The monetisation (revenue model) of user generated content?
October 12th, 2006
Let’s face it shall we - no one creates something and then gives it away for free, expecting no return. I mean, as much as we’d like to do stuff and give it away for free, in the interests of making the world a better place, the unfortunate reality is that we all have to earn our crust somehow, and if we throw our eggs into the user generated content basket, then you have to ask what the hell your revenue model is going to be?
For the uninitiated, user generated content (UGC for short) is basically where instead of creating valuable content yourself and then letting people read/consume it, you rely on your users to create that content for you. Two notable examples that have recently been acquired for absolutely stupendous amounts of money are MySpace and YouTube.
OK, so where do you start?
Adsense - let’s just throw this out the window straight away - you can’t start and build a business from advertising revenue that relies on people clicking little text based adverts on your website. At least, you would have to be insane to do that.
Advertising - sounds like a good option. But to make that work, you have to do advertising deals or have an advertising network at the ready that will provide you with contextual advertising that still gives you a good enough cut, and/or you have to have so much traffic that your advertisers would be stupid not to consider your channel for their ad spend (but of course the problem here is that you don’t get really good huge amounts of traffic overnight); and/or you have to have contacts that can give you an inside track to advertising spend where your growing number of users and traffic is worthy of someones attention.
Either way, advertising revenue as a viable sustainable business model only works when you scale to a large enough user base to make the revenue model work.
Build it and they will come - is where you assume that whatever you are doing will grow big enough and quickly enough to attract the attention of your friendliest 800 pound gorilla on the block, so that they will acquire you and make the founders / shareholders richer than they were the day before. Here you’re making some big bets - some might say stupid bets…
Find value to offer, and make it cheap enough to afford and easy enough to scale - is the attitude where your core offering is free, but if the users want a value added “widget”, then they have to pay for it. So, you’re not pushing people away ‘cos your offering is paid for, but you’re saying to them that you can have this little piece extra, and it will cost you a dollar a day/week/month (or whatever) - most people probably won’t go for it, but chances are a smallish percentage of your user base will go for it - so your revenue model needs to be really conservative (not “if 10000000000000 people use this, we’ll be rich!!!”), where “relatively small number of users x low cost per widget” == “enough money to keep the lights on”.
The only problem is, what in the sam hill is that widget going to be?
So - where is the middle ground? How can you offer a service which is useful to your users, and still earn enough money to get it off the ground while not killing your credit rating and making enemies with your bank manager?
At the moment, I think it’s a mixture of advertising and widgets, probably with advertising dominating once you scale up to a large number of users - the question is how you grow initially to a large enough critical mass to make things work.
I don’t know the answers to this, but rest assured I’m going to ask my sub-conscious to think about what widgets make sense to users, and are easy enough to implement, while also trying to do some more reading on revenue models for user generated content.
For now, I have the following URL’s open in FireFox:
http://www.e-consultancy.com/news-blog/361871/jakob-nielsen-s-tips-on-increasing-community-participation.html
http://www.gertismedia.com/blog/category/ugc/
http://mrwavetheory.blogspot.com/2006/09/zecco-is-free-business-model.html
http://paulstamatiou.com/2006/08/04/wordpresscom-adds-pay-feature-custom-css/
What do you think?
8 comments on “The monetisation (revenue model) of user generated content?”
01
I think this is a real problem with the “web 2.0″ buzz. Blogs and Ajax and Communities are fun and all, and you sure can waste hours on YouTube, but unless Google comes along and writes you a big check for your VC backed company that isn’t even profitable, where does the cash come from? It’s a real dilemma.
Personally, I’m not a fan of advertising, because it seems to me like a derivative form of commerce: people pay for ads because they drive people to products which people then buy. It’s easier to view ad bugets as a “nice to have” than your storefront, so I’d rather concentrate my efforts on the place money changes hands: at the ecommerce transaction level.
Have you taken a look at Second Life yet? People are managing to make entire careers in there . . .
02
User generated content is definitely the ‘de jour’ of the web right now and many companies are hopping on the bandwagon trying to sell/loan so called web2.0 services to consumers with Google Adsense as their only source of revenue.
I wholely agree with the statements you make about Adsense being a foolish basis for a business model and the ‘buy-me’ method is definitely a risky proposition (although it pays well).
