Vinny Lingham's Blog

The world surely has changed since the heydays of the late 90’s. It’s been a little over 10 years since Yahoo acquired Geocities for nearly $5bn. Yahoo announced today that it would be shutting down it’s Geocities service – it seems that free websites are on their way out? Clearly, I have a lot vested in this industry (especially since Yola (previously SynthaSite) recently raised $20m in funding for a “free websites” business model) – so I thought that I should at least try to provide an insider’s view of this sector and how it’s changed (and is still changing).

Yahoo has finally proved that the old advertising model on free websites will not stand the test of time. Yahoo placed advertising on all the Geocities websites – and clearly, this model failed. At Yola we purposefully do not place any ads on our users’ website – it makes no sense to us, for many reasons, including the fact that our users do not want it in the first place. We offer an advertising-free free website service – plain and simple. The quick observation is that if Yahoo, which is an advertising juggernaut, cannot monetize it’s free website service with advertising – how do we even stand a chance? We’re not even trying to…

That business model is so Web 1.0! Bandwidth costs were high, storage, computing & technology costs were high and you needed large data centers and many engineers to keep the lights on. Geocities built their business model upon an age old premise, that sites are expensive to host and therefore you needed to run advertising on each page in order to monetize pageviews and generate sufficient revenue to cover costs. Enter Web 2.0 – bandwidth is dirt cheap, and so is computing power ( which is available on demand via the cloud, almost like a utility). The economics have changed and advertising on our users websites is no longer the only way to generate revenues. Yahoo build a revenue base for Geocities around advertising, and as advertisers got smarter and understood the value of that inventory – when rates dropped, they did not have alternative income streams to fall back on. In addition Yahoo also sported a desktop based application which was heavyweight and did not work on multiple platforms (unlike Yola – which is entirely browser based). The costs of maintaining this piece of technology (written in Java) for the desktop exceeded the revenues – basically, the business model did not scale and also was not well leveraged. This resulted in a broken business model.

The demands among Web users have changed as well. Web users, and particularly small businesses, don’t just want an online presence (which was Geocities key value proposition), they want a professional-looking site that they can quickly and affordably build and the tools to help themselves and/or their businesses succeed (online marketing, commerce capabilities, etc.) – and that’s what we’re about. Meanwhile Geocities, while once revolutionary in the space, has failed to meet users’ changing needs and as a result, has been shut down.

We believe the model of the future is to create a platform that anyone can use to create their own personal or business website – and then we are able to sell add-on services (domains, templates, etc.) that allow the users to further customize their websites. Hosting & bandwidth is and should always be free to the end user. I look at the Internet as a really big LAN (Local Area Network). Why would you pay to transfer files across a LAN? Also, people can currently get free web pages in a limited sense through various providers, but a page with ads is like a social network site or similar – and not a true, professional web presence. People are sophisticated enough to want real websites, and that is what we offer them. And, when you provide a valuable service, your customers becomes loyal advocates, and you succeed if you have a profitable business model.

My most recent blog post was about freemium business models and how startups should consider moving away from advertising based business models, and focus on charging their customers for add on services (premium services). In order to build a long term sustainable business, you need to understand what value you’re creating as a company, and who would be willing to pay for it and build your revenue streams around that. Advertisers are just not willing to support websites that do not deliver ROI anymore – the game is changing…

There are two models for any online business, either the user pays or someone else does…

We conducted a survey at Web 2.0 expo earlier this month, and here are the findings:

* 78 percent of respondents believed the freemium model will weather the economic downturn, compared to 27 percent who put their faith in subscription-based models.
* 90 percent of respondents believe partnerships will be a driving factor for Web 2.0 innovation over the next year.
* 46 percent of respondents saw strategic partnerships as the fastest route to profitability; 42 percent believe its only subscription-based services, while only 39 percent believed it was advertising.
* Only 8 percent believed online auction sites will grow this year.
* 97 percent of respondents use Web 2.0 tools (Facebook, Twitter, LinkedIn, etc.) to establish an online persona.

The survey, promoted through Twitter, was conducted both online and at the Yola booth.

Most startups are evaluating their options right now. Ad revenue has dropped – not so much in aggregate spend, but more in aggregate price – some estimates are that CPM’s are down 80%? Anyone wonder why?

Contrary to the popular belief of most startup founders, advertisers are not interested in just buying advertising because they have money to spend and you have eyeballs. Google AdSense is not just a cash printing machine. Advertising needs to translate into real ROI for the advertisers or sooner or later they will abandon you. With consumer spending down (along with conversion rates), advertisers are getting smart and pulling advertising from sites that don’t convert, and increasing it on sites that do convert. This does not bode well for websites that cannot drive value for advertisers. What most people don’t realize is that Search is not like traditional advertising – you’re BUYING customers. There are too many business models out there that rely on advertisers to support the business, but do not drive positive ROI for the advertiser. These businesses are headed for rocky times (in fact, it’s already upon them!).

So, I’m not saying that you shouldn’t build great websites that people want to use – just be prepared to start charging for it if your traffic is not targeted or qualified for advertisers. Twitter is a great example – if they decide to monetize via advertising, they need to deliver customers to advertisers; if they can’t and the traffic doesn’t convert, then their business model will be to charge users for the service. Someone needs to pay to keep the lights on.

At the end of the day, the cost of inventory is the issue – the market prices will gravitate toward real value in order to improve the ROI’s for advertisers – but that really places your business model at the mercy of your advertisers and their budgets (and their ability to convert your users into customers). I’d rather be offering additional value added services that a small % of users would pay for on a regular basis, rather than try to monetize solely via advertising – and I’d advise other startups to start looking into that too…

The online advertising goldrush is over – time to start building real business that deliver real value…