Wednesday, December 22, 2010

Deep Thoughts in the Internet Business Age

Last week Felix Salmon linked to this piece, pulling the key quote:

"If you are not paying for it, you are not the customer; you're the product being sold."

This isn't always obvious at first glance, but I think it's pretty much correct, and brings up memories of the 1999 tech bubble where "eyeballs" where a main goal of every company who launched a website.  The quote is highly relevant today, too, as we talk about valuations for companies like Facebook, Groupon, and Twitter.  

I would never pay for Twitter - but that's not entirely relevant.  Yes, one method of revenue for Twitter would be to charge users - to make us the customers.  They haven't gone that route, and it doesn't appear that they will.  Instead, Twitter will take our tweets and sell the data contained within them, or figure out some sort of advertiser based revenue model.  They're not selling to @KidDynamiteBlog, they're selling @KidDynamiteBlog's eyeballs.

We could make the same argument with YouTube, and even Google as a whole, of course, which is probably the best and most interesting example.  Of course, the relationship is symbiotic - the real "customers" don't pay unless the eyeballs are there - so the companies have to cater to the needs/wants/whims of the eyeballs also, even though they aren't paying customers.  There is certainly a "chicken and the egg" element to this discussion lurking somewhere.

Groupon is another pretty simple example of this phenomenon: their customers are the restaurants and companies offering the deals - that's where the revenue comes from.  Still, the deal buyers - their massive email list audience, is essential to the equation, but the revenue comes from the other side - the deal sellers - the revenue generators.

Anyway, keep the above quote in mind when you try to value a company whose service you use but wouldn't pay for:  you may not be the customer after all.



Anonymous said...

hey kd,

check out this link:

or google "lenny dykstra mired in debt" to bring up the link to this 12/21/10 article.

oh, nails, where did it all go wrong? oh, of course! it wasn't your fault. it was JPMorgan's fault for extending credit to you in the first place. those predators!


Unknown said...

Very true! And when valuing such a company you should also consider too whom all those eyeballs can be sold. In the case of Groupon these eyeballs can be sold to the very lucrative but hard too reach small businesses. That is what makes Groupon so valueable.

John Battelle made a very nice analsys on this recently, see:

Dynamite-in-law, Esq. said...

Sounds to me like a classic two-sided market (e.g. credit card network). The company in the middle brings together two different sets of customers (for a credit card network, merchants and cardholders, for a web company, advertisers and users), and takes a cut for arranging the connection (for credit cards, the merchant discount rate, for web companies, payments-per-click, etc.).

Because the company needs to maintain both sets of customers to make money, it may provide benefits to retain one of them (membership rewards vs. free web services).

The key difference I see with web companies is that it is a little more one-sided. With credit card networks, both sides benefit directly from network effects on the other side. Cardholders benefit when more merchants accept the card; merchants benefit when more cardholders have the card. With web businesses, advertisers benefit from more users, but users don't reap a direct benefit from more advertisers.

On the other hand, credit cards also make money off both sets of customers (annual fees, interest, etc.), while web businesses are often entirely free to the users.

Kid Dynamite said...

yes, D-I-L, I was actually thinking that users tend to make out pretty well, on account of the fact that they usually receive a service for no cost (ie, email!)

What I was really trying to get at here, and didn't really explicitly enunciate, is those people who say "Twitter isn't worth $X Billion dollars - I'd NEVER pay to use it."... insert Groupon/Facebook, etc for Twitter...

EconomicDisconnect said...

I have to say I never understood just how much different companies were willing to pay for info on users and "eyeballs". I have never bought anything I saw in an ad online, and the google ad thingies don't even register to my eyes anymore. I guess it is liek junk mail; they expect a 0.01% response but if the whole world gets 3 fliers each, well you do the math.

Looking into the Mrs. Ryan foot story now, not looking good for Mr. Rex!

Dynamite-in-law, Esq. said...

Yeah, I think I'm just used to seeing the "you're not the customer; you're the product" line used to argue that Google/Facebook/whoever doesn't care about the users because they aren't paying.

But as you point out, these companies still need to cater to the users in order to have value for the advertisers. Reading your post again, it's clear that you were making the much more sensible argument that "would users pay to use this site?" is the wrong question to ask when valuing these web businesses.

Lothar Hillperson said...

re: D-I-L saying that users don't reap a direct benefit from more advertisers

It may not be as direct a network effect as the others you mention, but I definitely benefit from (e.g.) New York Times having a lot of advertisers in their network. Their ad revenue allows them to put together a large amount of quality content, and they could not get this revenue without all the eyeballs.

Transor Z said...

I've got a big problem with FB playing dumb when it emerges that Zynga or another "game" app provider "for which FB is not responsible" is mining information from users' computers. There is a privacy cost to the end user that is perpetually accidentally-on-purpose not disclosed. Free it ain't.

F-E-E-T Feet Feet Feet!

Kid Dynamite said...

Jonathan - I'm guessing you know that NY Times is instituting a paywall soon... sadly...

Justafed said...

Users may not benefit directly from more advertisers, but the middleman/matchmaker can, if advertising prices are the result of an auction (think Google). And in some cases users can benefit from thinking there are more advertisers in the network, although the effect is maybe not quite direct. So if I as a user am confident that the ads brought up by my search for "hotel Dupont Circle DC" are a strong sampling of what's out there, I spend potentially a lot less time searching. Now, that might not always be true, but it is more likely to be true as the number of advertisers goes up.