Ello and Consumer-Friendly Business Models

Posted on Author by Ben Thompson

Vox introduced Ello this way:

A brand-new social networking startup — Ello — has gone viral. At one point on Thursday, the site was acquiring 31,000 new users an hour — many of whom flocked to there because of a disagreement with Facebook over its policy requiring real names, which some say is unfair to LGBTQ and transgender users.

Ello might be the new Facebook or the new Twitter or the new social media flop. It’s too early to tell.

Actually, no, it’s not too early. Ello will fail, deservedly so. It has a consumer hostile business model.

Discussion of how a company makes money – its business model – is often completely divorced from discussion about the product at hand, but I think that’s a mistake; business models fundamentally impact product, if not now, then assuredly in the future. To their credit, Ello is quite up-front about the fact that many of their decisions are driven by business models, specifically, their opposition to ads. From their WTF document:

Many other social networks (like Twitter, Facebook, Tumblr, Google+, Instagram, etc. etc.) started out ad-free, then suddenly switched gears. They modified their privacy policies, started selling information about their users to data brokers, and bombarded us with ads. Many users of those networks feel betrayed.

Ello’s entire structure is based around a no-ad and no data-mining policy. Quite frankly, were we to break this commitment, we would lose most of the Ello community. Including ourselves, because we dislike ads more than almost anyone else out there. Which is why we built Ello in the first place.

OK, so how exactly will Ello make money?

Very soon we will begin offering special features to our users. If we create a special feature that you like, you can choose to pay a very small amount of money to add it to your Ello account forever. We believe that everyone is unique and that we all want and need different things from a social network. So, we are going to offer all sorts of ways for users to customize their Ello experience.

I have no idea what these features might be – a mobile app and an API would be good places to start – but the gist is clear: to get the optimal Ello experience you had better pay up, but only once, and you’ll have it forever.

This is a terrible idea.

Here’s how this policy will play out in practice:

  • The initial experience of using Ello will be a poor one because you won’t have access to all of the features
  • A poor initial experience will lead to high rates of abandonment among the few friends you manage to convince to try the service
  • You will complain to Ello and they will have exactly zero incentive to make things better

It’s this final point that is critical for me whenever I evaluate a new product or service: does the product’s business model incentivise the developer to be responsive to my needs as a user?

The way this drives my decision-making in hardware is the easiest to understand:

  • Businesses predicated on selling high margin products are highly incentivized to differentiate their products to attract my purchase, and also highly incentivized to ensure quality to guarantee that I stay loyal
  • Businesses predicated on achieving the lowest prices are highly incentivized to drive down costs, and are much more likely to sacrifice quality

Thus, I almost always buy high margin products, especially for products I use regularly. The incentives are better for me as a customer, according to the criteria that I consider important.

Things are a little more complex when it comes to software, but the same guiding principle is still in place: I like companies that are incentivized to make and keep me happy:

  • My favorite business model is a subscription: I pay every month for a piece of software or a service, which means the software or service provider is always under pressure to earn my money

  • Advertising is actually not far off from a subscription-style service: while in a very narrow view the adage “you’re the product that’s being bought and sold” is certainly true, the reality is that the Google and Facebooks of the world are arguably even more incentivized to make sure the user experience is great. After all, the value they offer has to be sufficient to overcome the negative effects of advertising (and in some case, particularly Google search, there are times when advertising is actually additive to the user experience)

  • Up-front payments can go either way:

    • I’m a fan of up-front payments if the developer has plans to release new versions of the software that require me to pay to upgrade. This sort of business is similar to high-margin hardware: not only must this developer offer something very compelling to earn my up-front payment, they must also deliver something of quality to ensure I’m willing to pay for versions two, three, and four
    • On the other hand, if the developer will never charge for upgrades, then I think this business model isn’t consumer friendly at all. A developer of such an app is incentivized to garner as many up-front payments as possible with no regard for existing customers
  • “Unlock”-type schemes are the worse. These can be products where you need to pay for features or assistance to accomplish some given task (free-to-play definitely falls in this category). Developers who use these schemes are incentivized to make the experience of their product frustrating so that I might be willing to pay to avoid the frustration. But, once I pay, there is no incentive to keep me happy

That said, my business model preference is impacted by the type of product that is being offered. For example, while I particularly like subscriptions for productivity-focused products that I use on a regular basis, games are more singular experiences that I take in at a particular moment in time; in that case I like paid downloads that let me experience the game on my own schedule. When it comes to social networks, on the other hand, advertising is clearly the best option: after all, a social network is only as good as the number of friends that are on it, and the best way to get my friends on board is to offer a kick-ass product for free. In other words, the exact opposite of the feature-limited product that Ello is proposing.

Make no mistake: I am very much aware that Facebook is tracking everything I do – and that it’s getting worse. As I wrote on Monday in my Daily Update (members-only), the killer feature of the just-relaunched Atlas is not buying ads outside of Facebook. Rather:

What Facebook is proposing with Atlas is that advertisers can connect the dots between online advertising – on Facebook or off – to actual purchases made by customers no matter where those purchases are made. This means that ads served through Atlas will, in the long run, be much more effective for marketers, even as Facebook improves their targeting which will allow them to command ever higher rates across all of their ad offerings.

Not only is that a marketer’s dream, it’s also profoundly creepy.

Here’s the thing though: the reason Facebook can pull that off is because companies like Datalogix, Epsilon, Acxiom, and Bluekai – all Facebook partners since 2013 – have been tracking what I do and buy for years. Privacy died a long time ago; pretending like Facebook killed it is naive (just ask Richard Stallman). If you truly care about privacy then don’t use the Internet, credit cards, a mobile phone, the list goes on-and-on.

If, on the other hand, you care about making a successful social network that users will find useful over the long run, then actually build something that is as good as you can possibly make it and incentivize yourself to earn and keep as many users as possible.

As for Ello, well, co-founder Paul Budnitz told Mashable:

“The advertisers are the customer and the user is the product that’s being bought and sold,” he told Mashable. “We don’t see ourselves competing with [Facebook], because what we’re doing feels so different.”

I completely agree; it feels like a political statement not a product that I – and more importantly, none of my friends – would want to use, and I’m pretty certain that Mark Zuckerberg doesn’t see them as competition either.