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Can You Build a Business off Free Services

March 13, 2007

vcmike

VC Josh Kopelman recently posted about the so-called “penny” gap, highlighting the huge gap between getting consumers to use an Internet service for free as opposed to getting people to pay for a service, even just a penny. It is a good point and a good post.

Anne from Gigaom joins the discussion this morning, with what I think is a misguided post. Anne jumps on the now popular  “Web 2.0 bubble” bandwagon, arguing that consumer Internet companies whose service is free are just “hobbies” whereas charging for a service marks the boundary of becoming a real business.  I agree that there is a Web 2.0 bubble, but for reasons very different than the ones offered by Anne.

The only thing wrong with Anne’s post is that it is flatly contradicted by the huge, vast, overwhelming majority of successful Internet businesses. Whether it be entertainment content, web access itself (a lesson AOL learned painfully late), utility services like webmail, calendaring, etc,  social networking services, SEARCH, blog tools, video uploading/sharing services, etc. etc. etc., the moral of the story seems to me to be overwhlemingly clear: in the vast majority of cases you can build a much more valuable web based business by offering a service that is free to consumer end users, but which has enough value to consumers that lots of consumers will use it, AND whose use results in an audience that is valuable.  Last I checked, the portals, hotmail, Google, Blogger/Six Apart/Wordpress, YouTube, etc., are hardly “hobbies.”

Okay, enough harping on Anne.

The real question isn’t whether the service should or shouldn’t be free — it almost always should be — but rather whether real value is going to be created as a result of lots of people using that service. Both steps are hard — building a web service that lots of people will use, and, building a web service whose broad adoption creates lots of value.

I fault the Web 2.0 community NOT for offering free services, but rather for too often assuming that lots of people will use the service and that building a big audience is equivalent with creating value. It’s not.

5 Comments

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  1. March 13, 2007

    >> hotmail, Google, Blogger/Six Apart/Wordpress, YouTube,

    But which ones are making money? 1

    YouTube was never a business, Blogger doesn’t do much, SixApart/Wordpress are competing against free but can’t scale to sustainable revenue.

    Free is all about the 1% – because that’s the number of free customers you will convert. So the math is easy… take your user base and focus on the 1%. With that done think about your exit strategy. Last time I checked in the Valley M&A has gone quiet – because 99% of the free services offer no discernible differentiator that can’t be replicated in a few months by a competitor.

    It’s all about the Benjamin’s in the end.

    Peter

  2. March 13, 2007

    Re: “in the vast majority of cases you can build a much more valuable web based business by offering a service that is free”

    Hmm. Seems like the “vast majority of cases” that are free end up as failures. Those that don’t most often end up as acquisitions.

    Now, don’t get me wrong, I’m not knocking acquisitions – but when you get acquired because you’re running out of gas in the tank , as is the case with many free-fueled startups, that’s hardly a success. A startup in that position rarely ends up being anything more than a shadow of the potential they once had.

  3. veknilash #
    January 2, 2010

    Классные мультфильмы на Кинозоуне.

  4. April 6, 2010

    I found Shtrudel M@il – a free webmail with tons of good features and great availability of user names and email addresses.

  5. April 6, 2010

    I found Shtrudel M@il – a free webmail with tons of good features and great availability of user names and email addresses. shtrudel mail

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