There has been a trend in recent years of companies – usually social networks – to build websites with absolutely no revenue model in the apparent hope they’ll think of one later. The most notable example is Twitter, and the most recent is Foursquare. Is this the right way to run a company? I’m merely an MBA student, but the VCs seem to think it is, or at least a few of them do, as they've allowed Twitter to run at a loss for the last four years, something normally anathema to their industry.
The reasoning for a business-without-a-business-model probably goes something like this: if we can get enough people (read: millions) to join our network, we can make money advertising to them, selling them stuff, selling their private info to marketers, or all of the above! (Or more accurately, the dot-com behemoth that buys us can do that).
Twitter finally announced their business model last April, by traditional standards rather late for a company that celebrates their 4th anniversary next month. It is based on adding sponsored links to their search results, and corporate accounts that provide deeper demographic information than is currently available. Not exactly revolutionary, but they makes sense. Both have yet to be implemented. No doubt Twitter will become profitable soon, but will it be profitable enough to make back the tens of millions invested to date, and even more: the opportunity cost? I won’t even hazard a guess.
Foursquare has one valuable and unique asset: they know what upwards of 500,000 people are doing at any given time. This is paydirt for marketers, but a privacy nightmare for Foursquare. Recent scandals at Facebook have revealed (yet again) that while people don’t mind handing over their most personal information to a social network, they are loathe to have it used for marketing purposes, even in aggregate form. Foursquare’s database could be several magnitudes greater in value than Facebook’s for one reason: they've closed the gap between Internet marketing and brick-and-mortar sales, and they’ve thrown in real-time geostats to boot. But the same thing that makes their database more valuable than the rest also makes it a privacy land mine on a scale never seen before. There may be other, safer business models for them to pursue.
Many retail companies have been essentially left out of the Internet revolution. For example, Starbucks has a website like everybody else, with product information and a small online store, but until they find out a way to sell frappuccinos online, the Internet will never be more than a toy to them. Foursquare may finally be able to change that, and to that end this year they launched a dashboard for businesses that lets retailers offer coupons, incentives and rewards to the “Mayor” of their location or anybody that "checks in." They’re not charging for it yet, but one can only presume they eventually will, just as Twitter plans to do. One app developer has even beaten them to the punch and launched a search engine for Foursquare offers that is fee-based for advertisers.
Is the business-without-a-business-model good for consumers? Almost certainly. After all, what is the downside of joining a network that all your friends are using, and is free to use? We are going to see some amazing and innovative networks appear in the next few years. But in the long run it can only work if the network survives, which means generating revenue. Otherwise they are left with a service that is no longer financially viable, and a bunch of pissed-off users. Is it a good model for businesses? That is less clear. While the Internet has a short but rich history of companies that grew wealthy running free websites with improvised business plans, their revenue model is usually advertising-based, a risky model in 2010. Only networks that bring new value to the table, like Foursquare, can justify this kind of risk.
