Subscriptions are the New BLACK. (+ why Facebook, Google, & Apple will own your wallet by 2015)

I'm on a redeye to NYC, supposed to be working on a presentation i'm giving in a few hours... but fuck it, i can't get this outta my head, so here we go.

(note: extremely raw, uneven, long, 1st draft publish & shoot; will revise l8r) 

ASSERTION #1: The default startup business model from 2000-2009 was based on growth (aka acquisition) and CPM- or CPC-advertising 

Over the past 10 years, we have seen a massive shift in advertising from CPM to CPC-based advertising.  This basically started happening when the 2000-2001 dotcom implosion blew the market cap of Yahoo to smithereens, and display advertising went into the shitter.  Altho CPM subsequently recovered, Google's IPO and the gradual emergence of CPC as a higher-quality advertising medium has been the dominant story of the first half of the last decade.  There's still a lot of page views and CPM advertising out there -- and YouTube & Facebook are making sure that doesn't change -- but as we VCs like to say:
    "at the end of the day, Yahoo is now Google's bitch".

Let me say that again with emphasis so you don't miss it. 

Google's ABSOLUTE FRIGGIN' SEARCH DOMINANCE has made CPC advertising the defacto monetization standard for the web.

Google is now making a ridiculous amount of samoleons: $2.5B free cash flow last qtr, or roughly $10B a year (a billion here, a biilion there, pretty soon that's cash-money, G...) -- and appears likely to continue doing so for the foreseeable future.  Although Microsoft, Apple, Ebay, & Amazon are all minting money too there's no question Google is an unassailable Internet JUGGERNAUT, at least in Search.

But what has all this Don't-Be-Evil-AdWords-Click-Happiness done to the internet & startup ecosystem?

It's made us a bunch of lazy, ad-happy, Web-Tards with crappy ROI. 

So crappy in fact, we should be ashamed to call ourselves entrepreneurs & venture "capitalists". Why, Schumpeter is probably rolling over in his grave at how little Creative Destruction we have rained down upon crotchety incumbents.  It's a goddamn travesty that some aspiring startup or greedy hedge fund hasn't pummelled Yahoo and eBay into a hostile takeover by now, and Microsoft has made itself almost irrelevant in the consumer internet space -- helloooo Mr. Ballmer? please tell me how you own hundreds of millions of users and more than half the browser market and you HAVE NO VISIBLE 3rd-party distribution or monetization strategy? -- Srsly, we have monkeys driving some of the biggest trains on the Internet at the moment.  

Lead, Follow, or Get Out of the Fucking Way.

And while there's been something of a Startup Renaissance going on since around 2004, all these little web 2.0 wannabees have spent an inordinate amount of our attention on ad-driven business models resulting in a big steaming 2-Founders-1-Cup of FAIL.  Everyone seems to have assumed that since Yahoo and Google were giants in internet advertising, therefore all internet startups should be using some form of CPM or CPC ad-monetization.

THIS IS A VERY LARGE LEMMING-LIKE ERROR IN LOGIC THAT MUST BE CORRECTED IMMEDIATELY. 

We have largely WASTED an entire web decade of time, energy & venture capital on extremely inefficient revenue models.  There have been a few interesting examples of startups acquired in the 00's for large amounts due to amazing growth (eGroups, MySpace, Skype, YouTube) or advertising potential (aQuantive, DoubleClick, AdMob, RightMedia).  However, mostly the decade has been an uninterrupted string of uninspiring business models and small-time acquisitions of Web 2.0 startups filled with rainbows & unicorns, rather than those based on simple, transactional revenue models.

ATTENTION u ASSHATs on Sand Hill Road & u HIPPY-DIPPY Startups in SOMA -- This Shit Stops NOW.

[fast forward to Twenty-Ten & the Soul of a New Machine: Subscriptions.]

ASSERTION #2: The default startup business model for 2010 & beyond will be subscriptions and transactions (e-commerce, digital goods).

Newsflash folks: The Internet does NOT want to be FREE... It wants to GET PAID on Fucking Friday, just like everybody else on the damn planet.

Yes there is a role for Freemium, but unless you missed the TPS report the FREE part is only a loss-leader for the MEE-YUM part -- it's a test-drive before you buy something. If your users are just kicking the tires then you need to kick them to the curb eventually (unless of course they are your viral bee-yotches, in which case it's ok to have a few invitation whores as freeriders).

Free is not Forever, unless you never want to be in control of your own fate.

Gradually we are discovering that the default revenue model on the internet should probably be the simplest one -- that is: basic transactions for physical or digital goods, and recurring transactions (aka subscriptions) for repeat usage.

Let me say that one more time so you don't miss it.

Get Dem Bitches to *PAY* You, G.

Ok, so there's only one problem with this.  It's called the Penny Gap.

Surprise, surprise... most people don't like to pay you squat unless they have no other choice.  And aside from the user's disinclination to pull out their wallet, there's also the problem of wallet friction itself -- payment conversion is shitty for many reasons other than just price.  Mainly it's because we can't remember our password.  I'll repeat that about a million times in this post so you don't forget.

WE. CAN'T. REMEMBER. PASSWORDS.

This is incredibly important, and i'll explain why in just a little bit... but now, let's talk a brief walk down Memory Lane past my old workplace, PayPal.

Password Friction: Where's the Login K-Y Jelly?

Here's one of the not-so-flattering secrets of the PayPal Mafia you've probably never heard: The far-and-away #1 customer service problem -- and cost -- at PayPal was something called "forgotten password recovery".  That's a nice way to say that people can't remember their fucking password. 

It's the biggest goddamn problem on the Internet, but at PayPal we made it even worse by tying a payment instrument to the process, and then locking out the payment instrument if they couldn't remember their password. What a Brilliant idea!  Let's see.... why don't we fuck over all of our n00b, first-use customers by forcing them to create an account they have no significant motivation to maintain yet, and then hope they don't give us a fake email address or fail to remember that password the next time they drop by... which might be 1, 3 or 6 months later.  Bingo, way to create the biggest HateStorm in Internet History: make it super simple for people to make their payment method unusable by simply forgetting their password.  Oh and i forgot to tell you we occasionally froze their account so they couldn't get access to their money.  That was a real winner too.

