Judging from the general response, last week’s rumor of an Elsevier purchase of Mendeley didn’t really come as a surprise to most. Mendeley has long been an intriguing set of services in search of a business model. Should the sale go through, Mendeley’s path mirrors that of many startups from was once called “Web 2.0,” and provides a cautionary tale for those relying on free services and a vision of an open access (OA) future that may result in a reshuffling of economic resources.
Competing against “free” has been the greatest business challenge of the social Internet era. From one side of the equation, it has massively reduced the music industry and continues to push newspapers into nonexistence. People like getting things for free, and if someone offers essentially the same product as yours without charging, you can rapidly be replaced.
But it also creates problems from the free side as well. “Free” is a bad business model. There’s a point where any startup has to begin turning a profit. Investor patience is limited. Initial focus for free services always seems to be about driving usage, with the idea that once a service is popular, you can figure out a business model later on. Even behemoths like Facebook and Twitter continue to struggle with monetizing their popularity. For the user, Ben Brooks refers to the problem as the “fragility of free”:
The fragility of free is a catchy term that describes what happens when the free money runs out. Or — perhaps more accurately — when the investors/founders/venture capitalists run out of cash, or patience, or both. Because at some point Twitter and all other companies have to make the move from ‘charity’ to ‘business’ — or, put another way, they have to make the move from spending tons of money to making slightly more money than they spend.
It’s at this moment that we begin to see the fragilities of the free system. Things that never had ads, get ads — things that were free, now cost a monthly fee. We have all seen it before with hundreds of services — many of which are no longer around.
Mark Cuban pioneered the only sure-fire way of making money on the internet back in 1999 with the broadcast.com sale to Yahoo: build a service, gather as much attention as possible, give the product away to as many users as possible, and then, at the peak of its hype cycle, sell the company off to someone else, and let them worry about the business model.
If Mendeley aligns with a new corporate owner, that will leave Zotero as the last of the major reference management services not connected to a large for-profit publishing house. CiteULike and Papers are already aligned to Springer, and while the Nature Publishing Group is shutting down Connotea, they seem to be replacing it with the stake they own in ReadCube.
Looking back on it, there may not have been any other conclusion for Mendeley. Online ad revenue, particularly in niches like academic research, remains sparse. And Mendeley faced the same sorts of member monetization problems as those faced by Facebook.
While these services have a loyal base of users, if one asked those users to pay a monthly membership charge for the service, odds are most would quickly shift to a competitor’s free service. Since much of the service’s value comes from having a large pool of fellow users to create a social graph, the loss of freeloaders would hurt in ways that don’t hurt a content provider. If the New York Times goes behind a paywall and loses most of its readers but retains enough subscribers to turn a profit, that doesn’t affect the quality of the news reporting. If a social network loses most of its users, the network is vastly less informative and functional.
Mendeley’s embrace of an open science ethos further complicates matters. By appealing to those on the cutting edge of social media use and sharing in science, Mendeley built a loyal following and gained a great level of reputation and publicity. But in order to gain that loyalty, they had to make their service as open as possible, allowing users to easily export their profiles and data and thus lowering the barrier to moving off Mendeley to a competitor (though it should probably be noted that Mendeley is not, as reported in TechCrunch, a proponent of open source software, and has never made the code behind the site publicly and freely available).
Really, they were caught between two different worlds. As one of our commenters noted:
Rumor had it that Mendeley would show up at publisher meetings and talk about wanting to be a partner and would show up at scientific meetings and talk about putting journal publishers out of business.
They were bound to upset at least one of the groups to whom they were appealing. The user who is dependent on Mendeley, and was apparently always the product being sold rather than the customer, may now be left in the lurch.
The fate of Mendeley and Connotea should serve as reminders of the dangers of relying on free services. The users’ needs and desires come secondary to the real customers — in Google’s case, the advertisers; in Facebook’s case, those purchasing data and access to users. When a company has no business model, then the terms of service they provide can turn on a dime when one comes along. Think of the recent Instagram furor, or all the companies built around providing services for using Twitter, and how doomed they are now that Twitter is shutting down the very openness that made them what they are today.
