Underpant Gnome Business Models
From Zanecorpwiki
I don't watch much South Park, but there's an episode I did see the one in which a bunch of gnomes were stealing peoples socks and undies. When asked why, the gnomes pull out a chart that has Step 1: Collect Underpants, Step 2: ?, Step 3: Profit.
When I co-founded my first company (while the Dot Com Bubble was still going), one of the first guys I talked to compared our company to the underpants gnomes. He was right. We didn't have a clear articulation as to how our whiz-bang idea was going to translate into profit, only the belief that it would. In our case, the business model wasn't hard and we addressed the problem, but it's a conversation I remember very well.
The idea, the service, the technology, the product, eyeballs, even customers--all these things are simply the raw materials. The business model is the engine that turns these raw materials into profit. Profit isn't the only output of business, but it's what defines a business. If there's no profit, then it's a hobby or research or something, but it's not a business.
That's why when I hear Marc Andreessen say:
div class=blockquote People actually laugh about this, but it actually makes sense. If you can get to scale, you can figure out a way to build a business around it.refCharlie Rose, February 19, 2009; 2nd page of the transcript/ref /div
Eric Schmidt, CEO of Google saying, is even more candid:
div class=blockquote [Saying People on social sites aren't interested in ads and you therefore can't monetize by advertising] denies the fundamental progress of innovation. There are absolutely will be solutions for that. We just haven’t invented them yet.refCharlie Rose, March 6, 2009; 2nd page of transcript. Sorry for the large replacement, I replaced But that with a paraphrase of Charlie's prior statements which Schmidt was referring to. Compare against source for yourself./ref /div
It's underpants gnomes all over again. Who knows how it'll make money, but it's big! It's emexactly/em what people where saying in the Dot Com Bubble, and it's just as wrong now as it was then.
So we have Andreessen spouting pure bullshit about just have faith, Schmidt saying essentially the same thing, and both directly stating it's not a problem as if they were reading off the same talking points. The brevity and complete lack of any explanation makes me think that these statements are exactly what they seem: bullshit intended to cover up a real problem.
Twitter is the archtype for this new generation of underpants gnome businesses. Others lose lots of money with no clear path to profitability, but Twitter actually makes zero dollars in operational revenue by intent. So it's fitting that Evan Williams, co-founder of Twitter makes the most amazing and telling statement yet:
div class=blockquote Now there is actually an economy built into the web that is much more real [than the Dot Com Bubble] and there`s a scale that makes it -- so if something is popular... it probably won`t disappear because it can`t make any money. That doesn't really happen anymore.refCharlie Rose, February 27, 2009; 2nd page of transcript/ref /div
Huh? There's no such thing as an economy... that makes it so if something is popular... it probably won't disappear [just] because it can't make any money. Economy emmeans/em that something emwill/em disappear if it can't make money; that's what the economy emdoes/em. Business that don't make money are----by definition--failures, and a working economy kills failures.
Andreessen seems to have drunk the Kool Aid (Oh yeah!), but I wonder if Williams' addled response is because he knows what's up, but he has a front to maintain. To be fair, Williams is partially right, there is an economy that sustains failing businesses: rich people with more money than sense. But that's not a game changer, it's just PT Barnum, and eventually the suckers run out of money or get some sense knocked into them (by an economy on the skids). If that's the case, then these companies are in trouble.
That's the push back on the inanity, but to be fair there is more to Twitter/Facebook/etc. than there was to Garden.com. There's no question that big social companies are all failing right now--there cash flow is negative and they have no answer as to how to turn it around. That's the definition of failure for a business. Period.
At the same time, they have created tremendous value. There is no magical economy of faith, but investors are willing/planning to wait for perfectly mundane reasons when the pay off is potentially large enough--and despite the fact that there is no payoff in sight, the potential is still very much there which justifies further risk.
Let's review:
- Advertising isn't the universal cash cornucopia some hoped it would be.ref group=notesTwitter has more problems with ads that Facebook or YouTube would because for a number of reasons. Even if Internet ads in general pick up tremendously, I don't see how Twitter in particular could make it on ads alone./ref
- The culture demands free services, thus charging would be uncool.
- There is also the fear that charging could drive away users, which would undermine the infinite future potential which is the only thing sustaining the companies right now.
- The stated position of those in the know is that they're waiting on someone to come up with a brilliant solution, and don't worry, it'll happen any day now.
- Some (Andreessen) may believe this; for most, it's probably a self-serving delusion that forestalls a crisis of confidence. Any rational observer has to say if you don't have a magic solution by now, it's probably not forthcoming.
The weird thing is that for Twitter (not so sure about the rest) there are three really good business models which don't involve ads (which are a bad business model for many reasons). Personally, I hope Twitter lets me pay them a subscription. That makes me, the regular user, their customer which is the only way Twitter the company can or should care about users. Charging, even under a freemium model is unfortunately uncool, but I hope that change because such a perception really hurts the consumer because it means the consumer can never be a customer and forces the company into some derivative business that disconnects the service from revenue.
Another really attractive option for Twitter is to use analytics. It's the perfect platform for a new kind of marketing driven by honest to god information and consumer tracking on a large scale. Imagine tapping tweets to see what the kids are into; what's the hot new color? What video game are people excited about and why? What movie are people tweeting on? Plus, analytics are kinda cool, non-invasive, and culturally acceptable.
Finally, I love the idea of letting people charge followings. Something super low like $0.10 a month adds up if you have 1,000 followers, and as Twitter grows, I wouldn't be surprised to see the most popular have followers in the 10's or even 100K range. Plus, there's a whole range of specialized, professional services that could be broadcast over Twitter like stock tips, people interested in following research in all sorts of fields, language practice through dual language twittering designed to teach, etc. where you could charge dollars per month. Even 10s or 100s of dollars for really specialized stuff.ref group=notesInterestingly, I'd started writing this up in the morning, and later that same day the Twitter founders were on NPR talking about charge-to-follow as a possible business model. Not saying I thought of it first--obviously if they're talking about it now it's been an idea in the works for months. It's cool because it's a confirmation of an independent thought./ref
I see why it makes sense to wait if you can. I see why it makes sense to pretend that you're waiting because you want to. I see why you'd pretend you can wait forever, and Oh, BTW, don't worry because things are different. But it's still a stupid story that really fucks up the market. Twitter will be all right. Most social stuff will probably get pulled into advertising and suck. I love technology, but everything is an evolution. Bullshit about magical economies and companies too big to fail are never a good idea.ref group=notesAnd that goes for banks too. It may make sense to save a bank because you don't want it wreck the economy, but the fact that you have to save it means you fucked up big time. Anytime anyone says too big to fail it means somewhere there's a fundamental ignorance about economy--if not a malicious manipulation--that needs to be fixed./ref
References
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Notes
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