The Free Ride Is Over

http://mattmaroon.com/2009/03/09/the-free-ride-is-over/

by twampss • 17 years ago

24 24 17 years ago

pg4• 17 years ago

I will literally bet money that this is false. There are some startups where you want to charge users, and some that you want to be free and just go for growth, and which strategy you use depends on the nature of the startup, not the state of the economy.

Thinking that every startup has to start charging its users now because the economy is bad is just as mistaken as thinking a few years ago that no startup had to charge its users because the economy was good.

startingup• 17 years ago

In the best of times, companies like Digg with fairly massive traffic have found it difficult to actually make a profit. And Digg is a poster-child of web 2.0.

Where does that leave the others dependent on similar user-generated-content-with-a-social-angle (which would describe so many of the consumer-oriented YC companies too)? Call me pessimistic, but I just don't see how the numbers add up to profitability, even ramen profitability for most such sites.

I have been in situations of ramen profitability and after a while (like 2 years) it gets tiresome. Even the most relentlessly resourceful people tend to throw in the towel and move on. This recession (depression?) looks like it will be around for a while.

pg4• 17 years ago

Something like Digg will clearly be where a lot of people get their news. And given the network effects, it was smart to focus initially on growth. The result is that at this stage they have a site that's big and unprofitable. Bad luck for them this stage coincides with a huge recession; but few saw that coming. Except for raising/spending too much, they seem to me to have followed roughly the optimal path.

You cannot do better than that. Optimal isn't always great, but it is optimal.

sachin• 17 years ago

I definitely agree that there will always be and should be services that are free while others that are paid.

However, I think what we saw in the last 5 years was an unhealthy focus on free where products that people may have been willing to pay for were driven to free because they were either subsidized by VC dollars, subsidized by cash cow business like Google's search, or eventual acquisitions by acquirers not necessarily looking for sustainable businesses. This may well have eroded a lot of potential value in that consumers have gotten used to these services being free and will likely not be willing to pay for them in the future.

vlad• 17 years ago

I will literally bet money that this is false.

You already do.

A lot of genuinely smart individuals post, comment, or author a lot of the content that appears here. Many accomplishments abound, including:

1) selling a shareware app written years ago.

2) founding and editing the top tech blog.

3) making a lot of money playing poker seriously.

4) completing their degrees early in life.

5) having written thousands of small and large programs over the past thirty years.

6) having an influential role at a company ten years ago.

Those who are in the game and not for the glitz are the ones whose opinion matters, and that opinion is to go for it, by definition. They go for it, and make decisions that put the company, customers, and themselves in the best position whenever decisions needs to be made.

pg4• 17 years ago

You already do.

That's what I meant: that YC is happy to fund startups that don't make money initially, if that's the right strategy for that kind of startup. So if you're planning to start the next Facebook or Twitter, by all means apply.

ssharp• 17 years ago

I agree with this. Certain businesses simply wouldn't exist today had they attempted to charge from the start. Although personally, I wouldn't want attempt to start a business like that. As the original article said, there are only 100 sites in the Alexa 100.

Since this articles was basically agreeing with the original 37Signals article, I'll comment on that as well. 37Signals tends to sensationalize their thoughts and try make any model that isn't theirs sound tired or thoughtless. It's fine for driving traffic to their blog and they are successful at what they do. They aren't billionaires either nor have they run a large scale company where their "getting real" concepts aren't quite so easy. You can't analyze every problem down to a simple solution.

They should be looked at as leaders for companies who have early revenues and profitability but their credibility for commenting on other models is extremely questionable and needs to be taken with a grain of salt.

mattmaroon3• 17 years ago

"High volume, ad-supported web businesses will always exist, because in certain areas (search for instance) they just make sense"

I wasn't saying it would disappear, just that it would become less common. If we can figure out a way to measure, I'll take you up on that.

spolsky• 17 years ago

Hoo boy, this is what everybody was saying at the end of Web 1.0. Evan Williams started a website called theendoffree.com (http://web.archive.org/web/*/theendoffree.com).

Then Web 2.0 happened. Ev starting doing free things again.

Coincidentally, the "End of Free" theory comes in waves, timed to the business cycles.

trapper• 17 years ago

It certainly would be interesting to go through crunchbase and do some exit analysis for each of the companies. I would hypothesise that there would be a really high failure rate of companies who do not charge. Conversely a "huge exit" rate for companies who charge would be insignificant.

It will be interesting to get your take given your position with a stable paid business vs stackoverflow - which do you see as the best long term?

axod3• 17 years ago

That would be really skewed. Most websites making money from advertising don't bother getting on Crunchbase. They don't need to go the whole 'schmooze VCs' etc route.

mattmaroon3• 17 years ago

Interestingly most of the more spectacular flameouts of Web 1.0 (Webvan, Pets.com, Govworks) were using a more traditional business model.

andrewljohnson• 17 years ago

It's true that ad models are not right for all, or even most companies.

However, in the BIG internet business, I think the key is to build a website for everyone. Maybe that's a freemium model or maybe that's an ad model. But it's gotta be some sort of model that gives everyone access.