PayPal was one of the classic stories of viral growth, however in this instance we also experienced viral growth in customer service: at one point more than 2 in 3 employees worked in customer service.  And i'm guessing somewhere between 10-20% of first-time customers never used the service again, primarily because they forgot their password.

Look, no online service is perfect and there are often good reasons why account recovery shouldn't be too easy -- sometimes it's not YOU who wants to get access.  But Password Friction at PayPal led to an unfortunate series of events which caused some signicant percentage of our users to HATE us with a PASSION that is usually reserved for politicians and lawyers.  Since i was often on the front-lines running our PayPal Developer Network, i got to hear first-hand from Merchants and Developers about how this password friction caused problems with payment, and with user frustration.  I got to know the folks in customer service pretty well, and i used to do my best to resolve some of our users pain.

So why am i bringing up all this bullshit now?

Well because as we transition to a Startup Ecosystem driven by direct payment & subscription business models, i want to make it clear how IMPORTANT it is to make sure users don't forget their passwords.  If they forget their password, and/or can't recover it, then guess what MoFo -- YOU DON'T GET PAID.

Which means you don't get Laid, you don't get Acquired, and you sure as friggin' hell don't get to Go IPO.

So listen up & i'll share a little secret with you -- there is one very simple way to avoid forgotten passwords.  Basically, it's this:

Make a Frequent-Use Product.

That's it, you say? 

Yeah, that's it Sherlock.  Make a brain-dead simple, frequent-use product.  If users login a lot, then they don't forget their password.

Now think about that for a second...what services have users login a lot?
1) Social Networks
2) Email & IM
3) Games, Music, & Entertainment sites

Which leads me to my 3rd & final observation.

ASSERTION #3: In 2015 the default login & payment method(s) on the web will be Facebook Connect, Google Gmail, or Apple iTunes.

Now i'm not suggesting PayPal and Amazon are going to disappear overnight -- both probably have hundreds of millions of users (well, at least double-digit million *active* users anyway).  And in fact, they will likely still have dominant positions in the market.  But i will say this: if they rely *purely* on purchase behavior, they are fighting a losing battle against other services with more frequent usage, whose users will be more likely to remember their passwords.  Like a Darwinian evolutionary experiment, only the fittest passwords survive -- and in this case, the fittest passwords will be the ones used most often.  That is, the ones we use for core services like email, IM, games, music, videos.  And guess what?  Most of those services happen on social networks like Facebook, which currently has over 400M users and is growing like crazy internationally.

Well at this point i hope you've pieced it all together.  The key to success -- one might even say DOMINANCE -- in payment systems is to begin with the foundation of frequent-use products, so that users won't forget their passwords.  Whether intentional or not, Facebook has played this game to perfection.  Not too far behind is Apple with iTunes, iPhone, and other related frequent-use media & entertainment products, and an App Store that people use regularly.  And even Google has a shot here, with both Gmail and YouTube as two very large, frequent-use products, along with the upcoming Android platform.  Twitter is probably a dark-horse here, but if user #'s continue to improve they could also have a shot. And i'd also keep an eye on Skype too, which still has a lot of frequent users and value.

Bringing up the rear pathetically here are Yahoo, Microsoft, and AOL.  All 3 of these services have hundreds of millions of users (via email & IM alone, not to mention other services), and yet they haven't figured it out.  Yahoo had previously developed a payment product called PayDirect, but shut it down in 2004.  FAIL.  Microsoft had the right vision with HailStorm, but their UX was absolutely friggin' terrible (see Password Friction again), and they didn't stick with it.  AOL similarly has been shedding users for a decade, and never realized how valuable their original email user base could be.  It's unbelievable to me none of these Internet Giants has figured out what is going on.  They have neither acquired nor merged in a payment service (Amazon, eBay) nor have they acquired a large social network.  Unless MSFT develops Xbox into a widespread payment system, or acquires eBay (for PayPal), Amazon, or Facebook i just don't see them climbing back into the ring.  All of those deals would be very difficult and unlikely, even for MSFT.

So that's it folks, i'm spent.  This has been a complete ramble and i don't have time to edit this shit, so i'm leaving it as it is.  Sorry for all the swearing and uneven pace, but hopefully some of you will take away something useful.

Comments

[Chuck]

Nice one Dave. The plethora of F-Bombs in the post alone is worth the read.

I agree on several levels. First, a lot of the founders of startups in the last decade were not true entrepreneurs. They were just hype machines running to stake claim to some idea and get the most attention. What's the point of a business without a business model. You are just sucking in your own toxic fumes of bullshit, hoping a larger company will come along and take a pull. Take the % of times that happened and multiple it by the % of acquired business model-less startups that actually succeeded post acquisition. It's a small number and market cap.

If you have a good product or service, people are willing to pay for it. But it has to be better than the free crap out there. As long as people are ok with making free crap, this problem will perpetuate.

Here's the other point regarding payment. Paying through a service that you have "credit" with is not only easier, but you naturally spend more freely. Think about it. There is a negative psychological effect that happens each time you confirm a total cost, your billing address and you pull out that credit card to enter in the numbers. It hurts a little bit each time.

Now think about your experience buying something from iTunes or Amazon (if your credit card is saved). It's so much easier and you feel less pain in the commitment of the cost. At least until your monthly statement shows up.

This is the next shift in payment since we moved from cash to credit cards. Instead of handing over a certain sum of the total cash in your wallet, you just swiped a card and went about your way.

I guess it's time to apply for that digital Facebook Amex card.

[Kidehen]

Dave,

A very insightful post.

Re. Assertion #3, it isn't going to be Facebook, Google, GMAIL, or Apple Itunes, its going to be a WebID. Yes, an ID owned by you without the PKI complexity of yore re. generation and management.

Basically, we are looking at what I call the "The Magic of You!" . Not only will you own your own Identity, you will make money from the granularity and quality of the Linked Data meshes exposed via your WebID.

