Monthly Archives

March 2009

Freeconomics – maybe people will start paying for things

By | Business models, chris anderson, free | 19 Comments

The folks at Chinwag were kind enough to ask me to chair a panel on the topic of freeconomics last night.  I’ve written extensively about ‘free’ as a business model extensively before, but to recap the argument for free is that more and more goods are being delivered digitally, the marginal cost of delivering a digital good is $0 (or pretty close to it), and that in a competitive market over time the price of goods trends towards the marginal cost of distribution.  Hence digital goods should be free to consume and companies will have to make money from advertising or by selling related goods – e.g. bands give away their music for free and make money from gigs and t-shirts.

The counter argument is that the only reason we have gotten used to getting stuff for free on the web is because VCs and large corporates have subsidised those services in a rush for market share, and that for most companies you can’t make enough money from advertising, or the other areas to make the free business model work – so it is unsustainable and we will all have to get used to paying again.

For the most interesting/surprising thing to come out of the discussion was a much greater degree of willingness to start paying for services than I had expected.  A lot of that was couched in terms of ‘if there was no free alternative I would pay’ which of course begs a very large question, but it will be intertesting to see what happens when people are actually asked to start paying, because I think they will be.  Subsidies from VCs and large corporates are drying up, if they haven’t run out already, and despite the fears of what it might do to their businesses I expect many companies to start experiementing with charging more aggressively.

The other takeaway that I hadn’t considered fully is that for many services in reality the marginal cost of delivery is not zero.  This was made most forcefully by panelist Alan Patrick, but also by panelist Bruce Daisely of YouTube who made the point that the worlds favourite video service now accounts for 10% of total bandwidth consumption – which I’m sure costs Google a lot of money.  This point knocks a sizeable whole in the ‘free’ argument, although ‘free’ fans would argue that these costs are going down all the time.

A debate on the prospects for internet display advertising

By | Advertising, Business models | 13 Comments

There has been an interesting debate unfolding on Techcrunch over the last week on the future of interent advertising.  The debate covered both search and display advertising, but I’m going to focus only on the display side of the story here, as that is the one that is important to the vast majority of web businesses.

The debate was kicked off on the bear side by Wharton Professor Eric Clemons, and he summarised his argument like this:

  • Users don’t trust ads
  • Users don’t want to view ads
  • Users don’t need ads
  • Ads cannot be the sole source of funding for the internet
  • Ad revenue will diminish because of brutal competition brought on by an oversupply of inventory, and it will be replaced in many instances by micropayments and subscription payments for content.
  • There are numerous other business models that will work on the net, that will be tried, and that will succeed.

His main point therefore is that we should all get innovating to find those other models and get them working.

I am largely in agreement with this and I particularly like the point that since the advent of the web we don’t need ads like we used to.  Previously ads were an important way of finding information about products we wished to buy.  A simple review of our own behaviour tells us that this is no longer the case – e.g. I bought an indoor plant irrigation system this morning and I based my decision 100% on product specs and some reviews I found on Amazon.

Also relevant here is that no web2.0 company has made it big from display advertising yet – a point made in this Economist article.  If you look down the list of web2.0 winners they either outsourced the business model problem by selling out before they cracked it (Myspace, YouTube) are still working on it (Facebook, Twitter), or eschewed advertising in favour of selling services (Skype).

The rebuttal to Eric came from Danny Sullivan of the excellent SearchEngineLand blog, and he largely focused on the search advertising side of the debate before ultimately agreeing that display ads alone won’t be enough for most sites:

I agree, many sites cannot sustain themselves solely on advertising. Mine certainly doesn’t. Our revenue comes from online ads, paid memberships, lead generation and conference attendance. As a veteran web publisher, I know that in my particular space, online ads alone don’t cover the bills.

There are plenty of other examples. Right now, some newspapers are reconsidering whether they should have “opened” their sites to non-paid subscribers, since ad revenues are plummeting. But even when ad revenues were high, the ads alone weren’t covering all the costs that go into producing the New York Times. Other streams such as print ads and print classifieds were helping to keep the online site going.

