The Confusatory

cbowns’s tumblr.

The Audacity of Getting Paid

Too many of the biggest sites on the internet today provide “free services”: they choose not to charge their users. This is a costly mistake that we’ll see play out again and again over the next few years as these sites struggle to simultaneously pay back venture capital investments and scale their services up, up, and up.

The core of this problem is simple: companies cost money to run. People work there and demand wages, and hosting companies want dollars to keep servers running and in working order. So if you’re a company that provides a product or service to customers, and you don’t charge them for it up-front, you have two options for money:

  1. You burn VC money. Uh oh, someone’s gonna want those dollars back later!
  2. You sell your customer’s eyeballs to advertisers. Good thing that’s an effective strategy that’ll give you lots of revenue and won’t at all tarnish your brand or negatively impact the user experience, isn’t it?

Most companies choose not to fight for ad revenue, at least not at the start (but interestingly, most bloggers do). Let’s assume you chose #1, and you found someone with deep pockets to give you some money to work on it, since they think your idea is “worth something” (for suitably loose definitions of “worth” and “something”).

Now you have two problems. One, you want your product to become popular and an intricate part of at least a few peoples’ lives (a.k.a “get users”). Two, you need to “monetize” something somehow to pay back the VC money that you’re now burning (a.k.a. “pay the bills”).

For a while, VCs are ok with you concentrating on the first of those. But eventually, they’ll push harder and harder for their investment to pay out. This can happen in two ways:

  1. You discover a magical way to get a non-trivial amount of money from your customers in exchange for your product.
  2. You sell. (You whore.)

If you think you have an idea for #1, this raises two more questions:

  1. Why didn’t you do this sooner and avoid VC funding?
  2. Since you are saddled with VC funding, how will extracting dollars from your users impact new user adoption?

#2 is a very big problem. Remember that your VCs are shopping your company around behind your back: they want to get paid back for their investment. They don’t care that you could have 2 million incredibly enthusiastic, paying users. They want 10 million non-paying users (that will run as soon as a better, faster, free-er clone appears), because the slide they’ll shop you around with will read “10 million daily active users!” instead of “2 million”. “Passionate users who will literally cry over the demise of your company” isn’t a bullet point anyone cares about (which itself speaks volumes about the game you’re playing here).

If you’ve made it this far, congratulations! You’re fucked. Sell to the highest bidder (probably a shitty Silicon Valley “titan” like Google or Yahoo that’ll buy you as an “IP and talent acquisition”, then gut your company and leave your users high and dry after 12 months of empty promises). Stop reading the news for mentions of your now-fading/already-dead company. Use what little money you were paid for your piddly number of shares (you had a minority stake because the VCs took a majority stake when they gave you those dollars in the first rounds of funding) to buy yourself a drink or three. (Here, try one of these. It’ll help.)


You just read the strategy of MySpace, Friendster, Facebook, Twitter, and Tumblr. If the last three names make this seem like “the emperor has no clothes”, you’re right. Before you dismiss this as outright blasphemy, let’s look at each of them in some detail.

Facebook. Launched in 2004 by a no-name kid out of Harvard, he actually grew the company organically with angel investor cash until Silicon Valley got their hands on it. Is now the home of “500 million users”. They’re primarily ad-supported, but advertisers aren’t impressed with their performance (though it seems to be profitable for Facebook). They can’t charge for the base service: if they do, a VC-backed clone will slurp up their users by not charging for it (well, not yet) and then be in the same position five years from now. They’ve also started requiring games to use “Facebook credits” for in-game purchases (and taking a 30% cut of said credits), which may just pan out, buy they let literally billions of dollars whoosh by in the past six years by not doing this from day one.

Twitter. Launched in 2006 by ex-Odeo and ex-Blogger folks, it took VC money early and scaled up, up, and up. Doesn’t charge any users anything at all, even though lots of folks would willingly pay for added functionality. Currently attempting to monetize by selling “promoted trending topics”, and since they own the top iOS Twitter client, they’re pushing promoted topics via the “Trends Bar” (a.k.a. the Dickbar). Previous attempts to make money from “promoted tweets” have not gone well. (Twitter is estimated to make $150 million this year from ads, but they just closed a $200 million dollar round with Kleiner Perkins. “You’re going the wrong way!”)

Tumblr. Launched in 2007 and initially financed by earnings from the founders’ day jobs, it’s now also funded by VCs. Tumblr hasn’t grown quite as rapidly as Twitter or Facebook, so they haven’t publicly talked about making money as much, but they’re starting to play with the idea. Right now, they sell listings in their directory and premium themes. However, given their scaling and availability issues the past few months, it seems like they’re growing faster than they can sustain without impacting the service. Charging new users would be such an interesting way of throttling that back to something they can sustain and support, wouldn’t it?

I’ve been a member of the above three services for a combined total of 13.5 years, and have watched all three grow from small services in a corner of the internet to the front-page, well-known brands that they are today. All three have made the same tragic mistake: at no point did they say, “hey, we’ll give you (more features, fewer ads, faster service) if you give us some cash.” I would have (and still would) willingly paid a substantial sum to each.


What lessons should we be learning from this?

First, making money is easy: you must have the sheer audacity to charge for a product. Pinboard.in turned profitable in week one. Minecraft’s early sales helped bootstrap its development, and the developer has staffed up and found office space in the past six months to work on new features and new games.

Second, making money from ads is hard. The above numbers are good, but they’re from two of the biggest social networking sites in the last eight years. Most sites won’t make anywhere near that, and many more won’t even be ramen-profitable.

The third lesson is for you, the user: if you use a product and don’t pay for it, you’re living on borrowed time. The company will eventually ask you for money, sell your eyes to an ad company, or disappear. Start paying for services even when it doesn’t get you anything. The company can focus on building their product up, not monetizing it after the fact, and it’ll likely be around for more than just the few months that VCs were willing to shovel cash into the company’s basement incinerator in the name of “growth”.