Earlier this week Rebecca posted the latest evolution of the USV thesis. It includes the words “trusted brands” which led some people to ask how an early stage company could already be that. I provided the answer in a tweet in which I wrote that
“trusted brands” — have incentives that are aligned with your customers/endusers so you can build trust over the longterm
I want to explain that further today and put it in the larger context of Internet business models.
During the Dotcom Bubble, there was a lot of talk about how web sites were aggregating “eyeballs” with the idea that these would be monetized later. Implied in the word “eyeballs” was that the business model would be advertising. And the idea of importing this business model made a lot of sense: after all what companies were doing on the web was “publishing” and advertising had been a key component of the publishing business model for a long time.
But over time a deep problem emerged with this imported business model. Online there was a glut of publishing and attention became highly fragmented. That meant that the price of advertising declined precipitously which put a premium on reach and on targeting. If you wanted to have an advertising based business you needed a large audience and you had to know as much as possible about them to make highly targeted ads possible. But both of these have proven to put companies into some degree of conflict with their endusers. Exhibit A for this conflict today is obviously Facebook with Twitter not far behind.
Interestingly and less obvious, there is also a conflict with advertisers also. How so? Because platforms can retain their value only if they prevent the advertisers from establishing a lasting direct connection with their customers that exists separate from the platform. It is worth reminding ourselves that in the pre-Internet days there was no scalable way for a company to have an ongoing direct relationship with their customers. If you wanted to get a message out you had to avail yourself of media through advertising. You couldn’t just send an email or a text or have visitors to your own website. Catalogs were expensive to print and distribute. And other than getting calls into a call center almost all communications was one-way. Today companies can have their own website and can have bi-directional communications with their customers. But if they did that successfully they would no longer have nearly as much need for platforms (other than for possibly reaching new customers).
Is there an alternative? The most promising model to have emerged are consumer subscriptions. We are already seeing some real breakouts, especially in media with companies such as Netflix and Spotify. At USV we have a growing portfolio of consumer subscription service companies, including Soundcloud, Splice, Nurx, Clue, Duolingo, Quizlet, Codecademy, Skillshare, Stash and Wattpad (some of these companies have hybrid models where they have some advertising for users who do not pay but also a paid version that is ad free).
The consumer subscription model provides a great alignment of incentives between endusers and the company. The company needs to provide enough value in their service so that customers continue to subscribe. Conversely the customer has an incentive to use the system and incurs no marginal cost in doing so. For instance, if you have a Skillshare subscription watching another video or even taking another entire class has no additional financial cost to you. That’s great because it means you can try out a class and if you like it continue. It doesn’t matter at all how much value you get out of this specific class. All that matter is that you get enough value across all your Skillshare activity.
There is important research that first predicted that subscriptions would turn out to be powerful and important as far back as 1996. I encourage everyone to read Yannis Bakos and Erik Brynjolfsson’s paper “Bundling Information Goods: Pricing, Profits and Efficiency” (PDF) which makes a terrific case for consumer subscriptions.
So I am excited to see the growth of this new model. In a world of direct two-way communications between companies and customers we all need less advertising and more subscriptions.
