Hmmm. I want to agree wholeheartedly with this post from Mark Cuban on his blog yesterday but can’t go all the way there. I do agree that “free” is an unsustainable business model. Who wouldn’t? And I, too, believe free-flowing investments have created a certain addiction to hope: get eyeballs first and then hope to make money. But dooming Google to failure because they’re based on “free” contradicts an important fact: $21.8 billion in revenue and $4.2 billion in net income for the full year 2008. 97% of Google’s ’08 revenue came from advertisers.
In other words, people PAID Google $21 billion for the privilege of posting ads next to search results and other content. Google didn’t give away those placements for free. Rather, they converted a free offering (search) into a profitable revenue stream (advertising). This is not a new idea. TV networks converted a free offering (TV shows) into profitable revenue streams (advertising), too.
What we’re really talking about here is an indirect payment cycle. A bunker shot, if you will. Instead of paying the content provider (including Google) directly for what they provide (search, programming, etc.), you and I pay advertisers for their stuff (having been exposed to their ads). The advertisers, in turn, pay the content provider for the chance to advertise to us so we’ll buy more of their stuff. And so on and so on.
Google isn’t working for free. They make a valuable product and exchange the people who consume it (you and me) for cash from advertisers. Were they unable to get the cash from advertisers (or elsewhere, like directly from people who search the internet), then, yes, I’d lump them in with the many companies whose start-up money runs out before real money appears.
It’s the difference between audience and customer. Audiences may or may not pay. Customers always do. Google has customers. Lots of them. And those customers don’t get you and me for free.
Facebook has an audience. We’ll see if it gets customers.
(Here’s a link to the full post on Mr. Cuban’s blog: http://blogmaverick.com/2009/07/05/the-freemium-company-lifecycle-challenge/)