"Free" is Killing Us--Blame The VCs

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nacholibre.jpgI believe it should be possible to start a small business and to have a small number of profitable customers, and to earn a living. From there, it should be possible to work hard, and to grow your business into something substantial. Until recently, this was the American way, and it applied to technology as much as to any other business. But no more.

In today’s “free” world, in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it. This is because in the digital world, advertising, the only real revenue stream, cannot support a small digital business. If businesses were based on the idea that people paid for services then small companies could succeed at a small scale and grow. But it is very hard to charge when your competition is free.

The economic problem with advertising businesses is that advertising businesses do not work without really significant scale. In the past, a good product or service could address a niche and succeed without being a home run. Today, a home run is required because if you do not reach a massive scale, advertisers are uninterested. And even if advertisers could be attracted, CPMs are so low that the revenue would be inconsequential. Small Internet businesses don’t work.

So how did we get here? In a word, VC.

Venture capital has totally distorted the market. VCs are investing billions of dollars in companies with instructions to get big fast and to worry about advertising revenue later. As a result the competition is for users and not for paying customers.

Unfortunately, to fix this, many more companies need to die.

With less “free” floating around, a more regular supply and demand dynamic can take hold, customers will have to pay for the things that are important to them and non-quantized growth dynamics can return. In the meantime, why should consumers pay for products and services that VCs and their pension fund investors are willing to give away for free?

The good news is at some point VCs will indeed realize how dumb all of this is and stop giving away everything of value on the Internet. This will all stop when the average VC can’t get any of his/her companies to scale because there is just too much VC sponsored free stuff out there. Then and only then will this crazy eyeballs business model redux finally be put to bed.

I cant wait.

SAI Contributor Hank Williams is a New York-based entrepreneur. He recently launched a new blog: Why Does Everything Suck? Exploring the tech marketplace from 10,000 feet.



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85 Comments

Henry Blodget said:
I disagree, Hank. I think the move to free is natural and a boon for consumers.

I think it's still possible to slowly build a paid subscription or consulting business if you can provide truly unique and valuable content or customized services, but I think what the "free" movement is demonstrating is that a lot of what folks used to charge a ton for isn't actually that uniquely valuable.

Yes, there will be a shakeout, as there always is. And the weaker VC investments will get slammed. But this doesn't mean there was something shortsighted about the whole movement (or many of the smarter VC investments).

Peter Cranstone (URL) said:
Well said.

It all boils down to a single word - Value. Right now VC's (the stewards of the investment capital) have really now idea what is valuable. Scale is no proof of value. Earnings is proof of value. And 99% of the current startups have no earnings and therefore indeterminate value propositions.

I'm tired of all the free stuff. It's not free, you're paying programmers, infrastructure and especially the lawyers... and you still have no idea if it's really solving a problem that someone would be willing to pay for.

They don't even have customers - they have users, with no discernible way to convert them unless you consider the freemium play which is valued at roughly 1% of your user base.

For the entrepreneurs who listen to this sirens song its obvious what the melody is "dilution".

Peter Cranstone
CEO 5o9 Inc


Whoa, hold on here. I don't doubt that many companies will fail, but I think it is still possible to run a small business and make money. I can think of many, and I think you'll see many more come out with the iPhone platform, for example.

I say, what if the problem isn't that people are giving away stuff for free, but that companies shouldn't have been charging so much for it in the first place? I think that hobbyists are more responsible for free stuff than VC's, but no matter your view, the digital revolution has changed industries. Why pay for something that a nice guy across the world codes in a week and gives away for free in exchange for some donations?

I think the real thing companies should be asking themselves is why they were trying to charge so much for something in the first place? Chris Anderson's article on why free is the future of business over at Wired.com makes it clear that costs have gone down dramatically. But some companies refuse to accept that this might mean that they just have to settle for making less money. The music industry is a great example. Instead of lowering their prices right away when their costs came down with digital distribution, they tried to fight it, and they got burned by free. Other similar companies need to realize that the world has changed, and there is less profit to be had. Until they do, they will get burned as well.