It’s far better to pay for a service that’s critically important to you than to rely on one where you are not the sole focus of the company providing that service. If you’re the paying customer, then the company’s health is based on keeping you happy. Mendeley and Connotea are showing us that a free service can at any point be shut down or suffer drastic changes with little regard for the user’s best interests. If you’re an altmetrics startup that was planning on building a business around Mendeley or Connotea bookmarking as a key measure of researcher interest, what do you do now?
Sean Takats suggests that indeed, a sell-off was always the business model for Mendeley, and that these types of software products simply don’t make enough money to exist on their own:
Individual researchers, in the aggregate, never paid for the software. EndNote’s bread and butter isn’t the poor sap who shells out $300 for a boxed copy. It’s the research institution (e.g. university library) that signs multi-year site licenses for tens of thousands of dollars each. RefWorks relies — though it feels odd to continue to use the present tense — nearly exclusively on these deals. So if Elsevier does acquire Mendeley, researchers won’t be getting it for “free” any more than university students get RefWorks or EndNote “free” at subscribing institutions. The software will be bought effectively via library subscriptions to Elsevier content. It’s just more wealth transfer from research institutions to for-profit publishers.
These economic realities stand in stark contrast to the notion of the “decoupled journal,” a vision of the future where each aspect of academic publishing is separated out and purchased by the author in an a la carte fashion. So far these services are not providing much evidence that they are viable standalone businesses. Aside from the factors discussed by Takats, many are competing with “free” and have that hurdle to overcome. Why would a researcher pay Rubriq $700 for a round of peer review when Peerage of Science, or pretty much any journal on earth (other than F1000 Research) will provide one for free?
Rather than breaking things down into individual components, perhaps we’re instead looking at a different sort of decoupling — a separation instead between services aimed at separate customer bases: authors and readers.
For any selective journal with a high rejection rate, balancing a budget in an author-pays OA economy is problematic. The three options available to improve one’s financial situation are to raise author fees, to lower one’s standards and publish more, lower quality articles, or to cut costs. And since the author will have replaced the reader as the primary customer for the journal, reader-centric functionality will be a prime target for cost savings. This comes at a time where we’re just on the verge of a revolution in new tools, in semantic technologies, API’s, alt-metrics and text-mining.
These approaches offer great promise, but also require significant investment in development, implementation, and maintenance. The only path to growth for these technologies may indeed require a decoupling, with the needs of authors paid through article processing charges (APCs) and the needs of readers (and others looking to reuse the articles) through site licenses to suites of tools.
With the acquisition of Mendeley and so many other reader service startups, the large commercial publishing houses may have already started down this path. Many see a lateral move taking place, with revenue streams merely shifting directions within the same company, from journal subscriptions to a combination of author fees and service fees.
This serves as yet another area where the OA movement is unintentionally reinforcing the dominance of the larger commercial players in the market. The smaller, not-for-profit publishers simply don’t have the capital to fund technology development and acquisition on this level. In the long run, though, market consolidation may not be such a bad thing.
A comprehensive package of integrated tools may offer better functionality than purchasing them piecemeal, and as research funding continues to dwindle, bulk approaches may offer some relief. As we know from both sushi restaurants and cable television, a la carte is almost always more expensive than a package deal.
Discussion
60 Thoughts on "Mendeley, Connotea, and the Perils of Free Services"
Libraries? They may ultimately be paid for by the tax payer, but they are there and ‘free’ and provide a far better service than the internet — and rarely carry advertisements.
Nothing is truly free. You pay. You pay money, attention, even lip-service — but you pay. The mistake is to ignore that. The question is where in the chain the burden of payment should fall. And what are the benefits or drawbacks of placing the burden there. In traditional science publishing the burden is on the shoulders of the library; the reader or author doesn’t pay. The reader doesn’t even always pays attention, as many articles are scarcely read. The downside is inaccessibility for many. OA (‘gold’) publishing places the burden on the author, on the grounds that the author has the strongest imperative to maintain a publishing system. It’s “publish-or-perish”, not “read-or-rot”. And the benefit of putting the burden on the shoulders of the author is universal accessibility.