Take a deep breadth here, really, this isn't hyperbole, its just about a Web and this burgeoning aspect known as the Web of Linked Data.

In the future you activity will be oriented towards adding granularity and quality to your profile. I say this because: the granularity of your profile will be inextricably bound to quality and quantity of vendors that will seek to ride your Linked Data highway. Basically, bye-bye worthless surveys and focus groups, and hello to the real deal i.e., your world view described and maintained by you, on your data access terms.

Facebook, Google, Yahoo! et al, haven't be able to crack:

1. Personalization without wondering across lines of personal privacy (cookies don't cut it!)

2. Disambiguation of data (think: "Tiger Who?" vs "Tiger What?") across any kind of data set (small or large)

3. Esoteric Find -- by this I mean: find me a Camcorder vendor within a N km radius of my currently location where I can obtain Camera with a specific features such as a : Zoom Length to Body Weight ratio <= X .

Some Links:

1. http://itc.conversationsnetwork.org/shows/detail4233.html -- Podcast interview with Jon Udell about self indexing via structured profiles courtesy of RDFa
2. http://bit.ly/26tZud -- Numerati & Magic of You

3. http://delicious.com/kidehen/linked_data_demo -- Live Demos (note the iPhone demo re. Finding Stuff around you via Linked Data rather than select services as you see today re. Web 2.0 )

4. http://www.youtube.com/watch?v=CRbdeNMPCug -- FOAF+SSL based WedID demo

5. http://www.youtube.com/watch?v=YkzghnkuOzA -- disambiguated search (Precision Find Demo)

Kingsley

[Techne.wordpress.com]

ASSERTION #3: In 2015 the default login & payment method(s) on the web will be ... no passwords at all. Not for login and especially not for payment. Using Facebook Connect, Google Gmail, or Apple iTunes as the "new portal" is an extension of an old technology model. The next step is to do away with passwords that as a methodology are inherently insecure for good and use a security method adequate for digital information transaction and payment. Why should I remember obscure codes when a computer is much better at doing that type of task?

[Claire Jarrett]

Hehe. Makes great reading. I combat the problem of forgotten passwords with Roboform but yes, how are internet newbs supposed to manage this?

Totally agree we are starting to see quite how powerful Facebook is becoming, they have it totally right. Having to eat my words as it bored me silly a year ago.

[Dave]

I totally agree with @RichStaats, unedited rants rule.

[Grant Schultz]

Real businesses need real revenue...right away.

Onboard with everything Dave. We're past the pretty unicorn phase with the web, and into breeding healthy racehorses.

[Takara in Tokyo]

Love the candor, "Get Dem Bitches to Pay you G!" Ha! Priceless!

[TSwoopes]

Absolutely love the candor and great advice! Ha! "Get them Snitches to *Pay* you G!" Priceless...

[StatSheet]

This doesn't have to be an either/or question. My company, StatSheet, uses both Free and Subscription.

I wrote bout this in a recent blog post:
http://statsheet.com/blog/a-new-kind-of-freemium-give-away-the-whole-sell-the-pieces

[Liubinskas]

On the money again Dave. We've been telling companies we work with that aiming for subscription to start with generally means that you'll create something worth paying for. If you aim for free then often it's only just better than not worth much.

For our companies, subscription also means;
You're more focused.
You find people who really want it.
You only get people who care about you enough to pay, no tire kickers.

Lots of overlap with your notes and the comments so feels good.

Cheers

Mick Liubinskas

[Social Gold]

I can't agree more, Dave. At Social Gold, we enable single touch purchases for repeat users, and users never have to login into an alternate account.

It is especially effective for a rapidly growing online identity such as Facebook -- we've seen both revenue lift for merchants, and better experience for users.

[Ash]

Great post Dave. Interesting rant. Your point about frequent use products was noted. Great point.

[pearl]

Do you HAVE to swear so much?

[Joe Pemberton]

I was going to write how you don't get it: how if Facebook charges admission people will flock to the FreeBook, or UnicornBook or whatever.

But if Facebook leaves the front door free, and simply adds merchant's access to users and becomes the payment middleman, they've got pure gold. Now Facebook just has to figure out how not to alienate everybody in the process; something they're pretty good at.

[Steely_glint]

I'm sorry but what part of that is a revelation ? Skype, the telcos and even the ringtone boys have known all of that for years. It's just the web that got all hung up not understanding the difference between the two meanings of free. If only Berners-Lee had spoken Dutch!

[Aumg]

To follow-up on your ad-based and freemium models, these need to be enhancements to the business model, not the focus of it. In other words, the subscription (revenue generating piece) of the business model needs to be done first, then once you have users you can use the other two models to enhance the revenue streams.

Advertising example: once I know who my users are and understand the demographics, I can market my service to advertisers who are willing to pay top dollar to access these eyeballs.

Freemium example: Once I have subscribers and understand the features that are valuable, I can create a freemium model without those features to offer to people knowing that they will want to upgrade to the feature rich version. To your point, freemium is way misunderstood. People do it the other way around, going free first and then trying to figure out what features people are paying for.

BTW, outstanding post. It's also generating considerable noise on other blogs, so thanks for initiating the conversation.

[Account Deleted]

Absolutely agree with the point on frequent use! In a subscription/transaction world, we are the government and all activity is good activity if we get our tax dollars.
I'd like to build something where people were free to do their own transactions, on a peer to peer basis. You don't need to control all of the transactions, just the ones that add or remove from the 'pond'. I hope that will be the Facebook model, but I suspect not.

[Lars Tong Strömberg]

Great write-up and indeed passwords are tricky to keep track on. Maybe Facebook, Google and Apple indeed are the only real competitors here, but I still hope OpenID could compete.

Any comments to that (especially since PayPal joined a year ago)?

http://www.readwriteweb.com/archives/paypal_joins_openid_foundation.php

[WebGuru]

Dave, landed on your page from one of twitter followed. Well said, the Internet might be invented to be free access of information, but the person behind some internet service was not intended to be free. Internet is another vehicle of service-money exchange.

