Fred Wilson writes today about his favorite business model for the web, which in short is: give away your service or product for free, build a large base, then upsell that base to premium services. At McDonald’s, this is know as the “fries with your shake?” model.
This is a model I know intimately and lived with daily during my tenure at Real, and am thus all too familiar with its flaws. Which are: that it is incredibly vulnerable to attack by competitors.
At Real, we gave away a free player, built a huge base very quickly, and then tried to get many folks from that base to buy our premium player. It worked well enough at the beginning; the upsell was polite and relatively innocuous while we were a private growing company, and before Microsoft got determined to crush us. But once we went public — in the mania of the late 1990s — there was pressure to grow more quickly, and we pushed the premium player harder. Then Microsoft arrived on the scene, commoditized our other line of business (selling servers), gave away a free player that included most of the features of our premium player, and bundled it into the operating system. We were left with a bunch of bad choices, ultimately pushed the premium player a lot harder in order to survive the onslaught, and many
consumers [ed. note, in flashback to my bad, pre-cluetrain enlightened mindset, I somehow used the c-word!] people never forgave or forgot that. Understandably.
This “fries with your shake” model can work, if you are in a small niche business that doesn’t attract much attention or competition. But if you are building something that becomes attractive or threatening (or both) to GYM, you basically will face the choice of folding or flipping once the onslaught begins.
Consider what might have happened with Flickr as an example, as it’s a service Fred lists and one I know better than the others. Imagine if they had taken venture money, gotten positioned to build an independent company with strong revenue growth, and with an eventual IPO. What would Google, or Yahoo, or Microsoft, or a dozen venture funded ankle-biter competitors have done? Mimicked the feature set, and given away unlimited storage for free. Indeed, some are already doing this now.
One might respond: well, Flickr built a community, and members of that community wouldn’t just switch over to a similar, but cheaper, option. They would have stayed loyal. Maybe. But a more likely scenario is this: a steady erosion of users, with a reverse network effect; small numbers of people migrating to the cheaper — but equal — option, and taking others with them over time; increased griping and snarking, wondering why flickr was charging, when others were giving away the same service for free (indeed, I’ve started to see that among some of the alpha alphas on various boards); comptetitors fueling those gripes, trying to erode the allegiance between the service and the people who used it.
It’s just too damn easy to attack these models, and people will want to do it if there is a valuable market for the service. A much more defensible model — my favorite, one I wrote about in my last post — is the efficient marketplace model. eBay and Google’s model. And Second Life’s. And the model of newer services like Etsy. These are very, very hard to attack — even if you have better technology, you can’t dent these services if your not offering a place where there are more buyers, or more sellers, and more buying-selling going on.
Imagine if flickr had built more of a marketplace function into their service. There are some great photos on flickr that I would pay to use. A dollar, or two, or three. For inclusion in the occasional slide deck, or on my site. Imagine if they had built a business not just around their community of free users, but between individual photographers (sellers) and bloggers, or people writing reports, or publishing a newsletter (buyers) with fair pricing and a farmers’ market “meet the producer” ethic and vibe. That would have been an interesting, and a big, big business. And much more defensible in the end when the predators came ’round.