There was a great article in the Weekend Journal about the dominant web business model to date – FREE. From Facebook to the New York Times online, nearly every major site established on the net today practices this model to some extent. Of the top 10 sites in the U.S. only eBay and Craigslist charge any of their users money.

“Consumers are saving their money and playing free online games, listening to free music on Pandora, canceling basic cable and watching free video on Hulu, and killing their landlines in favor of Skype. It’s a consumer’s paradise: The Web has become the biggest store in history and everything is 100% off.”

How do you build a business around free? How can a news organization survive if it has to give all of it’s content away for nothing? How can a social network thrive if it has to open its platform to the world free of charge? The model to date has been give it away, attract millions of users, then slap some ads on the site to generate revenue. But does that actually work? Generally not.

Sure sites like Facebook and Twitter and The Huffington Post can generate millions in revenue through ad sales, but none of these sites has turned a single dime of profit. The most effective platform for ads (other than Google) is most assuredly Facebook, which allows you to target users based on any one of dozens of metrics – age, sex, location, interests, education. But Facebook only turns our $1 per 1,000 ad impressions. Which is part of the reason why, with over 100 million users, Facebook is less profitable then the corner deli.

Prior to the current economic crisis companies, their investors and founders were patient. Content with their popularity, to wait for a clearer business model to emerge. But today the era of free has come to an end. This is not to say that all websites will start charging for their services. The New York Times and other news sites will assuredly remain free (if they survive) and services like Facebook and Twitter will only ever be able to charge a minor fee (if anything). However, the majority of web-based businesses to emerge over the next decade will differ from their predecessors as they will have to include some revenue generation in their initial business model.

The current slew of iPhone applications is a good example of what we will likely see. Most iPhone apps are free. However, a great number of them come in two versions – a free demo and a paid expanded edition. Clearly the greatest number of people simply opt for the free version, but a few percent will go on to pay a couple dollars for the entire application and earn the app maker a nice profit in the process.

The Internet is just now emerging from its idyllic infancy and entering adolescences. This phase will most assuredly be characterized by rebellion and tumult as the web develops its identity, and a realistic business model in the process.

1 Comment
  1. February 04, 2009

    Great post Bryce. Very, very true. But I pose you this… if what you say is true, then how does Facebook make so much money and claim to be worth more than News Corp. can afford. Advertising dollars are making money–its just that they are only effiecently creating profit for a select few.

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