As you said, easier-to-use is the key of loyalty therefore moneymaking for internet star-ups.

[Zavee]

Agree, and certainly hope you are right. The revenue model for Zavee, our social shopping startup, is to charge member merchants a fee for each transaction made through the program. We don't charge consumers or non-profits.

We looked at the advertising model and quickly decided to pass.

[PayCheckr]

Offering users "many ways to pay" - including cash and non-cash alternative payments - will ease the transition. Call it "conditioned access." See the model at http://www.PayCheckr.com

[Tim Bourquin - MemberCon.com]

I would also add that the subscription and membership area that will grow the fastest is those sites owned by small businesses and individuals. That's because niche is what sells and the big media companies aren't interested in niche.

But for a small business or individual, a membership site focusing on a niche topic can be a great revenue source.

[Account Deleted]

Nice rant. On a more serious note, I am not sure that this is more than a personal pattern, but I am more than willing to pay for content when this content somehow complements another physical device (e.g. Kindle - Books, iPod - iTunes, iPhone - Apps). In essence, the new monetizeable media comes with its own medium, and the keys to monetization are seamless payment for users and the right security and incentive structure for content providers. Otherwise, if the medium is simply the same old browser and internet, it's difficult to imagine having attractive enough content to make subscriptions work.

[Pricing]

RE: Assertion #1 and #2

A particular segment seems to relate to you quite well, so I am glad you finally are saying what others have said for quite some time now.

Your post is a perfect example of getting messaging right for different audiences. Your message is nothing new, but your style resonates with an audience that will benefit from that underlying message. For that, thanks.

RE: Assertion #3

Interesting thoughts on where this is going and why. It could happen much earlier and your post could wake some up to new thinking and accelerated next steps in this area.

[Robin Ong]

I totally agree with you. To me, it's all part of life and evolution. If an object gets too much attention and users start to get more reliant on it, this object tends to come alive. As we pour more attention on to it, the life force in it tends to get stronger!
Let's not forget, Google was once a saviour to the netizens when Microsoft was getting to strong for our comfort. As with all natural order in life, a new force will surely emerge when the big G started to evolve from big brother to Godfather. Just relax!!

[SteveWilhelm]

I can think of a couple of poster children for the subscription-based business model: Smugmug, 37signals, GitHub, DropBox, SurveyMonkey, and BackBlaze. I subscribe (or have subscribed) to all of these services.

I just started using Heroku today, they just might join the list.

[Prokofy Neva]

Welcome aboard the virtuality cluetrain.

Job one is to bat away all your silly geek friends who think web 2.0 has to be only about paying FOR THEM and their widgets and consulting, and not getting CONTENT CREATORS AND USERS PAID TOO. And that does involve subscription fees an micropayments -- gasp. You didn't have the balls to write that, now, did you, because you couldn't stand the h8 from all your homeboys on the twitters if you endorsed the evil dreaded silo micropayments that "can't work".

More and more, we will pull the cold, dead hands of the geek class off the Internet, with their "California business" model that involves liberating property subject only to DMCA takedown notices filed by laywers *after* the face, and getting THEMSELVES paid for coding endlessly, and see that there is a normal, everyday, virtual commodities based economy to be had, and normal every day fees for services to be paid and enjoyed by all kinds of levels of users.

However, you have little credibility in having this epiphany, and you have not taken it nearly far enough.

http://secondthoughts.typepad.com/second_thoughts/2010/02/asshat-master-tries-to-tell-us-wattup.html

[Gordon]

Nice long rant ... ;-)

Subscriptions to a single newspaper will not work - the web strength lies in numbers. Why pay for 1 newspaper subscription when you have all the web reporting from everywhere?

IMO, in this decade we will see the following :

- Newspapers paying bloggers from everywhere.
- Newspapers charging google for news
- Google/FB charging CPC for news we read

Everybody gains ... that is the future economic model.

[Jeff_dickey]

@Morgan Schweers - your observation made the whole screaming frat-boy rant worth enduring. Business is like anything else in our claim-to-model-natural-processes invented economy: it either grows or it dies. To grow requires customers - satisfied, evangelical customers who do your sales job for you. To keep customers happy, no matter how good your product/service is, needs several-sigma-better-than-average customer service. There are very, very few people who can provide that kind of service without burning out, and far, far fewer who don't natively speak the customers' languages.

I remember how, back in the '70s and '80s, Japanese companies wanting to enter the American market opened offices and plants in the US, sent many of their best and brightest to lead and work in them, and made it a point to hire most of the people - at most levels - from the local area. Result? Happy American customers who kept buying more and more Japanese goods. Just ask Sony, Toyota, and dozens others.

Now, American companies have this idea that if the outsource everything to India or China or Southeast Uzbekiswhere?!?istan, they can save a few bucks, pay most of those bucks to their top executives and raise the dividend a penny or two. Then they wonder why their customers hate them. They're suffering from the same myopia that totalitarian political regimes suffer from: if the leaders had to put up with what the average subject goes through every single day, then they'd work hard to make life better for everybody. They don't, and neither do these CEOs of antinational (né 'multinational') corporations, who in fact have allegiance to no country but themselves.

The sad part is that we as a species have put up with all this for this long — and those who benefit from the current system shout and use ALL CAPS and bluster to cow us into continuing to put up with this, to think that there is no choice.

"If you refuse to choose, you have in fact made your choice."

[Ishermandom]

Wow, I am finding it hard to disagree more. Sure, subscription services and micro-payments are appropriate for some services; but a good targeted advertising system will continue to be more appropriate for most services. The cost of digital distribution is cheap enough to where the number of users who will frequent your free, ad-supported website will outweigh the lower revenue per user. Honestly, how many of your favorite websites would you still visit if they transitioned to a payment-based model (even if there weren't equally good free alternatives)?

As to the forgotten password problem: what we need is a good identity management solution that does not require users to remember lots of different passwords; not a bunch of websites squabbling to keep users coming back all the time.

[passerby]

Assertion 3 has a basic flaw. People hardly type in their passwords in social network sites or even email. They make use of browser tools to remember passwords. In fact I dont remember password of my facebook or linkedin, but I use them daily.

online banking and maybe paypal are the only places where people try to remember passwords.

