by Freddy J. Nager, Founder & Fusion Director, Atomic Tango LLC

Web 2.Uh-oh

Web 2.Uh-oh

Just over a year ago, Wired magazine proudly proclaimed that the future would be free, an argument based partially on ad-supported free sites like NYTimes.com. Of course, it was hard to take this manifesto seriously since Wired still charges for their magazine (cover price $4.99).

It was also misleading because it appeared during the height of the second dotcom bubble, when most of the free websites and services weren’t really living off their ad revenue. Some still aren’t. The New York Times website, for example, couldn’t exist in its current form without the financial and content support from its parent company.

I saw this fantasy revenue model first hand in Silicon Valley: most “ad-supported” startups were really living off deep-pocketed benefactors, such as VC’s or giant corporate parents. If these startups ran out of money, they simply turned to their sugar daddies and said, “Please, sir, I want some more.” They treated rounds of funding like a Major League Baseball player treats trips to the steroid pusher.

Then came last year’s big blowout, when every sector of the economy did a simultaneous faceplant, scoring a perfect ten in synchronized sinking. Many VC’s and corporate parents suddenly told their fledglings, “You’re on your own, kid” and shoved them out into the cold winter. This came just as many giant advertisers cut their ad budgets, including the online ad budgets that were supposed to be immune to advertising downturns.

You know that look the coyote in the “Roadrunner” cartoons gets when he finds himself standing in mid-air with nothing beneath this feet? That look crossed the faces of hundreds of dotcom entrepreneurs at the same time.

Making a Splash… in the Deadpool

TechCrunch’s Deadpool — the hot destination for the morbidly obsessed — reports on tech failures. And, sadly, it’s steadily growing. Here are a few recent Deadpool inductees: divshare, Fuzz, jumpcut, Juicy Campus, Eyespot, Fleck, Flektor, Springwidgets, wallop, Uber, QikCom, Coghead, WebbAlert, Bemba, Jubii, Dodgeball, and Jaiku.

Quick: what do many of them have in common?

Yes, many have ridiculous names that are hard to remember, spell or explain (friends should not let friends drink and name). But that was all part and parcel of an overall failure to communicate. In other words, their marketing sucked. Good naming or bad, how many of these companies had you ever heard of?

Granted, not all of these companies had big daddy money to burn, but others had millions of dollars yet refused to invest in serious advertising. I’m not talking Super Bowl excess, but perhaps some ads in, say, Wired could have helped. But I guess if all one cares about is rounds of funding, why build awareness beyond industry circles? “Yay, we got mentioned in TechCrunch and NewTeeVee and Scobleizer! The centuries-old rules of business do not apply to us because we’re so 2.0! Now we just gotta wait for someone to give us money!”

That mentality was particularly inexcusable for those whose revenue models were based on selling ads: How could they sell something they themselves didn’t believe in doing? It reminded me of this lasik eye doctor I met who wore contact lenses because she didn’t trust the surgical procedure for herself. (Side note: I still wear glasses and contacts today for this reason.)

Dodgeball and Jaiku, by the way, were both babies of Google, which lives off advertising but generally does very little of it for itself — or, apparently, for its offspring. Google is often held up by entrepreneurs as a model of achieving success without advertising. While the company and its products are great in many respects, Google’s marketing practices aren’t ideal for everyone. And as evidenced by Dodgeball and Jaiku, even almighty Google isn’t infallible.