Danny goes on to point out that this is little different from the offline world where advertising revenues are a fraction of total revenues, outside the sales of physical goods.  Thinking this through, given that many items that previously required a physical manifestation, e.g. music, can can now be delivered virtually, so all things being equal we might expect that advertising would be a higher percentage online than offline.  BUT, given the declining utility of advertising as a source of information and the increasing challenge of delivering interrupt based advertising are (probably stronger) forces pushing in the other direction.

The history of Apple doesn’t bode well for its future

By | Business models, Mobile, Open Source | 16 Comments

Let me start with an admission – I have never been an Apple fan.  My issues stem from my time working at my dad’s computer rentals business – we used to rent computers for as little as one day and were constantly moving them around the country, changing memory configurations, swapping out hard drives and installing and un-installing software – and the Macs used to break all the time.  The build quality was horrible.

At the same time I also started to take offence to their insistence on sticking with MacOS as a proprietary operating system when the rest of the computer industry was converging on DOS/Windows.  It was around this time that IBM effectively gave up on OS/2.

Being a Mac owner wasn’t enough to change my mind – the first computer I had when I went to Uni was an SE/30 (a device that I’m pleased to see was iconic enough to get it’s own Wikipedia page).

So, ten years or so later, I disliked the idea of being forced to use iTunes and have struggled along with generic MP3 players instead of buying iPods (although I’m happy now with my music on an SD card inside my Blackberry).

The arrival of the iPhone and before that the latest generation of Apple Laptops started to change the equation though.  On the laptop side the build quality problems were history and the reliability of the software is now what puts them ahead of the PC, and on the iPhone side here was a beautiful device that finally delivered on the promise of the mobile web.

It is worth dwelling a little on the astonishing success the iPhone has had since it’s launch in June 2007.  First there is unit sales, in the 21 months since then Apple has come from ground zero in the mobile phone market to the third largest player by revenues (behind Nokia and Samsung), having sold 13m units by October last year.

Then there is the app store – since the firmware update of July 2008 which effectively opened the App Store for business, third party developers have written 25,000 officially available applications with 800m accumulated downloads, as per wikipedia.  (It took Windows Mobile nine years to get to this number of applications.)

Yet despite all this I believe their current dominance of the Smartphone market (at least as defined by momentum and mindshare) will be fleeting.

History has taught us time and time again that open wins, and Apple just doesn’t get that.  It cost them dear before and I think it will do so again.  Worse, I doubt that Jobs will rescue them a second time.

The reasons for Microsoft’s success against IBM’s OS/2 are instructive here.  The following is from Wikipedia:

Much of its success was because Windows 3.0 (along with MS-DOS) was bundled with most new computers …. Microsoft favored the open hardware system approach that contributed to its success on the PC; IBM sought to use OS/2 to drive sales of its own hardware.

There were of course a number of other factors, but these are the most important.

In the phone market, as with PCs, the hardware over time will become commoditised and it will be the software that makes the difference (as noted above one of Apple’s USPs on the PC side is now the superiority of it’s software).  Right now the number of apps available in the App Store puts the iPhone way out in front on this measure but I doubt that will last.  Rather I think that Google’s Android will soon become more attractive to developers because of a) the number of devices they can reach and b) Apple’s track record in abusing it’s developer partners.

It is in fact this last point that prompted this post.  As you may have seen Apple yesterday announced a refund policy that is to say the least developer unfriendly.  From Techcrunch:

We reported yesterday about Apple’s alleged delay in payments to iPhone app developers, but there is more alarming news from iPhone developers about Apple’s refund policies. Apparently, if iPhone users decide that they want a refund for an app (users can get a refund within 90 days, according to Apple  policy), Apple requires that developers give back the money they received from the sale. But here’s the kicker—Apple will refund the full amount to the user and says that it has the right to keep its commission. So the developer not only has to return the money for the sale, but also has to reimburse Apple for its commission. Apple charges a 30% commission on all paid apps sold through the App Store.

And this comes on top of Apple blocking apps offer functionality they regard as their’s to deliver like  email or music, or which they determine to not be of requisite quality, and of having a track record of treating their developers like dirt.

