the blog

The recent chatter has been about the changing climate in the revenue models and capabilities of monetization amongst social media sites.  In the Wall Street Journal article titled, “The Economics of Giving it Away”,  discussed the unsustainable business models circling around social media sites whose strategy is to gain massive traffic in attempt to sell to a large company.  Per WSJ:

In the old days (that would be until September of last year) the model was pretty simple.

1. Have a great idea.

2. Raise money to bring it to market, ideally free to reach the largest possible market.

3. If it proves popular, raise more money to scale it up.

4. Repeat until you’re bought by a bigger company.

Google is now building companies internally, Yahoo is dead, IPO’s are few and far between, and VC’s are low on cash.  So how must the model changed after items 3 are 4 are now eliminated?

Alexander van Elsas has an interesting response citing some changes that are going to occur:

1. It leads to focus on network value instead of user value. In other words, the network and growth are more important than providing individual users value
2. It leads to walled gardens. If you have to make money with advertisement, and your business is not search, then it is imperative that you keep your customers locked in. The phrase locked in says it all. Instead of freedom we contain our users. Get him into the service and then never let him out.
3. It leads to destination sites, instead of user centric services. For advertisement we need traffic and eyeballs. It is therefore important to get your users to gather together in one place.

Brings an interesting point about the inherent shifts in the behaviors and fundamental attitude about the web. Open source, free resource, ad free, and even freemium models need to be revisited. Alexander argues that a user-centric web is where the value is. Focus on the user value, and monetize that value is the message. I am not convinced that focusing on the user value will solve the problem. I believe that there needs to be a fundamental change the the way that users view the web as free (cost and ad intrusion). Unless an innovative revenue model is discovered, users need to be accustomed to more intrusive advertisements or start paying for services.