The high risk business model of “Free”

On another post here about strategic social business tools 2011 Sean Bell asked a challenging question: “Why do I believe that free (mostly meaning advertising supported) products are not user focused and paid products are”.

Here is my thinking:
As a CEO I’m obviously thinking of my business from a long term strategic point of view. And since ultimately profitability is what gives me room to grow and sustain difficult times or times of deeper investment, at least part of my strategy is focus on where the money comes from.

If it is an advertising driven business model, I focus on optimizing everything around advertising, invest in easiness of placing adds and so forth and do everything to make my advertisers happy.

If it is license model, I focus on making it easy to sign up, make the product as valuable as possible and focus my resources and fixing everything a user needs to continue to pay and is successful with our product.

Examples:
1) Search engines were developed in the early 90’s. And while they improved over time, what really improved is the way advertisers can leverage the search phenomenon. There is endless reporting on who clicked when and what and how often… There is optimization on how where when those adds should appear and a whole slew of functionality that makes advertisers happy. The majority of engineering resources is obviously focused on the advertising model. Today 15+ years later, as a searcher I still get all the garbage I’m not interested in, I can’t filter my searches by certain behavior, I can’t block sites that I don’t want to see, I can’t differentiate between an online or offline offering, between academic research results versus commerce results and on it goes, I get zero reporting. We once developed a list of over 250 features a search engine should have by now – but nada.

2) LinkedIn is another example as it is a blend of advertising and pay model. The human resource / hiring part in LinkedIn is VERY well developed. The advertising part is very well developed. You get tons of statistics and reports. As an ordinary group owner for instance you get nothing. A new design was rolled over everybody and despite the standoff nothing happened. It is simply less focus and no real strategic effort. It got so far that big group owners even offered to pay if they would get their act together. Why not – it would disrupt the current business model. This is not a rant – but an explanation why certain things happen and others don’t.

3) Look at industrial media, news paper, magazines… Their business model moved from paid news paper to free news paper and an advertising model. Joe Doe in San Francisco never noticed, because he still “paid” for the San Francisco Chronicle. But the $30 a month didn’t even cover the delivery of the paper let alone production and completely ignoring content aggregation and journalism. Our Joe Doe ONLY and EXCLUSIVELY had to pay because advertisers dictated the price based on “paid circulation”. Industrial media was completely depended on advertising like a junky on heroin. Once advertising moved on to online – the media died. Ironically the Internet could be heaven to industrial media as it dramatically reduce production cost from paper to online and catapults distribution speed to instant and drives distribution cost to almost zero. But the business model was no longer news aggregation and distribution – but advertising.

4) Salesforce.com on the other side, also an online software provider, has a charge only model. Zero advertising and it’s entire focus of every single resource is on making customers happy and successful. The model is clear and works well for over 12 years now.

5) Facebook and Twitter on the other hand have grown enormously but based on investors money. The business model question is still up in the air for both. If it is going to be advertising only – like it looks today, the dependency on advertisers will over time overshadow the focus on user happiness. Now if it is a consumer product on the “I don’t care as long as it is free” level, it works as long as advertisers are in – but like industrial media – it will completely control the space.

Microsoft is still a large company and Google didn’t really took over Microsoft from a strategic position point of view. But as advertising is moving from Google to Facebook, Google has a real strategic challenge and there is no sign that they can fix it. It’s not very visible today but you will see it soon. Even billions in the bank are eaten up soon if you have a billion $ cost structure against it. And once you tune it down the saying goes “When the tough gets going the going gets touch”.

Advertising as a business model is a short term success story – but when it’s over its over. Investors will drop off first then users drop of, and we wonder how could a giant like this collapse – Boston Globe, Business week…. in times where information is more important than ever before. Oh did I mention AOL?

Axel
http://xeesm.com/AxelS