Darren Ehlers said:
I agree in the extreme that 100% free businesses face a steep challenge in achieving scale. I think, however, that a free offering coupled to a paid offering (Freemium to use Fred Wilson's words) is the way to go. A free offering protects you against other free offerings competitively and gives users a way to "try before they buy." Allowing them to grow into paid offerings from there also significantly reduces your cost of sales. Also, if the free model scales, then you can monetize that when the time comes (but don't count on it). There is nothing new here, other than I think new companies today need to plan to offer both from the beginning.

InkStained (URL) said:
There are a couple plays at work in my opinion. The first is the amount of time and effort it now takes to develop technology. The myth of the two guys in a garage is pretty far off base, and thus a signifigant investment needs to be made in order even a usable web product. This fuels the need for VC money in the first place.

The second part of the play is the marketsize requirement. Even if there is a viable business model on the back end, which can be converted over time - its going to take tons of potential customers to make real money.

Put these two together and you have the standard VC model. Pump cash to make a product, scale quickly to get users even if you have to give it away, try and convert users to a paid offering, exit.

Too often the paid model comes in from advertising. Every VC has seen the same projections about the growth of advertising on the internet and thinks they can get a reasonable percentage of that money. The problem is that most of them are wrong.

Volker Detering (URL) said:
Hank, just because there are only VC backed startups with "free" "business models" presenting at the NY Tech Meetup, that doesn't mean there aren't many, many successful small Internet businesses in NYC that are privately held, angel- or self-funded, and charge fees for services, and make a living.

SAI should research the "hidden" small business scene in NYC that relies on the Internet. This would interest me more than another article on the iPhone or what happens on Wall Street.

We at EventMe.com, for instance, started in 1999, without VC's, in the middle of the bubble, and turned profitable based on fees we charge our clients. And it's in a space where everybody told us it's not going to work, since websites like craigslist or magazines promote events for free.

Hank Williams (URL) said:
@henry

I agree its *possible* to start a small business in this way. But things that, in my view, should be doable as paid businesses today are generally not possible because someone else, who isn't making money, is doing it for free.

@Tom,
Yes, the iPhone is a really interesting example. The reason that will work is because apple has created a new type of ecosystem where almost everything will be paid. This is indeed great for little guys.

@Darren
I love freemium, but I think as things have gotten more competitive, even this has become hard to do because people give more and more away, and because the paid part is often not valuable enough to get people to pay for when so much is free either on the given product or from elsewhere. Web document storage is a great example of this.

@inkStained
I believe that in regards to creating products it is *easier* than ever for two guys in a garage to make a product without VC. I have lived that "myth" several times and can state that two guys in a garage isnt a myth.

@Volker
I dont think most of the companies at NY Tech meetup are VC funded. But it would be interesting to do an analysis of how many profitable web companies there are that are actually charging money vs advertising, etc

Richard Hayes said:
Where is the evidence to back up some of these claims? Looks like broad generalizations to me...

As somebody who owns a small internet business with a fairly small number of paying customers that earn me a low 6 figure income I was surprised by some of the comments in this article.

"In today’s “free” world, it is inherently impossible to start a small self-sustaining business and to grow it. This is because in the digital world, advertising, the only real revenue stream, cannot support a small digital business."

In addition to myself I know a number of people who run small Internet businesses that are growing nicely. They are sustainable and they don't all rely on advertising...

"The economic problem with advertising businesses is that advertising businesses do not work without really significant scale."

Facebook has really significant scale and it's not making money. Advertising and scale do go together but there are a lot of other factors.

"In the past, a good product or service could address a niche and succeed without being a home run. Today, a home run is required because if you do not reach a massive scale, advertisers are uninterested."

This isn't true. You can have a niche product and succeed. There are smaller sites that have advertisers and sponsors. They might not make millions of bucks but they still make money.

"The good news is at some point VCs will indeed realize how dumb all of this is and stop giving away everything of value on the Internet."

VCs aren't giving away anything. Companies are. And of the companies giving everything away for free if you did some research you'd find that most of the companies out there aren't VC funded.

I would also like some examples of what you think has value that is being given away for free legally. I can think of a lot of things I still pay for. WSJ Online, Smugmug, iTunes, porn....

