>Hansson calls this the neighborhood Italian restaurant model of Web commerce: It's a lot easier to start a nice neighborhood restaurant than it is to start the best Italian restaurant in the world (the Google of restaurants). But just like their bigger brothers, neighborhood Italian restaurants make money. Sure, they don't make as much as the best restaurants in the world, but they do well enough—and it's not nearly as much of a headache to run a neighborhood restaurant as it is to run a place where investors, critics, and the world's press are breathing down your neck.

This metaphor is bad. On the internet, there can't really be that many Italian restaurants because there are no local monopolies and no marginal costs.* On the internet, there would only be one Italian restaurant, and it would be 37 signals.

*Sure, there's the speed of light and the cost of electricity, but these are not strongly limiting factors.

Isn't this what the 'long tail' is about? Online, your 'neighborhoods' are demographic niches.

Now, if the needs of your online 'neighborhood' have already been met, then that's similar to living in a neighborhood full of Italian immigrants and still looking to start an Italian restaurant nearby. You'll have to move and learn about the needs of other 'neighborhoods'.

Many people (including Eric Schmidt in a submission that was posted earlier this week, although I've certainly heard it before) argue that the Internet follows more of a Zipf's Law distribution (http://en.wikipedia.org/wiki/Zipfs_law) than a "long tail". In other words, the bulk of the traffic and therefore the revenue is in the head. As a corollary, the Internet doesn't get rid of celebrities, it creates bigger celebrities.

True. Maybe the metaphor was apt. At any rate, we can all agree that there are quite a few niches that are a little cramped.

That's the common wisdom yes, but is it true?

If you have a business that depends on Metcalfes law (the value of a network is proportional to the square of the number of connected users of the system) then yes you need to get big fast and become the market leader.

But for many other types of business this is simply not true. To take 37signals as an example there are plenty of players in their market, probably thousands that are turning a tidy profit. I can name a few just off the top of my head.

A neighborhood of billions has more than enough room for many Italian restaurants.

That same neighborhood sometimes wants Chinese, or Greek etc, etc.

Given those two statements, and the sheer numbers on the internet, it will be a long time indeed before we reach the limits you talk about.

That being said, if you open an restaurant and serve canned spaghetti, you're probably not going to see high levels of success.

I think that it's kind of mistaken to attempt to put this whole thing in terms of 'neighborhoods and restaurants'. It's just not the same as on line businesses which purvey information goods.

How so? I think it's rather fitting to be honest, especially if you consider information "food for the brain".

The marginal cost of an information good is usually zero or quite low, food costs something. Food is not easy to replicate, information goods are super easy to copy and distribute. 37signals' products are used worldwide; Beppe's Trattoria is really only available to people within a short distance.

I can only speak for myself, but I wouldn't pay for facebook.

I can only speak for myself, but I don't use facebook even though it's free. I don't particularly need gratuitously large social networks made up largely of people I don't really know. Sites like facebook, reddit, and even this one to a much lesser degree mostly just distract me from getting things done at the computer.

When people ask me why I'm not on Facebook, I usually tell them that Facebook is like a really high-maintenance girlfriend without the upsides. Twitter is the only "social network" (if you can quite call it that) I'm prepared to use, mostly because it's so loose and informal. I hope it stays that way. I hope the "Hot Political Topics" bar isn't a sign of future feature creep that plagues other sites. (I'm not even in the US, why can't I turn the damn thing off?)

As for whether I'd pay for Twitter: yes, if all the people who use it now continued to use it. Unfortunately, charging for it would almost certainly cause a lot of them to leave, reducing its value - which would lead to a vicious cycle. I think this is the main problem with monetising social networks that aren't targeted directly at who are prepared to pay from the outset.

Freemium is probably the way to go. The trick is finding a sufficient set of value-adding features, ideally introduced immediately as a premium option. Nobody likes to pay for something that used to be free. Of course, if it was easy, they'd already be doing it.

Facebook is what you make of it. I have an account there and largely use it for gaming. Outside of that, I check it a couple times a week. It's been pretty nice for connecting with people (even facilitated our class reunion) but what I like best about it is that I don't really care if I ever check up on it.

I use it, but only because it mails me notifications about events. If my non-technical friends understood mailing lists, and enough of them were on the same one, that would easily beat facebook for it's primary usecase (at least in my situation)

I've put some serious thought to the question "How much is a Facebook account worth?"

Clearly, there must be a free account available because it wouldn't be worth a penny if it didn't have as many users as it did. So I re-framed the question as "What parts of Facebook are worth a premium?" as well as "What parts of Facebook would I pay for?"

