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Summary:

The debate continues over which model is better for social networks: free and ad-supported or paid for by users? Dalton Caldwell says the latter and is building a paid alternative to Twitter, but VC Fred Wilson argues that free is the only model that works.

There has been an interesting debate going on over the past week or so that gets to the heart of one of the deep-seated conflicts within the web-startup community: namely, whether apps and services are better when they are free or when users pay for them. Dalton Caldwell, the founder of Imeem, kicked things off by saying he is going to try to create a for-pay version of Twitter, and others cheered him on by saying that an advertising-based approach makes a lot of services less appealing than they could be. Venture capitalist Fred Wilson of Union Square Ventures, however, argued that free and ad-supported is actually the best model for consumer services that want to achieve a broad reach. So who is right? That depends.

As my colleague Ryan Kim has explained, Caldwell’s idea of turning an existing project of his — called App.net — into a kind of paid Twitter-style network grew out of an earlier post in which the entrepreneur lamented the fact that Twitter had given up on being a kind of real-time information utility with a rich and open API and decided instead to become an advertising-supported media company (something I have argued is a double-edged sword for traditional media companies). This post got so much support, Caldwell said, that he decided to turn App.net into the kind of network he wished Twitter had become.

Are we victims of an “ad-supported monoculture”?

In his posts, Caldwell rails against what he calls the “advertising-supported monoculture” that prevails in much of Silicon Valley, where apps and services are created that see users as content rather than partners — a model that is summed up by the popular phrase “If you aren’t paying for it, then you are the product.” Massive networks like Facebook and Twitter, and Myspace before them, focused primarily on getting as much scale as possible and monetizing that user base later, and the most common method for doing so happens to be advertising. But Caldwell and his supporters argue this is bad. As he puts it:

All of these services are essentially in the same business: vying for the opportunity to sell you/your clickstream to advertisers . . . I have no interest in completely opting-out of the social web. But please, I want a real alternative to advertising hell. I would gladly pay for a service that treats me better.

Wilson, however, says that as irritating as advertising-driven services might be, a model that is free to users is the one that makes the most sense for social- and consumer-focused businesses, simply because that is the only model that is going to appeal to the greatest number of users. Although some argue this approach has so many flaws it is effectively going away — as Rags Srinivasan did in a recent GigaOM post — Wilson maintains that a free model is the only way to get the kind of network effects necessary for a large consumer business. He also argues charging users is contrary to the rationale behind such services, since the content being monetized is coming from those same users. As he puts it:

When scale matters, when network effects matter, when your users are creating the content and the value, free is the business model of choice. And I don’t think anything has changed to make that less true today. If anything, it is more true.

In a recent response to Fred’s post, Caldwell says the Union Square VC misunderstood his point. The point wasn’t that some web services couldn’t be free, argues Caldwell, but instead that large-scale platforms of the kind that Twitter and Facebook have built — which connect users together and also allow outside developers to add value through APIs — are better when they are paid for, because then they don’t have to worry about locking down their APIs (as Twitter has gotten criticism for doing) or controlling the experience in order to monetize it. The money comes from developers and users who contribute to the network, and they are the only customers who matter. Says Caldwell:

Web2.0 built a lot of really cool, shiny things, but the foundational aspects of them are built on what I am arguing is a flawed premise. I am not simply criticizing, I am saying we can do better.

Would users be better off, or just developers?

So would the App.net model, in which users would pay $50 per year for an account — money that would be shared with developers who built on the API, as Caldwell described in his latest post — be better than the way Twitter functions right now? As far as I can tell, that depends a lot on which vantage point you are looking at it from.

If you are a user, the main concern (I think) would be not just what kinds of cool apps you could use but also whether the rest of your social graph was using it. I have argued in the past that this built-in network effect is one of the biggest weapons Twitter has, as it is for Facebook and any other large-scale social service. Of course, App.net could integrate its network with Twitter’s, so that messages would flow through from one to the other (as they do from similar alternatives such as Identi.ca), but then all Twitter would have to do is kill its access to the API, the same way it did with a project launched by Bill Gross’s UberMedia.

