Chris Anderson has kind of a kind of schizophrenic article up on free online services. On the one hand, he says this:
With physical stuff, samples must be doled out sparingly -- there are real costs to be paid. With bits, the free versions are too cheap to meter and can be spread far and wide. That's why so many people businesses (expensive!) are turning into software businesses (cheap!), which is why your cranky tax accountant has morphed into free TurboTax online, your stockbroker is now a trading Web site and your travel agent is more likely a glorified search engine.
Which is part of why so many things are freely accessible online - including our NC download. However, it's not a panacea, as Chris notes later on:
The standard business model for Web companies that don't actually have a business model is advertising. A popular service will have lots of users, and a few ads on the side will pay the bills. Two problems have emerged with that model: the price of online ads and click-through rates. Facebook is an amazingly popular service, but it also an amazingly ineffective advertising platform. Even if you could figure out what the right ad to serve next to a high-school girl's party pictures might be, she and her friends probably won't click on it. No wonder Facebook applications get less than $1 per 1,000 views (compared to around $20 on big media Web sites).
This is why the "do it all with ads" model is not an answer. It works for some entities, like Google (but note that they sell the ad service, they don't actually rely on the ads themselves) - it works less well for sites that want to fund themselves via ads. That's the ugly place that Facebook has landed in, and that Twitter is now pondering. As Chris says, the new revenue model guy at Twitter has his work cut out for him.
What this reminds me of is the experience of being a teacher. If you let the students get away with misbehavior early in the year, it's nearly impossible to enforce discipline later. If you come in with a really strict set of rules that you stick to, it's pretty simple to loosen up as the year goes by and the class settles in. To take that out to business, consumers (and business) have been trained by sites like Twitter - things are free, and they've always been free. Trying to add some kind of pay model now is really hard. I suspect that new companies starting up will have to have a paid model on day one - otherwise their users will have the same expectations that the Twitter user base does.
I think the days of "eyeballs are enough" are over. Eyeballs don't actually pay the bills.
free, business model