I just ran across a post by DEMO's Chris Shipley entitled "searching for revenue models" and think she hit the nail on the head. In my opinion, so many of these Web 2.0 companies are AJAX laden "eyeball monetization" projects with no business model other than advertising. Which of course is fine, but like Chris I don't see more than a few really being able to scale to where the advertising revenue will be significant. Further, and what is specifically interesting from where I sit is that the functionality of many of these products/web sites are impressive and are often capable of replacing their traditional conventional software counterparts. This will likely only effect consumer software, in my opinion, but its impact will be devastating to consumer software businesses. Chris writes:
"In the late '90s, a constant parade of start-ups came through my office showing business plans that relied on “monetizing eyeballs” and revenue sharing to generate an income and achieve some splendid valuation. We all know how that story ended: companies – eBay, Amazon, Yahoo, Google, and a very few others – that presented a strong value proposition to consumers weathered the storm and those that relied on other companies for their businesses, more or less, did not.
Today, the parade is back and this time the start-ups are beating the drum of free software and services. These so-called Web 2.0 businesses give away sometimes outstanding functionality now in hopes of finding a business model somewhere down the line. In the meantime, most of these companies are tapping advertising networks and hoping to build a revenue stream (trickle?) from click traffic. (Feels a whole lot like monetizing eyeballs, doesn’t it?)" Whole article here
The software business has seen constant innovation and business model evolution from the beginning. All of it - from Consumer to Enterprise Software - have utilized tiered pricing. With the proliferation of broadband internet for reliable and quick distribution, most vendors offer a "free limited trial version" as the entry point. As the markets get even more competitive, today many of these same vendors are offering a free version in perpetuity. Whether web based or desktop based this strategy is now commonplace. OK, this is not really news, but as a conventional software entrepreneur it is frustrating to see many of the "free" offerings that don"t need to be. In the long run this cannot be supported by advertising. Chris also rightly summarizes with:
"...at least for now, I believe consumers will pay for value and that it is fundamentally wrong not to ask to be compensated for the value you deliver to the market....The software industry, however, in large measure has become afraid to ask people to pay. Ultimately, this devalues not only the application, but also the industry.
This wont really effect large or enterprise software business at all. In fact, for companies like ours the free "seeding" of client-side or web based software is an expected marketing imperative. But the functionality and service needs of large customers simply cannot be served with free software (save for open source which is another discusssion entirely.)
The software industry is only hurting itself in my opinion and there are only a handful of Oddposts or Writelys that will see a payday with their "its free and I hope someone buys us" strategy (otherwise known as a hail-mary pass.) In the meantime, real software companies lead by experienced managers are going to have to adapt and in my estimation migrate upstream where businesses will gladly pay for real value. Consumers are getting a lot for free and they aren't going back to paying for much of anything. Now that I think about it, many younger consumers never have and never will actually buy a piece of software. Until they get jobs that is, and in that case their employers will buy the software they require to actually do their job and work with others.
Our company, Attensa, is focused on delivering meaningful value to businesses. Not consumers. Not publishers. And, by the way, its not evil to actually be paid for it.