[Buildaroo]

Morgan,

You make a good point. Customer service really doesn't scale and it must be such a cultural shock when web companies realize just how many people they need to hire to provide their customer base with 'good customer service'. A few programmers can program and maintain a service for millions of people, yet you may need hundreds or thousands of people to handle customer support.

My friends at google basically told me that this lack of scalability and the sheer cost (and probably the impact on their earnings and therefore their stock price) was what dissuades their management from actually addressing the problem.

But it's really just the cost of doing business. You can't offer consumers products without providing support. And I don't agree that it is impossible to provide good customer service at scale. Companies like Apple and Microsoft both seem to have figured out how to provide decent customer service. (At tremendous expense I'm sure.) But I also think that google/paypal/facebook should at least staff a hotline, even a $25 per incident hotline like Microsoft used to have, so that there is SOMEONE available.

It would also be easy and cheap for these companies to do things like have someone available on Twitter monitoring a support account. (like comcast does with @comcastcares) or to man a chat room like what Slicehost used to do. These things are so simple.

The fact that they don't do even these simple things indicates to me that these companies really don't care about their customers. They're actually contemptuous of them as an unfortunate consequence of their elitist programmer cultures. This attitude may not hurt the companies as long as they have what amounts to monopoly positions in the marketplace, but once there is another option, people will jump ship.

[Mark MacLeod]

Dave,

Your career in international diplomacy would be short-lived, but as usual you kill it. Revenue is sexy. Bring it!

Mark

[Raleigh]

THANK YOU.

I do not want more accounts. I must have hundreds of dead ones. I just want to use your frickin service, and I'm happy to pay, internets. Just don't make me create another account.

I have a Google Account. That is my master control center. That is me. Let me use that.

I want your service, I will gladly let you debit my checkout or pp...just dont make my come up with another username and password to use your service.

Smarten up internets. 1000X, pretty please, it is so bloody obvious.

THIS IS WHY YOU DONT GET PAID. YOU MAKE IT TOO HARD.

[Aaron Zitzer]

Insightful and very entertaining read, thanks. Assume you saw the iPad announcement slide that showed how Apple is tracking success - it's not about UVs or PVs it's the number of users' credit cards that they have.

[Rohi81]

A very good post minus the language :). A good wake up call for all companies, don't completely agree about dominant payment systems in 2015

[Mikewhitehouse1]

This is absolutely splendid!

[Vincent Lubbe]

Since I am on a rant: Interestingly FB becomes a primary bearer of our trust (compared to banks in earlier days, credit card companies etc.).

1. We entrust FB with the most precious we have - in this case our social capital.

2. We entrust FB with our financial capital on a transactional basis (ecommerce).

3. We might even entrust FB in future with hoarding capital (AUM: some kind of virtual credit/currency/goods - you might even need insurance for that ;-).

Other capital:

Whom do we entrust with our health (All these apps measuring this and helping us track and influence our behavior?)

Whom do we entrust with our "cultural & intellectual capital"? Until now we use google as a search/find and ultimately decision making machine?

[Meanfrisbee]

Thanks Dave for opening my eyes. I'm going for the money because I want to build a product that is worth it.

[Vincent Lubbe]

Right on!

1. Social networks will drive transactions through activities -> ecommerce in a big way.

FB will become a leader in transactions linking my activities to payments (they should work on their "event" module though, it is horrible, but vital for transactions!) I wonder what will happen to plancast, oona, eventbrite, amiando etc.

Referral traffic from facebook to USA today and other sites already surpasses google referrals!

2. I can't afford anymore to be ostracized by FB - the demand being a "member" should be relatively inelastic to price. And that helps determining a better margin (ask Buffett and Munger about doing this for See's Candies and other portfolio companies of Berkshire).

So why don't these social communities charge me yet for all that functionality -> probably still growing a lot = too early.

FB has an advantage, since it owns not only you, but your network of people. And that is what every sales person knows: if you own the relationship, you own the client.

[Dmitry]

i like how you write. and totally agree that the ads is crap. i run the most popular online travel guide to russia among other businesses and with google ads we'd only make 10% of what we are making now through direct agreements with only a couple of providers who pay us commission on every purchase made through the site.

[twitter.com/mikecane]

>>>That's a nice way to say that people can't remember their fucking password.

Jesus Christ. It's about time SOMEONE said this. I've been screaming it for over a year to every little twat who wants me to fucking reg just to leave a COMMENT.

YOU have Twitter signin here and that let me leave this.

I don't understand why you leave Twitter out of the ID game, though. I'm one of many people who can't stand Facebook but do use Twitter.

However, it really was a masterstroke for you to include iTunes. I never made that connection before and it is really, really, REALLY foresight on your part. It now makes me rethink *why* Steve Jobs mentioned holding 125 MILLION credit card accounts. I could see him stating that from a money/power angle -- but as a Universal Payment ID system too? Wow. That is just MASSIVE.

And it also paves the way for Apple doing what I insist they will do: make iTunes a *platform*.

The Apple Merchant Platform. And you just put in that missing link: *one iTunes ID to use ANY store on that platform.*

Brilliant!

[Gladrobot]

I just thought it would be helpful to add links to some wordpress plugins for susbscription software.

wp-member.com/
http://www.amember.com/p/
http://member.wishlistproducts.com/

[Maya Grinberg]

Absolutely agreed with you most majorly (not-a-word, btw, but I'll pretend) on the forgetting of passwords. I absolutely hate having to deal with my corporate card expenses through the Amex website because I can never, ever remember the password b/c of their whack password rules. And that's just one account!

Loved the post, even with the colorful language. You should write a book. I'd read it.

[Joel Andren]

I completely agree with your assertion about the diminishing impact of the advertising model and think that web startups will need to get paid in one of two ways.

1) Via subscription. I agree that this is the direction we may see, but I don't see this happening in the immediate future. Very few consumer sites are delivering the value that customers are willing to pay for. Perhaps this will change with ease of payment methods (a la iPhone/iTunes) and logins, but I think there may be another route most startups take...

