Fred Wilson responding to the recent excitement over App.net, a paid social platform:
Because most people prefer free to paid. I don’t have the exact numbers but I would suspect less than 10% of Spotify’s users pay for music. Why is Pandora so successful? Because it is free. Why is over the air radio still the most popular way to listen to music? Because it is free.
I agree with Fred. Most people would prefer free to paid. Generally, people are numb to advertising. It doesn’t bother them that they are the product and advertisers are the customers. However, there are still a significant number of people that question the motives of services funded solely through advertising. These people would prefer to pay to become the customer and have the service work for them.
The key is that you don’t need everyone, or even most people, to have a successful social network and profitable business. For every broad reaching free service, there is usually a nicer paid version for a smaller group of people willing to pay. Antenna TV is free, a smaller group of people pay for cable, and an even smaller group of people pay for HBO. Radio is free and a smaller group of people pay for satellite radio. The great thing about App.net is that it’s poised to become the first mainstream premium social network.
For a social network, the overall goal is to reach the broadest possible user base. This gives advertisers the the most bang for their buck and users the biggest opportunity for networking. But, assuming that there are no advertisers, how big does a social network need to be to provide value to paying users? I’d argue that a social network can provide value to its users with a much smaller user base than Facebook or Twitter. Right now, Facebook has around 900 million users. Using Fred’s 10% estimate from above, that would leave 90 million people willing to pay for an ad-free social network. I’d say that 90 million people is plenty. The cheapest App.net plan of $50/year would generate $4.5 billion a year in revenue. Even using Twitter’s user base of 500 million, you have 50 million users and $2.5 billion in revenue. Not too shabby.