The web is the only medium that reaches billions of people, and the Googles, the Flickrs, the Amazons of the world build a business that everyone can access and use, for free.

You can build a small internet business for a subset of people, but the businesses that make the big bucks, that get funded, and that change the world are apps for everyone.

That's why I got into this business - to build a machine for everyone to use. It's an exciting thing. It used to be that the most important thing you could do to influence the world was to write a book. Now it's making a website.

msort• 17 years ago

The Book vs WebSite analogy is good.

The free+ad vs charge model is like OpenSource software vs Retail Software.

The free model has the best scalability.

tdavis• 17 years ago

I like products that make money because it feels to risky to do otherwise. Places like Digg have almost no hope for making money at this point outside of an acquisition, never mind the crazy amount of dilution all the VC money brought them, making the size of that acquisition much, much larger.

Without a way to make money, you end up having to take a lot of money. In return, you give up most of your company. So now you're working for somebody else and waiting around for an enormous exit so that you can then work for somebody else for a few years so that then, maybe, you can escape with enough to cash to do it again? That sounds awful.

I'd rather have half a dozen small companies that together bring in enough to live happily off of than a single company that is predicated on a gamble and a hope that it will make me filthy rich sometime within the next decade. At the end of the day, all I really want to do is hack, write, read, and play video games. I don't need to have a company acquired by Google to do that.

pg4• 17 years ago

Without a way to make money, you end up having to take a lot of money.

That's not true. Digg may have raised a lot of money, but Reddit got big on very little. They were ramen profitable when they were acquired, and could easily have stayed that way if they hadn't been.

garply• 17 years ago

Hasn't the primary business model of media companies (newspapers, radio, TV, etc) been advertising since the rise of widely circulating newspapers?

That apparent historical trend makes me suspicious of claims that the ad-based model won't be the backbone of many (or most) internet media companies.

axod3• 17 years ago

Sounds like you just haven't run a successful advertising supported website. This whole "advertising is doomed, get people to pay" meme is getting really tiresome. Especially since it's coming from people who don't seem to have made a living from advertising before. Perhaps they tried, and failed, and now assume that it's impossible to make money from advertising. It's not. It's about as easy/hard as it has been for the last 10 years.

>> "The recession is the straw that has broken the camel’s back."

I'd be interested to hear why you think 'paid for' will survive a recession better than 'ad supported'. Do you think if money is tight, end users will keep paying for various websites? I'd wager not. Do you really think you're in a good position to know if it's broken the camels back or not? Is advertising revenue down, or up?

Also, alexa100 isn't important. There's tons of websites that don't even register on alexa, that make a living for their owners or far more from advertising. It's all in how targeted your traffic is. If you only get 5 visitors a day, but they're all ready to sign up for a gambling website through your affiliate link, that's more than 'ramen profitable'.

You should try it :)

johnyzee• 17 years ago

That's what I thought reading that post.

Adsense, as an example, is a real and viable business. I could quit my job on my one Adsense site if I had just 3000 visitors per day (assuming CPC held up).

The model makes money for me, Google, and, I assume, the advertisers. What's not to like?

mattmaroon3• 17 years ago

I wasn't saying that at all, as I mentioned, free will always exist.

The problem is that investment is aimed at companies that hit home runs. While you might be able to make a nice chunk off of advertising (i.e. enough for a few founders to make a great living) that isn't what investors look for. Ad-supported companies have to hit big home runs, or investors will move their money elsewhere, and founders will trend toward places they invest.

drusenko• 17 years ago

I'd have to disagree a little here: I think the "free" aspect of the web is a tendency towards marginal cost. If the marginal cost of a user is a fraction of a cent, it does not make sense to charge every user -- they inherently know that the service should be free, and even if they don't, a competitor can gain an easy advantage by replicating what you do and offering it for free.

Amid all of this "free" bashing, it's also very important to note that not all "free" services are supported by ads. The "freemium" model (free services supported by paying users) works quite well for many services, including those that have a high enough marginal cost that making money off of advertising isn't enough -- these should be the same services people are willing to pay for, since they cost a lot more to support.

If they aren't (ie, the YouTube example), then you're probably just fucked. But it may very well still be early to call the game on YouTube, for example: the internet has a notoriously short time span, even though it might take a long time to "mature" a business. I'm not familiar with YouTube's specific financials, but given the size of the site and audience, I would be very careful to rush to conclusions on the current and future profitability of the site.

qubikle• 17 years ago

Matts understanding of business is flawed. The web is CHEAP. Very cheap. Free IS affordable. That's why it's there.

Tichy• 17 years ago

Where will all the billions that are being poured into advertising go if there is no advertising anymore?

Why wouldn't the market regulate itself? If all web applications become premium now, there will be no space left for ads. The few remaining places might be able to receive higher prices for their ads. Higher prices for ads will mean freemium becomes interesting again. And so on...

Or there will always be freemium apps that compete with the premium apps, and the premium apps are doomed.

The Free Ride Is Over

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