24 Comments

Summary:

If you can get past the salty language, David “Master of 500 Hats” McClure has a good point to make about how the future of web services is likely subscription and transaction-based, and the fact that this model favors Facebook, Google and Apple.

If you can get past the blue language (which seems to come with the territory when he’s involved) there’s a new blog post from startup investor and adviser David “Master of 500 Hats” McClure that makes a number of good points about revenue models for startups, and (among other things) comes to the conclusion that “subscriptions are the new black.” As McClure describes it, the rise of Google has meant a corresponding dominance by CPM- (cost per thousand) and more recently CPC- (cost-per-click) based advertising, which has turned startups into “a bunch of lazy, ad-happy, Web-Tards with crappy ROI.”

“Everyone seems to have assumed that since Yahoo and Google were giants in internet advertising, therefore all internet startups should be using some form of CPM or CPC ad-monetization. This is a very large lemming-like error in logic that must be corrected immediately.”

McClure says that apart from a few notable exceptions, recent startup history shows “an uninterrupted string of uninspiring business models and small-time acquisitions of Web 2.0 startups filled with rainbows & unicorns, rather than those based on simple, transactional revenue models.” And what does he see as the future? In a nutshell, subscription and transaction-based models involving e-commerce, digital goods, etc.

“Gradually we are discovering that the default revenue model on the internet should probably be the simplest one — that is: basic transactions for physical or digital goods, and recurring transactions (aka subscriptions) for repeat usage.”

One of the biggest flaws in a transaction-based model McClure notes (drawing on his past life at PayPal) is that it requires users to register and engage in other complicated tasks such as creating and remembering their passwords, which they either make too easy and/or instantly forget after signing up. And the easiest way to get around all of that is to make your service one that users come back to repeatedly and often, so that they care deeply about it and/or don’t forget their passwords and login info.

And who does this model favor based on those criteria? Services like email and social networks. As a result, McClure says, in the near future, “the default login & payment method(s) on the web will be Facebook Connect, Google Gmail, or Apple iTunes,” for the simple reason that they already have your information on file, you access their services regularly and they are interoperable with almost everything (or can be). He adds:

“Now I’m not suggesting PayPal and Amazon are going to disappear overnight — both probably have hundreds of millions of users (well, at least double-digit million *active* users anyway). And in fact, they will likely still have dominant positions in the market. But I will say this: if they rely *purely* on purchase behavior, they are fighting a losing battle against other services with more frequent usage, whose users will be more likely to remember their passwords.”

There are some obvious holes in McClure’s rosy picture of the future. He even mentions one of them, which is that Microsoft and AOL and Yahoo have repeatedly tried to construct the type of model he is describing, using their massively popular networks — instant messaging, email, etc. — as a foundation for a single login system that would connect to transactions. In Microsoft’s case, it was called Hailstorm, and it soaked up billions of dollars before being absorbed back into the Borg, never to be heard from again.

Are users likely to be any more comfortable giving Facebook or Google access to their wallets and full (i.e., bank-verified) identities now than they were with Microsoft or AOL? Have times changed enough that online transactions are seen as routine, and a single sign-in-and-pay system would be viewed as a pleasure rather than a privacy intrusion? I’m not convinced. And will companies be any happier with Facebook or Google or Apple coming between them and their customers than they were when Microsoft tried it?

McClure is right about one thing, however: Display ads and cost-per-click are a mug’s game. Companies that can perfect a subscription and transaction-based model are likely to be the mammals in the ongoing evolution of the web.

Post and thumbnail photos courtesy of Flickr user (davide)

  1. … but if you subtract the swearing, is there anything in my post left to read?

    (thanks for the shout-out mathew :)

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    1. I wish Dave’s family including his kids read his blog. Swearing would stop in a second. :-)

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    2. Well, there’s lots of sentences in all-capitals and some great font-color changes too :-)

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  2. The swearing is the frame from which Dave’s artwork is complemented. ;)

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    1. I’m just disappointed in the lack of red bold swear words, because you know he MEANS IT then. :)

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  3. It has proven difficult to monetize, and subscriptions aren’t always the solution. Stepping from a flat cost model, say selling music, to a subscription base is easier than stepping from free to a subscription base. The model exists for payments in the former.

    People tend not to pay for the intangible, and the iPod is probably the greatest token of modern consumerism available. Outside of these cohesive experiences, building the experience first — earning trust — is likely to be better received than forcing a payment mechanism down consumers’ throats.

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  4. Chetan Conikee Monday, February 1, 2010

    David McClure is the Quentin Tarantino of the investment world. :)

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  5. This is great. Matthew, you should be an option on Google Translate.