The stuff I don't pay for like Facebook and Digg and Twitter isn't stuff that I would never pay for anyway because its fun but not that valuable.

Richard Hayes said:
Hank ever heard of Smugmug? I have been a paying customer for over a year. I pay $60 a year even though there are tons of free photo sites. Their site says they have 350000 other paying customers.

Tell them its generally not possible to run a paid business even when you have free competition.

Philippe Bradley (URL) said:
Coming from a biochemistry background, the similarities between freetardism and a viral infection are striking.

The virus is called 'freevirus' and the silly-VC-overfunded startup is the host that can provide, for a limited time only, all the resources needed to sustain the fundamentally unsustainable virion. The virus eventually kills the host, but usually it has been sustained for just long enough to spread to other hosts.

The spreading/infective process is analogous to a freetard startup forcing all other players in its chosen marketplace to also go free to compete.

If the host died off faster (less silly VC 'build it and monetize later' money) the market wouldn't have to respond.

With a bit more thought, similarities at the DNA level might also be apparent!

Maybe next time a free-troubled client comes to a consultancy with their worries, they should prescribe an anti-Freevirus vaccination - a brief, but ultimately safe, walk on the 'free' side, just long enough to put them off for life; and if their marketplace is infected, tell them to wrap up warmly and bed down until it has passed, or move to non-infected areas!

Hank Williams (URL) said:
@phillippe

Hilarious and insightful at the same time!

stone said:
Hank,

You may be waiting a long time. Businesses start every day and models are always evolving. Innovate and you'll find a way to keep a small business happy. The number of web companies touched by VC's is actually very small relative to the number of actual companies doing business on the web.

There are plenty of examples of small companies that haven't taken VC money that offer some free, some paid services: SmugMug.com and Craigslist do come to mind.

Innovation can get you where you want to be. I guess the question is: Can you innovate without investor(s) compromising the concept.

Hank -

Don't you think that this was a bit too much of a rambling missive then the rationally targeted essay it could have been?

What kind of small digital business are you thinking of? In your request to start with a small number of customers and make a nice little living then why in the world are you worried about taking in VC money? Are you generating some kind of content? If it's for a small number of customers then one may assume that you are creating some kind of specialized content that it's possible to charge for. If the content is that specialized then it may not be appropriate for large scale consumption. If you are starting off small and generating generic content (something with mass appeal) for a small number of customers, then what kind of service wrapper are you putting around it to differentiate it and convince a consumer to leave their current content source and consumer it with you instead? Is that service wrapper compelling enough to convince a mass market to pay for it? If not, then we're back at square one - you either need to pump out something so specialized (small market) that people feel the need to pay for it or something so generic (mass appeal)that advertising may actually be the appropriate revenue source.

joseph said:
Hank,

You are right about venture capital distorting the technology industry. A good way of removing the blinders is to substitute the word "banker" every time you hear 'venture capitalist'. Even though VC's claim a distinction based on ownership of equity in a company the distinction is hardly worth mentioning especially since most venture capital 'deals' leave very little for the workers who build the company.
I wonder why any entrepreneur would leave the corporate life to start a venture backed technology startup on financial terms which leave him little more than an employee to his investors.
Yes, there is a cost to not taking venture capital and that is a longer growth period. But you know that if you survive that time and have found a market with paying customers you will be rewarded with a sustainable business.
I predict the implosion of the American consumer; which is a secular, and long term trend, will reduce the incentives of the 'bankers' to operate their 'investments'as hedge fund managers might a portfolio of sub prime mortgages. The loss of such easy money supplied by the bankers will reward the real entrepreneur who has developed a sustainable business.

Hank Williams (URL) said:
One thing I just noticed. An edit by SAI made this piece sound a bit more absolute that it is. In my post I said

"In today’s “free” world, in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it."

In the SAI version "in most online business categories" was removed. I personally do not believe it is impossible to launch a business, as I am doing so, and I am charging people. But the number of types of businesses where this is possible is smaller than I think it should be.

