Chad Perrin: SOB

7 September 2006

how not to make money on the Web

Filed under: Geek,Liberty — apotheon @ 10:01

In his links for September Seventh, Sterling posted a link to Montastic. It’s a new, free website uptime monitoring service built using Ruby on Rails. The creators developed Montastic to solve a problem of their own and, after getting it running, realized that a lot of other people could benefit from this — so they offer it for free, no strings attached. It doesn’t hurt them to do so, and helps generate business for what they actually are selling, so there’s no reason to avoid providing this service to the world at large. This is the sort of thinking that makes all this Web 2.0 stuff work: synergistic mutual benefit that arises naturally when you help others just because it doesn’t hurt you to do so. It’s what happens when your market is about as free as any market has ever been. Thank goodness for the Web.

In the discussion following that post, Assaf of Labnotes (an excellent read that I recommend, in general) makes an amusing, facetious, and brief comment that points out how quick and easy it is to create useful software using Ruby on Rails. Sterling’s response:

Yes, assaf — and think of the people whose business model is built around selling competing software.

More to the point, think of the people whose business model is built around selling software at all. This stuff is only going to increase in frequency and usefulness, in pretty much every niche of the software market. Any company still in the business of selling software licenses is going to have a consistently tougher time making money as time progresses. Software does not lend itself to being treated as tangible property: an entirely separate body of law (copyright law, specifically) is required to make it possible to even try, and the process of trying creates new expenses in enforcing this unnatural business model based on artificial scarcity (which any economist will tell you is ultimately an unwinnable game).

Something like Montastic could be monetized by nothing more than a Google AdSense banner. Productized software, meanwhile, requires legions of lawyers, distribution channel partners, and insane wastes of development resources creating enforcement software like WGA and other DRM-leaning “solutions”, all of which ends up treating your customers like your enemies when they should be your friends.

Now have a look at what’s developing in the world of web services: in an article entitled Web giants lure developers, it is revealed that Google, eBay, Amazon, and Microsoft are attempting to hook independent developers with interesting new business models into their own business models simply by providing APIs these developers can use to mutual advantage. This is great. It’s a good idea. It has been a long time in coming.

As I point out in the first notable post of the ensuing discussion, however, Amazon doesn’t quite have it right yet, and I despair of Microsoft ever getting it right. While Amazon throws obstacles in the form of per-server API access costs in the way of developers (even if they’re relatively cheap by Amazon standards), Microsoft is missing the point entirely, from what I can tell. Of course, it’s not easy to tell, because Microsoft’s press releases about what it is supposedly doing are so burdened with marketing doublespeak as to be nearly incomprehensible. My impression, though, is that while even Amazon with its half-broken plan is at least turning web APIs directly into profitable e-commerce traffic, Microsoft is trying to use its own (more than) half-broken plan to increase vendor lock-in with vertically integrated software stacks, the main components of which (in Microsoft’s eyes) will still be shrinkwrapped, per-unit software license sales.

Yes, that’s it: when a new profit paradigm arrives, a business model that makes the old model increasingly irrelevant, Microsoft tries to leverage that to . . . perpetuate the old model, completely missing any opportunity to use it to generate revenue directly.

How long will it take for the old guard to realize that giving software away is more profitable than parceling it out one license unit at a time, complete with the billions of dollars in attendant enforcement that is required every year?

12 Comments

  1. It will be interesting to see how software business models continue to change, and how some of the big, lumbering organisms evolve — or fail to.

    Comment by SterlingCamden — 7 September 2006 @ 10:27

  2. mon.itor.us another (better) Web20 style monitoring tool, build on Ajax, provides uptime and performance monitoring, live charts, google gadget, RSS feeds, unlimited number of sites, distributed monitoring from multiple locations, and many other coold stuff

    Comment by Avoyan — 7 September 2006 @ 12:02

  3. I’m giving you the benefit of the doubt for now, because what you posted is somewhat relevant to the discussion, but that really looks like an attempt to advertise just because I mentioned a competing product here. Otherwise, I would have deleted your comment as spam before it would have come out of the moderation queue.

    By the way, one doesn’t build network monitoring software “on AJAX”. AJAX is used to constuct an interface: the network monitoring software behind it needs to do rather more than create an asynchronously updated interface over a stateless protocol connection.

    Comment by apotheon — 7 September 2006 @ 02:25

  4. Lesson learned from spending three days at Microsoft listening to them talk about the future:

    There’s a reason for the Microsoft double-speak.

    Their business model is: sell more units of Office, failing that, sell more units of Windows.

    If you’re head of MSN (now Live), your second goal is to reach out to more users. Your first goal is to make the Office team successful. And that goes for pretty much every other business unit.

    That’s why Microsoft has a hard time saying “Web development” or “open API” and looking you straight in the eye.

    Comment by assaf — 7 September 2006 @ 04:44

  5. apropos: http://www.wired.com/wired/archive/14.09/posts.html?pg=6

    Comment by assaf — 7 September 2006 @ 04:47

  6. I’ve heard stories about the hierarchy of important project domains at Microsoft, but not in a context that really caused me to think about it too much. Now, it’s becoming much more relevant in my mind to a lot of what’s going on in the software industry.

    By the way, thanks for the link, Assaf. That’s an excellent read, and has inspired me to flesh out some thoughts I’ve been having for a while. If this works out, I’ll have a new entry at SOB about market forces in the next day or so — but first, dinner.

    Comment by apotheon — 7 September 2006 @ 06:59

  7. […] SOB: Scion Of Backronymics » how not to make money on the Web apotheon expands on a brief comment discussion between assaf and I to explore the changing software business model landscape (tags: linklove software licensing) […]

    Pingback by links for 2006-09-08 -- Chip’s Quips — 7 September 2006 @ 07:17

  8. […] This wasn’t nearly as well-written as what I conceived last night, but hopefully it gets the point across. Bookmark to:          Track with co.mments You can also bookmark this on del.icio.us or check the cosmos […]

    Pingback by SOB: Scion Of Backronymics » the lessons of the Internet: market vs. meddling — 8 September 2006 @ 03:47

  9. You misunderstand the concept of economic scarcity in this context. The scarcity here is the time and talent required to produce software, not the duplication and distribution of the actual product per-se. It’s slightly obtuse, but it’s what makes well-written and useful software valuable. But, yes, the methods of distribution and software sales is changing and will continue to do so.

    Comment by Chris — 24 May 2007 @ 07:22

  10. Um . . . no, I didn’t misunderstand what was actual (natural) economic scarcity — I pointed out that a given business model relies on artificial economic scarcity instead of that natural economic scarcity.

    edit: Oh, yeah, and . . . thanks for commenting.

    Comment by apotheon — 24 May 2007 @ 12:11

  11. […] Some hints might be found in my older SOB entry, how not to make money on the Web: […]

    Pingback by Chad Perrin: SOB » Why Web2.0 Works (and what doesn't work) — 27 April 2008 @ 01:23

  12. I’m actually quite surprised to see this montastic.com still up and running considering most hosting companies come with similar services by default.

    Comment by Brett Dugan — 19 February 2009 @ 11:49

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