Accepting advertising for other services is a way of paying with attention. If done well, appropriate advertisements can be incredibly informative and useful. The notion that they are an irritant by definition is utterly misguided (though some advertising can be, as not enough care is always given to their relevancy and appropriateness, in content as well as in presentation). We would not have the free-to-the-user Google if we didn’t accept advertising.
The alternative is subsidy. And then we all pay, too. Taxes, contributions to charities, etc. Money trees are mythical, for those who didn’t know that yet.
Last of the free reference management services? Except bibtex. And microsoft word***. (And EPrints!) I hated my PhD students using Mendeley as their bibliographies were always weirdly formatted.
** Free in the sense that if you have a copy of Microsoft Word then you don’t need to buy anything else. And, in academia, you probably do have a copy of Microsoft Word.
I suspect that those using the social and networked functions of Mendeley and Connotea may not find Microsoft Word to be an adequate replacement…
“And, in academia, you probably do have a copy of Microsoft Word.”
True, but a depressing reminder. 🙁
I am a bit puzzled by your analysis David. If these startups cannot find a business model that pays how can their acquisition be commercialy sensible? Is there something about bundling them together or some other economy of scale at work here? Perhaps it is the principle expressed in John D’s famous “Pioneering don’t pay.” (But then he was a pioneer.) Or is it just that success takes more money than the startup investors have? How does this acquisition work?
It’s a good question–often the acquisition is not commercially sensible (see broadcast.com as a sterling example). This doesn’t seem to stop companies from rolling the dice.
And I think that when you offer the service as a standalone, that’s a very different proposition to a customer than offering it bundled in as part of a larger service. We know that readers (or at least their institutions) will pay for a subscription, and we know that authors (at least some) will pay an APC to publish a paper. If you separate out something like peer review or semantic tagging of an article from that end goal (being able to read the paper or being able to publish the paper) it holds a different value for the customer. And it’s unclear if that value on its own is worth enough to pay for the costs of delivering it.
Also, given the economies of scale a big publisher can bring to the table, they can potentially make money on a much smaller fee than a small independent company.
Good point but this is variable. Marketing a bundle certainly reduces the marketing cost for the bundle units. But management costs can be much higher since decisions require many more people.
True, but one would think that a company as profitable as Elsevier has a high degree of efficiency in their processes.
It’s ultimately a factor of the investment ecosystem. Start-ups (particularly in limited-size market niches) command investments of a certain size from the VC/PE community; much larger companies (with lower cost of capital) invest at greater orders of magnitude. Each investment is on the high-risk end of the continuum (less financial visibility). The latter is simply done with a few more zeroes on the end of the number.
Yes but this is the standard order of things for profitable startups. The VC’s grow it then spin it off to the Big Corps. In this case there is no profit and how to get one is unclear. Was Mendeley even funded by VC’s?
Some funding information here:
http://www.crunchbase.com/company/mendeley
I beg to differ; there are myriad examples of utterly UNPROFITABLE start-ups being sold (to both public and private capital) for sums that exceed any calculable traditional multiple. From Twitter’s latest funding round all the way down to the Elsevier Mendeley deal, both corporate and VC/PE investments are frequently based on metrics other than profits.
Fascinating! Every acquisition I have worked on involved potential profitability, but that was in other industries. Another dot.com bubble perhaps? Dot.com 2.0? Internet magic strikes again?
Keeping in mind that I have signed in to WordPress (for “free”), I’m wondering … even hoping that a buyer like Elsevier is doing this for future market share retention. Perhaps it’s a don’t switch entirely to Scopus hedge? Yes, I realize that somehow we’ll pay, but there is hope that the big “E” would keep budget realities in mind.
And … oops! In Elsevier’s case that would be a don’t switch back to Web of Science/Knowledge/Whatever … certainly got THAT backwards.