Hank Williams (URL) said:
@Rob

I am not writing this about my own personal business circumstance. I do believe it is possible in certain areas to make money charging people and that is what my company is focused on. I am describing a market dynamic, which is that most businesses online - smugmug notwithstanding, are going for advertising because they can't charge. They can't charge because there is, or will be, some VC backed company who will give it away for free. When money for eyeballs dries up, the markets will return to a more rational state.

Dylan Salisbury (URL) said:
This looks like a very insightful posting from 1998 :)

"In today's "free" world, it is inherently impossible to start a small self-sustaining business and to grow it."

Well, the economy changes quickly, and certain jobs become more and less lucrative, including starting your own non-VC-funded company. On the other hand, it's a good time to get a good high-paying job with great benefits at a company like Google, Microsoft, or Cisco. That's also thanks in part to VCs.

crawford (URL) said:
Spot on Henry.
As Gossage the Great said, "People read what interests them, sometimes it's an ad."
People will pay for what they value, be it with money or time or in trade for goods. We as marketers/communicators/builders have to work harder at earning our piece of mental real estate.

Drew Breunig (URL) said:
I think there's another angle to this... And that's social.

Digital does have a lower overhead (less cost per user gained) than physical. But Web 2.0 products are part product, part community. Their value is largely derived from the bustling community that uses the product. FB would be worth nothing with no subscribers, both from a consumer and investment perspective.

Remember how FriendFeed became suddenly awesome when the closed beta ended? The value for myself (and others) is the relationships that form. If payment is a barrier to usage, the growth stagnates and users don't get the best experience.

crawford (URL) said:
@Hank

Yes, that samll edit does make a difference. Thanks for clarifying.


Andrew Baron (URL) said:
"This is because in the digital world, advertising, the only real revenue stream, cannot support a small digital business."

I think this is false on both accounts: advertising is not the only way to grow major revenue (especially for a small business - look at Hanna Montana a child worth over a Billion dollars) yet ironically, advertising can support a small business better than ever before.

The relationship between the digital content and the advertiser can be as simple as a one person-to-one one person relationship. Two companies often come together to do great things as a result of the relationship between only two humans and the rest works itself out.

In short, there are several case scenarios of small content studios building up a business without any venture capital. Ask A Ninja is one great example of a couple of guys with a laptop who have a small business worth at the very least several million dollars.

Have you looked at the numbers on Smosh lately? No investment needed there.

Michael J. (URL) said:
I think the core point here is "non-quantized" growth. The two-guys-in-a-garage scenario works at the small end, but often requires funding for scale. So that's one step-function. There are others, including things like sysadmin and customer support outstripping employee ramp-up capacity. This is far from the "organic growth" model of yore. Thanks for a provocative essay.

Nick (URL) said:
If one can't compete with free stuff online, maybe one is in the wrong business. It is true, it is tougher on you as an entrepreneurs when one needs to compete with free, but if one wants to play ball, this the reality right now. One does has to deliver even more value in the face of free competition. See Kevin Kelly's Eight Generatives Better Than Free on how one might compete with free.

I don't know about the quick growth thing being imposed by VC. I can think of a couple that could have started an ad model years ago but I guess are holding out to be acquired. If a VC is being taken for a ride by and entrepreneur going for this strategy, it is the VCs fault, that is the risk they take.

John Wesley (URL) said:
I'm really surprised SAI ran this. It's just dead wrong, as commenters like Richard Hayes have pointed out.

Entrepreneurs are free to chose their owns business models. Yes, free is the dominant choice for the trendy, web2.blow VC startups, but there are countless other businesses that make a much more logical choice -- selling something.

Just because these companies aren't being covered on TechCrunch doesn't mean they don't exist.

jegman said:
i'm sure most of you read WIRED. however, if not, there's a good article that kinda speaks to this conversation. check it out:

http://www.wired.com/techbiz/it/magazine/16-03/ff_free

i get both sides of the argument, but as a consumer first (naturally), FREE has always treated me very well.

Abhilash (URL) said:
People still pay and will always pay for niche and personalized content.

Also,the more focused target market is the better click rate and conversion and higher revenue/reader.

Peter said:
The sooner free software dies, the better off the world will be.

Hashim (URL) said:
the problem with free is that it attracts a certain type of customer.

http://sethgodin.typepad.com/seths_blog/2008/03/the-thing-about.html

Mike Cane (URL) said:
Without specifics, the entire piece has the pitiful cast of crybabyism.

