I am not a big fan of the mainstream web 2.0 business model, providing services for free and create revenues via ads. I realise that is not a popular position, especially since this model gets some companies to become valued at a ridiculous $ 15 Bln in some cases (I will try to avoid the FB word this time).
Advertisement spend is very high. PWC reported a record of $16 Bln in on-line advertisement spend in 2006 in the USA (hey, wait a minute, did I just mention that a certain company was valued at uhhh $15 Bln, wow that’s the entire on-line advertising market).
Search takes care of 41% of that spend, which seems logical to me. Display advertisements are 32%, classifieds 18% and referrals 8% (with thanks to Marketingfacts pointing me to this).
The problem in this market is that both investors, startups, and advertisers are all looking for ways to create platforms in which they can display their ads to the user. It seems the easiest way to monetize a service given the potential ad spent on-line. But from the user perspective, ads will really only make sense when searching. In most other activities ads are the annoying little flashy items on your web page or mobile phone screen that you tend to ignore to the best you can.
We now have a perfect deadlock situation where on one hand we have the force of $16Bln on-line advertisement spend, and on the other hand we have the user ignoring most of this $16 Bln user value reduction but severely spoiled by getting all these services for free. We need to get out of this advertisement trap!
Rolf Skyberg predicted earlier that people will be willing to pay for networking services. I think he may be right, but I have responded earlier that we need to come up with clever ways of migrating away form this business model into new business models. So, what are our options?
- Getting the user to pay for an on-line service. Would you be willing to pay, say the amount any startup is using for their “ad revenue per user per year” in their business model. The thing is, if you average the advertisement income over all users in your service, we are probably talking about a few bucks per year (if the service does really well!). So how about it, all your social networking needs for only $5 a year and no more ad harassment? Of course, we ALL pay for on-line services already. It is called Internet Access and you wouldn’t dream of cutting yourself of from that. So why not chip in a little and help the service creators to earn a honest living! The real problem everyone seems to walk around of course is that no user is willing to pay for most social network right now is simply because they get NO real value from it.
- Getting the user to perform financial transactions on your service. This might not work for every service, but eBay and other market places are making a fortune out of it. I wouldn’t dismiss this as an option as long as you think user value here. Depending on what the user is doing on your service providing him something he can buy that actually benefits him is a good business model. Look at the success of World of Warcraft and other online games. And Skype does a good job at selling conversation time to its users.
- Create a free, limited, and a professional version of your service. There are a lot of examples in the market of that use this model. Flickr offers professional accounts for less than $25 a year (unlimited storage and upload capacity). The gaming industry is doing well on this (the golden member account).
- Asymmetric business models. The mobile phone space is the most successful example of this. Sending an SMS or calling somebody will cost you something, receiving an SMS or call is free. This is actually a very clever business model. Psychologically it stimulated interaction as everyone likes to receive messages and calls, but can’t stand the temptation of reaching out to someone as well. I am a big fan of interaction, it drives all value between people. And while Rolf Skyberg predicts people will pay to network, I would refine that and say people will pay to interact.
- Search is a good business model. People are always searching for something. Google has mastered this business model into perfection. Allowing people to find what they are in need of through your service provides real value, and that value can be monetized via the user.
- Getting people to pay for content. This is the downfall for the old-fashioned music industry as so adequately commented on by Ian Rogers of Yahoo entertainment. But then again, musicians themselves are showing that if you combine emotions to a strong community there is still a lot of money earned in content.
Personally I believe that options 2, 4 and 5 provide by far the best business model drivers wit option 6 a very good (niche) community model.
But the question remains, which entrepreneur has the guts to break out of “old fashioned” web 2.0 thinking and is willing to invest in business models that focus on user value instead of advertisement value. Who is willing to ignore the $16 Bln trap and do something completely different?
What are your thoughts on this? Do you see alternative business models that might work? Are there market examples where users pay for on-line value? Am I all wrong and should we focus on increasing ad spent to $32 Bln instead?
@vanelsas 
Very astute observations. I believe your recharacterization of “people will pay to network” as “people will pay to interact” is very true. We currently pay cell phone and SMS charges (and land-line!) happily to interact.
Good post as usual, Alex!
Briefly, my opinion (hope it is valuable at least abit 😉 )
1 – I don’t think that will work unless the social network (SN) is in the business field like linkedin is. The user value is there, even though not directly there. But the key is that mane linkedin users don’t pay for the account – their employers do, that’s sufficient.
2 – Indeed, just take a look at secondlife, it should be abetter illustration of this model. WoW is a game, we are used to pay for those, and Skype is just a VoIP service – an alternative to calling cards.
3 and 4- I absolutely agree with you here, with only one “but” – definition of this model can be (or should be) merged with the fourth one. Suggest you take a brief look at hotornot.com where you can only send predefined messages for free.
5 – Search, yes! mozilla raised $67 mln with google searches performed with their firefox, and who said that SN’s are not browsers in these regards?
6 – I would never pay for any content. I don’t even rent DVD’s – I either torrent the film either go to cinema, and many, many people do like I do. As hoped by radiohead (and proven several years ago by a friend of mine, minimal techno music producer), donation model is a good one…
7 – I would add another option, basing on the outlook for emerging technologies like augmented reality. Those techies require an upgrade of your devices, or maybe new devices, or maybe not devices but something else commodified… Here you can earn an honest comission on sales of those commodities, or meaybe sell them on your own…
@rolf @kbolgasov thx for your response. Will react on monday as my n95 is good for reading, not for writing 🙂
Just seems to me that free social networking is already a convention. I can’t immediately think of any service that started out free (on a mainstream basis) and then moved to a paid service. Perhaps Napster and file-sharing may be an example?
I’ve long held the opinion that “on the Web, everything wants to be free”, meaning that most services migrate to cheaper or free, rather than more expensive (whether legal or not).
Oh, and I think I’m going to start using the word “farcebook” instead of that which shall not be named. I’m just SO tired of hearing it that I refuse to proliferate.
@ Rolfsky, thanks for your comment. Astute they are, but now we got to find a way of implementing at least some of them to get out of the trap I was talking about.
@kbolgarov thanks. I think your nuance of payed content to donations is correct. The whol reason Radiohead made a succes out of their new distirbution form was that they left responsibility at the user, and they got rewarded for it. I am not sure that the exta suggestion you provide would be “mainstream” enough to become mass adopted, but it might be a niche that will lead to a different business model.
@jordan This movement to free is actually based on a very simple economic law. If anyone can lower the transaction costs for a service below yours, then you are out of business. Internet has lowered the transaction costs considerably allowing services to compete in price. However, the transaction costs are never 0, so that is why everyone tries to earn a buck on ads. In my opinion this will be a wave-like cyclus. We might just see a revival of services that cost the user something. But in return he gets more value than he would be getting from a “free” service.
@Alexander, @Jordan Mitchell
I believe that the main reason for radiohead success in their donation business model is the huge solid mass of true fans that they gathered around by their music, which always was
– of highest quality
– innovative
– allowed fans to differentiate themselves among other music-lovers
– and it was special
This, in my opinion, allowed them to switch to such a business model. Same could be with a good social network, or any other web-based free service. Just adding an offer to donate for the good work done. Justice is there – if the service does not meet the above listed criteria, donations will hardly by good…
@kbolgarov well said. It all comes down to providing the user true value. It creates a bond with your user that will easily survive something as bold as a donation model.