The reason that the web lost faith in charging for stuff is that marginal cost is so low. What is the cost to 37signals of having another customer sign up for one of their services? If I sign up for the $49/mo. Basecamp product, they are offering me 10GB of storage as well as bandwidth and application processing. None of that has a high marginal cost. Maybe $5/mo? Plus, many users won't use all that space so it's a maximum of $5, but the average marginal cost would probably be a good deal lower.
So, while many applications might have very high fixed costs (like paying people to create wonderful applications like those in 37signals portfolio), they have marginal costs that are so insignificant that people would like to charge customers less and get more customers - often ending up with them wanting to give it away for free for maximum uptake (with the whole profit thing put off until later).
Beyond that, some applications you can't charge for. 37signals has a portfolio of applications that don't get better for users as more people use it. That's unlike Facebook, Delicious, Digg, Wikipedia, etc. If those services charged a monthly fee, it would degrade the content that the sites have. Facebook isn't useful if they only retain 10% of their user-base because they're charging $10/mo. So, some websites must try alternative ways of monieization since charging users isn't an option.
Finally, the web often forgoes charging for stuff because they get big paydays for it. StumbleUpon got $75M. Reddit commanded at least a few million. Digg is looking for hundreds of millions while having no plan for profitability. Facebook is looking for tens of billions with no plan to make money! Jaiku was bought for millions. YouTube for $1.5B. I don't need to go on. People get rewarded for the behavior of creating a site with no expectation of profits. As long as that's working, they'll keep doing it.
Personally, I think 37signals has the right idea. But that won't stop people from making free sites with no profit plan which they hope to get bought since it happens enough. Yeah, I'm not going to create visions for myself of taking over the world, but others thrive on that. As long as there is some potential of getting bought for millions and a low marginal cost, people will create those free sites.
The marginal cost of printing another copy of the WSJ is low relative to the SG&A costs of running a newsroom, so I don't think this phenomenon is unique to web startups. But yeah, it makes sense that network effect businesses might sacrifice revenue for uptake.
That said, the promise of big paydays seems like DHH's point: how many more of those are there? Even if the era of the San Francisco Startup isn't ending, there's also a huge bias in the reporting of outcomes for aspiring SF Startups: we only really hear about the ones "important" enough to get funded.
Most companies that shoot for the moon on VC and free services fail. Your odds of winning with free are not good. You might even be worse off taking VC money; if you bootstrap on a free service and don't strike gold, you die in 6-18 months; if you get funded, you might lose 4 of the best years of your life on something with no chance.
> The marginal cost of printing another copy of the WSJ is low relative to the SG&A costs of running a newsroom
The concept of "free" and "eyeball economy" probably came from newspapers, because that's the paperless version of the newspaper business model: Newspapers are in the business of putting ads and classifieds in front of your eyes, not delivering news to paying customers.
Now, I can't find the reference, but I read recently that the subscription of a major newspaper (might have been WaPo or NYT) doesn't even cover the paper it's printed on, much less the delivery or the newsroom.
I don't understand how Facebook isn't running a billion-dollar ultra-segmented advertisement business, I would think they had the user data for it. Probably a privacy issue.
The WSJ paper edition is profitable. The for-pay WSJ online edition is more profitable. The core Trib paper edition is profitable. The point isn't that online is better than paper; the point is, plenty of businesses with low marginal costs charge high market-based prices. The marginal cost of a few more ground coffee beans is infinitessimal; the marginal cost of servicing one more customer at a Starbucks that is open anyways is very, very low, but Starbucks doesn't give away a loss-leader coffee product to gain share, and neither do its competitors.
Marginal cost is simply not a useful metric with startups. There are plenty of similar industries, and the notion that this means anything at all is garbage.
The material in a shoe costs a tiny, tiny fraction of what the consumer pays, but that doesn't mean they give them away for free (plus shipping) and slap an ad on the side.
Internet startups may have low marginal cost, but they have disproportionately high fixed costs. Good progammers make 2-3x what a factory worker does.
