A journalist for an industry publication in Chile asked me some questions recently about Web 2.0 business models, when there doesn’t seem to be a lot of business actually going on. Here are some of the edited answers.
Do you think it was a bad business decision for Google to acquire YouTube, in terms of the low revenue (or losses) the video site generates?
Outside of their core advertising-based products, speculating about Google’s business model is always a tricky thing to do. They don’t say much about their plans, and don’t seem to mind losing money on individual businesses if they think (for whatever reason) that it will make sense eventually. With so much money flowing into Google from advertising sales, this is an easier position to take than for many companies.
Google is in a position relative to the Internet similar to where Intel was several years ago with general computing. Intel figured that if people use computers more, they will buy more microchips, most of them from Intel. So they made a lot of investments (e.g. in games, virtual reality, 3D design, video) that didn’t contribute money directly to their bottom line, but increased the general usage level of personal computing. For Google, the more people use the Internet, the more they use Google services like search and the other products they offer. Youtube attracts lots of traffic, so it increases total Internet usage, which eventually — somehow — is good for Google.
Also, Youtube has become the place to put videos and to look for videos, making it more like a platform than just another service. This will open up more possibilities, like licensing deals, tie-ins with television and music companies, libraries, etc. Microsoft has shown with Windows how good it is for a business to control a platform. Google may not have figured out how to build a business (at least publicly), but there are lots of possibilities. Google is comfortable with short term uncertainty if they see a large long term advantage, something else that cannot be said about very many companies.
It seems that being popular is not always enough for success as a business. Is that so? I’m asking because of Twitter and other free services…
Popularity alone has never been enough to be successful as a business. What is new now is that business success is not necessary to be a success, at least in the short term. Twitter has enough money and is well on the way to becoming a crucial platform. Once they are there, there are plenty of ways to build a business. The short term things they could do to get revenue now (advertising, premium accounts, selling highly desired user names) would get in the way of becoming a platform, which is where the real opportunity is. They don’t want to do anything which would discourage people from using it, and I think that is very clever. I talked about Twitter’s business model on this blog earlier.
What formulas are there to make these services profitable, considering
the big audience they have?
Really, I see two main ways:
1. Become a platform like Youtube and Twitter are doing. I discussed the monetization schemes for Twitter on my blog.
2. For the other free sites that won’t become an unmissable platform, the standard way to monetize is either by advertising or premium services. Consumer sites which attract enough visitors can build a nice business on advertising, but most are unlikely to really break through and be big successes. It could pay the rent and some reasonable salaries, but not buy a private jet. The problem with advertising is that the big get bigger; people advertise on the most popular sites, so that if a site starts to become popular it quickly pulls ahead of the others. The Long Tail for the less popular sites leaves a nice, but not great business.
Premium services attract payment from users who like the service, and are willing to pay for more features or availability. So-called “freemium” sites combine the two, providing free services (sometimes supported by advertising) with limitations, and then paid premium services for those willing to pay.