Once other smartphones start to get close to the iPhone in terms of gadget appeal it is my contention they will start to win out in the market place because there will be more and better software available.

Further, I think the ‘closed’ mentality is so strong within Apple that they won’t respond well, instead clinging to the belief that by more fully controlling the user experience they will ultimately deliver a better service.  AOL anyone?

To finish it is worth noting that despite their great start, and being the third largest player in the mobile phone market by revenues they are still only a small part of the mobile market by devices sold – 1% of worldwide cellphone sales and 17% of smartphone sales.

These positions are not exactly unassailable.

The problem with hit based models

By | Casual Games, Content | 7 Comments

This article from Slate captures the problems with the games industry brilliantly.  It describes how despite record sales of around $32bn last year all the leading games publishers are now losing money (including Activision-Blizzard, owners of World of Warcraft).  Then comes the (obvious) explanation:

So how can publishers lose money amid such incredible sales and record growth? The answer is simple: They’re spending more than they’re bringing in. Game development budgets have ballooned, and publishers are reeling because they can’t keep the costs under control.

As we know, this wasn’t always the case, I remember when my uncle wrote a flight simulator game for the ZX Spectrum in his spare time, made £5k and bought a new car, or as Slate puts it:

Games weren’t always expensive to make: In the early days, a boy with an Apple II could rule the world.

As has happened across many different games genres and formats development costs went up as publishers and developers looked to compete on quality.  No news there, but reading the Slate article got me thinking if there is a weakness in the human psychology which makes us over estimate the chances that our pet projects will be one of the big winners, one of the few blockbuster successes.  That would explain why games companies have let development costs spiral out of control.

The latest format to go down this path is browser based casual games where average costs are rising from the low sub $50k to $700k for Bookworm Adventures.  iPhone games are the new black though, and people are releasing games that cost next to nothing to make and bring in thousands of dollars per day – it won’t last long though as big games companies pile into the market and games industry vets form startups in this space that I’m sure will soon be venture backed.

Facebook re-empahsises that realtime is it’s main thrust

By | Uncategorized | One Comment

This is the latest in a series of notes from Facebook which show how seriously they are taking realtime.  From their (I think excellent) response to all the negative feedback about the new redesign:

With the recent home page changes, we’re trying to present the right balance between what’s happening right now and what’s interesting over a longer period of time. We realize that both are important and getting them both right is crucial for the product to work. In the last few weeks, you’ve seen us shift the main emphasis towards real-time conversations and updates as the entry point to Facebook.

I think this says pretty clearly that they see the future as realtime. 

Going off piste a bit, I also think that to do realtime well probably means that being linked and open to input from other web applications is important.  The realtime data is much richer if I can see what everyone is doing right now whether they are on Facebook or not in a way that is less true for non-realtime updates.  The most obvious case of this is keeping up to date with your buddies who use primarily use other social applications and only log in to Facebook every couple of days.

Thus we can expect them to keep pushing and extending Facebook Connect, supporting OpenID and making Facebook data available to third party applications.

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Mobile display advertising market is still small

By | Advertising, Mobile | 5 Comments

The market for mobile display advertising is still small, according to eMarketer.  As of March last year their estimate was that the market size for 2008 would be $142m and for this year $338m.

It is a safe bet that between March last year and now those forecasts have come down.

This tells me that it will be very hard to build an ad-funded pure mobile play, even when the market picks up again.

I’ve always thought that for the majority of services an integrated web and mobile approach makes the most sense.  This data adds weight to that thesis.

Realtime search and shared data services come together?

By | Business models, Facebook, Search, Twitter | 6 Comments

In my perennial search for the NEXT BIG THING I have recently been writing about shared data services and realtime search.  This morning I find the two spaces might be coming together.  Salesforce.com’s Service Cloud, perhaps one of the best examples of a service which shows the potential for sharing data, has announced that due to demand from their 6,800 customers they will integrate Twitter by the summer.