2) B2C site with a B2B revenue model. Open Table, Yelp, Mint, etc. show the path here. They aggregate information and provide a service to consumers but are essentially underwritten by business partners. I think a majority of web startups may go in this direction in the interim before subscription models are baked out.

[Mike V]

Personal wireless fingerprint readers are the answer. Consumer biometrics are long overdue, but pretty much inevitable.

Soon enough, the swipe of your finger will be the authentication for all your devices, all your purchases, all your bank accounts, and yes, all your web logins.

Whoever breaks into the market with these the fastest and cheapest, and with solid security will rule digital payments, at least until a distributed mesh payment standard takes over.

Banks and credit card companies have all the incentive to mass produce these and give them away like candy, but they may be too slow, or too dumb to do it.

Apple is in a really good position to embed these into iPhone's and break into the market fast, I'm kind of surprised they haven't yet.

Google is in a decent position to make this happen on Android phones by providing software support, payments platform, and retroactive subsidy for the cost of the readers.

[Cheryllmorris]

An interesting read having spent some time on the research side of the payments industry... Definitely have not thought so practically about passwords as a deterrent to alternative payment adoption, so this was a new take from the PayPal trenches. Per online payment behaviors, the surveys I read or conducted all showed security concerns were the biggest inhibitor/barrier for alternative online payment providers... That's arguably why Yodlee failed doing what Mint ended up succeeding in doing – Not enough consumers trusted Yodlee at the time to give them their BoA login credentials. That was a couple years ago, though, when mobile banking was revolutionary. It truly amazes me how much things have changed in the payment space since then, particularly with regard to security concerns. Never would anyone have expected blippy to pop up 3 years ago.

I would not count out Google, however. I’ve always been fascinated w/ payment at the intersection of the physical & virtual world; so, I'm interested in what Google will do to onboard and create a powerful merchant ecosystem (must remember there's 2 sides to any payment system's success): Registered merchants on google maps + location based services + payment (pre-order, pre-pay, real-time couponing, etc.) is a powerful mashup. After all, only 4% of all retail $-volume happens online. I like to think that the 4% will start to eat away at more of physical retail sales bc of the virtual/physical types of mashups -- but agree that subscriptions will help drive up the ecommerce piece of the pie -- especially if media distribution and consumption behaviors change. But that may prove to be a big assumption to make. It's too early to tell, I think.

[Net]

Dave - you cracked me up! I LOVE your language. Let us all leave this PC BS that seems to be the lingo here in the Valley behind us together with the CPM model.

[Dana Oshiro]

I agree Dave. We've already seen enough high traffic music sites fail due to the cost of licensing fees and operations against a freemium model.

[Coreyward]

Well said, cyberfox.

Also, buildaroo, note that you're NOT the average consumer. Visa/MC still have a massive lead on AMEX because most people will take a heavy helping of shit before calling it quits. I don't like it and I don't agree with the logic, but it's reality and that's just how it works.

[Cyberfox]

Greetings,
@Buildaroo - Maybe you missed the part about 2/3 of PayPal employees being customer service? The customer service folks were not idiots, but (as far as I know) for financial reasons they had clear instructions that preventing fraud was more important than making users happy. If it was your account someone was trying to steal from, I think you'd prefer that choice also.

The Paypal payment service was definitely not buggy. What you describe is semi-automated fraud management.

The fraud management was aggressive, but that's partly because the fraudsters were VERY aggressive. One of the first things eBay did when buying Paypal was to consciously accept a higher fraud rate, in exchange for a less aggressive fraud-protection program.

Still, the underlying issue is not one I entirely disagree with.

What I'm saying is that good customer support IS important. However at scale (eg. 30 million customers or more) it's not just 'hire non-idiots'.

What would it take for YOU to do customer support? I'm not sure there's an amount you could pay ME, unless my primary occupation disappeared. Strip out the people who can do other tasks for more money (or less, but they don't have to get screamed at several times a day as part of their job!) and you're left with people who either don't want to be doing it (most) or are REALLY into customer service. The latter are diamonds and, like diamonds, RARE.

Customer support just doesn't scale. So any company whose core product DOES scale successfully is going to run into a customer support wall that they're going to have to figure out how to solve.

Also, the higher touch your business, the less it scales successfully as far as I can tell.

/ramble

-- Morgan Schweers

[Jonathan Brill]

Time for a reality check. Whether it's Fremium, CPM, CPC or subscription, there's a MUCH deeper problem.

Independent of the opinions of investors and producers, most content, including subscription content has never been worth paying for. Even in print's hay day, consumer subscriptions barely paid for the print production and mailing. Advertising revenues paid for the content production. Less advertisers = Less content.

While pure subscription consumer content is a great concept, it's REALLY hard find successful mass consumption models.

It's much more realistic to find symbiotic relationships where the aggregator, advertiser and content provider combine to make something that is both convenient and worth paying for.

At their core, isn't this why Gmail, Amazon, Craigslist, eBay, Facebook and, yes, even itunes are so damned sticky...and profitable?

[Buildaroo]

Interesting analysis.

It will be interesting to see the role that good customer service will play in the upcoming payment wars that you're describing. The top web companies like Google, Facebook, eBay and PayPal all seem to struggle to even provide decent customer service. Yet older companies like Apple and Microsoft focus more on customer support. It's VERY expensive to have a skilled and friendly support staff, and I think that web companies think that there's some algorithm that will eliminate the need for human support. However, the lack of investment by Google, Paypal and Facebook in customer support has already given them all a HORRIBLE reputation in that department, so it's already unlikely that consumers would want to fully trust them with any significant monetary transactions. The only way that I would trust any of them is if the transaction is backed by my credit card company. (And out of credit card companies I only trust American Express because of their amazing customer service.)

Companies should have learned from the mistakes that Paypal made in their automation. Paypal combined their innovative but aggressive fraud management algorithms with poor customer service, zero accountability and transparency to even important customers and a buggy payment service.

