Armchair Theorist

How does an Internet company or web property make money today?

Why can Web 2.0 startups like Twitter and Plurk afford to offer microblogging services to users for free while burning a hole in their pockets every month from SMS and bandwidth costs?

Do these companies actually have a business model, or are they all just waiting to be bought out and to let their cash-rich sugar daddy worry about the monetization problem?

Well, I believe the answer to that last question should be pretty obvious. I would like to believe that after the dot-com bubble burst earlier this decade, any VC-funded startup today must have a reasonably-sound business model in order to get funding in the first place. But what are these business models?

Michael Rappa has written an excellent article which proposed a variety of business models on the web, but I believe that we can further simplify his framework down to just four fundamental monetization strategies for Internet companies today:

1. Sell Advertising. This is the most straightforward model, and probably 90% of Internet companies today try to make money off of this strategy in one way or another. It’s simple – the more users you can entice to use your nifty service, the more eyeballs and page hits you have, and the more attractive your web property is for selling advertising. High volume content websites who don’t seek their own advertisers (e.g. Digg) can still leverage on ad networks like Google AdSense, Quantserve and DoubleClick to help generate advertising revenue. Location-based advertising (Brightkite and ShowNearby) and retailer affiliation programs (Amazon, eBay, and Shoplette) are all variants of selling advertising – i.e. pay me a fee or a cut of your revenues for the privilege of having access to my users.
2. Sell Content. This strategy is also easy to understand. Your site has original content – either text, audio, video, or even goods – which is not available anywhere else, and you sell it to your users for a fee (New York Times Electronic Edition and Veoh). Alternatively, you may not have any original content, but you manage to gather and organize difficult to find content all over the web (Offbeat Guides), or you run a platform that fosters user-generated content (e.g. Slashdot), all of which you can charge people for. You may also provide restricted versions of your content for free to the public for personal use, but charge cash-rich corporations to use them (Common Craft). Fees can either be subscription-based, or pay-per-use.
3. Sell Services. Basically, the service that your website provides is so awesome that people are willing to pay for it. Oftentimes, your site may provide free but limited functionality to entice users to pay for the premium service (Basecamp). Brokerage companies like eBay and Paypal also fall within this category. If Twitter follows GigaOM’s advice, their potential business model would also be classified in this category. According to Ryan Spoon, any of the services listed in his list may also be candidates to sell their services to users.
4. Sell Technology. To me, this is the strategy that has the biggest monetization potential, but yet is the most neglected by new startups. Most services and technologies that have proved themselves on the consumer web can easily be adopted for enterprise use. Why not charge cash-rich enterprise customers for them? Google has great search and productivity tools, so why not package them up and sell them in a box as Google Enterprise? Amazon runs a massively scalable web platform built on huge data centers. Why not loan out that underutilized infrastructure for other companies to use? And this monetization play is not limited to the “Borgs” – new startup Twine also has set their sights on enterprise customers since day one.

Most Internet companies can only successfully follow one monetization strategy. Some may be able to execute two. Very rarely can a company leverage three (Amazon and Google).

Any companies or startups you know that have their sights on all four?