Chris Anderson’s Zero-Cost Digital Distribution? Not For Me!

Whoever says that storage, hardware and bandwidth are ridiculously cheap by now should try and scale (and keep operating) cloud storage for 500k+ users – or roughly $23k per month for me. While economies of scale benefit ad-based business models, they also exponentially grow your storage costs – in the worst case for things no one ever wants to see again and you can not delete without driving away your customers.

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- Date: Monday, August 31, 2009 Time: 9:27 pm Discussion: Comments Category: Business and Technology Strategy, Telco2.0 Tags: business case, business model, Cloud computing, startup Print this blog post!

: Image by turoczy via Flickr

s you might have noticed, Portland, OR, startup Iterasi has publicly launched its PositivePress™ service to capture and index web pages. The service let’s you monitor your online presence in press and social media. Every webpage found is archived and completely indexed and searchable. of course you can use Clipmarks or Evernote to store web clippings by hand. Iterasi is targeting the corporate user and let’s you create annotations and sharing with team members of clients by tags, topics, etc., very nifty. Because it’s targeting companies, the pricing starts at $99, with a 30-day trial. A knowledge management colleague of mine quickly commented:

We’ve tried to build the first part of Iterasi (collecting from RSS feeds in one place) via a mixture of Yahoo Pipes, opencalais and a semtantic Mediawiki. But we’ve just “run out” of students :-/ PWC build something similar (for a lot of money) for their internal use. But they are feeding not only publicly available web info, but also articles from services such as Lexisnexis and Factiva. They also use the service to broadcast new studies from their knowledge base. The really cool thing is the very similar reporting mechanism: they can see who read what.

[...]

I think, iterasis pricing is a bit stiff! Starting at 99 USD per month to index and archive a few websites is too expensive by a factor of 10 (storage, hardware and bandwidth all are ridiculously cheap by now).

Read the last sentence again: “storage, hardware and bandwidth are ridiculously cheap by now”. Sounds a lot like Chris Anderson’s take on digital distribution and quasi zero-cost. But let’s take a closer look at that: Many students tried to come up with an internal “mix” solution (mashup would be the word here, I guess). What other billable work could these students have supported otherwise? Who would maintain this “mixture”, once in place? And why did we run out of students for such a project if it’s so cheap with such great benefit? Why did PWC built it for a lot of money, if storage, hardware, and bandwidth are so cheap? And why does Michael Arrington call Iterasi’s service “the must-have research tool”? In the face of these questions I don’t quite understand the barrier of $99 per month. What does a student cost us per month in supervision, management, healthcare, etc.?

orover, whoever started a Amazon S3 or Rackspace based web service with heavy download / upload / storage for consumer mass markets (which Iterasi does not target at the moment) knows that bandwidth, computing power, and storage is not that cheap to scale, especially not for a “free” model for countless web “hunter-gatherers”. Just look up Amazon’s S3 pricing. I’m helping to run another “freemium” service with a lousy 480k active users (users that did something in the last 3 months). The service allows users to upload and share content. Per month I’m paying about

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$1,100 for PUT/GET/COPY requests to and from S3

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$1,500 for incoming data

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$6,500 for outgoing data (as more people are consuming than creating)

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$13,300 for storage

Amazon S3 Costs of Web-Based Freemium Service

Amazon S3 Costs of a Web-Based Freemium Service

Here’s the overview: In total we’re in about $22,400 per month right now. When we add another 250k users in about 4-5 months, assuming similar activity (and who knows!), we’re at about $52,000 per month. Scale can suck. Yes, per active user it’s really small, but the problem is getting people paying from $0.00 to $0.01 (Chris Anderson has a whole book on that, remember?!)

et’s say we don’t offer a premium subscription service, but are only advertisement based – that is, we don’t factor in a “soft” revenue from personal brand, cross-selling, or gain from being asked to sit on director boards and getting stock options, etc. Below is the anticipated cost per user per month.

Cost per user per month for a freemium consumer web service

Let’s also asume that only 65% of all page views are actually done through the web interface where we can display Advertisment (we decided not to have ads in mobile and desktop clients yet). And let’s also assume that 25% of the users have ad-blockers installed and activated for our page. At a $4-6 cpm revenue from ads you can do the math how many actual website visits you need to break even – and that of course is just for hardware, software, storage. Now you shouldn’t start getting into streaming, requiring a content delivery network (CDN).

(Sidenote: now get into porn and adult friend finders, preferably pseudo-amateur or gay content, and you have a game changer. Or romantic novels everyone is embarrassed to be seen with on the Kindle, for that matter.)

ottom line: Near-zero cost of distribution only gets you so far. The same way as customers are hard to transition from $0.00 to $0.01 fees, it’s hard to get from $0.01 to $0.00 costs. I also experience that Anderson’s books are misread as “You don’t really need a business model at near-zero digital distribution costs, just use two-sided business models!”.

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PositivePress: A heavy-duty DIY Web archive (news.cnet.com)

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The Pros and Cons of Cloud Computing (technosailor.com)

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Tracking Your Customer’s Social Media Activity (marketing.blogtanker.com)

Pete Grillo

There are lots of attractive benefits to SaaS/cloud computing. However the advantages may not be what they first appear to be. The costs, as you point out, are anything but ‘free and getting cheaper’. No denying the cost of storage and bandwidth has continued to drop. Simple math says spreading the fixed costs – startup, development, etc – across a higher number of users equates to lower costs and greater profits.

I wish it were this simple. First, things change as user counts grow. Back-end databases that purr like a kitten act very differently when user counts go up by a 100x increase. Or 10,000x. Look at Twitter, a great service that is well capitalized and still has uptime issues. My point is that data centers don’t run themselves. Development and tuning go on forever. So where do you put employee costs with a hosted system? If you place (hide?) them in development they appear as one-time costs. It could be argued that the staff running a hosted service belongs in COGS. The numbers look very different when you start adding employee costs to the raw storage and bandwidth costs. Still attractive, but not ‘free and getting freer’.

In my experience at iterasi the benefits to SaaS are primarily convenience and version control. It is convenient for a customer to be able to access their account from any computer anywhere in the world. It is convenient for the SaaS provider to deploy products, new features and bug fixes in one place without hoping that all customers get the email or the CD and actually install the patch. Having sold software in a variety of configurations, this one alone makes SaaS the platform architecture of choice.

And, btw, we built our own data center in a co-location facility. Why? Because despite what conventional wisdom tells us, we could not run the number in such a way as to make cloud computing come close to the cost of rolling our own.
pete

Thorsten Claus

Hi Pete, Thanks for your comment, and I fully agree! And S3 is of course not really up to par in terms of latency, so no actual real-time data, please :)

One of the common slides that I present says that scale of (real-time and no-so real-time) information logistics is a design problem, no a resource problem.

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