Cannibals! Existential Risk in Online Business Models

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DIGITAL DUE DILIGENCE – Two of the most conventional business models online are doomed to collapse:

    1. “Let’s let users upload media in digital form, and then sell it back to them in print form!”
    2. “Let’s get famous online so we get a book deal/TV show!”

These models are easy to understand, and the second model is especially compelling to people who didn’t make it in traditional media. But there’s a hidden game theory aspect to the whole situation: the more people pursue these models (basically “Build a product/marketing arm online, then take it to the real world!”), the less the “real world” will matter.

Take ICanHasCheezburger as an example. It’s a blog network with a few business models: sell rock-bottom CPM-based ads (to big-brand folks looking for awareness, affiliates just running the numbers, or retargeters), and occasionally sell books. But every new site they create drags a little more leisure time towards the web, rather than towards books.

Or consider the @shitmydadsays Twitter account. Their business model involved creating a popular Twitter account and using it to promote a book and then a TV show. But if social interaction is intrinsically more interesting than TV, this had a nasty side effect: it made every TV show incrementally less popular.

This gets more compelling when you look at capital costs and marginal costs. Twitter was cheap to start — their founder returned capital early on — and the marginal cost of one new Twitter account is zero. So in an environment where media dollars in general are dwindling, or where there’s more net demand for the same number of leisure minutes, TV will die out first.

A huge number of online businesses rely on this dynamic. Every one of them will some day need to alter their business model or shrink dramatically:

  • LinkedIn gets lots of money from traditional recruiters and HR departments. LinkedIn is making both of those businesses partly obsolete.
  • ShutterFly sells physical prints of digital pictures. (Startup Picplum does, too, and seems to do it better. And Smilebox, recently acquired for up to $40 million, has a similar model.) Every Shutterfly user is someone less likely to end up needing prints.
  • Zoove sells vanity phone numbers. This is apparently a lucrative business, but how many people will be explicitly thinking about phone numbers five or ten years from now? It’ll be like having a punny IP address.
  • Chegg basically turned textbooks into a Software-as-a-Service model that happened to involve printers. Now they’re moving online.

These are generally good businesses. They bolt the world’s best user acquisition model onto an established monetization strategy, and it works. But every one of these companies has an expiration date: a long-term buy on ShutterFly is a bet on a forthcoming business that doesn’t even exist yet.

Tune in tomorrow for Hobart’s list of anti-cannibal online businesses. Cross-published at the Digital Due Diligence blog. Sign up for the Digital Due Diligence newsletter here.

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