Over the last few years, there have been millions of startups that operate entirely on the internet. Facebook, Twitter, Pinterest, Instagram, Medium… the list could go on for hours. It makes sense, the internet has truly changed everything. Most of these services are offered for free. People generally love this, and in fact now even expect it, greatly preferring free to paid online services. Personally, I am the opposite, and in fact prefer paying for online services that are valuable to me. Let’s break down why I feel this way.
A Fundamental Truth
It’s easy to conveniently ignore this fact, but when it comes down to it, your use of whatever free online service you signed up for is being paid for by someone. It costs money to run the servers, to hire and pay employees to work on the application. Quite a lot of money in fact, hundreds of thousands of dollars each year. So how does this business exist if nobody is paying for it?
Most of the time, the answer is venture capital. So what is venture capital? It’s like a crazier and more risky version of the stock market. A company with a bunch of money, called a venture capital firm, will give a chunk of this money to a company in its very early stages (a startup) to help it get off the ground, in exchange for a large chunk of ownership in that company. This is a leap of faith, as the large majority of startups fail and the venture capital firm will get no return on their money, losing all of it. However, a small percentage of startups are huge successes, and the chunk of the company that the venture capital firm purchased at a steep discount at the beginning of the company’s life becomes much more valuable, returning its costs many times over as the company is sold or goes to an IPO. The earliest investors in Facebook made over 312x their initial investment when it went public.
For startup companies, venture capital seems like a great deal. Free money, no strings attached, and they do not owe any money to anyone if they fail, which probability says that they will. What could be better, right? Well, we all know that there’s no free lunch — there are some strings attached. Since venture capital firms know that most startups will fail, they are quite aggressive in laying in to those doing well, and cutting out those on the road to failure. There are certain exponential-looking growth curves that venture capitalists look for in companies, and if these are not present, they will try to force you to sell the company so they can recoup at least a little money before everything goes down the drain. And if you are doing well, they will start pushing you towards a plan to start making money from your application, once again so they can start to recoup their costs (and those of the 100+ other companies they invested in that failed). That’s a lot of pressure!
Under pressure like this, many startups are forced to acquire the biggest numbers they can, as quickly as possible. They need to show that they are doing well, adding users and statistics, etc. so they can continue to recieve support for venture capitalists. As such, all barriers to increasing the number of people using your application must be removed. At the beginning, everything needs to be free — it’s a “worry about making money later once your a big enough” kind of deal. As such, most venture capital funded apps are free. And now users have come to expect all apps to be free. But eventually, the “free” apps must find a way to make money from you, as they are spending money building the app. Our generation has seen this process happen in a big way for Facebook, Twitter, and now Instagram. What was once a free service has slowly started selling your data, integrating ads, etc.
No Positive Outcome
The venture capital and startup relationship has been in place for years, and has cranked out many large successful companies, and of course many failures. But it’s a model that’s working, it’s making money for venture capital firms. And that’s all that’s important to a business — are we making money? And can we make more?
But what’s important to me is not whether the business is making money or how much they are making. It’s whether they are providing a valuable service to me. When a company starts being funded by venture capital, immediately all positive outcomes are removed from the equation. Suddenly, their company’s future is narrowed down to four possible outcomes.
- Fail and go out of business, company is not sustainable and not growing fast enough to satisfy venture capitalists, and they can not get more money and continue to pay employees.
- Do moderately well, then sell to another company. The other company integrates the startup’s employees then shuts down the original service.
- Do moderately well, then sell to another company. The other company then takes over the original service and tries to make money off it somehow. Usually this involves selling user data and aggressive advertisements.
- Do very well, move towards an IPO. Figure out a way to make money from millions of non-paying users. Usually this involves selling user data and aggressive advertisements. Careful testing will reveal the absolute limit that users can tolerate before leaving the service to maximize cashflow.
Think about it. This means for any service you are using online for free without paying, it’s probably venture-backed, and is headed towards one of these avenues. The problem is that all of them suck. I would much rather just pay them for a valuable service and have them run normally, instead of getting involved in either a service I value that will shut down, or turn into a massive, all-in, money-hungry machine directed by people whose sole goal is to get rich at the expense of their users.
The Facebook Story
Let’s dive into an example — the story of Facebook’s growth. Facebook started out as a humble tool used to help people strengthen connections with their peers. It grew, and it took on venture capital money.
