Only the monetising survive…

Watching financial news these days makes me feel I am in a Poseidon-like adventure film. Markets crash and burn, long-established institutions go out of business, gloom and doom is served with every newscast, and TV pundits advise people to take money out of stocks if they are going to need it in the next 5 years.

However if you are on Twitter and following any ‘weblebrities’, you would think you are on a different planet. Most are upbeat and optimistic. Until the last few days, when the mood has turned distinctly for the sombre. The carnage on Wall Street is now firmly on the High Street, the Main Street, Mayfair and Sandhill Road.

That cradle of innovation, Silicon Valley, is worried about how the global credit crunch will affect them. Although some VCs are still investing, the IPO window seems to have firmly shut as exits no longer make sense and indeed there is no liquidity in the markets to fund them. Small businesses, over at this side of the pond, are facing sudden and sharp hikes in their overdraft interest rates, which will make life hard for many.

So would any start-ups and small businesses survive?

It is difficult to answer that in an unequivocal ‘yes’, but some will. They will be the ones who have a sustainable monetisation model, i.e. a business model that is about making real, hard cash.

Survival may be easier for a small niche business, focused on, say, tailoring services, than it may be for a Web 2.0 firm with lots of VC money but no clear monetisation model. The demand for the former’s services may remain steady or even grow, because she can diversify quickly into updating or repairing services. Fashionistas, including those on a budget, swear by a good seamstress! Others may find use for extending the life of the contents of their wardrobe. The latter however need a serious look at their business.

Many Web 2.0 start-ups are focused on building communities of users, to which advertising can be served. Ergo, advertising is the business model. But when times are hard, advertising spends are cut. People also change how they spend, making advertising possibly less effective a tool than consumer promotions. Is advertising a sustainable business model? The opinion is divided. Some feel the model is doomed to fail; others think that if people cannot afford expensive entertainment, they may well get online and shop.

As a participant-observer, Facebook, Twitter, Tumblr etc all intrigue me. Mainly because I can’t see how they are making money at all. LinkedIn is an exception but it is not a consumer business, although it is a networking and community driven business. WordPress.com and other blogging enablers are also different.

LinkedIn has several revenue streams. It has a tiered, priced membership model for individuals, and it has a corporate offering. Paid services are available to corporate recruiters, and sometimes entire relevant sections of LinkedIn’s Answers service are sponsored by well-chosen companies. There is also a store for buying LinkedIn-branded kit and why not? The last one is a trick that all the consumer-centric businesses mentioned below are missing!

WordPress.com, the free hosted blogging service, makes money from advanced personalisation features such as URL mapping, CSS customisation, and additional space. I am certain their hosting relationships make them some money too.

What about the rest?

I can see advertisements on Facebook, which are never for anything I may be remotely interested in. There are also those ‘limited edition’, $1 a pop, virtual presents such as a Martini or a slice of cake, which I am sure someone buys for their friends. Tumblr is giving me, and many others, free server space for posting our musings in a semi-interactive, walled-garden sort of way. Now it has clone-like competitors such as Posterous and Publr.

Does anybody have an idea how Twitter may monetise? I can’t see one but then may be, I am just not ‘wrapping my head around’ well enough.

Fred Wilson, one of the investors in Twitter, was recently asked how these companies may make money. This is what he said:

“The No. 1 question I get about Twitter is, how do you monetize it? I think Twitter is no different from other user-generated content, like Flickr, YouTube, Del.icio.us, Blogger, WordPress, TypePad. Millions of people are creating content, and tens of millions are consuming that content on the Web. Those businesses are good businesses. And they make money in different ways.

People who can’t wrap their heads around trying to monetize these businesses aren’t trying that hard. It would be naive to assume that the management teams of Twitter or FriendFeed or Disqus don’t have four or five strategies for monetization in their business plans that they are evaluating. Just because people aren’t currently executing a business model doesn’t mean they don’t have two or three they are ready to turn on at the right moment.”

I think that right moment may be now. Or never. It depends on whether a business wishes to survive.

Related reading:

Fred Wilson on What To Look For Next

Pages 15 to 23 of Snowball, by Alice Schroeder (Warren Buffett’s speech to Silicon Valley VCs at Sun Valley ’99)

10 thoughts on “Only the monetising survive…

  1. I would love to see how Facebook, for instance, plans to monetise its model. We have all become so used to freebies when it comes to the Web that most will have to have advertising as the prime revenue driver, and, as you pointed out, in times like the present, that’s not a very good thing.

    Even looking at the LinkedIn example – it would be useful to study the revenue break-up: ad-driven versus non-ad revenues. My instinct would say the ad revenues would be higher. In fact, the B2B component of non-ad revenues would also probably be higher – and stickier – than revenues from membership. Any way of verifying my conjectures?

