It’s an oft-stated reality that confluence of low cost, simplicity, and speed in developing web applications has made it easier than ever for a new competitor to launch on to the scene and grab an opportunity or fill an emerging niche.
The relatively low risks to launching a new Internet business, compared to physical ventures with higher capital requirements, also leads to exciting, experimental ventures that can afford to launch in a less-than-perfected state and then polish and revise their product as users provide real-world feedback.
But these same qualities that attract attention of aspiring startups, like honey for entrepreneurial bees, also leads to the recurring bubbles and hype that seem inextricably tied to the Internet business world.
The low up-front investment requirements and accompanying cheap maintenance costs lead to ventures with uncertain, and often completely unknown, revenue prospects. But this itself is not the problem. I won’t dispute that a business with hundreds of thousands or millions of passionate users has a realistic possibility of eventually discovering a method to monetize those customers — even if that business model is not apparent up-front.
The problem is that a profit-producing business model is not the only wrench missing from these companies’ strategic toolboxes. On the contrary, some of these ventures are so far from defensible profitability, they’re bringing a standard wrench to a metric party.
Let’s look at Slide, the social network widget company, as an example. In its fourth round of financing, they raised $50 million, valuing the company at around $550 million. They just opened an office in New York City from which to sell more advertising. If you need more background on Slide, read here.
As I said earlier, the problem for Slide isn’t necessarily that they haven’t cracked the humongous money nut that is their 170 million unique monthly viewers. Hearsay evidence says that their CPMs aren’t anything spectacular. But they will probably figure this out eventually.
The problem for Slide isn’t that they don’t already make tons of cash off their sky-high viewership numbers.
The problem for Slide is that they aren’t going to last long enough to solve the business model puzzle.
Let’s grab a few of Michael Porter’s 5 Forces out of the strategic toolbox and start wrenching on the broken machine that is Slide — let’s say, barriers to entry, threat of substitutes, and degree of rivalry, for starters.
Barriers to Entry
The barrier to entry in Slide’s industry, producing widgets for social networks, is like a speed bump in front of a monster truck. The driver might feel it, if he’s sitting just right.
Brand identity:
Almost nonexistent. No user cares who wrote the tool that allows them to chest bump their friends. They just care that they can now do it online and no longer have to risk pecular injury or social embarrassment should their super chest bump end in a super pile of flailing arms and legs.
Capital requirements:
Lunch money. It doesn’t cost anything to put your application on a social network and the network does the hosting for you. You might even have change left over for a rectangular piece of lunchroom pizza.
Threat of substitutes
Switching costs:
Again, almost nonexistent. What keeps me from uninstalling your application from my profile and never using it again? The years of experience I’ve accumulated and deep integration of my workflow with your software? Oh wait, that’s Photoshop. Nope, I can learn a new application in the time it takes to super fart on a friend.
Degree of rivalry
Product differences:
Does Slide possess a unique ability in the industry to design a widget user interface that revolutionizes the marketplace, a la the iPod in a sea of mediocre MP3 players? Nope. Their viewer advantage is due to moving first, network effects, and questionable practices in recruiting users’ friends to add an application. But now that Facebook, for example, has cracked down on runaway app invites and is redesigning the profile page layout, Slide’s previous advantages have melted away like a chocolate bar errantly placed near my laptop’s cooling fan. (I swear it’s about to burn up.)
Now Slide needs to rely on actual product development talent to provide useful, long-term solutions for their customers — not flash-in-the-pan fads, which will never scale into a large, predictable revenue stream. Investing in venture capital is already like gambling. Slide’s investors have either steel balls or empty skulls to want to scale up the risks even greater and bet big on a company, like Slide, whose fortunes ride on something as unpredictable and finicky as consumers’ flavor-of-the-week poking preference.
Not to mention that the social networks themselves can quickly duplicate Slide’s applications on a whim and erase Slide’s business model. The next day, what were the basis of an entire company are now one of a hundred features of someone else’s product.
Sliding into home (aka The Conclusion)
If you’ve made it this far, it’s should be sufficiently clear that the strategic flat tire that will drag many Web 2.0 companies off the information super highway and into the ditch of dot-com blowouts isn’t simply their lack of a business model.
The fact that companies like Slide can build huge viewership numbers isn’t a freestanding sign of success. McDonald’s gives away millions of free toys every year. But with every one, it’s selling a burger-like hockey puck or nuggets that taste like chicken. And making money off of them, too.
Right now, Slide’s products are the equivalent of Happy Meal toys I didn’t ask for. If I show up at Facebook and find a Kung Fu Panda figurine in my Inbox, I’ll probably have fun with it for a while. I might even tell my friends to get one so we can start a big plastic-throwing fight.
But just because you’re good at getting millions of people to play with your free toys for a while doesn’t mean you’re the next Google.
Slide, if you’re listening, remember this:
You need to do something unique and useful.
Uniqueness is different than novelty. Novelty wears off quickly because it’s replaced quickly. Uniqueness comes from solving a problem in a way no one else can.
Usefulness is different than full of users. Making decisions expressly to grow your viewership, when you aren’t making much money off viewers, is aiming at the wrong target. Aim to be useful, first, to just a small number of people, and your audience will grow as everyone realizes your product is indispensable.
Be unique and useful first, and eventually you will find your proverbial chicken-flavored nugget of gold.
