Facebook and Business Model 2.0
5 January 2009Tim O’Reilly probably meant no more than to market his omni-present conferences when he coined the term “Web 2.0,” but the results have included giving some kind of ill-conceived business model faith to tens of thousands of hapless would-be entrepreneurs, and a smaller number of even more at-risk investors.
As though the Ferris Wheel (or, more aptly, the Great Mandala), had not already spun this way before, the idea of creating jillions of companies with no business model, no profits, and only some kind of ginned-up success metric (like eyeballs, remember?) was already proven to be a terminally bad one. To put it bluntly, when business models and profits are ignored, everybody gets hurt.
I said a couple of years ago that there were only seven customers in the Web 2.0 world, and today, if anything, that number may be shrinking. In lieu of being bought by one of these acquirers, what do these metric-heavy, cash-light companies do?
This week, a “new” analysis of Facebook has everyone talking: burning cash at gargantuan rates (perhaps $50-80MM per year), with the original investor money nearly gone, and the hoped-for Mystery Model not yet arrived, it may suddenly be Ox Sxxx time for the poster child of the 2.0 group.
One could be empathetic and note that online ad dollar growth has slowed into reverse thanks to the current economic woes, but guess what? That’s called business. It isn’t clear that matters would be enough different without this blip to matter.
How many companies are out there, just as there were in 1999 and early 2000, with a single lonely revenue line in the business model called Online Ads, for which the spreadsheet numbers will never get into the same room as the accounting figures? Is there any light at the end of this tunnel?
One answer is subscriptions, but these are generally reserved for content that no one else has, that has value for the purchaser (like the SNS newsletter, one hopes). But I don’t know if Facebook, with its many challengers in socnet country, is that irreplaceable, or has customers in a demographic willing to pay – for anything.
What happens to Facebook, and those thousands of other companies, if there are no ads, and no subscribers? I guarantee that their bills will continue to pile up for storage, electricity, bandwidth, support.
I spent about a decade not so long ago giving advice to technology startups, and helping them create alliances. (I still do this a bit, but on a more selective level; one of my clients recently sold to Symantec for over a billion dollars.) And one of my favorite non-obvious suggestions to new CEOs was this: Never launch a business in which success creates the greatest risk of failure.
Enter Facebook. The more popular it is, the more expenses it has.
2 Responses to “Facebook and Business Model 2.0”
January 20th, 2009 at 10:54 pm
Well, how much money? Live Journal seemed to do just fine by being free with non critical benefits to paying. But of course, that was being very careful with money, while Facebook seems to be of the old dot com boom crazy with money madness.
LJ did have some restrictions on free account creation to slow down free riders (paid accounts got one free account creation token a month, or you could spend $5 for a month of paid status before going free). Eventually, they sold out to 6apart, got adds for users who wanted more features, and were sold to a Russian media company (LJ has a big Russian community).
January 22nd, 2009 at 12:44 am
LJ dropped the free account restrictions long before it sold to the Russians; Six Apart found it a valuable development test platform for commercial systems for some years and only sold it because they wanted to try a different approach with Vox instead. It’s a good example of ‘freemium’ – one pay-for user supporting many free users – and there are a range of extras you can buy. Flickr is another good example.
Facebook has a potential goldmine for targetted and relevant advertising, but it screwed the privacy pooch so thoroughly with Beacon that it had to back right off. And now that the river of ad money is slowing down, even Google is laying off recruiters; FB may indeed be out of time.
Tim O’Reilly has always been really clear about Web 2.0; it’s just the rest of the industry hears the cash register more than the definition. Web 2.0 is where you get users to contribute information for free and you create business value out of metadata. Book reviews and buying patterns on Amazon; tags on flickr; not the comments but the social graph on social sites. You need to have users, data and a business model to fit Tim’s Web 2.0 definition…