6 ms·

Free is Killing Us. Blame The VCs

65 points by llimllib 19y ago

davidw 19y ago
He's wrong. We got there because of economics: the marginal costs of digital products are essentially zero, and so tend towards free: http://www.squeezedbooks.com/book/show/7/information-rules-a-strategic-guide-to-the-network-economy http://www.squeezedbooks.com/book/show/7/information-rules-a...
- hussong 19y ago
  They do, but only if they are commoditized. Once you get a sufficient amount of differentiation, you can (and should) "price information according to its value, not its cost".
  - davidw 19y ago
    Good point, but if it's big enough to interest VC's, it's big enough to attract interest in an open source or free version (Linux, Wikipedia). I can't think of VC's driving the price to zero in niches, as per his thesis that it's VC's driving the price of things to zero. I should add that there's also certainly space between a new product's entry into the market, and when it becomes commoditized. If you're doing something that's not easy to replicate, even if people do start trying, you might have a number of years to make some money at it.
- icky 19y ago
  > the marginal costs of digital products are essentially zero Assuming you can scale. ;-)
  - byrneseyeview 19y ago
    Well, assuming you can scale past one. "Marginal" cost is the cost of, for example, serving 100 pages instead of 99. It's tiny for Internet media companies; probably a bit higher for manufacturers. Some service businesses are basically all marginal cost. Scaling up or down is easy, but getting a competitive advantage is not.
- caveman82 19y ago
  I agree (in that the article is weak). He breaks down a incredibly complex economic model with a painfully crude analysis. If that's his hunch fine, but to assert it like it's a dissertation is almost shameful. This type of article is a complete waste of space, other than it serves as an example of how not to deconstruct a type of behavior.
- huherto 19y ago
  What an interesting read! It was published in 98. I wish there was a newer version including all lessons learned in the last 10 years.
nilobject 19y ago
I don't know if it's true that free is killing us. I can point to several counterexamples, such as 37Signals and FogBugz that charge for their applications, and are apparently healthy. I think that no matter what, there will be people who want quality service without the advertisements. The author compares launching big and launching small, but really they're apples and oranges. Yes, to launch big, you need to make a big splash and either be free or very low priced. But the alternative is still there: get the niche market, and launch slowly and by word of mouth of your users. I don't think we're in a situation where you can't launch small and make a living.
- nostrademons 19y ago
  More counterexamples: LiveJournal, Flickr, HotOrNot.
  - nilobject 19y ago
    I forgot an obvious one that I pay for: SmugMug.
    - hollerith 19y ago
      Another example is the blogspot competitor typepad.com: it does not offer free blog accounts: accounts start at $4.95 a month, and go up from there.
    - wallflower 19y ago
      From a talk by Jeff Barr, Amazon's Web Services Evangelist: Smugmug is one of the biggest customers for Amazon.com web services (meaning they could be invoiced if they wanted to be). However, they are billing everything on a American Express Platinum corporate credit card with the highest credit limit ($100K). Jeff says every month they probably earn three or four first-class tickets based on bonus points. According to Jeff, their rate of growth is astonishing (Jeff said that they are storing about 15TB (yes, Terabytes) a month in S3). What happens to images in Smugmug ceases operations? Well, apparently the family has committed to a multi-generational commitment.
- 19y ago
dpapathanasiou 19y ago
You can't blame the VCs as long as companies like Google, Yahoo, etc. can make money offering free services.
- marrone 19y ago
  Google and Yahoo can do it because they can take advantage of their scale to monetize ads, as well as their diversity of products (profitable products can help pay for the unprofitable ones). Which is exactly the author's point. He says that small companies are forced to swing for the fences in terms of user-base because a) that is all advertisers are interested in and b) the competitors (such as Yahoo! and Google) offer free alternatives. I dont think it reasonable to set Yahoo or Google as the measuring stick of success as those companies are clearly way out ahead of anyone
  - dpapathanasiou 19y ago
    Forget advertising for a moment. Suppose you start a company to compete in an industry (any industry) where your rivals are profitable despite offering free services. The fact they're able to do that is going to force your hand in that direction, too. So it's the market which dictates those conditions, not your investors.
    - parker 19y ago
      So then by this logic, it's the market that's going to tend internet revenus to zero? You're right. And this will lead to a massive market correction at some point. Companies that had the balls to listen to reason (a la 37signals), will be the ones that weather the storm. They'll end up being the Berkshire-Hathaway of the internet industry because they a)focus on the long-term, b) concentrate on what they know and do best, and c) fiercely execute on value, and not trends. There's a reason Warren Buffet came through the dot-com crash unscathed. And it's the exact same reason why companies like 37signals will as well.
      - dpapathanasiou 19y ago
wmeredith 19y ago
What about small software firms like Rogue Amoeba or Panic? They make fabulous programs and sell them for reasonable prices. I think the biggest problem with most of these web 2.0 startups is there is no product to sell.
- jamongkad 19y ago
  Don't forget to toss in Delicious Monster in the mix too.
noodle 19y ago
his assertion that online ad revenue is the only real revenue stream is false. the rest of the article fails because it was built on a faulty premise. its true that there are lots of sites built on ad revenue, but it is definitely not the only revenue model.
hooande 19y ago
