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Emerging Platforms

A Counterpoint To Freemium

Posted by Jay Friedman on November 13, 2008 at 09:15 AM PDT

Eric Franchi at Undertone blogged about the freemium model (http://tinyurl.com/5659bf) the other day and it was a very well-written post. But Chris Anderson's microphone is slightly larger so when he too addressed the model (http://tinyurl.com/5gpoev) I thought it might merit a counterpoint.

First, yes, there are absolutely certain models where freemiium or flatout premium works. Salesforce (as Anderson points out) and many other SaaS products will survive/flourish in a paid model. For companies who are either unfunded or looking to build a company to actually own, run, and profit from it (imagine that!) this model works well. The counterpoint isn't just that certain companies won't succeed with freemium, but that they could be much more successful as free.

Obvious examples of successful free-modeled companies are Facebook and Quantcast. Their greatest asset in my opinion is the vast amount of user data they hold on such a large number of users. They each own hundreds of different behavioral data points on hundreds of millions of users. Valuing these companies as a traditional business doesn't work. Valuing them as an acquisition by a major player with a substantial existing user base but a thin layer of data on each of those users changes the valuation completely. Any major publisher with multiple web sites who is able to access this many layers of data on a majority of its users can all of a sudden compete in an entirely different league than before.

I believe that outright free services which can collect deep levels of behavior across wide audiences will be acquired for significantly larger sums than those that choose the paid model. This is because the paid model will be valued by the acquirer more like a traditional business rather than for the potential to exponentially exploit for profit its own current business.