Moreover, marginal cost is on a sliding scale. One more customer to my Facebook app costs me literally nothing, one more than our current setup can handle may force me to shard my database. So the marginal cost is 0 for a long time, then some really large number for one unit, then 0 again for a while, etc. You really have to average it out.
Also, startups that do have significant marginal costs (YouTube, Pandora, etc.) still don't charge. So while everyone always touts marginal cost as the reason, it clearly is not.
> Marginal cost is simply not a useful metric with startups. There are plenty of similar industries, and the notion that this means anything at all is garbage.
This entire argument is flawed. If your marginals costs are so low, and you can charge $49+ (whatever) for what is essentially air, that means more money in your pocket. In fact, I'd argue that its much better if your marginal costs continue to get lower as you add more users! Why do you think Microsoft is such a cash cow?
I've seen way to many web entrepreneurs think of their products' price in relation to costs and and I just don't get it. Try to keep fixed costs low, focus on how much revenue you can extract from your customers, and drive marginal costs as close to zero as you can.
I think this is a point too often forgotten by web entrepreneurs. A product has no intrinsic value - its value is in the eye of the user. This is also to say that every single user has a different value for how much they are willing to pay for your product (which may in fact be $0). Simply because something costs nearly nothing to make, doesn't mean you should sell it for nearly nothing.
> Simply because something costs nearly nothing to make, doesn't mean you should sell it for nearly nothing.
Software costs a lot to make, what is low is the marginal cost: the cost to create one extra copy. The reason costs tend to zero is: if the marginal cost is zero, it's very easy to get into a price war. Maybe you won't sell it for $49, but your competitor might be willing to sell it for $29.
> If your marginals costs are so low, and you can charge $49+ (whatever) for what is essentially air, that means more money in your pocket.
If it's that profitable though, competitors will show up. Indeed, there are plenty of 37signals competitors. What really differentiates 37signals is how very visible they are (their oldest, most popular product is their blog), which makes it easy for them to get enough people to sign up to turn a tidy profit. That is their barrier to entry.
> Why do you think Microsoft is such a cash cow?
Because they have a monopoly. Operating systems and office software have a lot stronger network externalities than project management software does.
"So, while many applications might have very high fixed costs (like paying people to create wonderful applications like those in 37signals portfolio)"
This isn't a fixed cost. Consider apps A and B. Both are exactly the same featurewise. A has 100k users and B has 100 million. B costs a hell of a lot more to create and maintain.
I believe the point was simply that the cost isn't fixed. It rises in hardware costs, storage, bandwidth, labor, etc. with a user base. It would most likely be very much worth it to have the increased user base. But the profit/cost isn't a fixed ratio.
So, while many applications might have very high fixed costs (like paying people to create wonderful applications like those in 37signals portfolio), they have marginal costs that are so insignificant that people would like to charge customers less and get more customers - often ending up with them wanting to give it away for free for maximum uptake (with the whole profit thing put off until later).
Beyond that, some applications you can't charge for. 37signals has a portfolio of applications that don't get better for users as more people use it. That's unlike Facebook, Delicious, Digg, Wikipedia, etc. If those services charged a monthly fee, it would degrade the content that the sites have. Facebook isn't useful if they only retain 10% of their user-base because they're charging $10/mo. So, some websites must try alternative ways of monieization since charging users isn't an option.
Finally, the web often forgoes charging for stuff because they get big paydays for it. StumbleUpon got $75M. Reddit commanded at least a few million. Digg is looking for hundreds of millions while having no plan for profitability. Facebook is looking for tens of billions with no plan to make money! Jaiku was bought for millions. YouTube for $1.5B. I don't need to go on. People get rewarded for the behavior of creating a site with no expectation of profits. As long as that's working, they'll keep doing it.
Personally, I think 37signals has the right idea. But that won't stop people from making free sites with no profit plan which they hope to get bought since it happens enough. Yeah, I'm not going to create visions for myself of taking over the world, but others thrive on that. As long as there is some potential of getting bought for millions and a low marginal cost, people will create those free sites.