Unfortunately, the list is pretty short. I used to use Facebook a lot during college, but now I use it for the occasional info or photo lookup. When I'm bored waiting/traveling/etc, I will usually whip out my iPhone and comment on a bunch of feed items and that's always worth a few laughs. But would I pay for that? I just really can't see myself needing it badly enough.

What "advanced" or "premium" features do all of you use? What would you pay for those features?

Out of curiosity, if it disappeared tomorrow, how much would you pay to get it back?

("Sorry guys, we can't afford it anymore! We need people to chip in $1 each a month or we have to shut down. These friends of yours have already agreed to stick around: XXX, YYY, ZZZZ")

I actually wish it disappeared. It would make a lot of people more productive (me included) and allow me to not worry about writing a facebook app.

This is like a negative network effect where so many people are sucked into this black hole that it's hurting everyone.

I'm exaggerating a bit but I do see a negative effect. It may be outweighed by the positives but it's still there.

That's an interesting exercise, but in reality I wouldn't expect enough of my friends to pay to stay on. There would be a mass drop in the number of users, significantly devaluing my membership. So if that were to happen, I wouldn't pay anything. However, if they said "We're now at even cash flow, but have amassed a lot of debt! We don't intend to take this towards profitability, but please help us stay afloat." I might donate 10 or 15 bucks. Not that I expect that to happen either :-)

The problem with what the article suggests is that the penalty for not paying is the destruction of the usefulness of the service, that's unacceptable.

People log in to facebook precisely because people do 10 status updates a day, and post an ungodly number of notes, and join a ridiculous number of groups. If you restrict these, even if some people are willing to pay, the network is no longer compelling, and usage will drop, and you send yourself into a death spiral.

Clearly facebook's monetization does not lie in charging for an account, that is IMHO one of the dumbest ideas I've ever heard.

Oh, and the author is completely off his rocker if he thinks you can get 5% of people to subscribe to a pay-facebook. Think 1%, max.

But would 5% of their users? I could see that.

That sounds a lot like classic "Chinese marketing" that a lot of companies first tried when China opened up for foreign business. There are a billion people in China, so all we have to do is sign up 1% of them as paying customers and we'll be rich! Anyone can get 1% market share, right?

Of course it turns out that didn't actually work for most of the companies who tried. There has to be some kind of specific value proposition or you won't get even 1% of any market.

If only 5% of your Facebook network existed, would you use (let alone pay for) Facebook?

If it was the 5% of my Facebook network that I actually care about, this would make FaceBook more valuable to me.

(Okay, a bit more than 5%. Maybe 10-20%.)

Typically, there are free tools, and premium tools available to those who pay. They could work on some new features, and only release them to premium users. Ideally, the features are only interesting to those that care a lot about their profile. Analytics are a good option.

They should become a media company though.

If they charged people for any custom applications they wanted to put on their profiles, and then gave some of that money to the app developers, I could see both a dramatic decrease in crud, and a dramatic increase in the quality of apps in use (cause, y'know, they're paying for 'em.)

That conversion rate is as wishful as thinking Facebook can survive without an income. 2% would be outstanding, IMO.

I would. I like that Facebook works perfectly without messing things up. I'd pay to keep a site like that afloat.

I would pay for Twitter. If enough of my friends did.

Providing public goods by profit seeking entrepreneurs: http://mason.gmu.edu/~atabarro/PrivateProvision.pdf

I don't use twitter now.

I wouldnt pay for facebook either, linkedin maybe.

I think the Facebook example is a terrible example. If that had been their business model since day one, then fine, they can do whatever they want because every new user knows what they're getting. But if they get huge because users are flocking to their site without having to pay anything and dedicating a lot of time to the site, they shouldn't TAKE AWAY features that were previously free. That just seems wrong to me. That was the model they chose and that's part of the reason why they got so big. I don't think very many people created a Facebook account with the idea that they would eventually have to pay for what is currently free.

If FB had this business model from day one, I highly doubt they'd be as big as they are now. I think it's up to them to figure out a way to make money while not charging for any CURRENT features. If they want to charge for new features, that's fine; otherwise, it's just a bait-and-switch and they're doing a major diservice to the large user base that made them who they are.

The moment Facebook does this, I'm starting a Facebook knock-off and stealing every single one of their customers.

Then you'd eventually start burning up too much cash, would have to start charging, someone else would clone your facebook clone, and the cycle would start afresh. This is the social network predicament.

Yeah, but if I did it, I would sell for a billion dollars. :)

Facebook's business model: cross their fingers and hope very, very hard that someone decides to acquire them before the cash runs out.

Yahoo already tried.

zuckerberg already decided that running facebook is more fun than doing whatever you want everyday for the rest of your life.