THE STATE OF FREEMIUM:
Have you noticed that the YouTube experience has been getting worse and worse for free
users? This has been a trend since basically the
beginning of YouTube but 2023 has been especially pivotal. It seems that every month, Google is trying
a new strategy to maximize how many ads viewers see. For example, in May, YouTube started blocking
ad block, something that they had tolerated for YouTube’s entire history. YouTube has even gone as far as disabling
video playback for people using ad block, and that’s just the most obvious example. YouTube has also started experimenting with
30 second unskippable ads, and they’re even moving to take some ad control away from creators,
presumably to optimize ad impressions and maximize revenue. And it’s not just YouTube either, it seems
that every free service is undergoing a similar evolution. Discord’s free stream quality, for example,
has fallen substantially over the past several years, and don’t even get me started on
free mobiles games which are basically unplayable at this point. The funny thing is that you can even argue
the same thing about paid services as well. Netflix’s lowest tier, for example, now
has ads. I don’t blame these platforms and I can’t
speak for everyone, but most of these free platforms have offered be tremendous value
over the years whether its entertainment, education, or social connection. So, I think it’s completely fair for these
platforms to want to earn revenue for providing this much value. But, it does make me question the viability
of freemium. Of course, freemium is a great avenue to break
barriers and make services more accessible but should freemium really be the default
mode of monetization because it seems that that just leads to the same dead end everytime. These platforms eventually get worse and worse
for free users until users either leave or end up paying. So, join me as we take a look back at the
tech industries’ obsession with freemium and why the days of freemium may finally be
coming to an end. THE FREEMIUM DEBUT:
To understand how freemium became so popular, we first have to take a look back at what
convinced the tech industry about freemium in the first place. At first glance, you might be inclined to
think that the culprit is Google or Facebook or the slew of VC backed money burning startups,
but the culprit is actually none other than Microsoft. I’m of course talking about Windows and
Microsoft Office. Now this might be a bit confusing as neither
Windows nor Office was ever free but this is how freemium used to work. The official software itself cost money, but
it was relatively easy to get the software for free if you wanted to. And Bill Gates was well aware of this. In fact, he openly admitted it and even sort
of encouraged it. Eventually, Microsoft did shift their focus
to monetizing users instead of growing users. This was primarily by getting computer manufacturers
as well as schools and employers to pay for the software and this turned out to be a massive
success. Microsoft is now the second largest company
in the world and sometimes even larger than Apple. Companies like Google and Facebook as well
as a bunch of VCs saw this and looked to replicate this formula in a bunch of other niches but
there was one crucial difference between what Microsoft did and what all of these other
companies did. With Microsoft, even though users never feel
the pain of directly paying, they are indeed directly paying. With new laptops and computers for example,
the price of the software is just directly built into the cost of the machine itself. With schools, the cost of the software is
directly coming from tuition or local taxes. And with companies, the cost of the software
is directly coming from the bottom line which just means that all employees will receive
slightly smaller salaries, lower bonuses, you get the idea. The bottomline is that with Windows and Office,
while Microsoft has done a great job with masking the cost, it’s still the end user
that’s paying for the software. With new age companies though, that’s not
the case which brings us into the first major pitfall of freemium: the friction of monetization. The reason that YouTube’s monetization efforts
feel so significant is because there’s so much friction when it comes to indirectly
monetizing our use of the platform. For example, let’s say that YouTube on average
earns $4 per 1000 views and that the average view is worth 5 minutes of watch time. If you watch 1 hour of YouTube per day, you’re
averaging about 12 views per day or 4380 views per year. All of that translates to just $17.52 worth
of revenue for YouTube. Put another way, 365 hours of watch time is
not even worth 18 bucks. For perspective, subscribing to YouTube premium
from an iPhone costs more per month. Aka, YouTube would have to increase ads by
a factor of 12 to make casual users as lucrative as paid users due to all the friction. Instead of directly earning revenue from users,
YouTube is having to wait for users to spend money on advertisers products. Maybe 10% of this revenue gets put back into
marketing out of which 10% is actually spent on YouTube marketing. From there, YouTube has to give about 50%
to creators meaning that at the end of the day, YouTube is only left with max 0.5% of
the total revenue that their free users generate. Obviously, this is not all that great of a
monetization strategy but despite that, the entire industry would jump in. FREEMIUM RULES:
Whenever a given business works, other entrepreneurs and VCs naturally try to reverse engineer
what made the business so successful. With companies like Microsoft, Google, and
Facebook, the answer seemed obvious. It was obviously the users that made these
businesses so successful. In reality, there was much more to it than
just that. For example, a solid strategy to monetize
these users is also equally important but many businesses and investors would solely
fixate on just the first half of the equation: users. If they could just dominate a given industry
in terms of market share, they could worry about “collecting” later. One of the primary reasons that we got into
this vicious cycle of users over profits is due to low interest rates. With near zero interest rates, many investors
didn’t know where to put their money to earn solid returns. So, they slowly put their money in riskier
and riskier investments leading to a startup boom. I mean, just take a look at this graph, global
