Are We Seeing the Death of Freemium Model?

June 7, 2010
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This past April, popular social networking site Ning announced that it would no longer be able to offer its services for free. In an e-mail to his 40-percent-reduced employees this week, Ning CEO Jason Rosenthal wrote:

Our premium Ning networks like Friends or Enemies, Linkin Park, Shred or Die, Pickens Plan, and tens of thousands of others … drive 75 percent of our monthly U.S. traffic, and those network creators need and will pay for many more services and features from us.”

It shouldn’t be surprising that Rosenthal’s tone was rife with hope. But what if some or even most of Ning’s networks do not opt to pay for previously free services? I personally have been sent emails from soon-to-be-former Ning networks about their plans to move to a different platform rather than pony up.

Dissecting the Ning Decision

Those unfamiliar with Ning might think that the company is the brainchild of a few crazy kids without a great deal of business acumen. Think Chat Roulette. That’s hardly the case. One of the company’s primary visionaries and investors is Marc Andreessen, a man who has made billions from successful technology-based ventures.

Perhaps you’re

This past April, popular social networking site Ning announced that it would no longer be able to offer its services for free. In an e-mail to his 40-percent-reduced employees this week, Ning CEO Jason Rosenthal wrote:

Our premium Ning networks like Friends or Enemies, Linkin Park, Shred or Die, Pickens Plan, and tens of thousands of others … drive 75 percent of our monthly U.S. traffic, and those network creators need and will pay for many more services and features from us.”

It shouldn’t be surprising that Rosenthal’s tone was rife with hope. But what if some or even most of Ning’s networks do not opt to pay for previously free services? I personally have been sent emails from soon-to-be-former Ning networks about their plans to move to a different platform rather than pony up.

Dissecting the Ning Decision

Those unfamiliar with Ning might think that the company is the brainchild of a few crazy kids without a great deal of business acumen. Think Chat Roulette. That’s hardly the case. One of the company’s primary visionaries and investors is Marc Andreessen, a man who has made billions from successful technology-based ventures.

Perhaps you’re thinking that Ning never gained any traction? Wrong again. At the time of the announcement, the company’s Alexa rank was 126 and the number of Ning networks in existence was in the hundreds of thousands. Many popular Ning networks had tens of thousands of users, putting the company’s reach easily into the millions. The bottom line is that Ning could not sustain the Freemium model outlined in Chris Anderson’s popular book Free: The Future of a Radical Price.

The History of Freemium and a Possible Domino Effect?

For those of you not familiar with the Freemium model, it boils down to this definition from Wikipedia:

“Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.”

Now, if Ning were one of few companies attempting to grow its business via Freemium, then it could be dismissed as an aberration. It can’t. The model is pervasive. In fact, most firms these days receiving venture capital (VC) funding operate under some type of Freemium model.

Consider the fact that open source (OS) software companies are utilizing Freemium. For example, in April of 2010, OS data solutions company Talend received an additional $8M in VC funding. Talend allows anyone to download its software for free and use many of its bells and whistles. To unlock advanced features, however, clients have to pay.

What if the vast majority of Talend clients decide that 70 percent of a product’s functionality for free trumps all functionality with a bill? Would the Talend business model crumble? Based on what happened to Ning, will VCs ultimately become skeptical of the Freemium model and refuse to fund companies that rely upon it? As David Heinemeier Hansson wrote in a post on 37signals.com, “Eyeballs still don’t pay the bills.”

Feedback

This begs the question: Is the Freemium model ultimately sustainable?

What do you think?

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