business models

I’ve heard rumor that pandora isn’t looking too hot from a business standpoint. Heard that the model is one to make you broke. I’ve commented before on their commercial aspirations and revenue. I may even be partially to blame for some of the turmoil. If not for a few nagging bloggers would the commercials have survived? I suppose they may have - people may have acquiesced to the ads and taken them for granted.

But if ad revenue were enough I don’t think pandora would be in as much of a pinch. Pandora has done some of the more clever (and actually engaging) web advertising I’ve seen.

I think the real problem lies with the one thing pandora has never offered: on-demand music. Pandora can’t do this right? Wrong. It can’t do it alone. Pandora currently offers links to buy songs you’ve heard on itunes or amazon… But then what? Does pandora still pay to play the song I own? That doesn’t make business sense. Pandora helps you buy a song, then pays to play it. If pandora could integrate with itunes to 1) allow me to play songs i’ve purchased any time I want and 2) cut costs by playing from my hard drive rather than paying to stream songs I own, then they would save money and i’m guessing do a little better job of pushing the ability to buy the songs you hear. Did you know they have links to buy the songs you hear? I’m guessing many don’t know this. The availability of this feature is too hidden. Make it more prominent and give me some incentive (like on demand playback in pandora) and I might just help you make a few more bucks.

That may not solve everything, but it wouldn’t hurt.

I just read an article on wired about how Google is not doing very well monetizing social networks (synopsis: traditional Google ads don’t work on SNs). It’s a quick read and doesn’t say too much other than hinting that someone thinks there is an answer - but it’s a part of a very interesting problem. Despite the fact that social networks do a great job of getting users and keeping users on their sites for extended periods of time they haven’t really figured out the best way to turn users into dollars.

I won’t pretend to have the answer and I think it is different depending on the type of social network - a network that includes localized content obviously has different monetization opportunities than a network that has a more generalized focus. However, it seems to me that the focus really isn’t in the right place. Text ads work on search because they are almost the exact same thing a person is looking for when they do a search - if you’re searching you’re looking for links to relevant content, and that’s what text ads provide. When you’re on a social network you’re looking for information about people and things you care about. That’s not as easy to monetize - you can’t expect one of your “friends” to pay so that their photos are given priority over another one of your “friends.” It’s tough because you don’t care who views your content on most social networks that aren’t for businesses. This changes when you either have a social network that people are using for business, or when you let others develop on your platform. Let’s face it - I hate platforms - but I also think they might just be the best way to monetize social networks.

When facebook added the developer network and then the app platform they created something that they can get businesses to pay for. It’s all free now, but if Facebook charged fees for setting up apps, fees for premium placement of apps, a fee per user, or any other fee based on their apps platform - companies (and some people) would pay it. The true value of facebook NOW is it’s ability to expose new ideas to a large audience. You can’t monetize the content created by individuals for their “friend” individuals - you can monetize providing companies access to a huge network - and I won’t be surprised to see it.

But… what do you think?

The New York Times has an article today about Twitter. The author, Jason Pontin, doesn’t really seem to get it, and from that he concludes that it won’t succeed. He puts more stock in his own skepticism, saying “I wasn’t sure that it was good for my intimate circle to know so much about my daily rounds,” than he does in the exponentially increasing user base.

But what really bothers me about the article is the discussion of the lack of a business model. This early in the game, Twitter shouldn’t be concerned with a business model. It’s still very early for Twitter, at this point it’s more important to watch how the service is being used and grow the user base. From these two activities the best way to monetize the site will emerge. In fact, the NYT hints at what I believe will be the eventual business model in its discussion of John Edwards. There are two types of twitters emerging 1) the casual user and 2) the purposeful twitter. Some, like Edwards, are using the service to get a message across - these people / companies represent a strong possibility for Twitter to monetize. It’s simple 1) let companies / politicians pay to be featured Twitterers 2) show me a suggested Twitter user on my homepage based on my activity 3) I add that person/company as a friend and start receiving their messages - each of which is paid for or otherwise limited to limit the number of paid messages I receive (it can’t be just an advertising site).

It won’t be long before companies begin Twittering (some already have) - they will gladly pay for reach and visibility - and Twitter should gladly accept payment.

Everyone needs to eat, but Pandora has officially upset me with its newest revenue source: pre-roll commercials. I loaded a station on pandora expecting to hear music and instead heard a commercial for McDonald’s Dollar menu. One of Pandora’s big selling points is that it does not have commercials, the more commercials that find their way into the service, the less likely I am to use it. Pandora already makes money off sales of songs that people discover on the site and click through to buy on itunes or amazon. I did this last week, I had an itunes gift card and chose to buy some songs I had bookmarked on Pandora, I used the links on Pandora to make the purchases. That’s one Pandora revenue stream, but they’ve also sold out their site design in the past turning it into an ad. Now they need another revenue stream? I understand that this is guaranteed revenue compared to the click-throughs which I’m sure most users rarely use, but this goes completely against what the service is supposed to be about. So, should I switch back to last.fm?

