Commentary
What's A Good Business Model, Versus A Bad One
- by Adam Singolda , February 29, 2012
Today, I visited Facebook headquarters in Menlo Park, and I met one of the company’s senior execs. Very impressive guy. I won’t mention his name or his department for the sake of confidentiality.
However, I will share the conversation.
We talked about a few things, and from one topic to another. We drilled down into what type of business model is so good that it can help a company not only to generate revenue, but to gain market adaptation of the core product. For every company, that market adaption could mean different thing. For some companies it means more page views, for others it means more advertisers and for others it means downloads.
A good business model that can scale into real revenue, and organically, is hard to find. On the flip side, once you nail it, it’s like fire and it’s beautiful to see because everybody “gets it” -- your users, buyers, investors, your market.
We’ve all seen it before -- to generate initial revenue, most companies would usually go with some sort of “ad-based business model.” Usually it means bundling with some third-party ad provider that is OK to syndicate their ads to provide some “clean my teeth” ads that pay high CPC with near 0% CTR. Not ideal.
OK -- so what’s good versus bad?
A good business model is one that is very close to what your product does in any case, but in a paid model. The most famous example would be Google Adsense For Search (AFS): while some results are organic, others are very relevant and paid. That’s good.
Another good example is Spotify. The company’s assets are songs, and it makes money directly from people wanting to listen to them in a subscription-based model. No banners on the bottom, or funky like-buttons to listen to the next song. Another good example is WIX.com, whose product is sites that you can build. It has free and paid versions -- both exactly the same product. Beautiful.
A bad business model is exactly the opposite. It’s when you have money coming in to support your core product in a nonorganic way. One example would be Twitter these days. While I trust it will get better, as I’m personally hooked on the product, I find its CPM-based promoted tweets at the top of the page to be somewhat of a display banner, which is not even related. I’ll stop here, but I’m sure you get the drift. Bad is when the revenue coming in is not directly related to the product the company offers for free.
If you can find a good scalable business model, you’ve found gold, since you can focus your company on one product, one KPI, one message, and educate your clients what they are paying for. I hope this helps !
Adam, as usual, great insight. And for those who don't know, Adam is not coming from a theoretical perspective here. He's one who practices...and has succeeded at what he preaches. He's probably too modest or doesn't want to appear self-serving to say this, but I can do it: Taboola (Adam is founder/CEO) is a prime example of what we're talking about here.
Of course, it's harder than it sounds to find this sweet spot. MUCH harder.
Insightful - although by this measure you suggest that Facebook has a bad business model. It would be hard to argue that the ads on the righthand of the content are very similar and simply a paid version of the same core content we all go to Fb to see.
Facebook has it's work cut out for it if revenue is ever going to come remotely close to what it will need to be to justify it's astronomical market cap. Not clear to me yet exactly how they're going to do that, but as Adam suggests, they need to come up with organic approaches.
Ron, thank you *so much* for the (too) kind note sir.
Truth be told, I learn every day mostly through working with people like you that are happy to share what's working -- and more importantly -- what's not in the media space. Re: the future of Fabebook, I totally agree with Ron. I don't think Facebook future revenue is in necessarily display. Their biggest competitive advantage, and value in the market is "us", people going there, interacting with others, sharing our most personal valuable experiences. That has bigger value than 250X250 in my humble opinion. Especially if the market cap is $100B and up. Btw, it's already happening, FB is fast growing into the sponsored content model where we're seeing news that are sponsored and those are much more expensive that than the colorful cubes on the rightrail we all know as banners. Overtime, I think the blend of revenue will change. My 2 cents. Ron - thanks again for the comment.