David, thanks for this analysis. I’ll just note that you slightly mischaracterize my argument by stating that “software products simply don’t make enough money to exist on their own.” That’s certainly not the case with Zotero — which no longer relies on grant funding — and it need not have been the case with Mendeley. My point is that dozens of full-time employees and a full-bore marketing push are not likely to bear the demands of also turning a large profit to VC investors. And this raises a second issue in your piece that bears clarification: conflating “profit” with “sustainability.” There’s nothing that says that any business needs to be profitable, in the way you’re using the word, to be successful. If expenses are met and innovative services are delivered, it’s still successful. Most business owners, and indeed even publicly traded corporations, aren’t chained to the idea of massive profits. It’s only the small world of venture capital funded startups that faces this pressure, entirely self-inflicted with the expectation of reaping a payday.
Sean, the “self-inflicted” bit is pejorative, presumably intended. But the world of investing rests upon an abstract mathematical foundation, to wit: the higher the risk accepted, the higher the rate of return expected. It’s a formula largely blind to human/moral value judgments like that (unless we’re to reject capitalism altogether). Most business owners are indeed “chained to the idea of profits” (your ‘massive’ excluded because, unquantified, is solely for emotional inflection)–profits are business owners’ raison d’etre, and profits (which come in many forms; after all, Mendelay’s owners will indeed achieve a profit on their investment) are necessary to initiate or continue any investment. What you mock as “reaping a payday” is, in a capitalist structure, “getting paid.” Don’t you?
Thanks for the clarification Sean. How is Zotero currently funded? According to their website, ” It is generously funded by the United States Institute of Museum and Library Services, the Andrew W. Mellon Foundation, and the Alfred P. Sloan Foundation.”
On the second point, I strongly believe that profit is essential to sustainability. One must have a surplus of funds in order to grow, experiment, develop, and to weather any problems or storms that may come along. If you’re strictly breaking even, and then a key piece of equipment breaks, you can’t afford to replace it.
I’m not arguing against the idea of profit, nor am I against capitalism. And I’m not mocking the idea of reaping a payday. I’m just saying it’s the business decisions of the Mendeley crew that’s leading to this outcome, not the space of reference management itself.
I’m sorry I wasn’t more clear in my comment, and maybe I need to expand on this more fully in another venue. But essentially my point is this: it’s not at all impossible in this space to do more than make ends meet. Zotero is “profitable” in the sense that it easily pays for infrastructure and the development of new functionality, features, etc. Its funding comes from the sale of services including storage and training.
Paying oneself, and one’s employees, handsomely is not the same as delivering an acceptable return on a venture capitalist’s investment. That’s my point about the above piece’s confusion about the kind of “profit” necessary to thrive in this space.
In other words, it would appear that we’re on the same page here.
Sean, I think you’ve made some really important points here. When a new space like this emerges, we see something of a goldrush mentality. Lots of people jump into the fray, hoping to stake their claim as a first mover and become dominant in what will eventually be a highly profitable business (see altmetrics, science blogs, peer review systems as other examples). And that mindset may not be appropriate, or even possible here.
It speaks to the idea that tools for the academic research community may best be owned by and developed by the academic community itself, rather than by profit driven businesses. A different set of priorities come into play as does a different set of risks (particularly if one is reliant on grants or the whims of faculty to secure next year’s funding).
But do you think a paid membership business model is viable for a product like this?
Thanks, David. I’m glad that I finally explained myself better! Based on our experience from 2009 (when we launched paid storage) to now, yes, subscriptions are an effective way to fund development of Zotero and subsidize storage users who are under the “free” limit (today 300 MB). We have been very conscientious about not tying any specific functionality to paid accounts — e.g. we don’t place any limits on collaboration like Mendeley does with non-paying users; likewise users can use their own servers to host files if they want — and this decision is largely driven by our politics and experience as academic researchers. We really do want anyone to be able to use Zotero to collaborate. But we also believe that it’s good for business, too, because if non-paying users try our own service to collaborate and like it, they’re more likely need more storage down the road and become paying users.