I'm starting to understand that most websites, especially websites produced by YC companies, are really media companies. From a business perspective, most of our startups have more in common with MTV or the New York Times than we do with Microsoft. We make money in the same way that any media company does - by selling advertising. I don't think there is anything wrong with that. It's certainly riskier and subject to the whims of a fickle public. But there is also a bigger reward for success. Saying that a new media company should charge their customers before they become popular seems counter intuitive. IIRC, this is how the Onion and many other major media publications began...they gave their product away for free until enough people read it that they could charge for ads. It seems to me that most of the author's points could apply just as well to starting a new magazine or newspaper. Yet, I don't think that many people would agree that college newspapers are killing themselves by giving their products away for free. I think that the expectations people have for web startups would change if people looked at them as media entities and not software companies.
- wallflower 19y ago
  I'd like to hear you expand your thoughts in an essay (no pressure). This is intriguing.
- mynameishere 19y ago
  The Onion predates the www. They were a subscription-based tabloid (and still are). Generally, free media is bottom-of-the-barrel and advertisers prefer paying audiences. The traditional broadcast networks are the biggest exception, but that's probably a holdover from their predating cable. I've mentioned the stats before, but the nytimes has 10 times the web traffic as print, but 1/10th the ad revenue. (Those numbers are wrong, but it's something like that.)
  - hooande 19y ago
    I was referring more to the print publication of The Onion and the New York Times than to the websites. To clarify my point, starting a website with an advertising based revenue model is similar to starting a new newspaper or magazine. I used The Onion as an example because I remember it being freely available in bars back when I was in college. I don't have any marketing data on whether advertisers prefer paying audiences or not, but I assume a lot of that would depend on the advertiser. I know that the bigger players in web media (facebook, myspace, etc) are definitely "bottom-of-the-barrel" when it comes to advertising rates because they reach such scattered demographics. With that being said, I don't fully understand your point about advertisers preferring paying audiences. I think the problem is in the math. If I start charging for content (turning my users into a paying audience) then I'm going to most likely going to serve less page views. I don't know if the extra money advertisers are willing to spend for my now paying audience would be enough to offset the loss in page views. The main example of a media website with a paying audience I can think of is the NYT, and I think the only reason they can get away with charging for content is because they've been established for so long. I think the rest of us are going to have to decide between 1) charging up front 2) trying to build a media property 3) trying to make money from premium subscriptions (which usually just amount to being donations from dedicated users). Thanks for the reply, I'll definitely be thinking about this.
sabat 19y ago
Social, economic, and technological changes are bad because they force me have to think and work.
parker 19y ago
I agree. 99% of Google's top-line revenues last fiscal year came from their adwords/adsense empire... every single other web serivce they offer accounts for 1% combined. "Business" is about making money. Let's just agree that without revenue, you have no "business". And this suggests that even Google is having problems with monetizing products aside from their golden goose. This probably slightly irritates Google, but it should really scare those of us who don't have a golden goose yet. We shouldn't be interested in creating products that are "built to flip", as my ex-CEO liked to say. We should be interested in creating products that create tangible, sustainable value... and that means making money. Some startups can do that by offering products for free, and scaling up. Others will have to charge for their offerings, commensurate with how targeted and value-creating their offering is. It will be a combination of the two. The idea that every internet startup can survive by giving away their service will lead to one thing: disaster. At some point the Googles and Yahoos of the world will not be able to explain acquisitions to their shareholders, because they have a fiduciary responsibility to create wealth. If the acquisitions do not create wealth, they will stop making them. But that lesson will take years to learn, in my opinion.
edw519 19y ago
Hey, Hank, the last time you flamebaited us with "Relational Databases are Dead", we played along and had a nice little thread. But that was your only free pass. On to new business... First of all, I still chuckle at "whydoeseverythingsuck.com" That thought is the antithesis of everything we (should) believe here. I guess it's just your little tongue in cheek thing. Cool. You say, "it is inherently impossible to start a small self-sustaining business and to grow it". I, along with 7 million of my compatriots beg to disagree. If you don't want to play roulette, er I mean pursue VC, there are a lot of other ways: bootstrapping, friends and family, angels, debt, etc., etc., etc. I guess the thing that bothers me most about that remark is that someone may come here, read that, actually believe it, and then become discouraged. OTOH, maybe it's just another form of Darwinism. Anyone who pursues an "advertising = only revenue" strategy should be prepared for the worst. More prospects for those of us with sound business models.
- wanorris 19y ago
  Exactly. Some form of bootstrapping + pursuing a vertical market = doing exactly what he's talking about. This is alive and well. This won't get the same tech media coverage as starting Facebook or Twitter, but if you're pursuing a vertical, who needs tech media coverage anyway?
- DocSavage 19y ago
