The South by Southwest Interactive Festival drew people from a variety of perspectives together to listen to App.net Founder and CEO Dalton Caldwell discuss an alternative to ad-supported social networking. As a heavy Facebook and Twitter user, ad-supported social networking is the only model I know, but by the end of the session, I was able to see a feemium model as a real possibility.

Caldwell’s previous company was imeem, built with $70 million in venture capital. It was a music-sharing site supported principally by advertising. Imeem had more than 20 ad salesmen trying to monetize its 26 million users, but in a good month they were selling only $2 million in ads and eventually the company had to be sold at a fire-sale price. Similar services, such as YouTube, survived only by being purchased by more deep-pocketed Web companies. Although conventional wisdom had held that all you had to do was build a large user base and a business model would present itself, imeem and others proved that wrong.

Moreover, Caldwell and others bristled at the thought of selling private data about users to survive. As he recounted, what if Dropbox added ads to each of your documents on the service? Even more important, he believed that it was fundamentally wrong for companies such as Facebook to claim that, in essence, they owned all the private data generated by their users. Aren’t there some services and things too important to its users to be ad-supported? There had to be a better way – didn’t other people agree with Caldwell that “I want an alternative to advertising hell — I would gladly pay for a service that treats me better.”

In summer 2012, Caldwell crafted what he called an “audacious proposal” and asked for support, both monetarily and through commitment and participation, from Internet users. He and his team had spent almost a year building a consumer-facing iOS application and service with realtime feeds, developer APIs, and an enjoyable interface. He proposed to refocus App.net to be a “financially sustainable realtime feed API and service,” and in return was looking for 10,000 committed netizens to help raise $500,000 to make it happen. Caldwell got more than $750,000 and 11,000 backers, and App.net was born.

The key to App.net was inverting the economic model. The larger the number and variety of applications on the service, the more likely the average user is to upgrade to a paid subscription. Just as importantly, the member owns all of their data. That data must be available both to the member and any developer in a format that would allow the member to control their own data and dictate its use. App.net studied successful Web 2.0 businesses such as eBay and Air BNB and asked the question — what comes first, the renters or lessors (or the sellers or buyers)? Their takeaway was to aim at developers first, not at users — the “if you build it, they will come” approach. In just a few months, App.net had 120 production quality apps. Less than a month before SXSWi 2013, the freemium launch of App.net occurred, and in less than a week the user base had grown from 31,000 to 51,000, and continues to grow. Just as importantly, content creators such as The Onion, The Verge, and TechMeme are using App.net to reach larger and larger audiences.

Perhaps Caldwell is right and some things are too important to entrust to people who need to exploit you to survive. While it is early in the game, the passionate back and forth between Caldell and the SXSW crowd suggested that App.net has tapped into some deeply held convictions that change has to come.

This post is by Stephen J. Easley, vice president for government affairs and general counsel of F2 Technologies, a company for wireless data and software. He is also an entertainment lawyer, representing clients such as the Buddy Holly Educational Foundation on corporate and intellectual property issues. This was his 27th SXSW conference.

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