Is “Free” Killing the Tech Entrepreneur?

As “free / ad-based” becomes the de-facto business model for web app developers and publishers, many start-ups are being forced to redefine themselves as media companies, moving away from a technology orientation. This presents a major challenge for tech entrepreneurs: they tend to be very good at serving their product end-users, but in a “free” model the end-user doesn’t directly generate revenue… advertising does.

Do tech entrepreneurs have the right DNA to address advertiser needs as passionately and skillfully as they do consumer needs? Does “free” pose a threat to the tech entrepreneur?

Tech and media are very different beasts and require different skill-sets. I have met so many entrepreneurs employing “free / ad-based” business models for their web products who don’t recognize this; their products were simply not conceived and developed with the advertiser in mind. As a result of this, there are now many popular online products and services that may never generate meaningful revenue. At SplashCast I worked directly with many of them: Gigya, Clearspring, RockYou, WetPaint, and many others… These are really great companies, managed by first-class teams with hundreds of millions of users… but still with unclear revenue potential.

I believe that “free / ad-based” is here to stay as the prevailing business model for web-based applications and services. Many smarter people than me also believe this. Developing web platforms and apps has become so easy and cheap, and the “expert knowledge-base” is now so widely shared, that technology is no longer a barrier to entry or competitive advantage. Look at the top performing web services launched in the last few years: Facebook, Twitter, YouTube, Hulu… technology was not the secret sauce that made them successful. The market value of web app technology is approaching zero.

In addition, the prevailing consumer expectation continues to be that content and services delivered on the web should be free. It’s a double whammy / perfect storm conspiring against tech entrepreneurs.

Footnote: “free” business models are a red-hot topic at the moment, fuelled by Wired editor-in-chief Chris Anderson’s recent book, Free: The Future of a Radical Price, and lots of great blog discussion here.

Red Hot or Not, Free Presents New Challenges that Require New Thinking

To be successful in a “free” world, entrepreneurs need to transition their thinking and their companies from a “technology orientation” to “media orientation”. This means thinking in terms of content, audience, and advertising: the 3 core drivers of a media business. Shifting from technology to media means:

Product becomes content
Marketing becomes audience development
Sales becomes advertising optimization

The operational analogy is that the CTO becomes a Chief Content Officer, the VP Marketing becomes the Chief Audience Officer, and VP Sales becomes Chief Advertising Officer. While this may be extreme advice, the “free” business model should at least force management to consider some fundamental operational restructuring that is more aligned with a media business.

Specifically on the sales front, “free” means shifting from a tangible asset sale, software or service, to an ephemeral asset sale, audience attention. Attention is the scarcity online; it is what advertisers demand and buy. The concept of selling audience attention is foreign and heady for many tech entrepreneurs, and is often not what they “signed up for” when they launched their companies.

Entrepreneurs usually start companies because they’ve devised a unique solution to a nagging problem. They tend to be passionate about solving that problem and creating the best service possible. They are driven by seeing their product improve the lives of millions of people. This passion for product is essential. But in a world of “free”, the product itself does not directly drive any revenue. It is, in fact, a big loss-leader. Product is “bait” for audience attention.

Free is a Business Model, Not a Hall Pass

Tech entrepreneurs tend to obsess over what is a loss-leader, usually at the expense of the money-maker.

In a media model, management’s essential task is acquiring and maintaining the highest quality audience possible, at the lowest cost. Quality of audience is determined by advertisers, based on how closely it fits the demographic or behavioral profile they are targeting. Advertisers place highest value on audiences that demonstrate an intent to buy the product the advertiser is selling. It would behoove entrepreneurs to consider this at the onset, in the early stages of product development. Building a big audience isn’t enough. A large low-quality audience is not a lot better than a small low-quality audience. The inability for app developers, such as Slide and RockYou, to sell advertising at scale, even though they amassed hundreds of millions of users, illustrates this point.

“Free” is seductive for the entrepreneur, but usually for the wrong reasons. A primary tenet of “free” is to remove all friction from user adoption. This gives license to the entrepreneur to focus on what is most gratifying: driving massive adoption of their beloved product. “Free” also postpones what many tech entrepreneurs abhor: selling. Further, with the simplicity of Google AdSense and the proliferation of ad networks, some entrepreneurs believe they can build highly profitable businesses without ever closing a sale themselves. Ahem.

“Free” is a business model, it is not a hall-pass. Media is a serious and seriously challenging business. Tech entrepreneurs need to jump in with eyes wide open to this reality from the outset.

TOPICS:

EVENT ANGLE:

ResearchANGLE

Trackbacks