it is published it will never go away. So there is a clear responsibility for a user to think about what he wants to share online and what not. But there also lies a responsibility for the networks that stimulate sharing. There is a responsibility for those that exploit our data, our interactions commercially. And companies that exploit our data, our photos, our interactions without specific consent or knowledge of the user are simply evil.

Nice try with this post SiliconAngle. But two falses do not make a right. It just makes it more wrong.

You are the most important brand

A User-Centric web is by design a brand agnostic web when it comes to identity. There is only one brand, and that is you.

The current web causes different types of problems that can be lead to possibly 2 design flaws. The first one is that it is a document-centric web. Read this excellent post by Chris Messina and Jyri Engström here.  The second one, maybe caused by the first flaw, is that business models evolved and became network-centric. In other words current business models enforce that services focus on scale before user-value. Traffic, usage and numbers are more important than individual user value.

As a result we get customer lock-in (which idiot came up with that term), walled gardens, an unhealthy attention to scale and growth, identity wars (who gets to own you), data lock-in, social graph ownership (Facebook owns your relationships and interactions), etc., etc. It’s a slippery slope we can’t get off easily. There are patches to this mess (e.g. OpenID), but that’s all they are right now. OpenID doesn’t fundamentally change the web, unless it becomes embedded in a User-Centric web.

OpenID provides us convenience. We can now register/login to services using existing accounts we have at Facebook, Gmail, Twitter and so on. OpenID in that sense patches the problem of having multiple identities/profiles across different services. The problem with that patch however is that it still locks me into one of those main services (Gmail, Facebook, Twitter).  There lies a danger with OpenID. Even though it is set up with the right intentions, it might end up keeping the current web alive, instead of helping us move to a User-Centric web. If my identity becomes my Facebook account, I’m not very likely to leave that service. For OpenID to help us move to a User-Centric Web we will need independent identity providers.

If we were to design a User-Centric web, then I would prefer that the “user” part is separated from the “services” part. In other words, my identity, my home base, my relationships, the data that flows through that. It should all be under my own control. To accomplish that we would either set that up ourselves, or for those that don’t know how, create service providers that can take care of that for us. These service or identity providers would have one purpose only, to serve me and my data. Think of it as a bank where I store my online presence safely. They would only have one business model. Provide me service and I would pay for that value. They would only compete with other identity service provides in that user value. We can’t let companies like Facebook or Google take care of our identity, as they are in the business of making money off of my identity and interactions.

Once that is take care of, I can join services, meet friends, interact, do all the things I can do now, but I would be in control of my own online identity. I can decide how much of me a service, or a friend can see. I could lock it down like fort Knox, or open it up like the biggest Social Media fan. There are no portability issues, I can’t get locked into a service anymore. As my online presence is separated from the actual service, I can simply move to another service and have all my friends (data) available there. A service becomes a possible channel through which I can interact. Companies will become true service providers, instead of traps I can fall into. The would compete on user value instead of network value. There is certainly demand for such a setup.

It’s a simple idea, turning things inside out. It isn’t simple to get there though. As long as we keep ourselves trapped in the current web business models we will never reach a tipping point. All we do is dig a hole and lock ourselves in beautiful walled gardens with cute “openX” patches while Facebook, Google and other big companies keep exploiting our online identities and interactions commercially.

Don Quixote, Image taken from Wikipedia

A number of posts drew my attention this week. First, 2 respectable media outlets explain us that the Facebook exodus has started. While I am not a big fan of Facebook (its their business model I don’t like), both the NY Times and the Guardian are writing sensational yet unfounded stories about the start of the downfall of Facebook. From the NY Times:

Things fall apart; the center cannot hold. Facebook, the online social grid, could not command loyalty forever. If you ask around, as I did, you’ll find quitters. One person shut down her account because she disliked how nosy it made her. Another thought the scene had turned desperate. A third feared stalkers. A fourth believed his privacy was compromised. A fifth disappeared without a word.

Based upon the evidence of five people leaving Facebook the exodus has started? In the very next paragraph the author already kills his own headline:

The exodus is not evident from the site’s overall numbers. According to comScore, Facebook attracted 87.7 million unique visitors in the United States in July. But while people are still joining Facebook and compulsively visiting the site, a small but noticeable group are fleeing — some of them ostentatiously.

A Facebook exodus is a slight overstatement, especially now that Mark Zuckerberg announced that Facebook has passed the 300Mn active users and is now free cash flow positive.

