Now That Internet Economy Is In Danger, Google and Facebook Could Save It

Svetlana Gladkova,

on November 22, 2008,

Google could save the entire internet economy I think everyone has been thinking for a while now about how the entire internet industry is flawed and how it will face even more serious problems in the future unless something is changed in terms of how businesses make money here. Recently every time a new startup sends me a pitch about their new product, I’ve been stubbornly asking them about exactly how they were planning to make money.

The reason for focusing on the financial side of things is quite obvious for me as the world financial crisis is making all of us switch focus from things like creativity and innovation to such issues like money - less attractive but vital when it comes to business. We have already seen way too many layoffs and way too many startups going out of business for absence or lack of money. And I think that right now we are all witnessing a situation where entrepreneurs will need to come up with creative and innovative ways to make money in addition to creative and innovative ways to entertain their users.

So I think that if every single startup in existence learns how to make money in addition to making great products and raising money from VCs (if they are lucky enough), we could see internet industry growing actually healthy once the financial crisis is finally over. Right now we are watching startups already learning what a healthy business is as they are cutting costs that are not particularly required for their operations.

But there are obviously two main ways to reaching profitability: the first one is cutting costs everywhere you can and the second one is to try and earn more. And it looks like internet industry is vulnerable in both approaches to reaching profitability. First, the startups community is often accused of abusing venture funding by throwing numerous excessive parties for whatever reasons they can come up with instead of sticking to only the expenses that are actually needed for a startup’s life and growth. And second, startups seem to be way too spoiled by the free and advertising-supported business model that everyone has already grown accustomed to expecting of them so they seem to rarely even try to come up with something more substantial as a business model.

Sure, from a user’s point of view nothing can really be better than free whenever it comes to a service as people are rarely willing to pay for something that they can get elsewhere for free. And the real problem that I see is that during the recent years of the development of the internet industry everyone has grown to expect almost every service to be free - or at least to have a free alternative with a limited feature set. And this attitude has made many companies choose the free and ad-supported business model simply because their potential users expect them to - even when in reality they could come up with some unusual monetization model by offering users the value they will be ready to pay for.

At the same time how many companies can actually afford to provide completely free services to users? I’m afraid that the answer here is that not many or a very limited number of startups can launch their products for free ad-supported use without having any revenue sources but advertising.

Sure, there are companies like Google that have the money-making business in a totally different field (for Google it is Adsense, obviously) that allows them to support other products that don’t generate any revenue but help in building user loyalty and eventually driving more paying customers to their money-making products.

But unfortunately Google is a rare exception and the majority of startups only run one product or service and need to support these products using the money they make off these exact products. Until recently there was also an option of raising some funds from a VC firm and hope to be acquired eventually but everyone is questioning the prospects of VC model now and we will be sure to see only products that have strong prospects for profitability getting funded these days.

But my point is that it is not only startups to blame for the way these startups choose to offer their services for free without even attempting to charge for their use. Why? Simply because the users now are way too unwilling to pay at all as they will very often find a free alternative. Besides, there is now a certain attitude among internet users that everything that is available online should be available for free.

Unfortunately whenever I try to write about the necessity of the internet industry to earn money - either by charging users or by making them watch some ads - I am attacked with multiple furious comments from readers stating that everything should be free online because this is the only possible arrangement that we should stick to. I am quite sure that everyone has heard similar negative opinions - be it about paid services or encouraging users to watch ads to compensate content creators instead of using various browser plugins to block ads.

I am a strong supporter of the idea that everything that takes human efforts to build and create should generate revenue for the creators (if they want it, of course) but unfortunately it looks like it will take teaching the entire internet community that they should be willing to pay in this or that way whenever the service you use brings value to your life that you actually appreciate having - be it for business or entertainment purposes.

But of course I fully realize that such change of everyone’s attitude will only be possible if absolutely every service provider starts to charge users for what they provide. Of course, if Zoho and ThinkFree decide to charge for their services but Google’s office applications remain free, these smaller companies will simply go out of business because free is a price you can hardly compete with - even if your product has a number of important advantages. And it is especially difficult to compete with a free product if it is offered by an established industry leader - Google in our case - that can use its power to efficiently promote its own products.

So my idea is that given the current state of the internet economy we really have no options but to try and teach users to pay - in this way or another. And smaller players will never be able to make users switch from free-only to paid (or at least partly paid) options so it should be up to the industry leaders - like Google and Facebook - to initiate the process by starting to charge for the services already popular among their users. And if Google charges for office suite while Facebook charges for certain social networking things like having more contacts than a regular user has or managing a page or a group for your company, I think that everyone else will follow - simply because they can not charge in the current situation but are very willing to try doing so if they have any chances to succeed.