It’s worth noting that Zotero, as a grant-funded project, operated under the rubric of “research,” and that continues to be the case even now. Figuring out the needs and desires of the academic and research community, and looking for ways to transform its practices, are pretty much what we’re after.
The fragility of the Mendeley community may be seen in this community blog comment. Some users have already declared publicly that they will stop using the product.
If Mendeley is sold to Elsevier it would be one of the worst betrayals to Open Access ever. One that might kill the whole idea. Please don’t do that
http://feedback.mendeley.com/forums/4941-general/suggestions/3567676-don-t-sell-mendeley-to-elsevier
The ideological aspect certainly complicates evaluation of this (possible) deal. David C. offers a counter suggestion below namely that Elsevier wants the technology for its subscribers not the Mendeley users.
Elsevier is a company making huge profit, but it is also a company who lost the trust of its users, and this comment is a good example of that.
By buying Mendeley, they may change that: if they buy it, and push it toward being more open (release all codes), they may convince the users to trust them again. It would be a cheap way to save their reputation.
For the users, it may be then benificial: Elsevier does not need to make Mendeley commercially profitable, but they need to polish their reputation. For the user, this could mean better tools for free.
On the other hand, if they try to sell the service, they will destroy their reputation even more and will loose the users who will go to zotero (I will at least).
They may also be some ways to sell products derived from what the community will produce. Think of annotations of paper using ontological tools done by the community (for free), which would lead to an effective search of new paper that will interest you, I would pay for that service…
To offer something free works, if you can back it up with something you sell (see skype: more than 90% of their traffic is a free service, the rest is enough to make huge profit…)
Despite the noise, it’s unclear that this apparent loss of trust is widespread or that it has hurt Elsevier’s business. I suppose we’ll have to wait to see their 2012 financial report, but has there been any notable dropoff in submissions or readership for their journals? When I asked someone from Cell Press how much of a backlash they saw from the Research Works Act, the answer was none whatsoever, as apparently most people don’t realize Cell Press is owned by Elsevier.
Spending $100M to buy a product and give it away to make a small minority of customers happy is probably not the greatest business model, particularly for a publicly traded company that has an obligation to its shareholders to maximize profits. Elsevier already does a tremendous amount of community outreach, particularly to developers, but they seem to receive little credit for this:
https://www.developers.elsevier.com/cms/index
Not sure why giving away Mendeley would be any different.
And yes, giving away something for free does work if you can back it up with something else you can sell. But that’s easier said than done. And as noted in the post above, that business model often works against the best interests of the users of the free product.
Regarding these huge profits I read something that these are prior to paying bondholders, which is debt service, so the real profits are relatively small, perhaps just a few percent.
For Elsevier what’s not to like? So they get a product without a sustainable profit stream yet. They’ve placed that bet many times. See Scopus. See their whole journal system historically. They can afford a longer timeline to profitability than most VC investors because they can roll the overhead costs onto their other successful products lines, much like they have done with start up journals forever, far longer than VCs are willing to carry a product. Elsevier’s product lines fit well with Mendeley, as it appeals to both individual scholars productivity a key to their long term survival, and to institutions looking to optimize collections based on use a future key to their profitability. Whether the user base will follow Mendeley to Elsevier, and will Elsevier continue investment to enhance the service are some of the issue if the purchase goes through.
No doubt this could make Scopus a much more appealing product for many. And it’s important to note that even if the entire Mendeley community defects, Elsevier has an audience already, the readers of its 3,000 journals, that could find the product useful.
In justifying mergers, CEO’s often claim the is “synergy,” with the acquired product or technology working together with a company’s existing offerings. Doesn’t always work out, but synergy certainly could be the motivation with Mendeley and Elsevier. Fear also plays a factor: fear that a competitor might acquire the valued technology and gain a leg up.
As Stevan Harnad points out quite often, Elsevier is the only major commercial publisher that entitles all authors to deposit their articles as green open access. If you don’t have a personal web site or institutional IR, then Medeley is a vehicle publicly go green.
