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 3rd 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.
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?