  Yes. He lost me when the author said "in the digital world, advertising, the only real revenue stream, cannot support a small digital business." Chris Anderson is doing the lecture circuit before his book on Free comes out. His Wired article has a list of business models beyond advertising: http://www.wired.com/techbiz/it/magazine/16-03/ff_free?currentPage=all http://www.wired.com/techbiz/it/magazine/16-03/ff_free?curre... 37signals makes their living off the "Freemium" model. I don't think Prince raised a VC round before he gave away his CD. As the cost of providing some services goes to zero, businesses can make some things free, especially if it helps grow other markets.
- attack 19y ago
  If you're going to call him out on the probability that any given person can create a startup more successful than a day job then at least be more specific as to what you think that probability is. Him: It's impossible. You: It's so certain, it's basically guaranteed! You can be a person who behaves very aggressively with what appears to be extremely risky behavior but at the same time calculate risk very carefully with as much data as possible. This is what I aim to be, a calculated risk taker. Not a foolish man who dives head first without thinking. Motivation is really great, but I don't see a lot of value in blind optimism.
webwright 19y ago
Here's that I posted on his blog: I agree with a lot of this... But VCs aren't going to change (and it isn't really in their interest to do so). VCs ONLY win in two cases-- someone buys the company or the company IPOs. Sustained modest growth rarely gets you to that destination. It's not irrational for VCs to push for growth at the expense of revenue/profit. For their "business model" (the hits in their portfolio paying for all of the duds), it makes perfect sense. I suspect that if a VC tried a new model (focusing on sustainable growth and revenue/profit), they'd find that they'd have a healthier portfolio that was largely illiquid.
- parker 19y ago
  >> I suspect that if a VC tried a new model (focusing on sustainable growth and revenue/profit), they'd find that they'd have a healthier portfolio that was largely illiquid. Well, if VCs were to concentrate on sustainable growth and profits, maybe we'd see a resurgence of the flacid IPO market. It wasn't too long ago that tech entrepreneurs were motivated to make profits which then allowed them to take their companies public. Seqouia would not have made a crazy-multiple on their investment if Google had focused on being bought pre-revenue in preference over creating profits and taking themselves public. Google's IPO absolutely dwarfs YouTube's acquisition. I think a VC model encouraging profits over growth would be a healthy thing for everyone!
- nostrademons 19y ago
  Something I'm curious about: what if VCs worked like Berkshire Hathaway, reinvesting the cash thrown off by portfolio businesses but never selling their shares? Profitable businesses all generate return-on-capital; that cash can be reinvested to get new businesses off the ground. It seems like this would be a good model for seed-funding businesses like YC to try, because they've got many more at-bats than big VCs. It might be hard for a big VC firm to generate enough cash for this: if the average investment is $5M, they take 50% of the company, and 90% of their investments fail, then their "hit" needs to churn off $100M in profits to sustain the next round of startups. But if you target hundreds of niche businesses, your investment is $20K, you take 10% of the company, and 50% of the companies survive, then they only need to spin off $400K/year in profits to fund the next round. That seems a lot more achievable. Then again, one of the reasons Berkshire is successful is that Buffett refuses to invest in businesses that don't have predictable streams of cashflow. Startups are anything but predictable, so maybe the model's fundamentally flawed when it comes to startups.
dbreunig 19y ago
I think there's another angle to this... And that's social. Digital does have a lower overhead (less cost per user gained) than physical. But Web 2.0 products are part product, part community. Their value is largely derived from the bustling community that uses the product. FB would be worth nothing with no subscribers, both from a consumer and investment perspective. Remember how FriendFeed became suddenly awesome when the closed beta ended? The value for myself (and others) is the relationships that form. If payment is a barrier to usage, the growth stagnates and users don't get the best experience.
- davidw 19y ago
  Right - you're thinking of "network effects" or "positive network externalities".
  - dbreunig 19y ago
    Why say friends when you can say "positive network externalities?"
    - davidw 19y ago
      Because it encompasses a broader meaning. eBay isn't about friends at all, really, but has strong network effects: buyers go there because there are lots of sellers, and sellers go there because there are lots of buyers. I'd highly recommend the 'Information Rules' book I linked to elsewhere (via my site:-) to anyone interested in this stuff. Most of it is pretty intuitive, but it's nice to have it all grouped together and explained.
      - dbreunig 19y ago
        That was a joke. :)
        davidw 19y ago
        Ah... well, truth be told, I think that economics does tend to weighty jargon for concepts that are, if not completely obvious, not exactly earth shattering. Still, they are useful to give labels to those concepts.
gscott 19y ago
Free is a very powerful marketing tool you will get more sign ups and then can convert those up rather then having nothing free and try to convert people with limited trials.
pg 19y ago
This reads like a pre-Ford car manufacturer complaining about the fact that Ford was reducing the price of cars by an order of magnitude. This is not a recent trend. In fact, it's practically the definition of technological growth that it makes things dramatically cheaper. I don't think this is a trend that will ever be "put to bed."
- Hexstream 19y ago
  Well, he seemed to be saying the prices are made artificially low (ex: free) because of VC's subsidizing the businesses.
  - pg 19y ago
    Sure, but since technological innovation tends to decrease prices, calling a price "artificially low" is the same thing as calling it a future price. When GMail launched, it offered artificially large amounts of free storage, in the sense that they couldn't support many users at that size. That's why they had to start with invites. But they knew that disk would keep getting cheaper, so they just gave people a number that would make sense in the future.