List the specific now-free services you believe people should be *paying* for.

Let's see if anyone actually agrees.

Let's see if they actually have *value*.

jrh said:
Are VCs also to blame for free TV, radio, newspapers, and magazines? It's a perfectly viable business model that won't go away.

If you're ad-supported, and you want to make money, you have to be good at selling ads in addition to whatever else you do. That's the part of the equation that many startups are lacking -- just as traditional startups often have great products with a bad sales force.

It's not the business model that's the problem, it's the execution.

Joe said:

Radio is free, always has been, and look at the state of that medium.

Pretty poor, if you compare it to the nominal "for a fee" services that compete with it.

Dash Chang (URL) said:
Another great conversation starter using an argumentative opinion piece. SAI and Mr. Arrington have been masters of public stimulation.

Instant Conversation Among Techcrunch, ReadWriteWeb, and Silicon Alley Insider on Craigslist



lenny said:
I think the freemium model is great if it suits your product. Advertising dollars generally suck. I would really like to see a breakdown of some succesful companies whos revenue is based on advertising alone , how much profit they make from advertising and how much money had to be pumped into them to make them profitable.

Todd said:
Interesting discussion. A review of non-freemium businesss models, with an emphasis on companies in the Alley, would make for far more interesting reading than the upcoming SAI 25. Get to work.

Anthony Kuhn (URL) said:
This is great stuff, Hank. You've definitely sparked a lot of interest in this topic, as evident by the many, many comments. I linked to your piece today in my blog entry at the Innovators-Network so more interested parties can join in the fray. Happpy Friday!

dave mcclure (URL) said:
>>in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it.

this is just patently false, and the statement that VCs are making it hard to compete with free is just specious, at best.

your article is spot on correct had it been written 8 years ago, however the market has dramatically changed since the 3 phases of boom-bust-restart have happened since then.

it's true that most online advertising businesses don't work unless they scale well, however this is far from saying that advertising is the ONLY online business model, or that there are SOME online advertising businesses that work at small sizes.

here are 3 specific examples of where i think your essay is completely off track:

POINT 1: VENTURE-BACKED STARTUPS AREN'T ONLY BASED ON ADS, AND AREN'T ONLY FREE. i'm an angel investor in over 10 startups, of which only a small minority (<3) are dependent on advertising for more than 1/2 of their revenue. of those, 2 don't intend for that to be their long-term business model. most of my startups charge for some part of their services, and/or have other models that complement advertising. they may offer many services free to get customers, but they do charge for other services.

POINT 2: THERE ARE SEVERAL EXAMPLES OF SMALL BUSINESSES THAT WORK QUITE WELL & AREN'T FREE. i used to work at PayPal from 2001 to 2004, and literally millions of small businesses (really small, <$100K in online revenue annually) use PayPal to make money. they're certainly doing
quite well, and there continue to be plenty of other online small biz that simple either sell things, and/or have subscription payment models, or freemium models that do great.

POINT 3: THERE ARE EVEN SMALL BUSINESSES RUNNING JUST ON ADVERTISING DOING ALRIGHT. i taught a class last semester on building facebook apps, and of the 25 teams of 3 in our class, at least 5 team created apps that had over 1 million installs, and several thousand active users, and were generating advertising revenue north of $1-2K per week. while this isn't huge money, it's enough for a 'small business' of 1-3 students to cover their living expenses, and perhaps even pay for their tuitions and have some money left over. not all of the teams did that well, but if over 20% of them can start a business on a shoestring, and in less than 3 months make a living SOLELY on advertising, i think it's possible for other folks to do the same.

in short, i think your arguments are dead wrong, on almost all counts.

- dave mcclure
http://500hats.typepad.com

David Evans (URL) said:
At first I was going to leave a snarky comment because the post is so basic and light on details and doesn't say much.

10 minutes later I continue to ponder the points made, which is why its a good post.

Blaming it on VC is expected, since you're probably a money guy.

An academic might have addressed the fact that many industries are slamming consumers with the free value proposition. VC are one small reason for the shift towards expecting things to be free.