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    1. Thanks, Mark — maybe I could contract myself out :-)

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  6. McClure is right. Advertising is a stop-gap revenue model to pay the rent until paying for content and services via the web becomes easy enough to be widely accepted, and Facebook Connect is certainly an easy way to do it. So is a mobile carrier with IMS.

    I have a dream that somebody advertising will be banished to the digital ghetto.

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  7. Om and Matthew,

    I can’t believe GigaOM is filled with such pollyanas!

    Let me say, as someone often accused of using too much foul language, that you CANNOT separate the quality of a post from the bad langage. Ever. EVER.

    Much of the original reason you thought Dave’s post was a good, insightful post worth writing about was because of the purity of it – the rawness of it that comes from a lack of self-editing and self-censorship. That sort of unfiltered expression comes with a price, and that’s the language it comes wrapped in.

    However, equating the quality of the ideas with the foulness of the language – as you did in your headline – is just insulting and condescending. To your readers intelligence and to Dave’s. “Yeah, this’d be great, kid, but you need to clean up that language. What do you think this is, a brothel? Run along now.”

    Bad language can be an essential part of a good blog post. There is a vast, vast difference between:

    “… people can’t remember their fucking password.”

    and

    “… people really can’t remember their password.”

    The first expresses a sense of frustration, anger and annoyance that we all feel and can relate to. Taking out the word “fucking” is to take out the sentences fundamental expression of truth. The second sentence is debatable – “Meh, I can remember my passwords, fine.”, the first sentence is not.

    My Mom reads my posts, my kid will someday read them as well. If I swear, it’s because it’s coming from a place where that word lives that shouldn’t be filtered out or censored because some people think those particular words aren’t right or proper.

    I’ve been fighting this battle since I was the editor of my college newspaper, and my advisor’s thought a headline entitled “Add/Drop Hell” emblazoned over a picture of a long line of students trying to change classes was too risqué. Please. And now I have to read headlines like this one’s in my news reader? Come on. We all need to grow the fuck up. You have HBO, you live in the real world. Deal with it.

    Anyways, I hope you see fit not to let your prudishness get in the way of linking to and intelligently commenting on something in the future, without belittling the author’s choice of language.

    -Russ

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    1. Thanks for the comment, Russ. I’m not a prude, by any means, nor did I choose the headline in order to belittle Dave’s choice of language.

      I guess we differ on whether swearing is inseparable from the points Dave was making. Although it’s clearly an integral part of who Dave is — and I have no problem with that at all — in some cases, I think that kind of language can get in the way of a point someone is making, particularly in writing.

      Not everyone is as open-minded about that kind of language as you are, I think. That’s why I wrote the post.

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    2. thanks for the man-love, russ.

      (i’d have a Bro-mance with you any day of the week… ;)

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  8. There’s no question that Dave makes for entertaining reading and he certainly has some insights for start-ups. But can you imagine having this guy as your VC? Holy f*ckin Tourettes Batman. I pity the founders that have to open their Gmail on Monday morning to his rambling, f-bomb strewn missives.

    Dave, passion and conviction are great. But, hey, let’s face it, you’re forty years old. It’s time to grow up, focus and maybe stick with one font for an entire post.

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  9. Dave is wrong. Advertising/free will and always does win. If you can’t make money out of it that’s your problem and become an accountant or school teacher.

    See Google.

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  10. I agree with McClures assertions on the future of payments systems shifting over to the likes of Google or even Facebook. The key here is integration, just look at how Facebook Connect has evolved, you can now use that one login to comment on a variety of sites including those running IntenseDebate and Disqus. The point is that with 350 million users a move like that from Facebook would make a lot of sense.

    Google has done some of this already with Google Checkout…I’m just not sure that it has been adopted as PayPal has been. However with Google’s increasing presence in our everyday lives I wouldn’t be surprised if the use of its Checkout service becomes the norm. Google is Gmail, Mobile phones, Movie Rental Service, and soon the OS running our PC’s. How long do you think before they become the payment method of choice?

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    1. Facebook is the next MySpace. All the folks who integrate Facebook Connect on their site will regret it. It basically says this is social media and the value of that sucks. Retain control over your destiny. Don’t let Facebook shaft you like they shafted all the app developers.

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    2. and don’t forget Dave has a vested interested in Facebook. Not that he’s a brown noser.

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      1. um, i’ve never worked for Facebook directly, and i haven’t invested in them directly either.

        i have the tiniest little piece of incentive from a small amount of carry which has an indirect ownership stake in Founders Fund investment in Facebook. but since i’m not a partner & didn’t do that deal, it’s a pretty damn small amount.

        i am an investor in several startups who do rely on Facebook for features & distribution, so in that sense yes i am “vested” in their success… however to suggest that my opinion is somehow colored by financial incentive is a big stretch.

        i’m also a big fan of other platforms as well, to varying degrees so i’m not exclusively kissing facebook’s hiney…

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