Business models of the web and why UGAL is not free
April 30, 2009
Business models have changed with the web. Before the web, everything had a price. Many services are now free on the web: email is free, creating a blog is free, hosting videos is free, Facebook is free etc... No need to purchase Windows of Microsoft Office anymore, open source alternatives (Linux and Openoffice.org) are available for free. So called "Pirates" watch the latest movies days before their release date... for free.
The funny thing is that many of the companies offering everything for free are very well valuated: $15 billions for Facebook at the time Microsoft took some shares (much less now). Venture capitalists inject money in companies that offer only free services as well.
All those services look alike (they are free) and it is not always easy to decrypt the various offerings, including the ones like UGAL which are not free. Different times, different business models. Some are viable, other much less. Here is a quick look.
Google, with its ultra efficient search engine is the king here. Ads matching the keywords you just entered are displayed on the side of the search result pages. The audience is as targeted as it can be. If you own a Restaurant in Portland, the very best spot to advertize is the Google result page for "Portland Restaurant".
Because their search engine attracts a huge amount of traffic, Google generates a lot of cash from those ads, even with relatively low click thru rates. They just announced revenues of $5.51 billion for the first quarter of 2009. The model works well for them, thank you very much :-)
Many sites offer free content on the internet. I am not talking about the personal blogs, but professionally written informational websites (or blogs), like Techcrunch (tech companies), Slate (news) or Lifehacker (geeks). Those sites generate enough traffic to make a living of the ads they display on their pages. Very few are however able to reach a sustainable level: creating quality content is expensive and even with quite a lot of trafic, it is frequent that revenues from ads barely cover the cost of running the business.
Social networks (Facebook, Twitter, Youtube etc...) have truck loads of trafic, but they still need to find the right business model to "monetize" (hate this word) it and most of them are big money loosers for now. In an excellent Times article, Douglas A.McIntyre states that for an advertiser, the difference between a search engine and a social network comes from the difference in the quality and targetness of the content. He believes that journalists and analysits were wrong in estimating that the only fact to be able to generate traffic was enough to generate cash.
The business of having online sites with content created by amateurs to be viewed by other amateurs never had a reasonable chance of making money.
Freemium : free with limitations
The idea of the model is to create a reputation by offering a first level of free service and ask users to upgrade to "pro" accounts for additional functionalities. For example, Flickr has a free version limited to 100Mo of storage, whereas a "pro" account with unlimited storage costs $24.95 per year. On a somewhat different model, Jimdo offers a free version of its CMS that is ads supported (customers host ads on their website on behalf of Jimdo) and a paying version that is ad free.
The viability of the freemium model is difficult to assess. It is assumed (difficult to verify) that less than 10% of customers upgrade to a paying service when a free option is available. The model works only for services with a large customer base. And because 90% of the customers do not generate revenue under this model, the aquisition cost of the "real" customers is far greater. We considered the model for UGAL, and decided to not implement it. Simply because dedicating 90% of our resources (servers, bandwidth, storage) to free riders did not seem a good fit for a service targetting small businesses.
The concept of open source software is well explained on the Madriva website, an editor of a Linux distribution:
"Free software" (or "Open Source Software") refers to the users' freedom to use, copy, distribute, study, change and improve the software.
These "software rights" have generated a large and dynamic development community in the last decades. Linux is one of the most successful examples of Free and Open Source software development projects.
Unlike the free services of the web (ad supported and/or freemium), profit is not the driving force behind open source software. Members of the communities contributing to Open source projects benefit from the efforts of others, making the software better over time. Developers then generate a profit by selling services (training, installation, maintenance) around the open source software itself.
Why isn't UGAL free?
We get often critized by Open source enthusiasts (not to say extremists) for charging our customers when open source alternatives are available for free. Yes, solutions like Joomla, Drupal, Typo3 are totally free to download, but they still have a cost: they need to be installed, configured and maintained over time. It is not easy and it requires technical knowledge. UGAL takes those challenges away, the counterpart being that we charge for our services.
Our customers are small businesses. They do no thave an IT manager on staff, and are most of the time novice on the web. Installing a database, deploying scripts or managing a DNS server is not what they want to spend their time on. Most of the time they cannot either afford the budget to deploy any Open source solution. UGAL frees them from all technical details and let them efficiently work in minutes on the most important aspect of their website: its content.
UGAL's business model is simply compatible with the needs of our customers.