Posted by: Rob Hof on October 23, 2008
If online advertising is headed for a fall, as many people are assuming, what are all those hundreds of Web 2.0 startups doing to contend with the possible loss of their key business model? I mean, besides panicking and laying off people because everyone else is, or at least because their venture capitalists told them to?
In a magazine story, Lucrative Alternatives to Online Advertising, that just went up online, I explored a couple of alternative business models that are getting more traction, at least in some kinds of Web services: subscriptions and virtual goods.
For some Web entrepreneurs and VCs who were always skeptical that ads were the answer for many companies not named Google, this is simply a return to common sense—and vindication after several years of being told nothing but ad-supported startups would work. “There is no better indication that your service is valuable to customers than when they actually pay for it,” Robert Kagle, a general partner with Benchmark Capital, told me. He adds that he and his firm survived the dot-com bust by virtue of backing successful transaction-based sites such as online marketplace eBay, the luggage site eBags, and the online real-estate broker ZipRealty.
Although nothing is as large as online advertising as a revenue source, and probably won’t be, it’s wise that even companies with an established ad business are looking to supplement it with other revenue streams. “There’s an opportunity for new transactional businesses,” says Max Levchin, CEO of Slide, maker of popular social-networking widget software. Casual games service Zynga, for another, last July raised $29 million in new funding and immediately bought Yoville, a virtual-world widget for Facebook users that generates about $5,000 a day from ads and virtual-goods sales. CEO Mark Pincus says display ads are only about a third of the company’s revenues, and ad prices aren’t very good.
I think you’ll be hearing a lot more from startups that are looking beyond ads. Because, as Ruben Steiger, CEO of the virtual world/social media brand marketing firm Millions of Us, told me—in a pointed reference to Wired Editor Chris Anderson’s famous cover story Free! Why $0.00 Is the Future of Business—“The reality is everything isn’t free.”