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Summary:

Mark Cuban, owner of the Dallas Mavericks and cofounder of HDNet, offers running commentary on Blog Maverick. This post, which follows an ea…

Mark Cuban
photo: AP Photo/Dan Steinberg

Mark Cuban, owner of the Dallas Mavericks and cofounder of HDNet, offers running commentary on Blog Maverick. This post, which follows an earlier look at Free versus Freely Distributed, is published here with his permission.

The problem with companies who have built their business around free is that it is far from free to remain successful.

The more success you have in delivering free, the more expensive it is to stay at the top. The more success you have, the more important it is to management to remain successful. The more important remaining successful is to management, the more money they will spend, the more chances they will take, the more infrastructure they will build, the more people they will hire. All of the things that will prevent them from staying lean, mean and flexible. All of the things that distract them from innovating within their core competency.

Let’s look at the rule that eventually KILLS all freemium-based content plays:

There will always be a company that replaces you. At some point your BlackSwan competitor will appear and they will kick your ass. Their product will be better or more interesting or just better marketed than yours, and it also will be free. They will be Facebook to your MySpace, or MySpace to your Friendster or Google (NSDQ: GOOG) to your Yahoo (NSDQ: YHOO). You get the point. Someone out there with a better idea will raise a bunch of money, give it away for free, build scale and charge less to reach the audience. Or will be differentiated enough, and important enough to the audience to maybe even charge more. Who knows. But they will kick your ass and you will be in trouble.

For Google, who lives and dies by free, we don’t know who their BlackSwan company will be. But we all know it will happen don

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  1. I think the next big thing is a fusion between news, social networking and citizen media/blogging

  2. Justin Credible Monday, July 6, 2009

    This goes back to business 101, get a business plan before you start a business. For years it has been acceptable for internet companies to launch and grow without a way to make money(Could you imagine a retailer whos' plan is to give out merchandise to build traffic to the store and then come up with a way to make money?). The industry is built on pure speculation. It's sad because you will have your Googles and Ebays get lucky(make loads of money eventually after years of being in the red) then you will see a flood of engineers startup the next big thing and suck venture capitalist funds dry. Before you write one lick of code, develop a business model that is not advertising based, you know the whole "the site will become popular and I will charge people to advertise." Expand your creativity beyond the end product and into the business model. It would also help if the giants(Microsoft and Google) quit overvaluing sites in order to out bid each other. People start to think their video sharing site which costs them lots of money to operate will be worth 1.7 billion in the long run. How is that idea panning out?

  3. Wow. A rather myopic view from Mr. Cuban. I guess Mark doesn't believe in building companies, just selling them for profit — "when you see your BlackSwan company appear and you know they will kick your ass, rather than ramping up to try to compete, get out. Sell. Or maximize cash and pay your shareholders every penny you have."

    Yikes.

    I think Mark circles the way to combat the "Black Swan" but doesn't quite hit it (which is not to combat the Swan at all, but to adapt to neutralize its impact and repercussions — refer back to Taleb).

    Instead of the full-frontal arms race and corporate bloat that typifies a #1 free co, entrepreneurs should build sustainable businesses, and keep them fast and lean, and make them profitable from the get go. Yes, corporate execs and the bigco masses that follow them tend to make counterintuitive decisions in their scramble to keep their jobs and show forward progress. But that tendency can be avoided if the people running the companies think more like soccer (small gains, keep pressure, create opportunities, rely on speed, adaptability and creativity) and less like American football. CEO's, boards and INVESTORS should ease-up on the non-sensical "headline" metrics and constant pressure to linearly increase numbers, and instead take a more holistic approach to building companies with strong foundations and solid fundamentals. Sure, at the end of the game the score may be 3-1 and not 21-7, but a win is a win and counting by 7 can get you in trouble.

    Oh, and if soccer's too "foreign," basketball is a decent analog as well Mark.

  4. Michael Altschul Monday, July 6, 2009

    I (along with posters on Cuban's blog) agree with @jordan that this view is incredibly myopic. The blog is worth a visit, especially for Fred Wilson (a leading freemium thinker)'s strong case that paid makes companies more vulnerable than free:
    http://blogmaverick.com/2009/07/05/the-freemium-company-lifecycle-challenge/#comment-65442

  5. Christopher Levy Tuesday, July 7, 2009

    Mark has always been completely full of himself/shit.
    He sold a dog company to Yahoo who lost BILLIONS on it.

    However, I have to say, Mark makes some very valid points here that echo my thoughts in this space over the last 2 years.

    Free=Dead.

  6. Christopher Levy Tuesday, July 7, 2009

    I should add here, Mark's company, Broadcast.com, was offering content for FREE until Yahoo showed up and wanted to monetize it.

  7. scrilla_gorilla Tuesday, July 7, 2009

    "He sold a dog company to Yahoo who lost BILLIONS on it." I think that only supports his point. Yahoo! lost billions on it. Cuban _made_ billions on it. So who is full of it?

    I agree with everything Cuban said, except I disagree on Google to some degree. Google has demonstrated that it is far from a one-trick pony. While they still depend on search ads for much of their revenue, the Google innovation machine has been moving aggressively and successfully into other spaces. This flies under the radar because, unlike a company like Apple which is front-heavy on promotion, Google's MO is to release new products under the radar, perfect them, and let word-of-mouth take care of crushing the competition.

  8. Free is Good Tuesday, July 7, 2009

    Mr. Cuban, simplifies it too much. In the case of search, Yahoo chose to ignore search's monetization potential in favor of the portal and media strategy. Google provided a better mouse-trap and understood that search could be a powerful revenue generator and subsequently capitalized on it.

    In the case of MySpace, the seeds of its demise were sown at its conception. MySpace was not truly a place for friends. It was more of a "night club" where you could meet anyone, be anyone and of course, be "hit on" through spams and predation, by anyone. Upon News Corp's acquisition, the focus shifted to creating a music and media portal to monetize the traffic. On the other hand, Facebook chose to be a place where connections are real. Facebook continued to innovate but concentrated on what attracted users in the first place – a place for friends.

    If there's a lesson here, it is not so much that you will die from "free" but rather that "free" is a powerful marketing tool and the lost leader of choice of the internet. Free is good. The real lesson is that narrow and deep is the way to sustain your business. Do one (maybe two) things really, really well and you will outpace your competition.

    Now, I've just oversimplified it.

  9. There are two different versions of "free" discussed.

    The version of "free" I'm hearing in the comments regards no-cost consumption by a consumer base. I do not believe this "free" is under debate. This type of "free" can be subsidized by advertising, underwriting, selling collected personal data, etc.

    The "free" I believe is the subject matter is the socialist web business model. These are socialist web service with the goal of amassing hundreds of millions of people and figure out how to market or sell to them after the fact.

    Mark Cuban points are valid – these type of serviced zero-summed themselves to commodity upon launch. People will only see these socialist web services as commodity and will run to the next commodity because it all free.

    Free is only good when it is a stepping stone (Napster) and you have real skills to get to the next level. It is not good when the people and the service is a one-trick pony.

  10. Michael Altschul Tuesday, July 7, 2009

    @ed dunn: Cuban certainly does not differentiate; in fact, he specifically calls out the freemium model. And his examples include Facebook and MySpace, which reap significant revenues via ad, sponsorship, partnership, etc. And I would offer that the money backing the "socialist" model you mention has the intent to monetize before, not "after the fact." Their strategy is typically to gain market share via first mover advantage, with phased roll-out of the monetization strategy. Many startups begin this way. Even Bing was ad-free during the first ~week of release.

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