Business -Websites seek to transform audiences into profit

In the aftermath of the dot-com bust, many chastened venture capitalists pledged never again to finance an idea scribbled on a cocktail napkin with no viable business model. Too many poorly conceived companies like Pets.com and Webvan had flamed out. The new breed of Internet start-ups needed to have a clear path to profitability.

The discipline did not last. Successes like YouTube, the online video site sold to Google for $1.65 billion in 2006, convinced some venture investors that building a website with a large number of users could still be more valuable than making money from paying customers. Now, as the global economy enters a severe downturn, the relative merits of these two philosophies will be tested again.

The two poles of the debate are apparent in the world of microblogging, where people use the Web or their cell phones to blast short updates on their activities to a group of virtual followers.

Twitter, a start-up company in San Francisco that has become a household name, is the leading microblogging outfit. At least 3 million people have tried its free service, according to TwitDir, a directory service. But Twitter has absolutely no revenue—not even ads.

Yammer, a new and much smaller copycat aimed at corporate customers, has a mere 60,000 users. Unlike Twitter, its founders set out from the beginning to charge for its service. Just six weeks after its public debut, Yammer is already bringing in a modest amount of cash.

Twitter has drawn much attention in the tech world since the service began in 2006. When a user is logged in through the Web or a cell phone, it asks one simple question, “What are you doing?” Users answer in 140 characters or less. While some of these “tweets” have the profundity of haiku, most are mundane, like “Sure is pretty out tonight” or “My eyes itch. I am very aggravated.”

Yammer tweaks the question, asking, “What are you working on?” The goal, said its chief executive, David Sacks, is to make offices more productive. People on Yammer update colleagues on company events or ask work-related questions without clogging e-mail boxes.

Sacks said finding a way to make money was a priority for Yammer and a lesson he learned as operations chief at the online payment company PayPal after the dot-com bubble burst and the company had to make money fast. His focus on profits helped Yammer, which is based in California, win the TechCrunch50 prize for start-ups in September. TechCrunch, a leading technology news blog that sponsored the contest, called the company “Twitter with a business model”.

Yammer’s business model is compelling, Sacks said, because it spreads virally like a consumer service, but earns revenue like a business service. Anyone with a company e-mail address can use Yammer free. When that company officially joins, it pays $1 a month for each user. In Yammer’s first six weeks, 10,000 companies with 60,000 users signed up, though only 200 companies with 4,000 users are paying.

The founders and backers of Twitter, which has reportedly raised $20 million from venture capitalists, are just as adamant about their decision to grow first and monetise second.

Like the value of the telephone network or the Internet itself, the value of Twitter increases with the number of users. So growth is its top priority, said Evan Williams, Twitter’s chief executive. “If we spent time monetising early on, it would have meant we weren’t doing other things that made the product better for users,” he said. Registrations have grown 600% over the last year.

Next year, Twitter plans to introduce several ways to bring in revenue. One idea is to charge companies that want to use Twitter as an official channel to talk with their customers and monitor what they are saying.

Although Twitter will focus on building revenue next year, Williams argues that Twitter’s growth-first approach has a proved track record.

Williams helped found Pyra Labs, an early blog company that grew rapidly but struggled to build a healthy business before it was sold to Google for an undisclosed amount in 2003. He noted that Google itself began as a search engine with no revenue before finding the lucrative advertising model that has turned it into a business titan. “It was the classic story of not worrying about monetisation yet and getting their product right,” he said.

—NY Times / Claire Cain Miller