No More Free Lunch Online. Good for Everyone

There’s no doubt that the economic crisis we are now in now will damage some industries and change others. And of course internet will be one of the industries affected. I think it is already obvious that if there is one thing that needs to be changed and will probably change, it is the way new products are launched hoping to achieve popularity first and figure out how to monetize all the users at a later date.

Now that investors will fund less and less startups, it is obvious that the lucky few will most probably be those that are capable of showing the value to the investors - and the value should include some revenue stream planned, it should not be about how cool potential users could find the application only.

So of course startups will have to change their attitudes towards money. And while it is true that everything is supposed to be ad-supported in web 2.0, I think everyone has already realized that ad-supported can be very risky - especially when a startup is targeted at general web audience and can not offer any clear targeting to potential advertisers.

So I think that many startups will have to try and figure out their business models that will provide some predictable revenue streams - preferably with customers paying for something, not only watching some ads to support the service. I think this must be true for both newly-launched startups and those that launched some time ago, raised a round or two of funding and are enjoying some attention and popularity from users.

The newly-launched startups will need to introduce a certain business model from the very beginning. In the past I could often forget about monetization aspect when reviewing a startup here on Profy but in the existing economic environment it is simply not fair to ignore it as I don’t want to make our readers believe something is both good and sustainable when in reality it is only good.

I know that many startups are looking to raise funding and it is quite understandable as many startups has been launched and are blossoming on VC money only without any prospects of earning anything on their own - unless some internet giant decides to acquire them. I can also hardly criticize a startup for not wanting to make users pay for their service - often they launch their products to make the world a better place out of their own enthusiasm. But unfortunately for many of such startups, the times have changed and no one should expect VCs to invest in projects that don’t earn anything at all.

Of course there is also an option of acquisition as an exit strategy and chances are companies with lots of available cash will consider buying some properties now that the crisis is here and people will hardly expect to get exactly the price they would have requested a few months ago. But does every single startup without any business model represent a good acquisition target? I am sorry but I don’t really think so and even if some startups get acquired by established companies, many more will remain independent - without neither revenue, nor funding.

When it comes to existing established startups (those that launched to scale first and think about money later), they will need to both figure out how they now face too challenges. First of all, they will need to change the way they spend money so that the amount raised could last longer - at least until they can raise something again.

The second challenge is to try and introduce some new approach to monetizing their existing applications by offering some paid services and enticing users into switching to premium accounts. And I think we are already starting to see the first signs of some companies trying this strategy out.

For example, on Thursday we saw Vimeo, a rather popular video hosting and sharing service, introduce premium Vimeo Plus accounts where for $60 per year a user gets lots of additional features while regular users get some new limitations instead. The explanation was simple and straightforward: Vimeo was not popular enough to generate significant advertising revenue to support it - thus the only option they had is introducing paid accounts.

Actually watching comments on Vimeo news posts everywhere I am now under impression that the general opinion is that it is a wise move for Vimeo and everyone is happy to see a decent business model after all. But this is the general opinion in the tech blogosphere and among the people who read tech blogs daily - not among actual Vimeo users.

Comments on the Vimeo announcement post are mixed with some users happy and supporting and other very much irritated and disappointed. I did see some users unhappy about the decision but not about the paid accounts but about restrictions to free accounts that were not there before. But still I saw some people holding the small plus badges near their user names on the service with many people expressing support for their favorite video site (even though the price tag of $60 can seem to be a little higher than what users could pay without even thinking). Also many users were very much unhappy about the fact that international users could not buy the Plus accounts (probably because of problems arranging international payments) - so this is also some indication of the fact that there will be more people buying into the paid option.

Another possible example could be StumbleUpon supposedly engaging in certain behind-the-doors activities to drag users into buying premium accounts for the social web discovery service. The thing is that I have heard rumors from some heavy StumbleUpon users (unconfirmed so it’s rumors only and please view them as such) that StumbleUpon is banning accounts that can be guilty of spamming other users to get traffic to their blog posts or the posts they are promoting. The banned accounts are invariably free yet sponsor accounts stay, even if they can be accused of even heavier spamming as well.

Even Twitter seems to be getting ready to introduce some sort of a business model finally after all the discussions and suggestions in the blogosphere - with Twitter investors actually promising “at least one and possibly more revenue initiatives in the next year”. And when Twitter team and backers finally admit they do need to generate some revenue off the microblogging service, I think it is a good indication of the fact that the market is changing and everyone is ready for the changes required to survive.

As a user I can say that there are plenty of services that I may be very much willing to pay for - if they offer such an option. I already pay for Flickr, Skype and for StumbleUpon and while I would not pay for Vimeo as I am not so very much into video, I know quite a number of people who will be absolutely willing to pay for it as they use the service heavily in their work and when something helps you make money, you generally are prepared to pay for it yourself.

Of course there will be other users that are always unhappy about paying for anything online and constantly seek new ways to avoid paying even for what is supposed to come for a fee. But there are also users who constantly protest about watching ads as well - and you will never persuade these people to stop using various ad blockers because you need to make money and they enjoy the content you create. And while such users can be very loud and will probably be protesting heavily, I don’t really think it is wise waiting any longer to come up with better ways to generate revenue with services that generate value for users. And of course there will be users who will not protest but will quietly continue using - and paying for - something they really need.

And you know what? If there’s one thing I am happy about the current economic downturns, it is how it will inevitably change the internet industry as only solid startups will survive - those that generate real value for people and revenue stream for themselves. Even if they don’t raise a new round of funding, they will always be able to support themselves using this revenue stream. And relying on funding until you grow big enough to rely on advertising can be risky as unfortunately some startups will never even grow this big.

Photo by Borderline Amazing used under Creative Commons.