The race to the bottom of Free!

In our rebuttal of the "Free!" concept of online business models, one of the things we point out is the game theory implications of Free - ie it only gives you market advantage if no-one else is going free, after that it becomes how much are you going to spend or risk to give away the free services vs the next player in the space. (You can see a summary presentation on this over here).

This guest post,written by Marcelo Calbucci, the founder and CTO of Sampa, on TechCrunch lays this dynamic bare - he notes:

Once you offer something for free, all shades of people will try to benefit from your service. You’d think a service like Sampa with a strong family and baby branding would just repel small business, teenagers, criminals, etc. but that’s not the case at all. And I suspect most blogging services; photo-sharing or web-site building solutions face the exact same issue we did.

Also, its apparently dirty little secret that a lot of social media site numbers are based on teenage girls (the ones that used to buy seven singles in the days of Hit Parades:

One time we went to pitch Sampa to a VC in Seattle, and out of the blue he mentions this other startup growing amazingly fast – had nothing to do with our business. After the meeting I went to check the startup website. Their Compete and Alexa growth was just amazing. Their website contained profiles of all users since it was a public social network. So I clicked on the profile of the 20 people featured on their homepage (“most recent users to join”). Of those, about 75% were girls between the age of 9 and 13 – likely the worst demographic to make any revenue from.

Did the startup know about this? Oh, yeah. Did that VC that was looking at investing on them? Likely not.

Or possibly did but was betting that the companies they would hawk it to wouldn't. As the author notes, although there are all sorts of legal issues with young teens and even pre-teens (never mind their unsuitability as an Ad target demographic), most sites do not push their TOC very hard:

Can you force users to comply with your Terms-Of-Service and still be successful on a UGC service? Yes, you can. Facebook manage to be very aggressive on the enforcement of their TOS, and so did Flickr. However, if you look at most Web 2.0 startups, they are not doing that at all. The most prominent case is YouTube, which allowed copyright infringement on their website and can plot a $1.6B exit based on their “turn a blind eye” strategy.

Maybe a tad unfair, but how many sites will really be willing to trawl through and cull their fastest growth segments? And when Sampa sifted through their user profiles they also found:

....criminal websites, from people trying to steal credit-card and passwords to the ugly side of online pedophilia. We had the FBI come over twice to collect evidence.

And let’s not forget link-farms. Although we had CAPTCHA and email confirmation for new websites, every once in a while someone managed to create dozens of websites in a single day all full of links to some bank, real estate agent, mortgage broker, auto dealer, etc. I’m sure the business that were benefiting from it didn’t know they hired a “black-hat” SEO.

As they point out, these issue are highly unlikely to just be unique to their site, pretty much every Social Network-builder, website builder or content sharing site will have the same issues they dealt with. And the hypothesis is that the pressure of the Free! dynamic implies they will by and large take these risks. Because if you don't (as Sampa decided to do), and someone else does, you fall off the "traction" escalator.....