The problem is that people click on junk advertising that isn't nearly targeted enough to be considered useful. That gets free services excited.


Previous commenter argues in capital letters again your points. Of course there will always be ways to make a few grand a week doing small stuff.

You said it yourself, over a million installs on FB and only several thousand active users.

Everyone jumps on a new application and then abandons it because it's not very good.

Let people figure out how to capitalize on the FB market and we'll see the daily user numbers grow.

Right now it's sandbox time and cheap to make mistakes, for better or worse.


isayusay (URL) said:
@jegman
Thanks for sharing the link. I'm conviced by the 3-way market and learn a lot from the section on the taxonomy of free.

Alan Wilensky (URL) said:
Vertical markets needing solutions languish, the selfsame businesses that would gladly pay subscription fees - while ad supported YASN and YAVSS clones scarf up the VC cake and subsequently enter the TC deadpool.

http://bizcast.typepad.com/clients/2007/12/sacramento---th.html

Hank -

I share your frustration. However I think that VC is a symptom, rather than a cause - the root problem is our country's easy money policies in general.

Loose monetary policy punishes saving and rewards borrowing. Similarly, it devalues thrifty wealth creation and rewards wild speculation - the wilder the better.

Besides, why should web entrepreneurs have to "mark-to-market" their wares (figure out what somebody is actually willing to pay for their product) when nobody else has to?...

Don't expect the Dave McClure's of the world (i.e. those who got rich by virtue of happening to be in the right place at the right time) to understand your perspective any more than the Wall Street types whose livelihoods rely on keeping the casino open just a little longer, cost be damned - - but many of us out in trenches recognize the true cost of the current system.

Good Luck,
Ant



Rod Boothby (URL) said:
Hank,

There is only going to be more free. And the thousands of companies we work with at Joyent are building successful small and large businesses on "free".

The pattern is simple. The developers on Joyent build applications that are ad supported. If you are building a Facebook app or an opensocial app, Joyent gives you infrastructure for free. Facebook, Hi5, Orkut, or any number of other social platforms give you marketing and distribution for free.

The developers then make money from ads powered by RockYou, SocialMedia or any one of a number of other networks.

At Joyent, we have seen many people build companies that general more than $1M a year in revenue, while giving their product away for "free" and building their business by leveraging free infrastructure and marketing/distribution.

And, they do all of this without VCs.

The entire premise of your article is flawed.

You can build a business for free, you can give away your product for free and you can make good money doing it. Joyent and the thousands of companies that are built upon Free Joyent Facebook Accelerators or Free Joyent OpenSocial Accelerators prove it.

- Rod

Today's Wall Street Journal has tech advice to the next president. Thoughts? http://online.wsj.com/article/SB120736007257191763.html?mod=googlenews_wsj


Odin Chen (URL) said:
I disagree. "Free", instead, is giving us better life. Indeed there are businesses that are affected, but free services give more power to the users and create more new models. And even with a limited amount of money, you can still sustain a web2.0 business.

And also, not only advertising is a viable monetization, there are more than that to assist a free model. Higher quality services (see Wordpress) and micro-payment are other ways.

Think about "Free model" vs "Not-free model" like 2 perfume shop, one give out samples for free and one doesn't. Free is just a marketing approach, which is more effective.

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3.) Advertise Your Chops, For Free, To Kids:
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Jay

Carlos Leyva (URL) said:
I suppose if you take a very narrow view of what it means to start a business (i.e. just a tech business) then perhaps the argument is plausible. For everyone else, free tools and low cost services is an enabler.

The action lies in taking enabling technologies and transforming industries that are still in the stone ages (relatively speaking). Lots of opportunities still to be had in this space.

I am not so sure that "tech is dead" in any kind of real sense except as a "pure software play." There are still opportunities around software enabled services. I don't believe that we have anything close to saturation there.

Drew (URL) said:
I hope Nick....er Henry is paying you on a per-comment basis. Impressive numbers so far.

