Web 2.0, Revenue Models and Profitability: A Web 1.0 Comparison
centernetworks.com
centernetworks.com
He's missing the whole lean, mean segment by looking only at the top.
Try comparing the sheer number of companies during 2.0 and 1.0, and you'll start to see the difference.
If you need a real example of lean companies look no further than YC companies.
I'm talking about Flickr, the early Flickr, how lean and neat was that!
Can we now look forward to more creative and lean things? At least until Web 3.0 rises to drown it all in money and unoriginality, again.
Sounds like what consultants/talking heads do to move those awful self-help, get rich quick, business books.
http://blog.twitpic.com/2008/12/be-yourself/
Twitpic is self funded and ran by one guy from his apartment
He does it because he loves it, not because it pays the bills. Does everything HAVE to turn a profit?
Does everything that you're trying to earn a living off of, pay bills with, and hire employees with have to turn a profit? Hell yes.
If you're not going to aim at providing a return on investment, don't pretend you're a business.
"But Patrick, that's not fair. You're talking about real companies that have paying customers. I'm talking about 'web properties' that aim for userbases the size of nation states, and accordingly have to aim for the broadest possible reach and the poorest possible customers."
But why are we talking of those? The model demonstrably fails when you can afford to throw hundreds of millions at it. The "We provide value to customers and all our employees keep their clothes on, thank you very much" model has worked for thousands of sales in a year, tens of thousands, hundreds of thousands, millions, hundreds of millions, etc...
"the fact that offering free, advertising-supported services to millions upon millions of people is not a lean and- mean undertaking"
and
"They figured that the revenue and profits would come eventually but clearly that was putting the cart before the horse"
I see lots of people on HN building great products who have clearly not asked (and answered) the most important question: How will my service make money?
It should be becoming painfully clear that layering advertising on top of a useful service does not work.
Adsense works because it puts relevant ads in front of people who are already searching for something.
FB users are connecting with friends not looking for products.
The author clearly does not get it. Profitability is not a "pipe dream" for companies like Digg and Facebook. If profitability was the only objective, I'm sure they could achieve it. The pipe dream is attaining the massive scale necessary to build a publicly traded company.
So it isn't that he doesn't see your point of view it's that he thinks you are wrong (he obviously sees your point of view because he wrote a whole article that's clearly intended to refute it)
It seems to me that, by thinking he must be too stupid to see your point, it's you who are missing the point. I mean, he might not be right but at least he's got enough perspective to see that there's another side to the argument.
He is 100% right when he says that "building a product and building a business around a product are two very different things". This is the problem that Web 2.0 companies realize after they start and gain critical mass. Sustaining that growth rate costs significant capital regardless of what open-source technologies or inexpensive hosting platforms you build upon.
The real problem, in my eyes, is that VCs and other investors see the critical mass first and dump loads of cash into these startups without demanding a viable revenue model and I don't mean relying entirely on AdSense revenue. While Adsense can be a good starting point to generating some revenue it should not be looked upon as a means to an end.
The problem with Web 2.0 companies is that they all have one underlying theme in their business plans. Gain traction, obtain substantial outside investment, and then move on to something else by selling out to the highest bidder.
While I do believe that companies like Digg and Facebook could generate substantial revenues, what is their motivation right now to do so? Investors continue to dump money into them and investors are fighting to own a piece of their "empires" without viable revenues so why deviate from that course. Right now they are only looking to grow that critical mass further and eventually look for the highest bidder that will move the founders to the next project.
Web 1.0 companies (or pre-bubble burst companies) saw IPOs as a viable means to an end. They were focused on generating revenues as large revenues at the time equaled successful IPOs.
What type of thinking is that? That VC companies are required to shoot for the home run exit? That's not a mode of thinking, it's the reality of the VC industry. Lean, efficient, profitable companies are great, but unless they aim to become big businesses they are not VC worthy.
As for the other side of the argument, I must be too stupid to see it. All I could glean from that convoluted mess was that Digg and Facebook should be more like Google and eBay.
Even if you'd rather shoot for being acquired, it still makes sense to try and reach profitability as soon as possible. If you keep living on VC money forever sooner or later you run 2 risks: 1) the VC money will dry up, like in a bad economy 2) the valuation of the company gets so high it doesn't make sense for anyone to acquire you.
People seem to have forgotten all the failures that produced. VCs are fine with 9/10 complete failures, as long as there's 1 home run.