Sometimes You Actually Need a Revenue Model

Or, Facebook is about to start selling your data Google made a name for itself by selling highly targeted ads alongside search results. Search results by their very nature are a perfect place for advertisements. Brilliant algorithms scour thousands of servers in an instant and bring me highly relevant information on demand. Companies and individuals can buy that space up top and off to the side in the hopes of getting eyeballs on content that doesn't rank well enough on its own for organic search to do the job. This works very well, and Google has grown to immense success. We can look at the myriad services that Google provides and see that virtually all of it is supported by their core advertising business. This is a model we have already seen; Windows and Office pay for pretty much everything at Microsoft. We use Google's services because they work well and cost us virtually nothing. Advertising makes this possible. The problem with advertising is that it provides too many foolish entrepreneurs with the illusion of a business model. All of this effort is made so that the viewer can pay as little as possible, without regard to the actual value of any given service. Practically speaking, if your web app isn't free, it costs too much. A few weeks ago I sat down on a Saturday afternoon with a rare bit of free time. I'd been concepting a simple web application, and set out to build it. A few hours later, it was ready. I gave it a name, put it on the web, and asked a few friends to check it out. After about a week of feedback and further adjustments I tweeted about it. Several days passed with nothing to report, and then my little web app made a surprise appearance on LifeHacker. Were it not for Twitter, I wouldn't even have known. Within a day it had been visited from every continent except Antarctica; within a week it had been visited by users in more than a hundred countries. Articles about it appeared in several languages on several startup-oriented blogs. Each of these articles assumed my app is a startup, which is incorrect. I built it as an experiment, and state so on each page. It isn't a business; it's just an idea. It doesn't cost me anything *extra* to keep it online, and until it does, I don't mind it being free. I'll improve the service and see if there's really something there, but I didn't build it wondering how I could monetize it. There is no revenue stream, nor is there a plan for one. I knew that going in. This leads me to Facebook. News broke this past week about Facebook planning to allow companies access to its user data. With a gigantic and energetic userbase filling in profile fields detailing everything from age to job history to favorite movies and relationship status, Facebook is sitting on a huge treasure trove of information. It's a data miner's dream, and Facebook appears set to cash in. That's all well and good until you realize that we may not want all of this information going to the highest bidder. I certainly don't. I get enough spam and junk (snail) mail, as we all do. The last thing I want is an even wider selection of companies to have access to my data with the sole purpose of selling me stuff. Worse, we don't even really know how this data will be used in the first place. It reminds me of a meme you may have seen. It goes something like this:

Build something cool.
Make it really popular.
???
Profit!

The Internet is singlehandedly killing newspaper by taking away advertising revenue, and in an ironic twist of fate, many advertising-supported web sites are finding that the ads simply don't cover the bills. Facebook falls into this category. Facebook's advertising platform is arguably the best out there among social networks, allowing virtually anyone to create highly targeted ads. Despite the power of this system, Facebook isn't able to make enough money selling ads to cover all of its costs. What happens when the largest social network on earth can't make advertising work? They start selling off your data. Twitter - my favorite social network - is in an even worse situation. Many of us wonder how Twitter makes money, and I think the smart bet is that right now they don't. Twitter's problem is its purity, for lack of a better term. The service is so devoid of cruft that advertising sticks out like the proverbial sore thumb, and those who come across as spammy are universally derided. How do you monetize such a system? This is the problem with the modern Internet. Everyone has been convinced that everything on the Internet is free, and advertising dollars are starting to show their limits. Dot-coms worldwide are having to acknowledge the fact that having a bunch of users means nothing if you can't convert that into sustainable revenue. It's a potentially rough lesson to learn, but in these economic times we're all going to have to acknowledge a few simple facts. This stuff is not free. Servers cost money. Developers cost money. Maintenance costs money. New features cost money. If you have an idea for something you want to run long term as a business, you can no longer count on the great advertising hope to pay your way. You cannot count on VCs being willing to run in the red without a realistic plan for getting to the black. If you've got a great idea, be sure you know it's economically viable. Otherwise, you may end up having to sell your users' data, and that's going to piss them off. Side note: I started writing this entry shortly after having a lovely discussion on the topic with Eric, whose superior writing abilities enabled him to finish his post first. This post can be seen as a follow-up or addendum to what he wrote.