The freetards at NY Tech meetup are indeed tiring. But really what's their alternative. It costs money to charge for advertising (bummed audience, sales hires, time wasted with ad dudes). Sometimes free is cheaper. A bigger problem is that even if you have something which you can sell online or put ads against, your margins won't last very long. What possible hope does Yahoo have of surviving as a standalone...and they (kinda) invented pay-per-click among other things. Remember when the matras were scalable and extensible. Well now the mantra shd be what's defensible? Guess what? Free is defensible (as long as you don't have VC pricks breathing down your neck). BTW their breath is cold as ice.

Drew (URL) said:
As I was saying, it's not the free it's the competition. http://www.nytimes.com/2008/04/06/technology/06sweat.html?hp
It's a killer.

Small business's that rely on content attracting users that respond to advertising are, and have always been, risky. VCs support only those they believe can produce the goods. Of those, only a fraction succeed. The problem is sometimes the content and almost always the competition. As the world becomes smaller due to technological advances, the competition grows and life becomes that much harder. However, please keep in mind that building a large online user base only became possible due to these technological advances.

Other online models, that don't rely on selling advertising space work rather well. In that respect, online advances have made it possible to reduce the associated overhead, to produce better products and overall, better service that users are willing to pay for. If companies are able to lower the prices b/c they're still left with a substantial margine - great.

Selling advertising is fine, but at the end of the click-through road, there must be businesses that sell products. If not, how could anyone spend so much on adds?

The two people in the garage tale is no myth. New businesses of the sort appear on a daily basis. This is fact.

JimF (URL) said:
Spot on. Some posters might argue you have over generalized, but the point is still absolutely correct. There used to be a criticism that a business plan was for a "product not a company". Now, we see business go live that aren't even products, they are features on products. They are pushed to an overly large scale quickly to flip them Ponzi style, destroying the market for legitimate businesses.

JimF (URL) said:
Spot on. Some posters might argue you have over generalized, but the point is still absolutely correct. There used to be a criticism that a business plan was for a "product not a company". Now, we see business go live that aren't even products, they are features on products. They are pushed to an overly large scale quickly to flip them Ponzi style, destroying the market for legitimate businesses.

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Q dub (URL) said:
I share this sentiment. Free should be reserved for products that are extremely discretionary. I suspect the prevalence is also due to a heavy level of group-think within the valley (and yes, intelligent people are equally prone to group-think!)

If something is of value, there should be a willingness to pay. This free-with-ads trend surely is killing many great products. Think about products that are extremely useful but do not generate much "eye-ball time" -- namely products that effectively simplify any current activity stream. It's hard to successfully launch "freemium" products when the whole internet culture is obsessed with, and unreasonably demanding of free.

Q dub (URL) said:
I share this sentiment exactly! Free should be reserved for products that are extremely discretionary. I suspect the prevalence is also due to a heavy level of group-think within the valley (and yes, intelligent people are equally prone to group-think!)

If something is of value, there should be a willingness to pay. This free-with-ads trend surely is killing many great products. Think about products that are extremely useful but do not generate much "eye-ball time" -- namely products that effectively simplify any current activity stream. It's hard to successfully launch "freemium" products when the whole internet culture is obsessed with, and unreasonably demanding of free.

Not only that, but the proliferation of free-with-ads actually increases risk for everybody--business either win big or blow up big. If more startups could survive at small-to-medium scale because they have effective cash flows at earlier stages, it becomes much cheaper to support a larger portfolio of companies.

Part of me thinks VCs thrive on this kind of inefficiency because it increases the demand-for-capital, something they've been struggling with ever since it's cheaper to start a company than the pre-bust days.

Slow Blogger (URL) said:
The free business model itself is not a problem. In certain situations, it works. Google is a great example. They are a big advertising board, and a very good one.

However, some seem to believe that the free is 'the only' business model of the future. Now, that is a big problem. Sometimes it seems a bit religious, making whoever speaks for the 'paid' model look almost evil. Out of this blind belief, businesses that should have been a paid model make themselves free, which hurts themselves as well as the competition.

I agree with Peter Cranstone in the second comment. There is nothing we can produce for free. Around 2000, people praised about the rise of 'New Economy' like we could end all economic issues. Certainly, we were wrong. I also remember the praise of advertising + free model in that bubble era. How soon we forget...