Of course I may be too naïve but as it is I think that we will continue watching the entire internet industry slowly stagnating because of inability to turn great ideas into successful businesses. Of course the existing leaders can be sure that they will most certainly survive simply because of their leading positions. But I think it is now time to realize that a change is totally needed for the industry and if the leaders start charging, everyone will follow. But if such leaders refuse in the current situation, they will most certainly survive but how fair is it for the industry?

Image credit

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17 Comments (Subscribe to rss)

Phillip - November 23, 2008 at 01:07 am PDT

Rising creativity is the best part of a downward economy. No more parties and getting investor money just from an idea. I really wonder how much profit is facebook making? Also is youtube making any profit from those video text ads they show up at the bottom of videos? It’s a much more qualified lead when a person goes on google.com and types let’s say investing then watching a funny video about investors on youtube. I don’t think they will ever figure out a scalable way to make money from those youtube videos. Even if a person clicks on the ad it’s not going to be a qualified lead and thus valued a lot less then someone typing investing in google search.
Svetlana Gladkova - November 23, 2008 at 05:27 am PDT

Phillip, true, much of the creativity we’ve seen lately has already been focused on new approaches to monetization with some companies actually coming up with something unusual in terms of charging users or at least making ads they show their users more efficient (like the recent in-calendar marketing Calgoo has come up with). I only hope this creativity will actually help achieve good results for the entire industry.
Thomas Power - November 23, 2008 at 06:20 am PDT

Linkedin, Xing, Naymz, Konnects and Ecademy all charge a subscription. Without it all 5 would be dead. True only a tiny percentage pay but it is enough to build a business. Great piece and thank you.
Svetlana Gladkova - November 23, 2008 at 06:30 am PDT

Thomas, thank you, glad you enjoy the piece. The examples you mention here are all about charging a handful of users for the exceptional service you can’t get elsewhere while I was mainly talking about products that have lots of competitos and can easily be found elsewhere online - especially with companies like Google abusing the overall free approach that is very difficult to compete with.
Rajiv Bhatnagar - November 23, 2008 at 12:14 pm PDT

Indeed,Innovators will only survive this war of escalations.
Google and Facebook.aint a congregation of human email contacts rather they reflect the acceptance of Electononic medium as catalyst to express their expressions.
But I do hope this not the end of the game ..rather the begining of “Battle De Royale”
Hari Bala - November 23, 2008 at 07:08 pm PDT

Free Vs Pay will continue to exist in a free economy. Innovation and path breaking ideas will germinate during such times of financial crisis. The internet will continue to drive numbers exponentially and customers will get more choices and smaller companies will be able to challenge the big guys in a market place that has distinct customer profiles. There is adequate room for all types of businesses as long as they continue to serve the changing customer preferences.
I think if Google and FaceBook start charging, other free such sites would gain tremendously. The USP of Google is that searching is free and effective and those foot falls are valuable for customers who need to advertise to drive prospects to their store fronts.
I do visualise that in the immediate future visitors will be paid/offered goodies to visit sites as an incentive. Every one is chasing customers and the eco systems works to a balance.
Svetlana Gladkova - November 23, 2008 at 10:03 pm PDT

Rajiv, I also hope this is not the end of the game and these two giants will be willing to change their operations to help the industry as well.
Svetlana Gladkova - November 23, 2008 at 10:07 pm PDT

Hari Bala: That’s an interesting idea of paying customers for paying attention but I think only the businesses that actually make money will be able to share part of that money with their potential customers. And this makes the points in this post even more important - you have to figure out how to make money first to incentivise your visitors next. And that means that everyone will have to pay attention, including the giants like Google or Facebook.
Michael McKay - November 24, 2008 at 04:05 am PDT

Perhaps there is overuse of the “freemium” model proposed by Chris Anderson in his book The Long Tail. However, there are lots of reasons companies benefit from giving things away for free. For a startup, one of the big reasons is advertising and marketing - a key reason behind offering free services. For the company, there is always a cost and the key is to ensure that you get a positive return on your marketing investment. It is not clear if companies are successful at this, which makes them easy to critisize.