Granted, I’ve predicted a few times that Facebook usage would decline myself, and I was wrong too. My assumption, that the Facebook business model stands in the way of your online friendships, turns out to be incorrect. While I’m worried about the network-centric approach that sites like Facebook take, putting the value of the network growth over the value that an individual user gets, the user doesn’t care. They play around, have a great time, and as a byproduct ensure that the different advertisement schemes and virtual goods that Marks sells them make Facebook a cool $ 500+ Mn a year.

It’s something that I find hard to accept. To me, online relationships are no different from real life relationships when it concerns friends and people I have met in real life. We would never accept Mark Zuckerberg holding up billboard displays of hot and sexy girls in our face, while we are having a good time at a friends house. Yet that is exactly what Facebook can do online. It’s called targeted advertisement. I tend to think that’s BS. Sex sells, but there is nothing targeted about that.

What I find more disturbing is that the Facebook business model forces them to exploit our profiles, our friends, and our interactions commercially. We get a free service, and in return we get Big Brother watching us every day. Facebook has great privacy preferences (hidden away carefully), but even the ultimate guide to Facebook privacy can’t tell me where that one switch is that protects me from Facebook.

But why am I complaining. 300Mn people beg to differ. They don’t care about all of that. I may think that we are losing something precious here, our individuality and a personal control over our own online lives. That we are locking ourselves in and don’t care about it. Human nature at its best. The rest of the word just doesn’t care.

Chris Messina and Jyri Engström have written a great post on the People-Centric Web (I have always called it a User-Centric web). But it’s fighting for a lost cause. It’s Don Quixote and Sancho Panza fighting windmills. The dominant web business models are based upon the exploitation of our data, our interactions. And unless that changes, unless users are willing to pay for the value they get, that business model will remain to be dominant. Having People-centric technology and services isn’t good enough. They are useless without People-centric business models. Mark Zuckerberg proves that. Sadly, that also means that we will never be truly free or in control of our own doings on the web. But who gives a shit about that?

Michael Arrington provides good insight into a current dilemma for Twitter. Should Twitter turn revenues on or keep them off? The dilemma being that a revenue-less but growing company will lead to speculative valuation and therefore possibly a high acquisition price. A company with revenue however will be valued on an X-factor related to the revenue being generated.

While it may be a real dilemma for Twitter I feel it is precisely this attitude which makes Silicon Valley sometimes look like a big bubble of nothingness. We’ve heard this story so many times. Entrepreneurs or investors answering questions about revenue for a web company with “we don’t know yet”, or “we are still thinking about it”. Companies being successful because they show incredible growth, instead of sustainable profits. It’s unbelievable that so much money is invested into companies that (seem) to have the arrogance to assume that growth can come first, and thinking about revenue later.

Don’t get me wrong, there is nothing wrong with thinking about, or even discovering revenue streams, while you are building and growing the service. And I obviously do not know if Twitter is not thinking about revenues every day. But I do object to the attitude that anything that grows can be turned into revenue, or that thinking about revenue can be done later. What’s your business model? “Eh, well, we are still thinking about it, but we are probably worth millions if you want to buy us!”

Growing a company is the easy part, especially with all the web 2.0 tools that are available now. There are countless ways of driving traffic to your service. If you are able to provide value, then you can be sure that you can also grow your service. But growth in itself is no reason to assume that sustainable profitability is also within reach. They are entirely separate challenges, only bound by the one common denominator that drives both, user value. Should Twitter do advertisement, subscriptions, API fees, mobile? These are questions the company should be asking itself every day. Growth is not a business model, getting acquired isn’t one either.

Silicon Valley thrives partially because of its opportunistic nature. It’s a great strength but also a big weakness. If a company is created with the sole purpose of getting acquired, then there isn’t really any value creation. Unfortunately it still seems to be the most common ‘business model’ in the online world. All it really does is move investment money around. It doesn’t add any money to the ecology, there is only losses to be made. There is no value creation, merely destruction.

Unfortunately there is always an old-school ‘wanna be cool’ company that is willing to acquire and pay for the mess. Everyone happy, even the acquirer, until he finds out that the economic rules that he has to live by in the real-world also apply in the online world. If you want to be profitable you need sustainable revenues.