David Kaspar (URL) said:
Did you not consider advertising networks like Adsense?

A network would allow a small business to at least get some revenue while they grow users.

The business could then switch to own ad service when the numbers support it (and keep 100% of the revenue).

I think VC's use a free model because nothing else has worked, so they stick with what they know could be successful. You just need to be the one company to reach critical mass and you win. VC's probably think that because others have done it, so can they.

I think everyone here realizes that for many consumers there is a perception that costs have gone down for most companies, and therefore things should cost less. In a digital age, where nothing is consumed, people realize (or think) that it costs almost nothing to add them to the mix. After all, if I join Facebook, do their costs go up dramatically? No, it was already pre-made, It costs them practically nothing to add me, its all automated. So why should I pay for it? Sure, I'm getting something out of the deal, but is it really worth paying for?

So I think one of the big reasons the free model is currently being used by many VC's is because the other alternatives have almost always failed. People charge for something of value, they give it away for free, or pick something in between, like freemium, where you give it away for free and charge for more valuable options. But no one has really been able to charge LESS for something and really make it work.

So really what I'm saying is that I think VC's use the free model because they're afraid of micropayments. No one has really been able to make it work. Its the model in between free and full charge. But almost no one tries it anymore.

I think as micropayments get easier, you'll start seeing less things for free. For example, one industry where it works in the music business. Apple makes great use of micropayments. I think you're going to see anther revolution when the iTunes App Store for the iPhone comes online. Shareware developers are finally going to have an opportunity to have a slew of consumers already accustomed to the micropayment model ready, willing, and able to buy their software.

I think the iTunes App Store will be the place to watch to see if it companies can make it work. You'll have software that costs money alongside free alternatives. It will be interesting to note which types of software people are willing to pay for even if an alternative is free.


Michael Martin (URL) said:
I agree with your argument here, but you're like 9 months behind the market with it -- many businesses and VCs are already exploring alternatives to the advertising-based monetisation strategy. Like wouldn't you say that Murdoch's decision to keep the WSJ closed was a wake up call if there ever was one?

http://brokensymmetry.typepad.com/broken_symmetry/2007/07/signal-to-noise.html

Reasoning by analogy to offline markets, there is plenty of room for a variety of monetisation strategies for content online. The smaller the market (i.e., audience or number of users), the more likely that subscription-based access makes sense.

Chris (URL) said:
We've had a successful subscription service for over 3 years now. Because ExpertFlyer is a niche play, our subscribers see value in the in-depth information for travel beyond what a "cheap" ticket is.

That's the problem with "free" is that it forces people to only go after the big game while leaving many markets and opportunities under servered.

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williams jerry (URL) said:

Hello ,
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I have recently added designing and creating artwork on the computer, I have been selling my art for the last 3 years and have had my work featured on trading cards, prints and in magazines, I have sold in galleries and to private collectors from all around the world. I am always facing serious difficulties when it comes to selling my art works to Americans, they are always offering to pay with MONEY ORDER , CASHER'S CHEQUE etc, which is difficult for me to cash here in London United Kingdom.
I am looking for a representative in the UNITED STATES OF AMERICA who will be working for me as a part time worker and i will be willing to pay 10% for every transaction as benefits and 2,700a month which wouldn’t affect your present state of work, someone who would help me receive payments from my customers in the states, I mean someone that is responsible and reliable, because the cost of coming to the state and getting payments is very expensive, I am working on setting up a branch in the state, so for now i need a representative in the UNITED STATES OF AMERICA who will be handling the payment aspect for our company. These payments are in MONEY ORDERS,CASHER'S CHEQUE etc and they would come to you in your name if you are willing to assist as a representative, so all you need do is cash the money order or cashiers cheque deduct your percentage and WESTERN UNION Charges then wire the rest back.
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If you are interested, please get back to me with the following infos:-
1.) Full Names
2.) Home/Cell Phone number
3.) Full Home Address, City, State and Zip Code.
4.) GENDER
5.) MARITAL STATUS
6.) AGE
7.) NATIONALITY.
Thanks for your anticipated assistant and God bless..
Reply: williams_jerry506@yahoo.com
My phone number +44 702 405 2803



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