My feeling is that the Internet has changed the basic value system. By paying for access to the Internet, people get so much information for free that their perceived value of many services are diminished. Why pay when free versions exist? I don’t think that charging for these is the solutions. Companies these days need to use free versions to get noticed. Their task is to effectively engage the customers with the free versions and entice them to move towards the premium paid versions as quickly as possible by adding real value.
Svetlana Gladkova - November 25, 2008 at 01:09 am PDT

Michael, I am actually a big supporter of the freemium business model and we have seen lots of rather successful businesses relying on this model - simply because things they give away for free are compensated by things that they charge for. I object to relying on totally free and ad-supported services instead of trying to suggest a better value that they can charge for. And Google is one of such examples - there are only a few of their services that you can pay anything for but do you know anyone who actually pays for Gmail? I don’t, unfortunately.

There’s really nothing wrong in offering some basic version to users for free - provided that this free version will encourage some users pay for extras. But hoping that you can make anything free and earn something off advertising simply rarely works.
jj - November 25, 2008 at 05:01 am PDT

I think the notion of new business models being required is sound. I’m just not sure that the way we go about implementing these business models should be one of duplication of the major players. There are, in fact, many ways that organisations and websites can improve the value of their offerings to clients on a fee-basis, whilst still providing a free standard service. And when it comes to offering content on a fee-basis, it may not in fact be the end users who pay the fee. There may well be an infotainment/reverse advertising strategy for mainstream social networks and websites that will be both palateable to users and achievable for companies - you just need the right blend of technological know-how and business wit in a technology strategist to realise.
Ceri - November 25, 2008 at 06:26 am PDT

Following the old adage of “follow the money” who makes the most money? Ignoring Microsoft, Facebook, Google, most of the money is provided by the ISPs - and that is an established revenue stream.

Just throwing ideas into the ether, is there a way of getting ISPs to contribute to revenues for a site?
David Wall - November 25, 2008 at 07:12 am PDT

I agree with Michael McKay. Just because a business or entrepreneur offers something for free doesn’t mean that they don’t offer an upgrade that encourages consumers to spend money.

Even if a Google plug-in like Semantifind is offered for free, it should have a positive impact for that company.

So why fight the free market? I say embrace it. Most companies are just using the free product to build their market share.
Svetlana Gladkova - November 25, 2008 at 10:26 am PDT

jj: I agree with you 100% and I think that there are cases where even smaller companies can demonstrate unique selling point that will provide important value to customers that they will be ready to pay for. And of course there is always an option of a basic free service. But the problem is that the larger companies (like Google) will always continue the development and will eventually match your product on its best selling point but it will still be able to offer the same product for free and you will have to go out of business as you won’t be able to earn any more.

But of course there are always options of some new creative advertising models that companies can come up with to replace the freemium if they can’t charge efficiently enough. My latest favorite example is in-calendar marketing by Calgoo (http://profy.com/2008/10/30/calgoo-innovates-in-monetizing-online-calendaring-solutions/) - that looks like the best monetization model I’ve seen in a while and I do hope it will work for the team. Hopefully we will see many more examples as companies figure out they need to make money in the current economic environment.
Svetlana Gladkova - November 25, 2008 at 10:30 am PDT

Ceri: Such ideas have actually been discussed for a while now suggesting that ISPs should share some of the money users pay them with owners of websites these people visit. And while it may seem logical from a user’s point of view, as a publisher I can see a serious threat in such an arrangement as ISPs will have to offer users some packages of sites they can visit (like we currently pay for certain channels on cable TV) and this will send many smaller publishers to oblivion. So while this is a good idea and probably exactly what the future of internet will be, I’d say it needs lots of research first to prevent unfair competition among publishers.
Svetlana Gladkova - November 25, 2008 at 10:32 am PDT

David Wall: As I’ve already replied to Michael myself, I am very much fond of the freemium model where a free product is actually used to get noticed and loved by users and build some market share in this manner. I actually object to everyone’s love to fully free and ad-supported model as this is what I view as the most vulnerable approach to running an internet business.
AJ Kohn - November 25, 2008 at 10:42 am PDT

Sites like Google, Facebook, Twitter, MySpace, Wordpress and others all contribute to the get something for nothing mentality. They’re teaching Internet users to expect a free lunch.

I recently blogged about the impact of this mentality on the decline of banner ads, particularly on social networking sites.

http://www.blindfiveyearold.com/are-banner-ads-dying

We have a whole generation who has grown up with less ad clutter, the using high value features for nothing and the ability to skip commercials on TV with the flick of a button. It’s one of the reasons why social networking advertising has gone absolutely nowhere.

At some point companies will need to actually deliver revenue and profit. The choice will be subscription based or advertising based. Users will need to make some hard choices … and soon.