The Abundance of Scale
During last ten years of the web, people have focused on scale as proof of value creation. Given that advertising is the dominant business model of the web, it has been presumed that sites which reach web-wide scale are valuable. The presumption was that sites with enormous scale will be able to monetize themselves at big numbers because of their overwhelming access to the web’s users. It is true that in order for big ad businesses to be built online, publishers need scale. But something is changing. Thanks largely to a connected social graph, mobile access, and the web’s global penetration, it’s just not that hard to get to scale anymore.
In 2001, fewer than 33 web properties had more than ten million monthly unique U.S. visitors. Last month, more than 124 did. In 2001, around 70 web properties had more than one hundred million monthly US page views. Last month, 307 did. [This data comes from Compete.com, which focuses on US only. If you double it, you usually get reasonable worldwide figures.] More and more web/mobile businesses are reaching large audiences very quickly. In its 18 months since launch, Instagram reached 12 million users (not sure if this is downloads, registrations, or active users. My bet is it is simply registrations. Still — it’s impressive for a team of under 10 people!) AppData shows 27 Facebook apps with more than ten million monthly active users.
With it becoming easier to reach such scale, there is no longer a scarcity of scale. This means the value of achieving scale is declining. As investors, if we bet on properties that have simply “become big”, that bet may no longer be enough to establish value. The next 10 years of the web will be about utilizing data on top of scale to build businesses. We are entering a period where the business model innovation will become more important than the innovation producing traction and engagement. It has always been impressive to see startups with incredible traction. But just using this traction to produce scale will not be enough to create the great companies of tomorrow. [Some of these thoughts were expressed earlier in my post "Confusing Traction With Value".]
Thank you David for pointing this out.
There is another reason why scale is less important now: content monatization models different than the ad-support one.
Sure, it is still difficult to grow a considerable number of paying users, but when you do — and there are examples of quality sites that sell directly to users with great success — then you can generate significant revenue with relatively small traffic; “small,” comparing to what would be required to earn as much by using ads.
On our site, there is a simple calculator (http://www.znakit.com/info/calculator) one can use to compare the two monetization models (ad-supported and direct (small)payments). For example, for each 1,000 users paying on average $0.25 for access, one would need nearly 67,000 visits/mo to generate the same amount of revenue from a banner ad.
Too bad that many VCs still prefer to look at your Compete or Alexa rank.
One of the interesting things about the tech startup industry is that the lion’s share of attention and column inches are devoted to the scale-focused firms you mention, not least because it’s in their interest to get as much exposure and PR coverage – i.e. free advertising – as they can.
However, more specialised startups, looking at solving pain points for, for example, large companies, can have just as much potential value but don’t get anywhere near the same amount of attention.