David Crotty’s arguments about “wealth transfer from research institution to for-profit publishers” makes little sense if you substitute “telephone companies,” “business-machine companies,” or any other industrial category for “publishers.”
Add this to the other false arguments about research information — such as the gag that “we university wrote, edited, and refereed all the research for free, so we should be able to access it all for free” — and you have to ask whether Crotty and others ganging up to remonstrate against Elsevier could pass an elementary course in logic.
Hi Albert,
Not sure why you got that out of my post. I work for a large publisher (and a fairly profitable one). I have never, and would never have made the argument in your second paragraph, nor does this article offer any support or disparagement for open access, merely it points out perhaps an unintended consequence of the movement working to the benefit of large publishers like Elsevier.
Hi David. Please clarify exactly what is your problem with “wealth transfer from research institution to for-profit publishers?” — or any other organization doing business with higher education?
I’ve never used that phrase, and have no problem with it. I’ve often made arguments that it is in a researcher’s best interest to outsource much of the work they must do that takes them away from their core job, performing research. That means paying a dishwasher, a centrifuge repairman, a journal editor, etc. I do think it’s in the research community’s best interests to own and control as many of these services as possible, as this provides the easiest path to getting their needs met.
And I’ll also point you to a posting from 2011 where I wrote that one must separate out the ideas of profitability and access, as open access may prove to be something of a cash cow for the big commercial publishers. Nothing wrong with that, provided that the researchers’ needs are being met:
http://scholarlykitchen.sspnet.org/2011/09/28/separating-the-threads-what-is-the-link-between-access-and-profitability/
David, you quoted Sean Takats using that phrase. What was your point?
You’d have to take that up with Sean. My point in including his quote was to talk about the viability of certain business model approaches, can you sell something like this product as a standalone item or is it better sold as part of a larger package or as bulk subscription to an institution. That phrase at the end is fairly irrelevant to my point and could have been left out altogether.
Also note this piece on the importance of allowing financial rewards to spur innovation:
http://scholarlykitchen.sspnet.org/2012/07/30/driving-innovation-finding-the-balance-between-fair-reward-and-profiteering/
The history of innovation in learned publishing has been led primarily by entrepreneurs, from Henry Oldenburg’s Philosophical Transactions to translation journals and you-name-it on the Internet.
David, you didn’t mention Academia.edu. I’d be interested to year your opinion on it and how it fits in with the services you describe here.
It’s not a site where I’ve spent much time. I used to have enough time to explore such things but these days, between work and family, not so much. In taking a quick look, there’s not much explanatory text there on what it offers, other than that it seems to be a place for posting preprints and postprints and sharing them. Does it serve the same reference management functionality as Mendeley and Connotea?
If I am not mistaken David is pointing out that a business which offers its product/service for free at some point in time has to make a decision. Sell the company, charge for the service, or go out of business.
I think David is merely pointing out that there is no free lunch – even the Salvation Army seeks funds.
Why E bought M may never be known. Will they make M a successful company and turn a pretty penny? Possibly yes and possibly no. But, that is what business is all about – isn’t it?
I think David’s observations regarding what I will call the new dot.com S&T publishing bubble points out some interesting observations and challenges for the future. For instance, can PLos keep raising fees and still attract authors or will they put themselves on the market? At what point will green and gold be as expensive as subscriptions?
I would suggest there are many other options beyond just selling the company, charging users for the service or going out of business. Some companies charge advertisers, others sell information and access to their users, etc. But each of approach presents a different challenge to the user, whether in terms of financial cost, uncertainty, poor terms of service, etc.
And many more business models exist….
the most successful these times is attract the user with free service and sell him a paid service in it (see skype business model). What publishers did a lot: ask your users to work for free (i.e. produce papers and review them) and sell what they provided you to other users (the reader). This could also work for Mendeley…
If there’s an obvious and viable business model for Mendeley, why are they looking to sell off the company rather than exploit it? It’s very easy to suggest someone come up with an innovative and previously undiscovered profit center. It’s another thing to put it into practice.