It's one thing to mess up a $5 transaction, and it's quite another to have a $5,000 transaction 'locked' up by Google or Paypal.

It seems that rather than learn from Paypal's mistakes, Google took it to the next level with their idiotic Google Checkout system. Their algorithms simply reject payments completely with zero transparency and there isn't ANYONE (even an moron) to call.

Can't wait to see how Facebook's amazing payment system takes shape. I bet that their algorithms will be better than Google and Paypal's, but they will still refuse to hire a decent customer support staff.

I guess when web companies offer customers what seems to be a 'free' service, customers should expect to be treated like dirt.

I would advise web companies who want to get into payments to learn customer service from American Express and learn what not to do by observing from Paypal and Google.

[Cyberfox]

Greetings,
Excellent article! One can only hope you're right. On the flip side, then there'll probably be a business opportunity in aggregating your subscriptions so you pay a single service provider, and they farm out your payments to everybody else and you have a single place to manage all your paid subscriptions. :)

One of the great things about the Rails ecosystem is that 37signals has been preaching this screed for a WHILE now, and have been making inroads into how people think. I think it's accepted wisdom in the Rails community that 'ask the users to pay' is the way to go.

You're touching on the downside of making a business where the users don't pay for it; they (37signals) talk about the upside, eg. the need for revenue focuses the mind on making a great product.

There are some great companies out there working on making it easy to get subscription right, like Spreedly (no affiliation, I just like them).

I'm really hoping Paypal makes subscription payments easier someday; it's a royal bear to set them up without a full-on $30/mo. Payments Pro account. Of course if I was still there, I'd fix that, but...I'd also be a screaming lunatic, after all the eBay crap. :)

Glad to see you're still kicking ass!

-- Morgan Schweers

[jme]

Oh yeah, this most refreshing post is destined to catalyze a lot of interesting chatter and discussion over the next few days. A nice punch-through to release the angst and murmuring out there.
Rant-like, sure, but sometimes it takes a rant.

Well done!

[Jeff_weitzel]

An observation: wallet friction is a big problem for micro-payments, but it may not be a big problem for subscriptions because the conversion only needs to happen once.

On balance, though, this is a tour-de-force, and maybe you should always blog on airplanes at 3am. Your main point is dead on. If the whole economy is moving online, it is just plain delusional to imagine that the ad supported business model is the only business model.

The challenge, I think, is that creating services and content that blow through that penny gap will require an entirely different kind of ingenuity than that which the denizens of the start-up community have been cultivating these last fifteen years. A blockbuster subscription business comes up with something people CANNOT LIVE WITHOUT, would kill their grandmother to get, like it was heroin. Inevitably, a really successful such business will provide this fix to maybe 10 million people. The business that can provide the nicotine for 100 million people will be a big deal indeed, but there can't possibly be more than half a dozen such universally undeniable needs in the marketplace, so most subscription businesses will be much smaller, serving specialized niches. Leaving out the handfull of giga-successes, the most badass subscription businesses will do maybe a billion a year in revenue.

So THAT's the challenge. Provide something that ten million people would spend a billion dollars a year to have. If you can do that, you're not going to be losing many conversions to forgotten passwords.

[Louisgray]

I agree on a few fronts:

1) I will always pay for quality. I have ZERO problem paying a subscription fee to Netflix and TiVo and Sirius radio, because they deliver valuable content. I am happy to pay for premium access to other products.

2) I am dead tired of untargeted, ridiculous CPM ads. I can't remember the last time an ad on Facebook was relevant to me.

I am encouraging those Web services I advise to find a way to deliver premium value and set up subscription models. Ads need to go away.

[Matt Gratt]

Completely awesome. TenCent is a company a lot of people don't know about, but they've gotten to be the size of Amazon by selling virtual goods in Asia.

Also, "ATTENTION u ASSHATs on Sand Hill Road & u HIPPY-DIPPY Startups in SOMA -- This Shit Stops NOW." might be my favorite line in a blog post ever.

[Recurly]

If startups learned to charge earlier than later, they'd build a better service... and they'd discover the winning product earlier. I've been down the freemium road before. The free users became the pretty girl; they'd ask for new features and we would add them hoping they'd choose us and eventually enter a credit card number. Inevitably, they were a big distraction from building a product with higher margins and lower support costs. Focusing on conversion rates and monetizing those users earlier than later makes building a better product a no-brainer. Then, it's just about marketing the product once the fit is right.

Isaac

[Norbert Mayer-Wittmann]

nice!

:) nmw

[Kathy Sierra]

DHH's video presentation for start-ups on the value of subscription convinced me, intellectually, and I've been thinking about it ever since. This post punched through to the core.

And as a tasty side-benefit, this post is also a visceral example of powerful content:

* Say something "surprising yet self-evident" (--quote from filmmaker Walter Murch)

* Be ridiculously relevant and practical

* Blog like your hair's on fire

(Putting the "me" and "yum" in freemium. Hmmm. I might just have to try this.)

[RichStaats]

well, im officially a fan. sometimes unedited rants are the best vehicle for great copy.

[Tonykarrer]

Certainly subscription models are great. But they can be really tough to make happen. That Penny Gap exists in all kinds of places. I think that we got the conversion from free to paid just about right for eHarmony, but a lot of businesses can't dangle matches to get people across the threshold.

My bigger concern is around Oauth and payment solutions. You may be right that in the long run we'll see dominance by a few specific single sign-on providers, but I'm pretty sure that right now a lot (most) startups shouldn't be relying on them.

I recently wrote about this in my post: When to Use Facebook Connect – Twitter Oauth – Google Friend Connect for Authentication?

http://socalcto.blogspot.com/2010/01/when-to-use-facebook-connect-twitter.html

Love to hear your thoughts on this as I'm not sure these issues go away. And FB Connect's retention policies make it problematic to use.

[Jasonmmurphy]

I enjoyed the owning my wallet piece, particularly the part regarding PayPal. I worked alongside PayPal in 2006 when my company helped them launch PayPal Mobile and Text2Buy. I think they were partially looking for mobile phone authentication to replace the email component because most folks don't give out fake cell #'s.