    - attack 19y ago
      A very large percentage of sites/products start off free and without ads but then start requiring subscriptions, reduce the value of their service and cram it with advertising once they get big. In these numerous cases, "future price" would not equal lower. Certainly, technology drives prices down but technology is not the only factor that affects pricing. Unless you mean very long term? But in very long term, everything is just going to go to zero so that frame of reference is not very useful. I agree that this elimination of competition is bad for the consumers, bad for innovation, and bad for those more capable companies that didn't get the huge funding. It's just making the rich richer.
- reitzensteinm 19y ago
  Actually, I think it's more a complaint about a digital equivilant to dumping - unsustainable business models put in place solely to build market share by hurting competition. The Ford analogy breaks down because Ford sold cars profitably by innovatively reducing costs (which I assume he would have no problem with). For the record, I don't agree with him either. Standing around saying "I wish I could do x but I can't because of y" is just another dangerous procrastination tactic, for any value of y.
jrockway 19y ago
What about 37signals? They make money from charging for their products. I think it's possible to do, but not as easy as "hack some website together and hope for the best". Some things are going to be easier to market than others. 37signals products (while I think they're useless) appeal to a lot of business-type people (who have money so spend), so they do well. If you look at startups like Reddit, they set themselves up for advertising-only revenue. There is nothing worth paying for there, so of course nobody is going to pay them. (Yes, I know that reddit sells the reddit engine. But the most public part of reddit is reddit.com.)
malbiniak 19y ago
man, you guys are a wordy bunch. chew on this. "niche thyself." don't believe me? may i present exhibit a, smug mug's article in business week: "Competitors such as Ofoto, Snapfish, and Shutterfly (SFLY) were well-established, and free. The business that wasn't already taken by them was split among the likes of Canon (CAN), Nikon, and Sony (SNE), which offered photo sharing as a service to camera buyers. But today, SmugMug is the destination of choice for professionals and serious amateurs, with more than 450,000 customers, including nearly 120,000 subscribers who pay $40 to $150 a year for the service. Revenues doubled in 2007, as they have for the past three years, to $12 million. With only 29 employees (including seven MacAskills), it's profitable." sorry to interrupt, have fun.
hillel 19y ago
There's another advertising model that may work for small companies. Here at Jackson Fish Market there are three of us. I think that counts as small. :) We also are a bootstrap. We make small beautiful web apps and offer sponsorships to brand advertisers. What we don't offer is an audience. Our apps are basically for rent to marketers who can get an audience elsewhere but need a place to send them to interact in a way that accrues value to their brand. We believe that this notion that advertising needs to be something that has value for the user (and not a distraction) is the wave of the future for brand marketers. These apps will need audiences, but there are literally hundreds of ad networks that can provide those. What those ad networks can't provide is useful destinations that are tuned to be complementary to a single sponsor. There is hope. At least, we think there is. :)
adityakothadiya 19y ago
I read this on 37signal's blog once - charge only for those products which enable people make more money, or save time, or be productive, or gain something in general. The rest should be Free - like Facebook, Twitter, or so. Facebook and Twitter do provide value, but they dont enable me to make money or help my business per say.
GavinB 19y ago
"This will all stop when the average VC can’t get any of his/her companies to scale because there is just too much VC sponsored free stuff out there." Markets don't disappear because they're too crowded. When they're too crowded, some people are forced out and it moves down to a more reasonable equilibrium. That's like saying that a theme park will fail because it gets too crowded -- when something is too crowded to be worthwhile, people stop going and it then becomes not too crowded anymore.
antirez 19y ago
I can't agree more. And the result is that no one is willing to improve upon something good enough but that's free. For example there are very wild problems affecting almost every internet user, like email. I bet that there are many hacker teams around that are able to come up with a better gmail, or simply a web based email system more biased towards advanced users: but how can you compete with an alternative that is good enough, is under this big name, and gives you all the space and free access to POP, IMAP, ...? Result: no enhancement over gmail, we just need to wait for them to release the next feature. Is this really better for users? Mostly not, the email or other core internet services are such an important thing for users that to pay 30$/year is nothing compared to the advantage of having a better internet experience.
antirez 19y ago
> The good news is at some point VCs will indeed > realize how dumb all of this is and stop giving > away everything of value on the Internet This is unfortunately not the case since VCs know that for companies like Google and Yahoo is valuable to buy a startup that is not able to be profitable from itself, but added to a core of other free services it will be worth the money.
thenotself 19y ago
The free model can work if it leads to a secondary revenue model, such as B2B services, or secondary products that actually do make money. Launching a business blindly for free hoping to "fake it until you make it" is not a recipe for a successful business model. I wrote about how to properly use the FREE software model today at http://www.onlineepiphany.com/2008/04/04/how-do-they-give-that-away-for-free/ http://www.onlineepiphany.com/2008/04/04/how-do-they-give-th...