Update: Because I love when companies do this, I’d like to point out that Tom, Pandora’s CTO, has left a comment on this post.

In my last post I was praising yahoo answers as a place to meet potential customers, but what I really want is yabe. Yabe does not exist as far as I know, yabe is ebay backwards. I want to tell companies that I want something and then I want them to rush to tell me how low they’ll go to sell it to me (instead of selling something and seeing how much someone will pay for it). Sure it’s reverse economics, but it is the exact conversation that takes place in a b-to-b world. Not sure if it would work for b-to-c or c-to-c commerce, but it’d be an interesting concept and something I may pursue. No one is more willing to listen to your ads than the person that asks for them, that’s part of why Adwords works so well.

The real reason I want this service is because I need a new web host. My host is too bogged down, and Lopico has been moving too slowly for my taste since I relaunched. I don’t think that I need dedicated hosting yet, and I certainly can’t buy a server, so I’m just looking to move to a more powerful and less crowded shared network. There are hundreds if not thousands of hosting companies that can meet my need, so I want them to fight for my business - which they should.

Maybe I’ve missed it, enlighten me if “yabe” exists.

Jason Calacanis, who is one of my favorite bloggers, had a good post the other day on the struggle of Social Networks to effectively advertise.  The gist of his post is that the entertainment provided by the social networks makes the user unlikely to leave the site.  So, if they don’t suck why do social networks fail?

As I see it, the problem is not with the sites / concepts, the problem is the user.  MySpace started out by targeting bands and actors, almost guaranteeing that it would just be a fad. Is there any group more prone follow to fads than entertainment industry? Maybe high school and college students, which happen to be a primary target for SNs.  The problem is the users.  They don’t care about the future of a social networking site, all they care about is the network, its residence is immaterial.

For example, a lot of MySpace’s success is based on Bands.  If a few influential bands had incentive to leave MySpace their followers would soon leave, and eventually the wannabe bands would leave as well.  No one cares that they are on MySpace, they care about who else is on MySpace.

So, who can win in this space? The answer is, a social network that can survive without the network. If you can survive without the network, that is to say you offer something other than a residence, you may be able to survive.  If you can’t do this, you will fail.  The sites best suited to offer social networks are probably sites not initially set up as Social networks. A company like Apple could probably create a lasting social network, because they have other things to offer. If you built a social network around iTunes you could offer all of the features of MySpace, but also offer the uniqueness of the iTunes store.  Therefore, even if some of the network residents leave, the unique thing that they all want, the thing that initially brought them to the network, remains and will keep them coming back at least for that aspect.

Apple may not be the best example, but it’s one possibility. The point is, if a SN is created on 1) a fad-prone network of users and 2) a business model based solely on advertising, it will always fail.

Here’s an idea - web 2.0 co.s aren’t that great at being businesses, they’re much better at being betas. In fact, many of them do better as private betas (in terms of publicity) than they do as public sites. For Example, people loved Edgeio until they saw it. So, when someone says they have a great beta - and it’s been leaked to a handful of testers who are in love with the service - why not start charging others to use it? Say to the public - “you can use this same great service that all of the A-listers are talking about, it will just cost you a small fee.” Get the A-list chasers to pay for a month or three, then when it’s time to take off the private beta label give them a choice - keep paying or see advertisements. If they’re already paying it will be easier for them to justify continuing to pay, and since they have invested in your idea they’re more likely to keep using it.

First we heard about G:Drive, then we found out that G Calendar will be launching very soon. So, all of the 2.0 co.s that were slaving over their versions of calendars and online storage are now seemingly dead.

Worst of all they were banking on either a) being bought or b) developing a large enough fan base that reliance sets in, at which point they can think about having a business model. Sorry, you didn’t have a business model when you had traffic and now you have no possibility of a business. You could have made some money, but instead chose to create a cool cloneable app that created no reliance in your users.

So yes, your run is over, you could fight, but you don’t have anything that they don’t.

It’s the way of 2.0 - no business models anywhere - this is why 90% will fail. The creativity is great, but if you don’t have a business model you don’t have anything.

Pay attention to what Google is and is not doing. If you don’t want to get crushed, look at what they’re not doing. Google is not a content creator - create content. Look at what Jason Calacanis did (is doing) with Weblogs, inc., he built an incredible content network that couldn’t be replicated merely by building an application. And what happened? His company was purchased.

But what do I know? Google is scraping my site and using my information on Google Local, so maybe I’m dead too.