    Interesting poser on Twitter!

    Cheers,

    Quirky Indian
    https://quirkyindian.wordpress.com

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  2. I was going to comment here earlier but ended up blogging instead!

    Advertising-based online biz models have been bothering me for years- who on earth clicks on those ads? The newness of the format surely must have been fooling some people, probably the ones who sold their biz for billions on the grounds that it was popular. Bloggers I admire have always said the media is to use for furthering your behind-the-scenes business. Guessing there is always going to be some ad money, but only a bit and for a few, and you need more than that to be profitable. But don’t some people think you can sell your audience for money, or give away for free and be rewarded in dollars by magic? It looks that way.

    (The only reason this stuff bothers me is the madness and delusion, I know it’s there, but not very much more than that…)

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  3. hello.
    my two bits – i lived through the carnage in 1999 when the dot com bubble burst, and now again – when the sub prime bubble has burst. Both times i was running a startup.
    Markets tend to have a very short memory, and their propensity to run towards various sorts of Ponzi schemes is huge.
    i guess that until there is clarity in the difference between value and valuation, this will continue.
    but, you are right, the best business model is something that earns hard cash now….and not zillions of eyeballs 14 years later 🙂

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  4. Nice post ! The word \monetizing\ brought back memories of the dot com era when the market was rewarding the supposed ability to \monetize eyeballs\. For startups, especially technology startups, even if you don’t monetize your product in a standalone fashion, you might make it if you can \fit in\ and close gaps for a giant. Writely and Google is a good example. These are the ones that go under the radar because a).No IPO b).No hype c).No eyeballs.

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  5. The word on VC street is that advertising based revenue models are going to get the funding rug pulled because all those juicy revenue projections are evaporating as corporates cut ad-spend faster than you can say \credit freeze\…

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  6. @ QuirkyIndian: Thanks for your comment and question. In addition to advertising and those $1-per-virtual-present offers, Facebook could have a few other potential revenue streams. Access fee chargeable to those, who are keen to create applications for Facebook, could be one of them. I struggle to come up with more possibilities, unless it starts selling personal data on the sly! I think the MSFT investment was a mistake; if Facebook were a Google property, even part-owned, they could do their advertising business much better than they do now. I have never found reason to click on an ad offering me a ‘Pink Patch’ to lose weight (bearing in mind all that I know about obesity) or a cheap club somewhere in America (given that I live in London).

    As for LinkedIn, data is scant since it is a privately owned company. However it appears only a quarter of its revenue comes from ads, and the rest comes from other corporate services and subscriptions. I do think LinkedIn’s promise lies on more corporate services than in frivolities, which may not be an option available to Facebook or MySpace.

    You can read some more on this link.

    @ Alice: Thanks for your comment and the hat tip on your blog, putting me in the company of Guy Kawasaki and Hugh McLeod!

    I think we may be in danger of self-referencing too much when it comes to assessing the utility of advertising. Many people do click on ads and even those, who are normally averse to doing so, do click in some specific situations. For instance, quants analysing ad-clicking data find that automobile ads are clicked upon more often than any other category of ads.

    But on the rest, you are spot on. Business cannot live by advertising revenue alone, with apologies to Deuteronomy for the snow-cloning. Delusion too plays a role as those of us who lived through the late 1990s – such as Harini below – already know and remember.

    @ Harini: Thanks for sharing your experience. And I cannot disagree.

    Ponzi schemes aside, I continue to be surprised when even VCs cannot identify – or do not wish to identify – business models of their investee firms. There is such a thing called ‘non financial value add’. I cannot seem to locate it in the examples that I cite.

    Oh and thank you also for the hat tip on your blog!

    @ Prakash: Thanks for your comment. My intent in choosing that word was to conflate the current situation with the dot-com-bust that we all, or at least some of us, seem to remember too well.

    You are right about creating something that is part of a bigger puzzle or problem. But I do not know how many Web 2.0 firms were established with that in mind.

    I think there may be two ways to create such a business – one is more hi-tech, and the other is a blatant aim to be bought by a given incumbent in a space. For the latter, I could, I suppose, bring up Shelfari which has recently been sold to Amazon. From the start, it looked like it wanted to be sold to Amazon and now it has. The product I am afraid is rather poor, but better integration with Amazon’s catalogue and search may yet save Shelfari. It remains to be seen what Amazon does with its shareholding in LibraryThing that came with its acquisition of AbeBooks.

    @ Romit: The denizens of Sandhill Road are feeling the crunch or is it just sand? Thanks for sharing that info though it does not surprise me.

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