65 points by llimllib 19y ago

He's wrong. We got there because of economics: the marginal costs of digital products are essentially zero, and so tend towards free: http://www.squeezedbooks.com/book/show/7/information-rules-a-strategic-guide-to-the-network-economy http://www.squeezedbooks.com/book/show/7/information-rules-a...

hussong 19y ago
They do, but only if they are commoditized. Once you get a sufficient amount of differentiation, you can (and should) "price information according to its value, not its cost".
- davidw 19y ago
  Good point, but if it's big enough to interest VC's, it's big enough to attract interest in an open source or free version (Linux, Wikipedia). I can't think of VC's driving the price to zero in niches, as per his thesis that it's VC's driving the price of things to zero. I should add that there's also certainly space between a new product's entry into the market, and when it becomes commoditized. If you're doing something that's not easy to replicate, even if people do start trying, you might have a number of years to make some money at it.
icky 19y ago
> the marginal costs of digital products are essentially zero Assuming you can scale. ;-)
- byrneseyeview 19y ago
  Well, assuming you can scale past one. "Marginal" cost is the cost of, for example, serving 100 pages instead of 99. It's tiny for Internet media companies; probably a bit higher for manufacturers. Some service businesses are basically all marginal cost. Scaling up or down is easy, but getting a competitive advantage is not.
caveman82 19y ago
I agree (in that the article is weak). He breaks down a incredibly complex economic model with a painfully crude analysis. If that's his hunch fine, but to assert it like it's a dissertation is almost shameful. This type of article is a complete waste of space, other than it serves as an example of how not to deconstruct a type of behavior.
huherto 19y ago
What an interesting read! It was published in 98. I wish there was a newer version including all lessons learned in the last 10 years.

nilobject 19y ago

I don't know if it's true that free is killing us. I can point to several counterexamples, such as 37Signals and FogBugz that charge for their applications, and are apparently healthy. I think that no matter what, there will be people who want quality service without the advertisements. The author compares launching big and launching small, but really they're apples and oranges. Yes, to launch big, you need to make a big splash and either be free or very low priced. But the alternative is still there: get the niche market, and launch slowly and by word of mouth of your users. I don't think we're in a situation where you can't launch small and make a living.

nostrademons 19y ago
More counterexamples: LiveJournal, Flickr, HotOrNot.
- nilobject 19y ago
  I forgot an obvious one that I pay for: SmugMug.
  - hollerith 19y ago
    Another example is the blogspot competitor typepad.com: it does not offer free blog accounts: accounts start at $4.95 a month, and go up from there.
  - wallflower 19y ago
    From a talk by Jeff Barr, Amazon's Web Services Evangelist: Smugmug is one of the biggest customers for Amazon.com web services (meaning they could be invoiced if they wanted to be). However, they are billing everything on a American Express Platinum corporate credit card with the highest credit limit ($100K). Jeff says every month they probably earn three or four first-class tickets based on bonus points. According to Jeff, their rate of growth is astonishing (Jeff said that they are storing about 15TB (yes, Terabytes) a month in S3). What happens to images in Smugmug ceases operations? Well, apparently the family has committed to a multi-generational commitment.
19y ago

dpapathanasiou 19y ago

You can't blame the VCs as long as companies like Google, Yahoo, etc. can make money offering free services.

marrone 19y ago
Google and Yahoo can do it because they can take advantage of their scale to monetize ads, as well as their diversity of products (profitable products can help pay for the unprofitable ones). Which is exactly the author's point. He says that small companies are forced to swing for the fences in terms of user-base because a) that is all advertisers are interested in and b) the competitors (such as Yahoo! and Google) offer free alternatives. I dont think it reasonable to set Yahoo or Google as the measuring stick of success as those companies are clearly way out ahead of anyone
- dpapathanasiou 19y ago
  Forget advertising for a moment. Suppose you start a company to compete in an industry (any industry) where your rivals are profitable despite offering free services. The fact they're able to do that is going to force your hand in that direction, too. So it's the market which dictates those conditions, not your investors.
  - parker 19y ago
    So then by this logic, it's the market that's going to tend internet revenus to zero? You're right. And this will lead to a massive market correction at some point. Companies that had the balls to listen to reason (a la 37signals), will be the ones that weather the storm. They'll end up being the Berkshire-Hathaway of the internet industry because they a)focus on the long-term, b) concentrate on what they know and do best, and c) fiercely execute on value, and not trends. There's a reason Warren Buffet came through the dot-com crash unscathed. And it's the exact same reason why companies like 37signals will as well.
    - dpapathanasiou 19y ago

wmeredith 19y ago

What about small software firms like Rogue Amoeba or Panic? They make fabulous programs and sell them for reasonable prices. I think the biggest problem with most of these web 2.0 startups is there is no product to sell.

jamongkad 19y ago
Don't forget to toss in Delicious Monster in the mix too.

