New Revenue Model for Internet businesses

In past 2 decades, Internet has changed the way companies have traditionally generated revenue. New businesses were spawned, new business models were formed and new industries were born.

Initially, corporations started selling goods online, bypassing the middlemen and reaching out to the consumers directly. Example: Amazon. This was the early wave of Internet based e-commerce.

In next phase, web advertising became the mantra for web portals. Example: Hotmail, AOL, and Yahoo. In past 15 years, Internet expanded at a very fast pace and therefore Search became the centerpiece of Advertising. And therefore Targeted Advertising became the norm. Example: Google.

In the past 7 years, Internet evolved into a more social platform. It became permeated into the daily fabric of our lives. Facebook and Twitter are experimenting into the recommendations based revenue models.

Internet became omnipresent and therefore, people started using it for entertainment. This led to the growth of Virtual Goods model. Example: Zynga. During the last decade, developing and maintaining internet products/services became more efficient and therefore Freemium and SAAS models evolved. Example: Salesforce

Since 2008, Daily Deals models evolved that connected the Social Graph with Local Commerce. Example: Groupon & LivingSocial.

Moving forward, few new revenue models are coming up. In the absence of a defined name, I would call them online-offline revenue models.

Online-Offline model:

As the name explains, this is the association of Online platforms with Offline (Local commerce) businesses. Online platforms are very scalable and therefore have lower marginal acquisition costs compared to their Offline counterparts. On the other hand, high fixed cost for Offline businesses makes them look out for alternate options to acquire new customers. This is like a marriage made-in-heaven.

In this process, the internet company generates revenue from Local businesses by acquiring customers for them. Groupon could fall into the same category but that model has its own caveats. Same could be said for Foursquare. Some companies are doing it quite effectively: Example: Redfin. Since this revenue model depends on the Offline businesses, we can expect to see specialized verticals. Example: Redfin is in the Real Estate business. Kiip is in the retail business.

There is a scope for creating more online-offline revenue models in other verticals. For example: Healthcare, or Retail. The premise of the model remains the same: Internet company acquires customers (with low acquisition cost) and generates revenue by driving them to Local commerce (offline).

Simply acquiring customers on Internet and driving them to Local businesses is not enough because switching cost for consumers is low and the barriers to entry (for new entrants) is also low (Groupon problem).  The challenge would be to create a model that can increase the switching cost as well as increase the barriers to entry for potential competitors.

Current Socialgraph has limitations

Many Internet experts are saying that  “Socialgraph” is very powerful and will be the base of a new set of innovative applications in future. My theory is that the connections on the Internet (aka Facebook) are good but they have their own limitations.

Here are 3 characteristics of Facebook stream and socialgraph as we see it today:

Not very useful: Facebook  filters (organizes) content based on Socialgraph and then puts it on stream. My personal observation is that the content that I get on Facebook stream has very little value. They are mostly “b’day wishes from friends-to-friends, photo tagging, and hilarious comments”. They are funny and good-to-have but are NOT very important.

Real-to-Virtual Mapping: Theory behind Socialgraph is that a person’s qualities (personality) can be characterized by his/her friends and their interactions. This theory is correct and works well in normal situations. However, when we talk about interactions on Facebook, 2 important things are missing: a) My friends on Facebook are NOT my “friends”. They are acquaintances. b) My interactions with them is limited to mostly 3 things as said above.

Interactions: Interactions on Facebook are mostly “positive”. In real life, we interact with positive and negative comments/behavior. Unless, we replicate “real life communication” within Social graph, it will be very difficult to deduce anything substantial out of it.

These observations point me to think that either Socialgraph is not powerful enough or Facebook is not making good use of it.

Looking at the money and resources that Facebook has, I tend to believe that they are doing their best in making SocialGraph useful. Maybe the current  Graph itself has limitations and needs to be extended.

~ ciao

Core Competency and the buzz

Every successful company has a “core competency” that gives it the assets to be unique, strong, and ahead of the curve to beat the competition. Top managers know that “Core competencies can not be copied”. But still, sometimes the buzz around CEOs creates such a big pressure that they overlook the basic rules.

Social Media is the buzzword for the past several years. With Facebook taking the Silicon Valley by storm, a lot of people have started believing that every company should either have “Social” in their products or they are out of touch.

Facebook

Core Competency: “Ability to connect users with each other in an informal way”

Twitter

Core Competency: “Ability to distribute/broadcast content/information”

Google

Core Competency: “Ability to find the meaning (context) of content/information”

Yahoo

Core Competency: “Ability to generate content/information”

All core competencies are good…but the business cycle makes importance of competencies go up and down with time. No matter what the business cycle is, the fundamental rule still holds: “Core competency can NOT be copied”. In layman’s terms: “You can not beat him in his own game”.

Let us see what these companies are doing now a days:

Facebook is pretty happy because the current buzz is “social”. They have to be careful because, with business cycle, the importance of their competency will change. Twitter also feels good, but somehow is being pulled into being “social”. Google is holding Search to its heart but is a bit disturbed by the “social” . I hope its not trying to copy Facebook’s core competency, else it will fail. Yahoo tried the “search”..and is now trying “social”..with no success.

So, what should the companies do?

Simple answer: Adhere to these 2 principles of Core Competencies:

1. Do not make a mistake and loose your own core competency. Remember, others can not beat you..but you can still loose (if you mess up).

2. Develop other (new) core competencies that are currently non-existent in the industry. Simply said: “Think beyond social”

Ciao~

After Facebook

Why do I want 400 friends in Facebook and hundreds of followers on Twitter?

Facebook wall is “cluttered” with messages that make less sense every passing day. My friends’ list contains 90% acquaintances and maybe 10% friends. The probability of me reading the content on my wall is dependent on the “quality” of the content…not the person. So, its fair to say that the quality of content is more important that the person himself/herself.

Now the question is: If content-quality is more important…then why can’t I see feed from others who are not in my “friends list” but who are still posting good quality material on Facebook. I dont care where that content comes from as long as it “connects” with me. So… what I want is the “intelligent” content that “knows” what I like.

Next question: How do we do that?

Facebook does not do that and will not do that because it goes against its core principle. Maybe I should be able to “follow” a content..or be friends with the content..rather than the person. Maybe a new company/product is required that can understand my profile and stream relevant content to me. I should have the ability to block each piece of content (or rate it). My feedback will make the system smarter. It is a circular loop.

And yes…this product should not start collecting friends. Leave that task to Facebook.

Google…are you listening?

ciao~