Jun08
03
The Web 2.0 Business Model Quandary
I don’t have an MBA but the little I do know about business tells me the ultimate goal for anyone starting or running a company is that it be profitable. Everything else - production, people management, marketing, accounting - is fashioned around that single purpose. I want Cerebra and Afrigator to make money. Sure, I want them to be fun, interesting and progressive - but they must make money.
I think it’s fair to say that websites like Facebook, YouTube, Zoopy, Twitter, Technorati, Digg and others aren’t meaningful and/or popular because of their technology (although good tech helps), but rather because of the vast networks of human beings using them. It’s humans that make Web 2.0 apps popular, not code. But looking at the significant list of apps and services I use daily, it’s hard to pick out any that are making money, never mind profitably so.
The problem is that 2.0 startups believe they have to be free to grow a userbase, which is probably true (simply because of the expectations of the market - just about everything 2.0 is free). Would you have used Flickr if you had to pay $25 a year for it? Probably not. So in order to reach critical mass in a userbase most 2.0 startups start off free, hoping that an ad-based business model will carry them. There are two obvious problems with this though:
1. Growing a userbase costs a stack of money (in infrastructure and support), and
2. It’s virtually impossible to ask for money for something you give away for free at the beginning.
So the one solution to this issue is a ‘freemium‘ model (coined on the popular A VC: Musing of a VC in NYC blog), where basic services or features are offered for free, while premium is charged for advanced or special features. Flickr, as I mentioned earlier, is the classic example - because it’s such a great service, a multitude of customers pay a nominal fee for the complete package. It’s not complicated - there are not layers and layers of options - just a free, basic option and a paid, full option. Similar quality services that I’ve paid money for include PBWiki, Plaxo and numerous Mac apps. More on the freemium business model here.
Sites like Twitter, however, never factored in a premium option (which I would happily pay for) and as a result are seeing their you-know-whats because of scalability issues. Technorati suffered bad press and continue to struggle when I would have happily paid them an annual fee for their offering (I wrote about this some time ago).
The point is great 2.0 ideas must be launched from day one with a premium option - you simply can’t make something that was free from the beginning a paid service down the line - and as a dev / management team you need to ensure the free version / basic options are compelling enough to grow a community with critical mass around them. $10 a year for a working, quick, 99%-uptime version of Twitter would not be excessive to me?
Bottom line - if your Web 2.0 app / service is good enough, enough people will pay (a fair price) for it to be, and stay, profitable.
Its true, as much as I love designing and building web apps, I would love to actually make some money out of it. The one thing that would help drive stuff up is bandwidth..
If a site is geared towards SA, then success is a harder thing to achieve. Maybe things will get better with time. Hoping that the government’s fear of embarrassment in 2010 will push it to help develop a better broadband model or what ever you want to call it
[...] unknown wrote an interesting post today onHere’s a quick excerpt [...]
Great points Mike.
I read a Harvard Business blog post this morning that spoke about the same problem, but suggested that the startups providing services to corporations (and not consumers) seem to be able to make the most profit. Why Web 2.0 Is No Bubble: http://conversationstarter.hbsp.com/groundswell/
Thought this might be of interest to other readers. Technology Review is doing a multi-part article on The Business of Social Networks: http://www.technologyreview.com/Biztech/20978/
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