The ones who would stand to benefit the most from Caldwell’s proposal are the developers and startups who currently feel like Twitter is beating up on them by restricting what they can and can’t do with the API. On a service like App.net, they would be co-owners in a sense, and therefore they would theoretically get treated more fairly. But even if they do get treated more fairly, the question of how broad such a network can get is still relevant to them. Who wants to be an equal partner in a business that has a tiny fraction of the number of users it could have?

I applaud Caldwell’s attempt to create an alternative model for a social network, and I think it will be interesting to watch and see how far it gets. But I think in the long run Wilson is more likely to be right: If users are supplying the majority of your content, it seems churlish at best to charge them for the privilege of doing so, and that seems to leave advertising as the only viable business model for such networks (although others continue to disagree).

Post and thumbnail images courtesy of Flickr users Quazie and Rosaura Ochoa

  1. Ouriel OHAYON Sunday, July 22, 2012

    Twitter in paid version? > Yammer. no? [yes ok...enterprise.. but already there..]

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  2. William Mougayar Sunday, July 22, 2012

    At the end of the day, I think each company will need to innovate on their own. Freemium is just an approach, not a solution. Lots of innovation lies in its interpretation.

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  3. Abdallah Al-Hakim Sunday, July 22, 2012

    I tend to agree with Fred Wilson’s point of view because any paid network will never achieve the scale that a free networks such as Twitter or Facebook or LinkedIn have achieved. The one point worth mentioning is that the advertising model itself is being challenged as mobile trend continues to accelerate. Interestingly enough, Twitter seems to benefit the most of mobile advertising (thus far) because of the relative non-intrusive nature of the advertisement. However, Facebook and even still twitter will need to innovate beyond a traditional advertising to cope with the mobile use. As William Mougayar mentioned, there is still a lot of room for innovation in that space. Finally, it has been shown through LinkedIn model that building a premium paid service on top of the freemium model does work. I would like to see both facebook and twitter incorporate premium accounts once they figure out the benefits it would offer their users.

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  4. Twitter is becoming paid..I think it’s not right.

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  5. Paul Martin Sunday, July 22, 2012

    I have just watched yet another British Bank ad for paid non-savings accounts (current accounts in UK terms). Most (all ?) Brits do not pay for having their money stored in a vault which they can access through ATMs, various money transfer techniques …. The Banks want to change the culture of free and by offering such as travel insurance (plus other forgettable goodies) are trying to entice people to pay for the service. Santander(UK) and Co-Op bank without blood on their hands are at the vanguard of this approach whereas Halifax are doing the opposite and want to give you money as an enticement to bring you back to them. Thus there would appear to be a diversity of approaches in this marketplace and indeed more entrants all the time (one every few weeks or so – if you include credit unions). As I see it the key issue is staff churn – there is always someone new serving at my small local branch whereas at John Lewis, my other lunchtime haunt, the same old faces entice me to buy the latest somethingorother. As an avid coffee drinker it is interesting to compare the staff approach when there is a paid service and it imho seems to be as much determined by decor but this theory is maybe for another compensation model.

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  6. Ah, “paid” won’t work because it won’t create scale, which is what you need for–um, advertising?

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  7. Advertising as the only CURRENT viable business model but they’ll be something else or an innovation/hybrid form.

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  8. Advertising is the only current business model? Really? Scaling? Let me see, I develop an app or website that really has NO value to me other than become a ‘pacifier” for me while babysitting my kids @ the park, sitting in a rest., on the bus etc..I download it once, try it, NEVER use it again, yet in the IT world I’m now called a ‘user’ of this service…the equiv. of calling me a “khardasian’ watcher just because I clicked through the program once..

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  9. Trace Cohen Monday, July 23, 2012

    Would you pay for Facebook? How about Gmail or Pinterest?

    When you pay for something you set a level of expectation that needs to be met or exceeded. Ad-supported definitely has it’s benefits for companies but then you need to figure out how to build a business around it or raises enough money that it doesn’t matter.

    We pay for bottled water though so this wouldn’t be asking for to much much.

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  10. From a user’s perspective, all advertising is not bad. Refined targeted ads are welcome as long as they are non intrusive. i bet 95% of the audience out SV thinks this way. Now how do you make them pay in the app.net model?

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