If you own a grocery store you may think about opening another store. I’m guessing you will calculate, look at growth and profit, and after countless of days without a lot of sleep take the decision to do it. But not some of our cool web entrepreneur with enough money made in earlier ventures. They just start something for the sake of it. Let it grow for a while, and see where it goes. If it fails, no big deal, just try something else, or even better, sell it to the next sucker that wants to give it a shot. BTW, I’m obviously not talking about you, but about that other guy.

Trying  many different ventures, or creating growth without sustainable profit doesn’t make you a great entrepreneur. It’s your ability to grow something into sustainable profitability that makes the difference. Because that is the real hard part. The rest is just play.

Side effects of using steroids

37Signals has a great post up, entitled “The bar for success in our industry is too low”. The author, Jason, takes several examples where respectable media (NY Times, GigaOM) take a story of a web company showing growth, traffic, and revenue and present it as a success. A quote from his post:

Let’s erase one claim right off the bat. The headline, “Using ‘Free’ to Turn a Profit”, is misleading and downright false as it relates to the subject of the story. Near the end of the piece Phil Libin, the chief executive of Evernote, says they are generating about $79,000/month in revenue. Then the article goes on to say “By January 2011, Mr. Libin projects, the company will break even.”

$79,000/month and they won’t break even until January 2011. So every day they’re losing money until 2011. And the title of the piece is “Using ‘Free’ to Turn a Profit”. What? How can the Times let a headline like this slide?

Jason points out something I’ve always disliked about current web practice. There is too much attention on growth, and too little on revenues. A company that shows impressive growth rates is successful, a company that doesn’t is a loser. Traffic and eyeballs, it’s so web 1.0. I thought we passed that phase, but when measuring the success of a company, or by just following the money that gets invested, I bet that a large fraction is still invested in growth. Iow in a future perspective of revenue. Jason:

This pattern — “success” based on forecasted future success instead of current success — shows up all over the tech-business press. Instead of metrics like “they make more money than they spend” we see stuff like “user count growth” and “followers” and “impressions” and “friends” and “visits” qualify success. Whenever you see someone piling big numbers into made up metrics, it’s a diversion. They want you to think that this time it’s different. But like Judge Judy says, “If it doesn’t make sense it isn’t true.”

Growth is necessary for any business to be sustainable. Web 2.0 and social media technology are steroids for growth. Connecting one big network to another, creating a third. It’s dead simple.

This relentless focus on growth masks the one thing that is important for any business. It’s web 2.0’s biggest tragedy. Do you provide enough value to turn that value into revenue? It’s easy to generate growth using web 2.0 social media technology. Everybody does it. But while the whole world is chit-chatting and sharing away with each other on all these networks, there are very few companies that are able to turn that into a profit. A total waste of resources, energy and focus. Enough talk already, we need to focus on value! What is more valuable? A company with millions of users, strong growth rates, but no revenue? Or a company like SmugMug, that doesn’t have millions of users, but a couple of hundred thousands of real fans. Each of which is a paying customer, turning it into a very profitable company?

This is something I struggle with every day (as CEO of Glubble). We are a small company. We do not have the industry standard impressive growth figures the way big social networks like Twitter have (although we are quite satisfied with our current growth rate). But we wonder every day how we can provide users value and turn that into a sustainable revenue stream. Instead of growth first, we focus on value first.

Is that a better strategy? We believe so. We are generating sustainable revenue now, we are showing good growth in revenue too. But we are not profitable yet. And we are aware of that every day we go to work. We have investors that help us reach that phase. But the trick is that no investor can really do that for you. It’s your own users that help you become profitable. Your product or service needs to be providing so much value that a user is actually willing to pay for it.

Growth fetishists never discuss this openly. They focus on growth and constantly give us impressive stats. There is a whole industry that ironically makes a profit by stilling our hunger for growth figures of other web companies.

All this does is take away attention from the hard part of the online business, generating sustainable and profitable revenue through user value. We don’t see revenue reporting in the online business. The reason isn’t secrecy. It’s simply because most companies do not generate enough revenue to be profitable (makes you look like a loser right?).

We haven’t implemented Facebook connect yet, we do not have connections to 50 other networks. Because it wouldn’t help us. We need do the hard part first. We need to get our service right. Our users are enjoying it, but we know we can do better.  We are now relentlessly focusing on improving the user experience and the value we provide. When we reach a point where we, and our customers, can feel really proud about the service, we will turn on some of these growth machines. But we will know that it will then lead to sustainable growth, both in users and revenue, instead of an impressive nr of page views.