noodle 19y ago

his assertion that online ad revenue is the only real revenue stream is false. the rest of the article fails because it was built on a faulty premise. its true that there are lots of sites built on ad revenue, but it is definitely not the only revenue model.

hooande 19y ago

I'm starting to understand that most websites, especially websites produced by YC companies, are really media companies. From a business perspective, most of our startups have more in common with MTV or the New York Times than we do with Microsoft. We make money in the same way that any media company does - by selling advertising. I don't think there is anything wrong with that. It's certainly riskier and subject to the whims of a fickle public. But there is also a bigger reward for success. Saying that a new media company should charge their customers before they become popular seems counter intuitive. IIRC, this is how the Onion and many other major media publications began...they gave their product away for free until enough people read it that they could charge for ads. It seems to me that most of the author's points could apply just as well to starting a new magazine or newspaper. Yet, I don't think that many people would agree that college newspapers are killing themselves by giving their products away for free. I think that the expectations people have for web startups would change if people looked at them as media entities and not software companies.

wallflower 19y ago
I'd like to hear you expand your thoughts in an essay (no pressure). This is intriguing.
mynameishere 19y ago
The Onion predates the www. They were a subscription-based tabloid (and still are). Generally, free media is bottom-of-the-barrel and advertisers prefer paying audiences. The traditional broadcast networks are the biggest exception, but that's probably a holdover from their predating cable. I've mentioned the stats before, but the nytimes has 10 times the web traffic as print, but 1/10th the ad revenue. (Those numbers are wrong, but it's something like that.)
- hooande 19y ago
  I was referring more to the print publication of The Onion and the New York Times than to the websites. To clarify my point, starting a website with an advertising based revenue model is similar to starting a new newspaper or magazine. I used The Onion as an example because I remember it being freely available in bars back when I was in college. I don't have any marketing data on whether advertisers prefer paying audiences or not, but I assume a lot of that would depend on the advertiser. I know that the bigger players in web media (facebook, myspace, etc) are definitely "bottom-of-the-barrel" when it comes to advertising rates because they reach such scattered demographics. With that being said, I don't fully understand your point about advertisers preferring paying audiences. I think the problem is in the math. If I start charging for content (turning my users into a paying audience) then I'm going to most likely going to serve less page views. I don't know if the extra money advertisers are willing to spend for my now paying audience would be enough to offset the loss in page views. The main example of a media website with a paying audience I can think of is the NYT, and I think the only reason they can get away with charging for content is because they've been established for so long. I think the rest of us are going to have to decide between 1) charging up front 2) trying to build a media property 3) trying to make money from premium subscriptions (which usually just amount to being donations from dedicated users). Thanks for the reply, I'll definitely be thinking about this.

sabat 19y ago

Social, economic, and technological changes are bad because they force me have to think and work.

parker 19y ago

I agree. 99% of Google's top-line revenues last fiscal year came from their adwords/adsense empire... every single other web serivce they offer accounts for 1% combined. "Business" is about making money. Let's just agree that without revenue, you have no "business". And this suggests that even Google is having problems with monetizing products aside from their golden goose. This probably slightly irritates Google, but it should really scare those of us who don't have a golden goose yet. We shouldn't be interested in creating products that are "built to flip", as my ex-CEO liked to say. We should be interested in creating products that create tangible, sustainable value... and that means making money. Some startups can do that by offering products for free, and scaling up. Others will have to charge for their offerings, commensurate with how targeted and value-creating their offering is. It will be a combination of the two. The idea that every internet startup can survive by giving away their service will lead to one thing: disaster. At some point the Googles and Yahoos of the world will not be able to explain acquisitions to their shareholders, because they have a fiduciary responsibility to create wealth. If the acquisitions do not create wealth, they will stop making them. But that lesson will take years to learn, in my opinion.

edw519 19y ago

Hey, Hank, the last time you flamebaited us with "Relational Databases are Dead", we played along and had a nice little thread. But that was your only free pass. On to new business... First of all, I still chuckle at "whydoeseverythingsuck.com" That thought is the antithesis of everything we (should) believe here. I guess it's just your little tongue in cheek thing. Cool. You say, "it is inherently impossible to start a small self-sustaining business and to grow it". I, along with 7 million of my compatriots beg to disagree. If you don't want to play roulette, er I mean pursue VC, there are a lot of other ways: bootstrapping, friends and family, angels, debt, etc., etc., etc. I guess the thing that bothers me most about that remark is that someone may come here, read that, actually believe it, and then become discouraged. OTOH, maybe it's just another form of Darwinism. Anyone who pursues an "advertising = only revenue" strategy should be prepared for the worst. More prospects for those of us with sound business models.

