Jon Russel of TheNextWeb had this interesting tweet the other day:
Twitter: $250M revenue & 198M mobile users Line: $338M revenue & estimated 185M mobile users Ad-based monetization not such a great model.
— Jon Russell (@jonrussell) April 29, 2014
To paraphrase Ben Evans’ excellent post a couple of weeks ago, this is an unfair comparison, but a relevant one.
There are a couple of thoughts that I have on this. Firstly, the clichéd “necessity is the mother of invention.” Asian social media companies have generally been pioneers in the space of monetization via virtual goods, whereas Silicon Valley companies have focused more on ad-based monetization. IMO a big factor is the availability and maturity of advertising dollars – if the US does not have a thriving advertising industry and sophisticated advertisers (the blue chip companies and their global brands), Silicon Valley biz models will look very different.
Secondly, an ad-based biz model (B2B) demands a fundamentally different set of organizational structure and capabilities from a virtual goods biz model (B2C). In Silicon Valley, the former often requires an ad sales force fluent with convincing Madison Avenue ad execs to allocate client ad spend, as well as building the tools and support systems needed. In Asia, the latter model requires sophisticated retail / payments capabilities, such as a distribution network for physical gift cards that consumers can buy to convert to virtual currency (which can then be spent on virtual goods), as well as handling various online payment schemes (or building your own from scratch) and fraud, and also a customer support service that can handle literally tens of millions customers.
Another way to look at the fundamentally different capabilities required: ad-based biz model is generally about monetizing user data – user behavior / intent that advertisers value, so data aggregation / modeling / predictions would be key tech capabilities; whereas virtual goods biz model is about creating demand for content – “I want to buy that virtual rose so I can express my feelings to my loved one” – and hence requires a content pipeline as well as understanding of what types of content sells.
Thirdly, from a product perspective, “adding advertising to my free service without annoying my users (or not annoying them to the point of churning)” is a very different design goal from “providing value-added services that a (typically small) % of my users are willing to pay for”. Advertising in exchange for a free service is something that users tolerate; getting users to actually pay real cash is generally speaking much harder.
To be clear, I’m not saying that one model is better than the other, simply that two similar services (from users’ perspective) could mean fundamentally different company strategies.
I’ll end this post with another set of examples for comparison: twitch.tv and YY streaming. Both operate online streaming services in the video-games space. Twitch monetizes via video ads (as well as cut of premium subscription fees). YY mostly monetizes via virtual goods that viewers buy to gift streamers in the public chat feed that accompanies the stream – if that sounds bizarre, you really need to see it in action.