Saturday, December 13, 2014

How to make money on the internet?

Whether is it music, movies, books or newspapers the underlying theme of all these industries is “Content is King”. The delivery medium may change over time in these industries, but one thing that will always remain constant is the demand for quality content and creative content providers.

If you still don’t believe content is king, then read the article below by Bill Gates who predicted in 1996 when we were still using dial up modems that made those shrill, weird sounds when we connected to the internet. This is when downloads were at bullock cart speed compared to today’s lightning fast broadband downloads. The article starts with a prophetic statement “Content is where I expect much of the real money will be made on the Internet, just as it was in broadcasting.”

What I find interesting though is that even though Bill Gates had this vision in 1996 and strongly believed in it, Microsoft was not able to monetize this vision. It was companies like Google, Amazon and Facebook that were able to monetize on this vision much better than Microsoft. It took a few years for each of these companies to figure out how to make money on the internet.

The main lesson here is that just having vision and predictive powers is not enough. You need to constantly be on the lookout on how to deliver quality content and value to your consumers in a way that they are more than happy to pay for it. This is no easy task as I learnt from my EMBA classes that the marginal cost of delivering content on the internet is close to zero and hence people expect most content to be either free or at a very nominal price.

That is the reason that you will see that while companies in most other industries focus on margins, the companies that make their money on the internet focus on market share and growing the market share at a rapid pace either organically or through mergers and acquisitions. Whether it is Facebook, Google or Amazon most of these companies hardly made any profits in their early days. It is all about becoming the number one player in your space. When you have your customers locked into your platform even if you make very low profits from each customer, the high volume more than makes up for the low margins.

Everybody has been wondering about the 19 Billion USD acquisition price for WhatsApp. When Facebook acquired WhatsApp there were 400 million users on WhatsApp. In one year the number of users have gone from 400 million to 600 million. Facebook already has 1.23 billion active users. So once WhatsApp gets more integrated into the Facebook platform, it can easily have 1 billion users. Even if you charge one dollar per user, that is one billion dollars in revenue. And as we have already learnt, the marginal cost of every additional user is zero. So you do the math in terms of what the profits will look like.

So in summary quality content and high market share are the 2 most important things for making money on the internet. You need to manage your cash flows very tightly till you have enough market share and are able to start monetizing that market share.

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