wanorris 19y ago
Exactly. Some form of bootstrapping + pursuing a vertical market = doing exactly what he's talking about. This is alive and well. This won't get the same tech media coverage as starting Facebook or Twitter, but if you're pursuing a vertical, who needs tech media coverage anyway?
DocSavage 19y ago
Yes. He lost me when the author said "in the digital world, advertising, the only real revenue stream, cannot support a small digital business." Chris Anderson is doing the lecture circuit before his book on Free comes out. His Wired article has a list of business models beyond advertising: http://www.wired.com/techbiz/it/magazine/16-03/ff_free?currentPage=all http://www.wired.com/techbiz/it/magazine/16-03/ff_free?curre... 37signals makes their living off the "Freemium" model. I don't think Prince raised a VC round before he gave away his CD. As the cost of providing some services goes to zero, businesses can make some things free, especially if it helps grow other markets.
attack 19y ago
If you're going to call him out on the probability that any given person can create a startup more successful than a day job then at least be more specific as to what you think that probability is. Him: It's impossible. You: It's so certain, it's basically guaranteed! You can be a person who behaves very aggressively with what appears to be extremely risky behavior but at the same time calculate risk very carefully with as much data as possible. This is what I aim to be, a calculated risk taker. Not a foolish man who dives head first without thinking. Motivation is really great, but I don't see a lot of value in blind optimism.

webwright 19y ago

Here's that I posted on his blog: I agree with a lot of this... But VCs aren't going to change (and it isn't really in their interest to do so). VCs ONLY win in two cases-- someone buys the company or the company IPOs. Sustained modest growth rarely gets you to that destination. It's not irrational for VCs to push for growth at the expense of revenue/profit. For their "business model" (the hits in their portfolio paying for all of the duds), it makes perfect sense. I suspect that if a VC tried a new model (focusing on sustainable growth and revenue/profit), they'd find that they'd have a healthier portfolio that was largely illiquid.

parker 19y ago
>> I suspect that if a VC tried a new model (focusing on sustainable growth and revenue/profit), they'd find that they'd have a healthier portfolio that was largely illiquid. Well, if VCs were to concentrate on sustainable growth and profits, maybe we'd see a resurgence of the flacid IPO market. It wasn't too long ago that tech entrepreneurs were motivated to make profits which then allowed them to take their companies public. Seqouia would not have made a crazy-multiple on their investment if Google had focused on being bought pre-revenue in preference over creating profits and taking themselves public. Google's IPO absolutely dwarfs YouTube's acquisition. I think a VC model encouraging profits over growth would be a healthy thing for everyone!
nostrademons 19y ago
Something I'm curious about: what if VCs worked like Berkshire Hathaway, reinvesting the cash thrown off by portfolio businesses but never selling their shares? Profitable businesses all generate return-on-capital; that cash can be reinvested to get new businesses off the ground. It seems like this would be a good model for seed-funding businesses like YC to try, because they've got many more at-bats than big VCs. It might be hard for a big VC firm to generate enough cash for this: if the average investment is $5M, they take 50% of the company, and 90% of their investments fail, then their "hit" needs to churn off $100M in profits to sustain the next round of startups. But if you target hundreds of niche businesses, your investment is $20K, you take 10% of the company, and 50% of the companies survive, then they only need to spin off $400K/year in profits to fund the next round. That seems a lot more achievable. Then again, one of the reasons Berkshire is successful is that Buffett refuses to invest in businesses that don't have predictable streams of cashflow. Startups are anything but predictable, so maybe the model's fundamentally flawed when it comes to startups.

dbreunig 19y ago

I think there's another angle to this... And that's social. Digital does have a lower overhead (less cost per user gained) than physical. But Web 2.0 products are part product, part community. Their value is largely derived from the bustling community that uses the product. FB would be worth nothing with no subscribers, both from a consumer and investment perspective. Remember how FriendFeed became suddenly awesome when the closed beta ended? The value for myself (and others) is the relationships that form. If payment is a barrier to usage, the growth stagnates and users don't get the best experience.

davidw 19y ago
Right - you're thinking of "network effects" or "positive network externalities".
- dbreunig 19y ago
  Why say friends when you can say "positive network externalities?"
  - davidw 19y ago
    Because it encompasses a broader meaning. eBay isn't about friends at all, really, but has strong network effects: buyers go there because there are lots of sellers, and sellers go there because there are lots of buyers. I'd highly recommend the 'Information Rules' book I linked to elsewhere (via my site:-) to anyone interested in this stuff. Most of it is pretty intuitive, but it's nice to have it all grouped together and explained.
    - dbreunig 19y ago
      That was a joke. :)
      - davidw 19y ago
        Ah... well, truth be told, I think that economics does tend to weighty jargon for concepts that are, if not completely obvious, not exactly earth shattering. Still, they are useful to give labels to those concepts.

gscott 19y ago

Free is a very powerful marketing tool you will get more sign ups and then can convert those up rather then having nothing free and try to convert people with limited trials.

pg 19y ago

This reads like a pre-Ford car manufacturer complaining about the fact that Ford was reducing the price of cars by an order of magnitude. This is not a recent trend. In fact, it's practically the definition of technological growth that it makes things dramatically cheaper. I don't think this is a trend that will ever be "put to bed."

