Monday, March 12, 2007

Growth and Free Services

Not sure what's been keeping me bottled up on blogging these days. Writers block? Maybe startup life is more hectic than I'd assumed. Either way, finally read something which got me fired up again. One of our seed investors, Josh Kopelman at First Round Capital, has a perspective on 'free' business models. According to Josh, getting users to pay for ANY service, even if charging a penny, is the biggest obstacle to material revenue generation.

At RockYou, we've had some some informal statements on TechCrunch related to our funding. Some of the commentary related to RockYou funding focuses on doubts related to the 'free' business model. How can RockYou (or any Web 2.0 consumer facing site) make money? While I generally agree with Josh in his post above, ultimately premium services should never be the singular focus of a 'free' business model. Having worked at eBay where online services to the buyer are completely free, the vast majority of revenue is not generated from premium services but rather from access to the consumer. Whether it's charging for leads, a transaction fee % or CPC/CPM, what makes or breaks online consumer sites is 1) the overall size of the userbase 2) how attractive that consumer demographic is to an advertiser and 3) how effectively said site is able to charge for that access (unrelated to simple onsite advertising via ad networks).

A great case example is Linkedin. Would anyone have predicted that Linkedin, a business social network at its essence, would be able to generate $100MM in revenues for 2007? A friend of mine that works in online recruiting mentioned that Linkedin has 35,000 recruiters signed up for Linkedin services, looking to access their 8MM+ user base. In this case, Linked in 1) has a big but not massive user base, 2) maintains a highly attractive demographic for recruiters and 3) was able to extract sizable but equitable rents from recruiters. Looks like the 'free' business model in this case is a damn good one.

So why invest in RockYou? At RockYou we have 1) a fairly massive & growing user base (8.5MM registered and 14MM unique visitors a month), 2) a very attractive demographic (teen/young adult) and 3) *wink* a plan to charge for access to that user base. Obviously our ultimate success will be based on how good that plan is and how well we execute on it. But with #1 and #2 continuing to grow, the team and our investors are feeling fairly good about the future of our little company.

One more thought - notice that premium services aren't a focus. I expect that premium services will play a material part of our revenue growth in the future, but I'm happy to being completely free to users into perpetuity if I can anchor userbase size and demographics for potential advertisers.
Listed on BlogShares