IMHO, my wallet will go to the company with the strongest form of authentication. I say this because simple is good but secure is better. And at the end of the day banks don't like CNP (card not present) transactions as much as card present.

So, I thhink it is eminent that we will see a service that blends a service like twitter with a payment method like paypal or Obopay.

Been wondering why a payment service like PayPal has not a made a play at a SNS yet???

[Kris]

B R I L L I A N T!

Thanks for writing this up, Dave.

I wrote a system for podcast subscription for my own show and launched it nearly 4 weeks ago. I expected about 10 users to pay up at varying levels. We're well over 100 and nearing $7,000 in annual recurring revenue. Not huge numbers but no promotion yet.

Users are ready to begin paying for what they consume.

BTW, subscription model is best thing I ever did. I makes me feel even closer to the listeners that used to get the shows for free. Now I actually want to give good customer support.

[Bruce Christensen]

Dave,
I had to cover my ears a couple of times and now I am washing the mental image of the "2-Founders-1-Cup" link out of my head.
But, I agree 100% that we and the Internet do NOT want to be FREE.

E-commerce will pay the bills for social media once we learn how products can add to the conversation.

I have been attempting to tell this story, but my voice is relatively small...
Thanks for shouting this message so loudly..!!

[RickWaghorn]

V interesting re the death of PPC... we do three-clicks and PPW.

People 'get' that.

We also do PayPal; gues no-one's perfect.

http://rickwaghorn.co.uk/2009/09/30/part-of-an-answer-for-me-is-something-simple-rewarding-and-available-in-three-clicks-part-of-every-answer-however-will-be-collaboration-between-big-media-and-small/

[nazila alasti]

Yep! Agree completely.That is why we turned on subscr. on Jooners.com 6 months ago.

2 additions:

1) Frequent use depends on customer demographics. So my 10 yr old and her iTouch makes our household freq user of iTunes. For now. But my mom-self is a frequent user of Amazon. Y! is asleep at the wheel. But I would add Amazon to your list of iTunes, Google and FB.

2) The web/social networks are moving towards more "doing" as opposed to connecting or entertainment. By doing I mean, accomplishing something (example: writing a blog is doing, reading it, is entertainment). When you are engaged in "doing", you don't want pageviews, you want to get "done". So the ad model is a non-starter. But...if you get something "done" really well for someone, then they are willing to pay for it. So yes, the more doing happens, the more subscriptions/payments are needed.

Nazila Alasti
CEO/Founder Jooners.com

[Richarddjordan]

Another great post Dave. Table scraps from Google Ads isn't the way to grow a billion dollar business and it needs calling out more often.

Totally stealing the line: "the FREE part is only a loss-leader for the MEE-YUM part"

[Tim Van Loan]

Free is definitely the new black when it comes to monetizing web services. Free only gets you so far, and ad's aren't going to pay the bills consistently. What we've seen is more and more developers realizing that in order to pay the bills, a recurring revenue stream is the way to go.

The thing to remember- and you make it as subtle as a punch in the face :) - is you've got to figure out how you're going to make money. Freemium isn't a cure-all answer, and if you're going the subscription route, you're going to need to do some work to figure out how to best sell your service to people who don't want to part with their pennies. We had a recent blog post on planning a freemium pay model that speaks to this.

The second problem of course is, how is a web service going to actually deploy subscriptions? Building a subscription system from scratch is a serious pain in the ass plus it's a massive time sink- pulling you away from doing important things like actually engineering your core product that people will pay for. It's why we created Recurly which makes deploying subscription billing super quick and easy.

It's going to be an exciting next couple of years, and we're looking forward to helping a lot of companies make that transition from a CPC model to a more sustainable subscription model.

[Joan Lockwood]

Hi Dave,
Take a look at www.Stardoll.com, a freemium model, but 1 in 3 subscribe to get the benefits of paid monthly subscription. Virtual economy whereby users purchase Stardollers to shop at StarPlaza for garments, makeup and housewares. Includes real designers and virtual. About to hit the 50M user mark. ping me if you want more information on them. They bought Piczo.com, where I was Int'l Mkt. - Joan

[Bernardlunn]

Dave, knocked it out of the park, I was nodding so hard in agreement I thought my head was going to fall off. The insight takeaway for me was not that subs & trans will beat ads in this decade (that's been my tune for a while) it is that making a frequent use service is key to the password problem. BTW, my default log-in these days is Twitter but that's just 'cos I am determined to be the last soul in 6 billion NOT using Facebook - its just my ornery nature. Bernard

[E14n]

I buy paper newspapers and subscribe to Safari Library, but I think moving to a subscription model is going to be a lot harder for many media sources.

Part of the problem is that most subscription models don't accurately reflect the value to users.

Take newspapers as an example, too much of the content is filler or poorly researched. You can get this sort of information as easily from free sources.

The other issue is failing to accurately value back catalog. Accept for a few researchers, newspaper back catalog holds very little value. It is most speculation about future events we now have a better source of information about.

If you take this into account what can a most online media sources reasonably charge without spending significantly more on developing there content.

I subscribe to Safari library because I get the subscription worth of value out of their catalog. I couldn't justify paying nearly as much for any online newspaper I have seen.

[Keith bohanna]

Crackin rant! Good to see this variant on your usual 2 themes, kinda bored with those ;)

back to basics here together with some interesting crystalballing around signup domination. We had avoided FB Connect so far with http://www.dbtwang.com as giving away that part of the user experience to FB (who can and do change stuff regularly to suit themselves) appeared too risky.

Must reassess.

Keith

[Biggiesu]

Holy 2 girls 1 cup reference! Dave, you've outdone yourself again! What you lack in font colors this time you've more than made up for in colorful content. LMAO!

Oh, colors aside, totally agree. The first decade of the 2000's were spent on maturing the technology stack so that tech co's could worry about building sites and not infrastructure crap. These next few years will be maturing of the "interface stack" so that we don't have to worry about building logins and credentials and payments and certs and secure credit card data storage and crap, but just worry about building a freakin usable site, with big ass butt(ons) ;)