A few posts drew my attention this weekend. first there was Chris Anderson talking about the economics of giving it away. It seems to me that Chris is changing his tone of voice in FREE. Whereas he often has focused on the zero cost distribution of FREE, he now talks about the revenue side of things. He notes that in a market where both venture capital and advertisement investments dry up startups need to make real money. This quote says it all:
What about those companies trying to build a business on the Web? In the old days (that would be until September of last year) the model was pretty simple. 1. Have a great idea. 2. Raise money to bring it to market, ideally free to reach the largest possible market. 3. If it proves popular, raise more money to scale it up. 4. Repeat until you’re bought by a bigger company.
Now steps 2 through 4 are no longer available. So Web startups are having to do the unthinkable: come up with a business model that brings in real money while they’re still young.
Fred Wilson follows up with a post about the need to not only look at revenues, but also at costs. He writes:
Chris goes on to suggest that Internet entrepreneurs are going to have to get people to step up and pay for something instead of just giving everything away for free because advertising isn’t going to foot the bill for every company. That may well be true and we are certainly thinking that way for most, if not all, of our portfolio companies. But Chris’s examples, particularly Facebook and Digg, are examples of companies that might benefit from looking at the cost side of the profit equation at some point (maybe not yet).
And then there is Facebook, with Mark Zuckerberg who feels he has found the pot of gold at the end of the rainbow. In an NY Times article, ironically entitled “Networking site cashes in on friends” we can read about his strategy:
Facebook is planning to exploit the vast amount of personal information it holds on its 150m members by creating one of the world’s largest market research databases.
In an attempt to finally monetise the social networking site, once valued at $15bn (£10.4bn), it will soon allow multinational companies to selectively target its members in order to research the appeal of new products. Companies will be able to pose questions to specially selected members based on such intimate details as whether they are single or married and even whether they are gay or straight.
I feel we may finally have reached a tipping point in thinking. While the FREE advertisement based business model might have given us lots of good things (free services), it comes with many downsides and basically holds web evolution back:
- It leads to focus on network value instead of user value. In other words, the network and growth are more important than providing individual users value
- It leads to walled gardens. If you have to make money with advertisement, and your business is not search, then it is imperative that you keep your customers locked in. The phrase locked in says it all. Instead of freedom we contain our users. Get him into the service and then never let him out.
- It leads to destination sites, instead of user centric services. For advertisement we need traffic and eyeballs. It is therefore important to get your users to gather together in one place.
I feel Facebook still isn’t convinced. They choose yet another indirect business model. Instead of focus on user value, they will now try to exploit user data towards brands. You get a service for free, but in return we sell you, your friends, and your data to other brands. Possibly the largest marketing database in the world. I’m not looking at any moral aspects of such a deal, but think about the inefficiency for a second. There is a clear misalignment between what the Facebook user perceives as value received from Facebook versus the value Facebook executives are trying to exploit. And it is this misalignment that makes it so hard for Facebook to make enough revenues. They have huge operational costs with servers and a large organisation. And they can’t back that with advertisement money. My prediction is that it will be quite hard to monetize the user database the way they are thinking about it now. The reason for this remains simple. A Facebook user is there because of interaction with friends. That’s it. Having a good time online doesn’t match any advertisement or marketing goal. If they want to pull this off, they better start lowering their operational costs big time.
I believe a User Centric business model is more powerful in the end. Focus on user value and monetize that value. It is the simplest and clearest business model there is. It is a model that comes with several advantages:
- With one specific variant, Freemium, you can use the best of FREE (near zero cost distribution) while at the same time monetize on user value
- You will be forced to keep your operational costs to a minimum as you do not want your customers to pay for the overhead you are creating to deliver value
- If your main focus is user value, you will build user centric services instead of network value services. Everyone will benefit from that. It will lead to open systems, cross platform integration and service oriented business.
- It forces you to constantly innovate your concept of user value. You want customers to stay with you because of the trust and value you provide, instead of locking them in. As a result constant user centric innovation will keep competition out and your customer happy
- It is fun to engage with happy customers. Do not underestimate this aspect. I can still get very excited when I read the “300.000 paying customers of SmugMug”. SmugMug doesn’t really have customers, they have fans!
Let’s hope more services will follow that path. it will do the user and the web a lot of good. A User-Centric web is to prefer over any other type of network.