Here are a couple links about Adsense and their abusive practices if you disagree with Gareth and I regarding Adsense.
http://prof.rogerkondrat.com/2006/07/04/monetisation-by-google-adsense-isnt-a-long-term-business-model/
http://prof.rogerkondrat.com/2006/07/07/adsense-nonsense/
Its true that building a widget can make you money but I think its a more difficult proposition than Gareth makes it sound (I am certain it wasn’t his intent to make it sound easy). A widget must do a few things in order to be a viable business model.
It must have a growing user base that is in the millions before a competitor joins or just really fast growing before a competitor joins the market.
It must be easy to use, develop new features or be capable of handling new features. For example a clock widget only has so much room for expansion, where as a widget like Meebome (communications widget) can have many features.
If possible it should be paid since ad sense is hardly a realiable means of building a business.
Is the widget exceptional enough to patent? Patent it if you can.
Can you clone it in 30-60days? Check out Ning.com for many many apps that are ‘web2.0′ and being copied within that time period. If you ever want to have your own youtube.com then go to Ning you can have your own in about 5min (including sign up).
As well you need your widget to have a hook. That thing that makes it difficult to give up your widget even once its been copied (as it will be its just a question of time no matter what).
Ebay has done this last part really well. Most people familiar with Ebays business model realise that most of Ebays attractiveness is in its buyer/seller rating system. Without this system Ebay wouldn’t dominate the auction market. That is their ‘hook’.
Just my two cents for what its worth
Cheers
Roger Kondrat
http://www.techwinter.com
03
Affiliate marketing is an obvious way to monetise a UGC site, as long as the merchant that you are advertising is relevant to the content.
04
For as long I have done web design development, I have been thinking about, ‘how does one generate revenue’ through web, I am of the school of thought that, ‘through advertising’ cannot be the only way, then we might as well borrow from TV Radio, or maybe we already have, there are some similarities between the current wave fo the web with television.
Paid Web Services (same as DStv, cabel(i think?)) such as flickr and public television (with advertising overload), such as most blogs, adsense; Maybe we need to borrow from that, maybe that is what works, maybe.
I am not comfortable with that idea, the idea that the digital media, a converstion of media, the (w)holly grail of communication, can only generate revenue if you follow old media.
I do not know what is possible, maybe the problem with web is that, it realises on the same human sense that radio television use (sight sound), maybe the day we can add, touch taste, we might be able to find different models.
I think.
05
Clearly if a site can generate large volumes of users who fall within one or more demographic groups valued by advertisers, then direct advertising - along with sponsorships and promotions - represents a potentially viable revenue model.
However, if you’re in the business of delivering specialist content to a niche audience - as we at Flirtnik do - then the only viable approach is to charge a subscription.
Provided the small user-base believes that they are participating in a fair exchange of value, they will happily pay up for your service.
06
I was just reading in e-consultancy how social networks are rejecting traditional forms of advertising (http://www.e-consultancy.com/news-blog/361902/social-networkers-reject-ads.html). As i suspected it seems that people are starting to rely more on peer reccomendation than on paid advertising - hardy surprising really!
I concede that advertising seems to pay the bills for many online ventures. I’m aware that i use a number of ‘free’ services online that are backed by this model.
Personally I would prefer to get a subscription based revenue model in place for a service that people value.
07
Andrew, I think you hit the nail on the head: subscription-based billing for products and services is the way to go. There’s a definite shift towards this in the States. Especially effective is the model where you get someone to sign up and agree to have their account automatically charged monthly. Netflix is great example of this.
Even my martial arts school (renzogracie.com) has come around to this model: whereas it used to be pay-monthly or pay-per-class, now you have to sign a year contract, and they automatically debit accounts monthly.
From a business perspective, it’s just more effective: you don’t have to worry about collecting unpaid invoices or customers forgetting to pay, and you can bet on some percentage of customers actually forgetting they’re even subscribed, and getting debited even when they’re not using your service.
Expect to see Microsoft shifting from selling software to selling subscriptions for their software.
It’s really a paradigm shift: it’s better for business if people don’t actually own what you sell, they only rent. A lot of the implications of this are being fought out in the area of copyright and ownership (DMCA, etc.).
08
We at www.psipi.com have found various ways to get around this, the first is realising that just turning something on is no longer cool, and that unless the real site has value and content in the end it will run out.
There is a new world coming that will destroy the old media, but in the process generate exciting vibrant times for those ready to take it on.
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