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Will Price: Broadcast versus Subscription Business Models
Will Price at Hummer Winblad has some good thoughts on business models for on-demand applications and web services more generally entitled Broadcast versus Subscription Business Models.
The economics boil down to the following:
Broadcast businesses seek to maximize revenue per impression/costs per impression, and the wonderful scale these models have achieved with respect to ads sales, affiliate models, and infrastructure costs provide for rich marginal profit margins. Scale allows for economics of scope, whereby they can offer great services - for free - knowing that their costs to offer the service are far lower than competing pure-plays and that their ad businesses will reward incremental users and page views.
And:
Subscription models are, in general, driven by four key areas: cost per acquisition, monthly average revenue per user (ARPU), free cash flow (EBITDA), and churn (cancellations/average users per period). Subscription models require a clear focus on acquisition costs, strategies to drive ever higher ARPU, and customer retention strategies.
In addition to the good economic drivers above, he makes a strategic observation: the “broadcast” advertising model, through being ”free” (i.e. zero-out-of-pocket-cost to the end user) has the potential to achieve such a scale that it can make money with a much smaller revenue/user, and through being free, enjoy small user acquisition (because it’s “free”) and delivery (because of scale) costs while maintaining marginal CPM revenue from the advertiser.
However, the subscription model can make money with a much smaller userbase (assuming it controls the cost drivers above), while the advertising model will necessarily hemorrhage money until/unless it achieve the super-scale to get the economics he describes. It’s a binary business plan - big win or nothing at all.
As such, broadcast businesses may be more attractive VC investments, because that’s where their economics are as well - they need a large, liquid exit in order to make money.
But that doesn’t make them the best businesses, nor the likely winners. At a minimum, the subscription model guys could “go free” when they reach sufficient scale, which would reward bootstrappers over VC funded ventures.
(Apparently today will be a burst-writing day)