The End of Free

Last week my good friend Preeti told me that a free service she uses, SplashCast, is now charging. In the company’s blog, SplashCast VP of Business Development Tom Turnbull provided an explanation, which I found both honest and insightful about the entire industry:

“As many of you know, on January 28, we announced that we would no longer be offering our free SplashCast product. As we have hopefully made clear, this has been a very difficult decision for us. The user generated content product was our first product, and we love it. That said, we simply haven’t figured out a way to build a business around it… SplashCast is not a big company. We aren’t Google. We aren’t NBC. We are a startup. Startups, especially in this economy, have to make tough decisions. They have to focus on doing one or two things well. We aren’t fat cats over here at SplashCast. As expected, the vast majority of respondents weren’t interested in paying a subscription fee to use SplashCast. Hey, I understand this. I use the scores of online services, most of which are free. Every once in a while, I might pay for something. In terms of those who were interested in paying, the average fee was very low. We’re talking a few dollars. Simply put, we don’t see SplashCast building a meaningful subscription based business. Additionally, many community members asked about the possibility of SplashCast selling ads against user generated content. We’ve taken a very close look at this approach. Unfortunately, for a wide range of reasons, advertising won’t work in the user generated context. The behemoth of the UGC industry, YouTube, isn’t even close to figuring this question out. Believe me, if we could make a meaningful business out of the free SplashCast product, we would. Therefore, we have stopped offering new free SplashCast accounts.  However, after listening to the community, we have decided to leave the free product in place for those who have specifically asked us to do so for them… Also, there are other services out there that do some of the things that SplashCast does. For example, you might check out Embedr…”

So in addition to grandfathering in existing users, SplashCast even recommended a rival. Smart move: why not burden a competitor with freeloaders?

The question is, will charging for previously free services work? Would it work for any of the free sites and services you use now? Would you stay with Facebook if they charged even a minimal fee? Would you watch YouTube videos if they cost even just pennies per view? Would you be reading this article if I had charged for it? (No, you don’t have to answer that.)

As the Wired magazine article mentioned, these free sites have taught an entire generation of consumers that media content is free. Faced with this ineluctable trend, some traditional media brands followed suit with bottom-line-wrecking free services, which is now forcing many to downsize or to simply shut down.

So while all that free content was great for consumers — at least at first — it also boosted the unemployment ranks. And when people are unemployed, they don’t buy cars or computers or $3 cappuccinos, so those corporations that actually make and sell things cut their advertising budgets. And when those corporations don’t advertise, guess what happens to all those ad-supported free sites without sugar daddies?

An entire industry with falling-coyote looks in their eyes.
Maybe this “free” business model wasn’t such a good idea after all.

Time To Pay Up?

I can’t speak for everyone (though I often pretend to), but I would pay for services and content I like. I already do so with music and apps at iTunes, photos at iStock, and upgrades here at WordPress.

My recommendation for companies that want to start charging: offer several tiers and packages, including a free option and, more importantly, micropayment options. For example, I like using LinkedIn, but the difference between their free account and their next tier up is $24.99/month, and for my purposes, the additional benefits aren’t worth that much. LinkedIn currently claims 36 million users — if they could get just $1 from each user per month, they would make an additional $432 million per year.

In addition to making money, micropayments also get users into the habit of paying. After I bought my first iTune (U2’s “Vertigo,” which was an iTunes exclusive at first), making future purchases was too easy, since all I had to do was click a couple of buttons. The lesson: make like a pusher and get prospective users hooked on that first little hit…

Now some sites will always remain free. Wikipedia insists on living off donations. And I make my income from developing marketing strategies for others — no reason to view my blog as a business.

But let’s consider YouTube, which continues to experiment with ways to monetize its content, as some analysts estimate the site will lose $470 million this year. What would entice you to pay to watch YouTube: an ad-free experience? a higher-quality video? having your video rating count for twice as much? having your comments appear at the top? an invitation to YouTube events and parties? exclusive first views of select videos? access to uncensored videos? a chance to appear in a video with your favorite YouTube star?

A large corporation like Google could also negotiate partner discounts as a bonus for your membership. For a $20 annual subscription to YouTube with all those benefits I mentioned, you would also get, say, a $20 discount at Amazon.com or Virgin America. In return, Amazon and Virgin would receive $20 of free YouTube advertising per registrant.