Hexstream 19y ago
Well, he seemed to be saying the prices are made artificially low (ex: free) because of VC's subsidizing the businesses.
- pg 19y ago
  Sure, but since technological innovation tends to decrease prices, calling a price "artificially low" is the same thing as calling it a future price. When GMail launched, it offered artificially large amounts of free storage, in the sense that they couldn't support many users at that size. That's why they had to start with invites. But they knew that disk would keep getting cheaper, so they just gave people a number that would make sense in the future.
  - attack 19y ago
    A very large percentage of sites/products start off free and without ads but then start requiring subscriptions, reduce the value of their service and cram it with advertising once they get big. In these numerous cases, "future price" would not equal lower. Certainly, technology drives prices down but technology is not the only factor that affects pricing. Unless you mean very long term? But in very long term, everything is just going to go to zero so that frame of reference is not very useful. I agree that this elimination of competition is bad for the consumers, bad for innovation, and bad for those more capable companies that didn't get the huge funding. It's just making the rich richer.
reitzensteinm 19y ago
Actually, I think it's more a complaint about a digital equivilant to dumping - unsustainable business models put in place solely to build market share by hurting competition. The Ford analogy breaks down because Ford sold cars profitably by innovatively reducing costs (which I assume he would have no problem with). For the record, I don't agree with him either. Standing around saying "I wish I could do x but I can't because of y" is just another dangerous procrastination tactic, for any value of y.

jrockway 19y ago

What about 37signals? They make money from charging for their products. I think it's possible to do, but not as easy as "hack some website together and hope for the best". Some things are going to be easier to market than others. 37signals products (while I think they're useless) appeal to a lot of business-type people (who have money so spend), so they do well. If you look at startups like Reddit, they set themselves up for advertising-only revenue. There is nothing worth paying for there, so of course nobody is going to pay them. (Yes, I know that reddit sells the reddit engine. But the most public part of reddit is reddit.com.)

malbiniak 19y ago

man, you guys are a wordy bunch. chew on this. "niche thyself." don't believe me? may i present exhibit a, smug mug's article in business week: "Competitors such as Ofoto, Snapfish, and Shutterfly (SFLY) were well-established, and free. The business that wasn't already taken by them was split among the likes of Canon (CAN), Nikon, and Sony (SNE), which offered photo sharing as a service to camera buyers. But today, SmugMug is the destination of choice for professionals and serious amateurs, with more than 450,000 customers, including nearly 120,000 subscribers who pay $40 to $150 a year for the service. Revenues doubled in 2007, as they have for the past three years, to $12 million. With only 29 employees (including seven MacAskills), it's profitable." sorry to interrupt, have fun.

hillel 19y ago

There's another advertising model that may work for small companies. Here at Jackson Fish Market there are three of us. I think that counts as small. :) We also are a bootstrap. We make small beautiful web apps and offer sponsorships to brand advertisers. What we don't offer is an audience. Our apps are basically for rent to marketers who can get an audience elsewhere but need a place to send them to interact in a way that accrues value to their brand. We believe that this notion that advertising needs to be something that has value for the user (and not a distraction) is the wave of the future for brand marketers. These apps will need audiences, but there are literally hundreds of ad networks that can provide those. What those ad networks can't provide is useful destinations that are tuned to be complementary to a single sponsor. There is hope. At least, we think there is. :)

adityakothadiya 19y ago

I read this on 37signal's blog once - charge only for those products which enable people make more money, or save time, or be productive, or gain something in general. The rest should be Free - like Facebook, Twitter, or so. Facebook and Twitter do provide value, but they dont enable me to make money or help my business per say.

GavinB 19y ago

"This will all stop when the average VC can’t get any of his/her companies to scale because there is just too much VC sponsored free stuff out there." Markets don't disappear because they're too crowded. When they're too crowded, some people are forced out and it moves down to a more reasonable equilibrium. That's like saying that a theme park will fail because it gets too crowded -- when something is too crowded to be worthwhile, people stop going and it then becomes not too crowded anymore.

antirez 19y ago

I can't agree more. And the result is that no one is willing to improve upon something good enough but that's free. For example there are very wild problems affecting almost every internet user, like email. I bet that there are many hacker teams around that are able to come up with a better gmail, or simply a web based email system more biased towards advanced users: but how can you compete with an alternative that is good enough, is under this big name, and gives you all the space and free access to POP, IMAP, ...? Result: no enhancement over gmail, we just need to wait for them to release the next feature. Is this really better for users? Mostly not, the email or other core internet services are such an important thing for users that to pay 30$/year is nothing compared to the advantage of having a better internet experience.

antirez 19y ago

> The good news is at some point VCs will indeed > realize how dumb all of this is and stop giving > away everything of value on the Internet This is unfortunately not the case since VCs know that for companies like Google and Yahoo is valuable to buy a startup that is not able to be profitable from itself, but added to a core of other free services it will be worth the money.

thenotself 19y ago

The free model can work if it leads to a secondary revenue model, such as B2B services, or secondary products that actually do make money. Launching a business blindly for free hoping to "fake it until you make it" is not a recipe for a successful business model. I wrote about how to properly use the FREE software model today at http://www.onlineepiphany.com/2008/04/04/how-do-they-give-that-away-for-free/ http://www.onlineepiphany.com/2008/04/04/how-do-they-give-th...