Posts Tagged software revenue models

My New Old-Fashioned Company — Part 2: Bride of Frankenstein

bride_of_frankenstein_3Before I comment further on old and new revenue models, I should do a reality check: is it reasonable to charge money for a useful product or service? Is it reasonable to charge money for a car, a cheeseburger, or a plane ticket? Sure it is, provided the value of the product or service is commensurate with its price.

So why should software be the sole exception? It costs money to make and maintain and support and promote software. It costs money for servers to host Software-as-a-Service. The developers who write the software may extol the virtues of open architecture, but I have yet to meet one who doesn’t expect their paycheck on time.

Somewhere in time, money for software became a bad thing – probably about the time Google happened and advertising was burdened with paying the tab for everything. Microsoft didn’t help matters by premium-pricing its products, regardless of whether or not they had been battle-tested before being released to the public.

Google changed much more than revenue models. Now, the goal of many businesses is no longer to make a profit. The goal is to sell the business to Google. Take the examples of Twitter and Facebook. Twitter’s founders have been riding a public relations tsunami recently, presumably to pump up the purchase price to Google. On a recent Colbert Report, Twitter founder Biz Stone was asked by Stephen Colbert how Twitter planned to make a profit, comparing the business to failed .bombs like pets.com. Biz replied that they were “experimenting” with revenue models and that they had “patient investors.” Sure they do, as the goal does not appear to have been to build a viable standalone business, but instead to offer the potential to drive enough additional traffic to Google to justify the additional ad revenue required to justify Twitter’s purchase price. This is all well and good for Twitter’s investors, provided that Google buys the company at or near the asking price. If they don’t, those “experiments” in revenue had better yield something other than Bride of Frankenstein. Personally, I would dismiss any Google-centric business plan as too risky, and I think that it’s way too late to experiment with revenue models after the business is well underway. Call me old-fashioned, but I think entrepreneurs need to have a very clear idea how they’re going to make money before they launch the business.

Facebook is another aspect of current conventional wisdom in Silicon Valley. Fortune recently reported that Facebook grossed $280 million in 2008, yet has yet to make a cent of profit. Even more troubling was the blasé attitude exhibited by their CFO and investors in response to this situation. One VC I spoke with recently said Fortune’s reported revenue number was on the low side – perhaps by as much as $70 million. Whether the number is $280M or $350M, how on Earth does Facebook not make a profit? Their users create all the content on Facebook – they even make their own advertising! Granted, Facebook requires a lot of horsepower to drive the service, but what do they need all those people for? This is an example of a typical Silicon Valley affliction: waste. The bloated payrolls, the game rooms, the gelato machines, the massage therapy, and on and on. And everyone spends an hour or more in their car on highway 101 to get to and from a bricks & mortar office building, even though nothing is manufactured inside, with the possible exceptions of frozen yogurt and coffee. It is the “nature abhors a vacuum” business model – consume every cent of potential profit with as much waste as possible in the shortest period of time. There is nothing particularly challenging about spending money rapidly. My goal is different – I want to get as close as possible to a $1 billion business with a headcount of one – now that’s a challenge!

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My New Old-Fashioned Company — Part 1: Time Tunnel

timetunnel4“Where do you get off charging $19.95 for your product?!?!” demanded the VC. I was stunned. I had never met this man, and wouldn’t have known his name if not for his DEMO ’09 name badge. Yet here he was, in my face, insisting to know how I could, God-forbid, charge money for my software product.

“I’m not looking for venture money,” I replied.

The VC dropped his jaw and lurched back, as though he’d been sucker-punched. He’d probably used this crap intimidation tactic before to blindside unsuspecting and hungry young entrepreneurs. Maybe it had delivered the intended pantsload effect for him in the past.

Not this time. I was neither young, nor hungry. And even if I was, well, this guy was just plain rude.

Realizing there was neither an opportunity to invest nor terrorize an entrepreneur, the VC quickly found his own exit strategy, grunted, and walked off. In the span of 30 seconds, I had managed to violate not one, but two fundamental tenets of Silicon Valley business: 1) never charge money for your software product, and 2) never offend a VC.

I should preface what comes next by saying that I’ve been away from the industry a long time. I started on the hardware side of the technology street in the 1980’s with a start-up business that made Motorola 68000 co-processors for the Apple II and IBM PC computers. It was like sticking a Pratt & Whitney jet engine inside a Volkswagen Beatle and, as it turns out, about as useful. I was fresh out of school and, like many fresh grads, was convinced that I knew more than everyone about everything. My first business pummeled my youthful hubris and boosted my common sense. Luckily, I managed to sell the business and escape with my skin mostly intact. Afterwards, my career took an unexpected 20+ year turn into information technology. After I sold my most recent venture, WebFeat, I found that I really sucked at retirement and needed to get busy with another venture. My new product, gwabbit, inserted me back, front-and-center into mainstream Silicon Valley. I was both anxious and excited about returning to the world of consumer hi-tech. When I had last worked here, it was a thrilling time, the zenith of the Comdex era of computers. Now Comdex is lost in time, like some unimportant geological strata. So too appear to be many of the business fundamentals I have taken for granted over the years. Reawakening now in the 21st century has given me an opportunity to actually think about every aspect of technology business, no matter how rote they may have been only a year ago.

Take profit, for example. My odd encounter with the VC was not my only looking-glass experience regarding my desire to, God-forbid, charge money for my product. Numerous reporters and analysts remarked about the novelty of my revenue model, as though it were a curious artifact found in some archeological dig. I think the reality is more akin to litmus than carbon 14, as gwabbit’s traditional pricing model offers an acid test of the current software industry’s revenue models as compared with reality (or sanity).

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