It’s like free, but different.
And new models like this may need to be implemented now or never.

I love Wired because they’re willing to go out on a limb and make declarations like everything should be free. But print media is getting beat up by free Internet content, which is now getting beat up by awful revenue models. So the entire industry needs to rethink this “free” business, because the way it’s going, those who claim “the future is free” might have nothing left to eat but their words.

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Related Article: Pipe Dreams: Did Silicon Valley Pick The Right Role Model?

Update 3/8/2009: Just got an email from Amazon offering me two years of Wired for $20, with $10 credit at Amazon in return. Coincidence?

Update 3/24/2009: Interesting look at Web 2.0 music sites in CNET from a few weeks ago. I love how SpiralFrog’s founder talks like everything is simply dandy, only to have his company kick the bucket just a few weeks later. Those tech entrepreneurs can lay it on as thick as any Hollywood producer or DC politician.

Update 3/25/2009: TechCrunch notes that one of the largest ad-driven “free” sites, Imeem, is “rumored to be in serious trouble” and is now trying to sell things to its user base of teenagers and college students. Imagine running a free amusement park, attracting millions of kids, and now trying to get them to buy souvenirs in order to cover your millions of dollars in debt. Think Disneyland could have made it on T-shirt sales? Good luck with that!

Update 5/7/2009: I love this line in TechCrunch’s latest report on Imeem’s troubles: “In the perverse world of music streaming licensing, the bigger your audience, the more money you lose.”

Update 1/17/2010: Imeem is history, and word has it that the New York Times is going to start charging for online content. Sorry, Chris Anderson, free is NOT the future of business. Indeed, it’s already becoming history.

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Shout out to @Preeti for her contributions to this article!

Shameless plug: Need professional consultation on your business strategies? Contact Atomic Tango

  • Luis Guajardo says:
    27 February 2009 at 5:31 pm Reply

    this is a great article. well articulated and you hit the nail on the head. banner ads and video pre-roll is just not gonna cut it. advertisers are more interested in integration these days because not enough people click on ads. and with this flopping economy they are very particular where and how they spend their advertising dollars.

    so they are going to the source of the polished content out there to integrate their brands. advertising is evolving as the internet evolves.

  • You are the most brilliant writer i know!!!

    Freddy’s Comment: Oh shucks, stop. If my head gets any bigger, I’ll have trouble pulling my T-shirts on.

  • Really enjoyed your post – thanks!

  • I could not disagree with you more. Free content actually reflects a more capitalistic approach to the market due to the fact that promotes maximazation of demand and findig alternative routes to generate income. If you can’t find alternative ways, tough luck, this the playing feild now and if you do not adopt you will not surpass.
    Having said that, I think that free will grow and grow and business will gain more and more understand of this model and how it applies to their businesses respectively. Google seems to be doing pretty well, with the free model and other businesses too. I think as a marketing professional yourself to support the notion that free does not work, would shortsighted on your part. I enjoy all the free services out there, in fact if something is not free I don’t dance with it. If it is really a useful service and offers a premium service that would benefit me and/or my business I would be all for it. So bottom line is Free is King and I believe it will always be. Good luck with your marketing career, but I suggest that you don’t bet against free.

    Freddy’s Comment: Oh, do tell — what exactly are these magical “alternative routes to generate income”? Because if you start charging your users for anything, you’re not exactly “free” now, are you?

    You know, Petros, since you adore free services so much, how about investing in them? I know they could sure use the money. If you do, be sure to acquaint yourself with the TechCrunch Deadpool, because that’s where most of them are heading if they don’t have some big sugar daddy (like Google) paying their bills.

    Speaking of Google, they’re the exception, not the rule. Let me know when you personally adopt the “Google model” and start offering all your business services for free.

  • Jesse Hopkins says:
    28 July 2009 at 7:51 am Reply

    Encouraging news for those of us providing custom high quality services online, and need to get paid up front and on the backend too.

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