“If Mendeley aligns with a new corporate owner, that will leave Zotero as the last of the major reference management services not connected to a large for-profit publishing house.”
It’s probably not coincidence that they are also the only open-source system among them.
Hmmm, that’s not true – Connotea is/was open source.
I am not sure that there is any peril identified here. Having done Business Development for many years there should be no surprise here. Mendeley started with a free model and that model was supported by their venture investors. Everyone knew what the plan was from day one. The only question for the investors is what is the best time to cash in. Free or not the play is a straight forward investment strategy. Mendeley did not do itself in by offering free services. The decision is not based on “we are out of money” but by the investors deciding that they have a solid offer on the table.
Elsevier is a well run company that has bought any number of start-ups, mid level companies and has made money on almost all of them. By my way of thinking the deal at $100 million is a steal.
As an investor in more than one company I have missed the window and held on too long. Timing is always difficult. Let’s hope Mendeley investors are calling this at the right time.
The “peril” in the title is meant more for users than investors. It’s a matter of understanding where you lie in the company’s business plans, and how reliant you should be on a service where you are not the customer.
Unfortunately users have a long history of getting screwed by investors. Just seems to be the way of life for the financial community. There is no question that the VC’s in this opportunity were not concerned about building up hope for open access, as most could care less or even understand what that battle is all about.
Dan, you’re pining for a post-capitalist system, apparently, but in any event you are absolutely correct, of course, that VCs are not “building up hope for OA” and that they “couldn’t care less.” Nor are they “building up hope for traditional content licensing models” or “building up hope for tool monetization” or any other kind of hope for any community, bar one: their investors. They are building up hope for profits among investors with a high risk tolerance who have allocated capital to riskier businesses in hopes of achieving above average (ie, above-index) returns. Any hope that the VC investor has a political stake in one model over another is sadly naive.
“Even behemoths like Facebook and Twitter continue to struggle with monetizing their popularity.” FB generated $1.25B in its last fiscal quarter and had operating income of $377M (30% op margin). Twitter is expected to generate $1B in 2014 (http://www.bloomberg.com/news/2012-06-01/twitter-said-to-expect-1-billion-in-sales-in-2014-on-ad-growth.html), and is believed to be profitable already (http://www.latimes.com/business/technology/la-fi-tn-did-vc-fred-wilson-just-tell-us-twitter-is-profitable-20130111,0,6904023.story).
While we may argue whether these companies are worth their current valuation, I think we’d all like to struggle with those types of results. Internet companies did not invent “free” models, they have been around a long time (TV, radio…) and often been quite successful. While it’s interesting to speculate on why Elsevier would buy Mendeley (and for what price), I think the fixation on free biz models is misguided. Free is simply one strategy for business success (and sustainable profits) that is fraught with risk for all stakeholders, just as with any other business model.
I think “struggle” is a reasonable word to use. 85% of Facebook’s revenue comes from advertising (at least as of 2011 numbers). Twitter is said to expect the majority of their revenue to come from advertising as well. Frankly, it’s kind of disappointing–you have incredibly innovative services with enormous user bases that are tremendously engaged with each service. Yet they have failed to find revenue sources beyond the low hanging fruit of selling ads.
This may prove to be tremendously profitable, but that’s mostly due to sheer size rather than any real innovation, or any newly developed business models. If you had asked either site’s founders a few years ago if they would have been satisfied that the only way they’d be making money is by selling ads, I suspect they would not have been thrilled.
Your point about other strategies offering risk is a fair one. But each offers a different set of risks for different stakeholders. I don’t think it’s too absurd to discuss the particular risks of a particular business model, especially since people keep getting caught off guard by what should now be obvious.
A reblogué ceci sur bibliothecaire ? and commented:
Add your thoughts here… (optional)
“CiteULike […] are already aligned to Springer”
No, we’re not. But they did sponsor us a few years ago.
Thanks Fergus–can you clarify the current relationship between Springer and CiteULike? You’re listed as a Springer “partner” all over the internet, but that information may be out of date. I’d be happy to update the post if you can provide further information.
Also, how is CiteULike funded?
