Business models are important, but today theyre commoditized
Let me first state: Business models are important. Of course businesses have to make money, thats a given. But thats not my point my point is:
Business models are a commodity now, so how will they make money? isnt an interesting question. The answers are all obvious.
So when you see the next consumer mobile/internet product with millions of engaged users, lets stop asking about their business model expecting a clever answer theyll have dozens of off-the-shelf solutions to choose from and instead, lets start asking about the parts of their business that arent commoditized yet. (More on this later)
Outsource your monetization
Between the original dotcom bubble versus now, a lot has changed for consumer internet companies. Thankfully, monetization is now a boring problem to solve because theres a ton of different options to collect revenue that didnt exist before:
Theres 200+ ad networks to plug into
Payment providers like Paypal, Amazon, Stripe
Offer walls like Trialpay
Mobile payment solutions like Boku
and new services coming out all the time (Kickstarter)
Not only that, consumers know and expect to pay for services, something that was novel back in the late 90s. If you offer some sort of marketplace like Airbnb, theyll expect a listing fee. If you are making a social game on Facebook, theyll expect to be able to buy more virtual stuff. Theyll expect to pay $0.99 for an iPhone app.
Contrast this with the dotcom bubble, in which you were creating brand new user behavior as well as building these monetization services in-house. In eBays case, people just mailed each other (and eBay) money for their listings. Small websites had to build up ad sales teams in order to get advertising revenue, instead of plugging into ad networks. Building apps for phones involved months of negotiation with carriers to get on deck. At my last startup, an ad targeting technology company, we encountered companies like ESPN which had written their own ad servers because they didnt have off-the-shelf solutions when they first started their website back in the late 1990s.
Let me repeat that: They wrote their own ad server as part of building their news site. And that means they had engineers writing lots of code to support their business model rather than making their product better.
Product experience renaissance
Lets be thankful that we dont all have to build an ad server every time our Ruby on Rails app is successful. This lets consumer product companies focus on what theyre best at. Also, building a new website doesnt require $5M anymore. The number of risks in getting your company off the ground are vastly reduced when you combine cheap server hosting, an open source software stack, and multiple bolt-on revenue streams.
This frees us up to be able to work on whats really important: Building and marketing great products.
These days, the primary cost for any pre-traction company is the apartment rent of the developers who are coding up the product. The profitability of any post-traction company is just based on how fast the team wants to ramp up headcount. If a team can hit product/market fit, a lot of other problems are taken care of.
The lesson behind Facebooks $3.7B in revenue
Once upon a time, I was skeptical about Facebooks business model because they received a mere 0.2 cents in advertising revenue per pageview they generated. In 2006, I calculated that maybe they could generate $15M in revenue per year maximum a nice business, but not a world-changing one. I wrote about this topic here: Why I doubted Facebook could build a billion dollar business, and what I learned from being horribly wrong.
As I wrote in my post, it turns out I was wrong, and Facebook in fact generated $3.7B in 2011 and will generate more than $5B this year. I was wrong in an interesting way though it turns out that they didnt dramatically increase their revenue per pageview, but rather they just grew and grew and grew, to ~1 trillion pageviews/month. My mental model was all wrong.
In fact, we have a lot more experience with advertising and transaction based models. Its pretty clear that an engaging social website will have 0.1% to 0.5% CTRs on their ads, and net an average $0.50 CPM. If you sell something, or have a freemium site, then you can expect 0.5% to 1% of your active users to convert. Theres lots of benchmarks out there, which I discuss in this older blog post. The point is, if you have the audience, you can find the revenue its getting the big audience thats the main problem.
The last dotcom bubble conditioned many of us to think about a different world than the one we face today. In 1997, there were a mere ~100M users on the internet, mostly on dialup modems. Let me repeat that: The entire dotcom bubble, with all of its bubbly goodness, was based off of 100M dialup users. Compare that to today, where we have 20X that number, over 2 billion users on broadband and mobile. The graph, courtesy World Bank via Google, is incredible.
The point is, the consumer market has grown by so much that the upside opportunity is tremendous if you get a product exactly right. Given all the growth opportunity, and given the plug-in revenue models, the main bottleneck for building a great company doesnt seem to be the business model at all.
In fact, the business model seems like a second or third order problem. So again, I argue, lets stop asking about it.
At over 450 million uniques per month, lets stop wondering what Twitters revenue model will be. Obviously it will be some form of advertising, and maybe theyll experiment with freemium or transaction fees somehow. You can debate if you think they will ultimately be a $100B company or a $10B one, but lets skip the conversation on whether or not theyll fail because they dont have a business model.
The new question to ask
If you agree with me that business model is no longer a first-order question, then whats the real question to ask? The thing that makes the business model work is really about getting to the scale where the business model becomes trivial.
Lets ask a more important question:
Could this product engage and retain 100s of millions of active users?
For the first time ever, hitting 100+ million active users is actually realistic. First off, how incredible is that? In recent years, many startups have done it, such as: Zynga, Facebook, Twitter, Groupon, Linkedin, etc. I think well also see Dropbox, Pandora, and others get there too.
For an early stage company, asking this question is really just a test of the teams ambition, their initial market, and an evaluation of their product/market fit. Obviously if their product isnt working, they wont even be close.
Once a startup has product/market fit and is scaling, then the answer to this question revolves around marketing and technology competence. Also, the product might have to evolve as the initial market gets saturated- like Facebook with college and Twitter with their early adopter audience.
To sum this all up:
Making money as a business is important, but commoditized
You can plug into 100s of options for monetizing an audience, if you have one
Were working with 20X the internet audience compared to the dotcom bubble, and 1/10 the cost of starting a company
Facebook is hitting $5B in revenue via sheer growth, not monetization innovation
You should aim to hit 100 million active users, and get an off-the-shelf monetization solution later
Evaluate new companies on market size and ability to grow to 100 million actives, rather than monetization methods
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