funding grew by 20x between 2006 and 2021. But, this insanity is finally starting to
slow down as investors now have a new place to put their money: treasuries. If you’re not familiar with treasury bills
and bonds, it’s basically a way to help fund our government. When you invest in treasuries, you’re basically
lending money to the government to help fund public projects and social programs. And in return for helping the government fund
these programs, the government will pay you back with interest of currently 5%. This is where the biggest corporations and
investors have been putting all of their cash and we wanted to create an easy way for everyday
investors to do the same. And that’s why we created our bond investing
platform Silo. With Silo, you can invest in government and
corporate bill and bonds with the protection of $500,000 in SIPC insurance and $2.5 million
in FDIC insurance all from the comfort of your phone. If that sounds enticing, please consider checking
out Silo in the description below. But anyway, this strategy of users over profits
largely worked for much of the 2010s. As long as companies were able to show phenomenal
user growth month over month and year over year, their valuations would keep increasing,
they would be able to raise more money and everybody would be happy. The only problem with this strategy though
is that if you pursue it for long enough, you eventually just run out of users. Everyone who could possibly use your app or
service is already using it. For most tech companies, this happened right
after Covid hit. With everyone stuck at home, these companies
experienced a final surge before achieving market saturation. And now all of sudden, their abysmal revenue
per user actually matters. Likely the best example of this is WhatsApp. There’s no question that WhatsApp is virtually
ubiquitous with over 2 billion active users. But, the same cannot be said about their revenue. In fact, WhatsApp doesn’t even generate
a billion dollars in annual revenue despite controlling a quarter of the world population. And a lot of this just has to do with the
fact that there is no straight forward way to monetize a messaging application. And this brings us into the next major pitfall
of freemium which is that it trains users to expect these services for free. WhatsApp used to be free to use till yesterday,
so why can’t it just keep being free? YouTube used allow AdBlock till yesterday,
so why can’t they just keep allowing it? The answer is that doing so is not only expensive
but quite unprofitable, and the only reason these companies put up with it for so long
is to hopefully convince you that the given platform is of value. Most users are aware of this but at the same
time, they don’t care either and I mean why should they? It’s not their responsibility to worry about
whether Google or Meta is making money. All that matters to them is how much value
they’re getting from a platform or service and when that perceived value goes down due
to more ads or higher subscription fees, they’re naturally gonna be upset. If anything, it’s these companies’ fault
for setting the expectation that these services are free. They went along with it because it was beneficial
in the short term but the same cannot be said about the long term and that brings us into
the current crisis that much of tech is facing: the need to monetize. THE RACE TO MONETIZE:
The bottomline is that the party is over. Whether you’re startup that has relied on
VC funding or you’re a tech giant like Google, the days of putting user growth over profits
are behind us. These companies are moving to monetize as
quickly as possible and they’re having to face all of the issues that they had previously
ignored like the friction of indirectly monetizing users and users’ unwillingness to suddenly
pay for things that they have been using for free for literally decades. And all of this is very much painting these
companies as the villain. Ah, it’s so annoying that Netflix is raising
prices and cracking down on password sharing. It’s so annoying that YouTube is blocking
AdBlock and stuffing in more ads, and so on and so forth. These companies can of course continue to
experiment with more creative modes of monetization but honestly, the better solution is probabaly
just ditch the freemium model. The reality is that for many of these platforms
to truly be viable with free users, the user experience would have to be degraded by such
a ridiculous amount that it makes no sense. Take YouTube for example. Let’s say YouTube wants to earn just $5
per user per month. I think most of you would agree that that’s
a reasonable amount. For YouTube to achieve this with the average
user who watches let’s say 1 hour of YouTube per day, YouTube would have to show about
10 minutes worth of ads every hour and that’s assuming that they earn $4 per 1000 views. In most niches, that’s not the case meaning
that YouTube would have to show even more ads like 15 to 20 minutes per hour. I don’t know about you but that doesn’t
seem all that enticing to me and I suspect that these companies are coming to the exact
same realization. To earn any sort of meaningful revenue from
free users, they would basically have to destroy the platform with ads or data collection or
payment for order flow or whatever new age mode of monetization they’re using. As such, I suspect that the main reason that
YouTube is cracking down so hard on adblock and pushing ads is not to better monetize
free users but rather to simply push free users to become paid users as I think that
this will become the new norm. The new norm will not be freemium, the new
norm will be paid. These platforms will of course keep around
their free versions but I suspect that these will be more like lite versions that are watered
down and noticeably worse than the paid version. This would obviously be a massive shift from
what we’ve been used to over the past 2 decades but hopefully it’ll be for the better. With users directly paying for these platforms,
hopefully we can move past more shady modes of monetization like data collection and payment
for order flow and things of that nature. Or who knows, maybe companies will just end
up doing both and things get worse than ever. Are you fan of freemium or would you rather
pay for your services? Comment that down below. Also, it seems that all of those money burning
startups who just focused on growth are currently getting their funding pulled. Check out this video to learn more.
