Subtract the Swearing and Dave McClure Has a Point

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)

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