This move has got others wondering whether Twitter can be the basis of a social CRM, and there are a number of companies like CoTweet pursuing this opportunity.  I think there is definitely value in companies mining the realtime data stream for customer service and even sales and marketing, but I think the real value in realtime search for Twitter and others will be unleashed by consumer facing services.  (Note that ‘realtime data’ includes, but is not limited to Twitter – e.g. Faceconnector is already using Salesforce to mine Facebook data for CRM purposes.)

With a nod to VRM thinking, I think that consumer services which allow you to monitor and interact with the realtime feed on your chosen topic area over a period of months will create a lot of value for both the consumer and advertiser. 

As an example, on the consumer side tools that mirror the slow process of moving towards major purchase decisions that we all have offline (dipping in and out, periodic periods of intense research, focusing in when we happen to be in the room with a relevant expert, sharing information with co-decision makers) would be very useful and I think are only possible now that we have Twitter and Facebook to work with.  For the advertiser the information generated by this search process is very valuable, obviously for retailers of the subject of the search, but also for related products and other products a similar person might buy.  E.g. if I spend six months investigating cars and home in on Audi and Mercedes that is of obvious interest to the car companies, and to insurance and finance companies, but also to other brands whose target customers drive these vehicles.

The nod to VRM comes because the data generated by the realtime search is a kind of personal data store and I suspect the right privacy model is to give the user 100% control of this data and which parts of it are made available to advertisers.  Possibly even to the extent of allowing them to choose which brands they will give access to – business model TBD.

The future for news?

By | Business models, Community, Content | 5 Comments

This morning I discovered Zimbio the second fastest growing ‘member community destination’. Hat tip to cnet and Nielsen.

Zimbio is a content site that mixes UGC and professionally produced content, using proprietary technology to filter and classify stories and help users find relevant content.  In their own words:

Zimbio seamlessly blends the best of traditional media, participatory journalism, and proprietary technology. Stories and rich media from traditional news sources live along side blogs, commentary and opinion articles written or posted by readers’ peers in a new media platform, the wikizine — an interactive magazine that anyone can create or edit.

You could think of this as a kind of wikipedia for current afairs.

And it is startlingly successful.  They have 15m uniques up from 6m in July and most startups would kill for this Alexa chart, current rank 494. (For some reason the embed code won’t work so you need to click on the link to see the chart).

We see evidence every day that the old models for news aren’t working.  This model retains some professioanl journalism, but (I assume) will have radically lower costs due to the UGC component, plus the consumers get to participate much more giving them a richer experience.

This mix of technology, editorial (I would guess), professional contribution, UGC and mass collaboration might have legs.  I have no idea what the finances of this business look like (it has had one $7m round of venture which I have just discovered is from one of our sister funds) – but if the monetisation works out OK this could be a model for the future.

Good to see that Microsoft’s Adsense competitor is doing well in beta

By | Advertising, Google, Microsoft | 11 Comments

Techcrunch reports today that Microsoft’s Adsense competitor Pubcenter is getting good reviews from it’s beta testers:

PubCenter is being tested by a small subset of web publishers. Our tipster says that he is receiving from four times more in revenue from Microsoft than Google AdSense. And the money isn’t the only advantage PubCenter has over AdSense. The advertisements themselves are are higher quality than Google’s ads

That is encouraging news for web publishers and those of us that would like to see more effective competition for Google.

It strikes me that Adsense is a good area for Microsoft to go after.  Most publishers can be easily persuaded to switch to the service which offers them the best eCPMs which I think will make it much easier for Microsoft to take market share than in search advertising where they first have to convince the consumer to switch away from Google.

On top of that according to Techcrunch they are doing a decent job of product quality as well – this covers customisation of how the ad units look, effectiveness of targeting and ease of setup.  Having just installed Adsense on this blog I can say that Google is ok in this area, but could certainly be bettered.

The final weapon that Microsoft has at its disposal is the revenue split with publishers, and obviously any concessions in this area show up directly in publisher eCPMs – so this could be a pretty powerful tool for gaining market share.  Google has some of the highest margins in corporate history and over time you can almost guarantee that competition will bring them down to more normal levels – leaving more money in the ecosystem for other participants (in this case small web publishers).  Hopefully Microsoft’s Pubcenter will make this theory a reality.