Bloglines and Bloggers

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One other thought on Bloglines. (the blog aggregator that I plugged in an earlier post). The interesting thing about these services is that they allow a reader to completely avoid the ads served up on blogs. That is, you never actually leave Bloglines' site -- they simply feed you the text from the blogger's most recent post(s). Most of the blogs I read don't actually serve ads. They're simply using the forum as a way to generating interest and eventually selling more of their product or service. But for those bloggers that are generating substantial revenue by serving ads, these services present a big challenge.

Radiohead

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I don't think there's a really great business model here but if I'm going to write about the economics of music, I have to write about Radiohead's democratic pricing model.  Basically, fans could pay whatever price they wanted for the album.  I hear that they got, on average, 8 bucks.  There aren't a lot of bands that could pull this off so I'm not sure this is an emerging trend.  Worth thinking about though.  Could this work for other industries?

Music & Business Models

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I've been thinking more and more about monetizing music and I have to say that I would much rather continue to pay $14 for a CD then to see the whole industry shift to an advertising model.  Supporting art with ads is depressing and just plain wrong.

I mean how far can this go?

Imagine if museums didn't charge admission?  Instead, you could get in for free but all of the art would be covered in advertising?

The Music Industry & The Long Tail

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There's a brilliant post from Seth Godin today on the music industry that's worth reading a couple of times.  And not just for people that work in the music industry. Check out it here.

Here's what I think is the most powerful sentence in the entire post:

"You used to sell plastic and vinyl. Now, you can sell interactivity and souvenirs."

I've been thinking about this for a while but it's nice to finally hear an expert say it so plainly.  To me, selling copyrighted music in the digital age is like selling the Mona Lisa  -- once you've sold one copy you've sold em' all.

Knowing how quickly old industries can disappear and new opportunities can pop up, here are a couple questions that we should all ask ourselves at least once a year...

If record companies can go from being extremely profitable to being forced to sue their customers to having a superfluous product and being forced to sell souvenirs and interactivity in about a decade, what could happen to my product?  And what am I doing about it today?

Facebook's Top Two Questions

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What are Facebook's most valuable assets? 1.  Attention from high-value consumers. 2.  Data (behavioral, demographic and preferential) on these high-value consumers.

How should they leverage these assets to make money?

If it were me, I'd simply broker the sale of that attention and data to interested parties (advertisers that want it to sell stuff and advertisers that want to learn more about consumers).  There's no shortage of either.

But here's the catch.  Much like a real estate broker wouldn't sell your house with you knowing it, Facebook can't sell a consumer's attention or data without them knowing it. Everything is op-in and the user always gets a portion of the transaction.

 

Monetizing Facebook's Beacon

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Beacon, the controversial advertising tool used by Facebook to deliver highly targeted ads to users, was removed from the site a couple of weeks ago due to increasing concerns from privacy advocates. Beacon was a great idea.  Basically, the tool would allow data from other sites to be automatically delivered to a user's Facebook profile.  For example, if you went to Fandango to purchase movie tickets, your transaction data would be transmitted to Facebook and included in your profile.  That way your friends would know where you buy movie tickets and what movie you're going to see. Minus the privacy concerns, I think it's pretty neat.

Here's how I think this probably affected each of the three stakeholders.

Facebook: For Facebook this was wonderful because, presumably, they could charge advertisers high fees (with sky-high margins) for these ads.

The Advertiser: For the advertiser it was great too because it effectively created "forced word of mouth"; i.e. "oh, Betty buys her movie tickets at Fandango, maybe I should too".   Of course this doesn't mean that Betty is necessarily happy with the Fandango service or that she would recommend it if the data were under her control -- which does make the referral a bit less impactful.  Nonetheless, there's still a lot of value here.

Facebook Users: For the users, this wasn't so good.  It was an obvious invasion of their privacy for nothing in return.

To me this was the perfect time for Facebook to use the "pay-the-consumer business model" I've referred to in other posts.

Think about it for a moment.  This is a win-win-lose model.  Facebook and the advertisers win and the user loses.  How could the user win?  Why not simply transfer some of the margin from Beacons' sales directly to the users.  That's right, invade the user's privacy but give them something in return.  Further, make everything opt-in.  Privacy advocates can't complain when everything is opt-in.  And there'd be no shortage of opt-ins because people like easy money.  You could setup variable pricing for the advertisers based on unique users that viewed the data -- you could even charge based on the profile's of the users that made the transaction (Facebook has a TON of demographic and behavioral data that they could share with advertisers.)

To execute this, they simply could've added an icon to every users homepage asking them if they wanted to make some easy money.  When the icon is clicked, the users could opt into Beacon's various features.  Each feature would clearly describe two things:

1.  Exactly what data they'd be forfeiting and who it would be seen by. 2.  Exactly how much money they'd receive in return for the opt-in.

Of course they wouldn't have to actually send cash to the user.  It could be gift cards, or actual merchandise from their favorite merchants.  It could even be raffle based -- "opt into Beacon for the chance to win an iPod).  Eventually it could buy users access to premium site features.

The bottom line her is that the only way innovative ad systems like Beacon will be sustainable is if the users have control of the data that is sent and if they feel like they're getting something in return.

The key here is trust.

And I don't know about you but I'm usually more likely to trust companies that pay me.

"Freemium"

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New word...for me, anyway.

Freemium.  First articulated by the venture capitalist Fred Wilson.  Basically, it's the business model of generating traffic and users by offering a free service.  Then, upselling that customer base on premium services.

By the way, I've been reading Fred Wilson's blog lately.  It's pretty good.  I'll post some responses to his posts in the next few days.

LinkedIn

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LinkedIn, a great site which provides a good service, is a good example of the difficulty of monetizing web traffic.  Should they survive on service fees (mostly from headhunters) or from advertising? I hear that, like most other networking sites, the majority of their revenue comes from advertising.  This fact underscores a really interesting problem.

There are so many cool industries that have popped up from Web 2.0 -- social/professional networking being one of the most exciting.  But like Web 1.0, many of them are simply surviving on the ad model.

What is it that makes these companies say, "hey, we've got this awesome site that millions of people love and are using daily, why don't we take away from the experience by distracting our users with ads?"

I think the answer is that they simply can't come up with anything else.

There are three possible solutions to this problem, I think.

  1. Continue using the ad model (a great short term strategy but in the longer term users will only get better at ignoring the ads; oh, and just as important, the advertisers will simultaneously get better at measuring their effectiveness.)
  2. Use the service-fee model (which, for what it's worth, I happen to think is a great long term strategy but it could never support the ridiculous valuations that LinkedIn and others are chasing.)
  3. Discover a new revenue model.

Until companies can be as creative about monetization as they are about generating traffic, the industry is stuck with 1 and 2.