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Web 2.0 Business Models vs. Mobile Services

Interesting read here on the business sense (or lack thereof) with Web 2.0 startups. Russell Beattie compares the services these startups provide with services offered by mobile phone companies:

Maybe it’s because I straddle the Web and Mobile worlds why I think this is such an issue. I deal with companies every day who have no qualms about charging 25 cents to send 160 characters of data from one person to another, or who have no problems charging $3.00 for a 10kb .gif image or a bad .midi version of a popular song, or even up to $10.00 for a small Java clone of Tetris - a 20 year old game. Unlike the web world, the mobile world is accustomed to charging for every thing that has the slightest bit of value. The difference between the markets couldn’t be more drastic.

Maybe it's just me, but isn't it a good thing that most Web 2.0 startups aren't gouging their customers $3.00 for bad MIDI songs? Here's my take on the topic:

First, Russell is absolutely correct that web businesses need to make money from the services they create. This is the main point of his article, and it's a very good read, so go check it out and consider his points.

There are some other factors, however, that also deserve consideration. I, for one, am appalled by how much the cell phone companies want to charge for crappy services. The first time I saw a genuinely decent deal -- Sprint PCS in the late 90's, call from anywhere to anywhere with no extra fees -- I signed up. (Sprint later went downhill and is currently no better than the rest.) I won't tolerate 25 cents for a text message. I won't use any mobile data service that isn't flat rate for unlimited data.

This is part of the reason WiFi hot spots are so popular. If cell phone companies weren't trying to gouge customers for data access, most people would probably use that instead of seeking out hot spots. But as it stands, we all seek out businesses that provide hot spots -- free and unlimited data is worth the trouble -- and those businesses, in turn, sell more coffee/sandwiches/etc. to us.

The other factor, getting back to Web 2.0, is the cost of building a web-based service. As Paul Graham points out in the first half of this essay, the cost of creating a web startup is damn near zero. Assuming you're willing to do other jobs to pay your rent, you can do a startup on the side almost for free. The tools are spectacular, good hosting is cheap, and public APIs from the big guns (Google, Amazon, etc.) provide you with lots of data to mix-n-match.

Russell's main point is that a web business is still a business, therefore it must make money. But if your site only costs $100/month to run, then you can afford to make it free to users and skim pennies from ad clicks. A useful service with a couple good ad placements could make $100+/mo, easy. Of course, your effort building the site is worth something too, but it's probably easier to grow a $100/mo (self-sustaining) income to $10,000/mo than going from zero straight to $10,000/mo.

The 37 Signals model is a good one to look at, too. Provide free basic services, but make customers pay for the premium stuff. The freebies prove the quality and value of 37 Signals' offerings, so customers don't have any qualms about paying up when they're hooked. Rather than try to take my money upfront (as Russell advocates), I'd much rather see a business prove their value first.

Again, I'm all in favor of businesses making money for providing their services, which is Russell Beattie's core message. But I don't think the cell phone companies provide the best model -- I loathe them -- and it's also possible to provide free services while making money from ads or premium services.

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