Is retail the only profitable online business model?
January 22, 2008 – 8:54 amI read an interesting article on Read/Write/Web this morning that talked about the viral effect and building scale in Web 2.0 companies. One of the main points made in the article surrounds the idea that there are three online business models with varying degrees of complexity. The easiest model to scale is supposedly one that encourages communication (Twitter, Gmail), the next being entertainment (YouTube, Secondlife) and the last and hardest being research, which in my opinion includes retail since most dollars made are by driving transactions (Google, Amazon). The article then goes on to say that the opportunity to monetize each of these business models is inverse to the ability to develop the business. For example, while it’s relatively easy to scale a model like Twitter, its hard to make money from it. Take for example MySpace, a communication model that in my opinion has yet to come up with a compelling offering for advertisers. What’s kinda freaky is that communication tools are the ones that typically end up having great viral success and scale very quickly - just look at how quickly Facebook became a phenomenon.
I have to say this article is one of those gems that I love to see in print. Bernard Lunn does a great job pointing out the obvious (which was needed), that you can’t effectively monetize communication. If I used a phone service that interrupted my conversation every 2 minutes to play me a 15 second spot I’d discontinue the service immediately. In the same way when I’m focused on instant messaging with someone I’m ignoring the ads around the IM window. If some enterprising ad company decided to insert ads in the middle of my IM conversation I’d seek out a new service. The challenge to the Internet is that unlike a phone service which has been fee based from the beginning, online communication services scale in a free model. Free means more choice for consumers and less opportunity for service owners. Lunn does point out that if you achieve enough scale you can make money but the returns are nothing compared to what you get from providing research based services. I can imagine this is a lesson that eBay learned the hard way when they bought Skype at a $2.6 billion price tag. What I took away from the article is that while this Web 2.0 boom is full of great cool technologies to bring people together, at the end of it all research is the only moneymaker. This is clear when you look at the most profitable businesses online: eBay, Amazon, Google. They all provide research/retail services.
My2Cents:
Advertisers need to be careful putting dollars into new communication media. There is a halo effect for advertisers being the first in a given technology (remember 50% clickthrough rates in 1996?) but ironically most new communication services launch without advertising opportunities. What this means is that by the time they conceive of an ad model the service is no longer cutting edge and the user community revolts against the ads (Beacon anyone?).
The real value to the service providers is in the user data. The next 5 years are going to herald a lot of change in the marketing industry. We’re strongly headed from marketing being the soft skill to marketing being an analytical data directed science. Communication services that have the knowhow to understand and monetize communication are likely to be the ones best suited to reaping the rewards. Distilling those communications for marketers to use in their marketing efforts has more value than showing random ads to site visitors. Slowly we’re learning the lesson that Google taught - when advertising is in response to a query, the user doesn’t see it as advertising, they see it as content.
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Tags: advertising opportunities, Amazon, Bernard Lunn, communication, communication media, Communication services, communication tools, cool technologies, data directed marketing, eBay, given technology, google, instant messaging, my2cents, online business models, online communication services, profitable online business model, research/retail services, retail, rrw, scale, Skype, USD, YouTube
