Internet Business Models

Evidently, there are two ways to make money on the Internet:

  1. Sell ads
  2. Sell stuff

There are plenty of companies selling stuff: Amazon and Apple are obvious examples.

But most of the cool new Internet companies are taking the advertising approach: Facebook, Twitter, Google, et al. These companies make all, or nearly all, of their money selling advertising.

This focus on advertising has some interesting effects. The users aren't the customers — if you're not paying for something, you're not the customer. Which means that, despite protestations of not doing evil or of making money to build better services, these companies are beholden to their advertisers (i.e., customers), not to their users.

On the other hand, the users are getting something for free (sort of), and it's hard to argue against that. This has some side effects. One area where companies are still charging for actual products is smart phone and tablet apps. But prices in that market are really low (99 cents! and Apple takes 30% of that), which makes it hard for anyone to make money, which in turn leads back to advertising (look at Angry Birds, for example).

So what are the results of all of this? Is the ad-based model going to destroy small software vendors? Probably not, but they may have to incorporate ads to make any money. When companies are more advertiser-focused and less user-focused, does that result in inferior products? I have no idea; I think we'll have to wait and see. (I'm not even sure how one would measure product quality.)

It's not just me

Dalton Caldwell complained about Twitter's business model and then proposed an alternative. An alpha version of was running as of mid-August 2012, charging $50 per year (or $100 for developers).

This has raised an interesting little backlash, with various pundits complaining that has the audacity to actually charge their users, with one going so far as to compare it to white flight. I find it interesting that people are perfectly willing to pay a few hundred dollars for an iPhone, and another $80/month for a data plan, but not $4/month for a social network. Then again, the detractors may be in the minority — we'll just have to wait and see.


One side effect of all of this is that the various players are trying to build walled gardens. Marco Arment suggests that Google killed Reader as part of their drive to push everyone and everything into Google+. Jeremy Keith laments the fact that sites are dropping RSS feeds (or not providing them in the first place). If they want to force their users into a walled garden, they'll avoid anything that enables interoperability.

I'm hoping the walled garden approach works out as well for Facebook, Apple, Twitter, et al. as it did for AOL.