In order to grow faster, Facebook opened up an Application Programming Interface (API), an interface for developers which they could use to build applications with Facebook’s data. This helped to form many new companies running on Facebook’s social graph, which in turn boosted Facebook’s popularity. However, once they grew large enough, they decided that the applications developers were building with their data were a threat to their own future plans, and started limiting their API, closing out large sections of it over time. Eventually, they had shut down their API to everything except for a few narrow use-cases, tightly controlled by Facebook, rendering their “open social graph” completely closed. This effectively put bunches of companies out of business and many people out of work. These people were outraged, and protested loudly to Facebook. But Facebook did not care, it had leveraged developers to grow, but now that it had grown it had no need for them anymore. Cutting them out would help Facebook to make more money, so it had to be done.
Now that it was large, Facebook needed a way to make some money. So they started selling their users’ data, invading their privacy, and serving as many ads as possible. Facebook is run by smart people, who do thorough statistical testing. Every day, they run hundreds of tests on who they can sell data to, where they can place ads, and how many ads they can place to get you to click on the most possible without getting so frustrated that you leave Facebook.
In addition, they started limiting the reach of your posts. Originally, when you made a post on Facebook, all your friends would see it. Over time, Facebook gradually cut these numbers more and more until posts only went out to a small limited number of your friends. For Facebook pages run by companies, bands, etc, these numbers were reduced even further, down below 10%. Once they numbers were appropriately low, Facebook rolled out a program where you could pay them to access all your friends/followers. “If you post normally,” they said, “this post will only reach X% of your followers. But if you pay us to ‘promote’ the post, we’ll send it to everyone!” Business owners were outraged. The had poured hours into building a fanbase only to have Facebook throttle their reach and hold their fanbase hostage until they paid. And now that they were reliant on it for their business, they had no choice.
Facebook’s history is a series of the same pattern, over and over. First, they introduce something that could be of value to you, for free. They let you use it, enjoy it, until you depend on it. They use this to grow their company and their numbers. Then, once it has been proven to work, they slowly restrict the feature until they can squeeze money out of it, either through forcing you to pay, selling your data, or filling up the interface with advertisements.
You see, Facebook is not a company that exists for the purpose of making sure you have wonderful interactions with your friends and a rich, vibrant, open social graph. They are a company that exists to see how much money they can squeeze out of you in exchange for using their service for free. Then they take the money they make from you, and reinvest this in figuring out how they can make even more money from you.
The Circa Story
Circa News was an application that summarized news stories. I found this app randomly one day, and quickly it became a fixture of my homescreen. While I just could never get hooked on traditional news sites because of their super long, detailed, and usually violent and sad stories, Circa had a smooth, clean interface with short and clear descriptions of the top news for the day. It also figured out what kind of stories I like to read and presented me with 10 stories a day tailored to my own unique interests, which do not include people dying and doing horrible things most of the time.
With Circa, I went from never reading news to reading it every day. I felt much more informed, and enjoyed the 5–10 minutes or so I spent every day going through news stories. Finally, I had found something that really worked and got me to care about current events.
I never really thought about how they operated or made money. There were no ads, and the app was beautiful, clean, and free. It turned out they were not making money, they were venture capital backed and were hoping to accumulate enough users to be able to continue getting backing then eventually figure out a way to make money. Unfortunately, they were not able to do so, and one day they announced that they did not have enough money to sustain the service and would be shutting down permanently. I was so sad! Circa was a part of my everyday routine, it was keeping me informed, and I loved the app. But now it was gone, immediately, with no chance of return. Just like that.
I searched for alternatives and downloaded a few. I had them on my homescreen for varying amounts of time, but before long I stopped using every one of them and reluctantly uninstalled them. Now I don’t read news at all. I would have gladly paid for Circa. I got tons of value out of it. But they never even gave me the option. They went the venture capital route, and it was “go big or go home”, being sustained by a small base of paying users was not an option. So they went home, and that was the end of it.
Why I’d Rather Pay
If I’m using a service for free, the company is still paying for me. They are just trying to figure out how they can get money out of me, and if not, they are on the road to being out of business. But if I’m paying for a service, the company is trying to figure out how to make me happy so that I’ll continue paying, and refer other people to the service so they will pay.
This is why I hate the free model. If a service is free, I know that it’s goal is eventually going to be to squeeze money out of me in any way possible, regardless of whether it makes me enjoy the service more, or even how ethical it is. I also know there’s a high chance they will shut down, so I’m reluctant to rely on a service like this. But if it’s paid, I can be confident that the company is making money for the services they provide, and are actively trying to make them better, and give me a better experience. Or at very least, keep the same experience that I am already paying for. Certainly not making it worse.
Photo is of a cactus on a hill in Monaco, which is technically its own country but really is a large city in the south of France. I chose this photo because it’s pretty and I feel like this is a kind of prickly post, going pretty hard against the grain. Not a stretch… right?