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Oct. 1, 2014, 9:43 a.m.
Business Models
LINK: stratechery.com  ➚   |   Posted by: Joshua Benton   |   October 1, 2014

Ello is the new anti-Facebook social network du jour (remember Crabgrass? Diaspora?) that’s attracting attention for its strong stance against advertising and advertising-related data harvesting as a business model. Will it actually be a success? Ben Thompson says no and, in the process of explaining his argument for why not, outlines some Business Model 101 that also applies to news and news-y startups:

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

News companies are, generally speaking, both blessed and cursed with the first two models Thompson outlines — blessed because of the promise of ongoing revenue and an alignment of incentives between user and producer; cursed because it means that, unlike most other people playing in the modern app economy, they have to keep earning users’ business every day, with all the cost structure issues that implies.

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