Whither “Freemium” – Where Is Google Going?

There are lots of ways to make money, especially on the Web. One of my favourite bloggers, Fred Wilson, recently did a section in his MBA Mondays series on revenue models, and Steve Blank gives a pretty good treatment in his opus, “Startup Owner’s Manual.” Two of them, in particular, are relevant to Google:

  • Multi-Sided Markets: I like to call this the “three-way model.” I give something away for free to you, which draws you to my service, which convinces someone else to pay for access to you. There are three parties to the market. This is classic Google, and where it got its start. Search is free to consumers, while advertisers pay good money (almost $11BN worth in the most recent quarter) to access those consumers. 
  • Freemium: This is a fairly recently coined word, although the concept has been around in various forms for years: it is a variant on loss-leaders, free samples, giveaways, etc. In the Web, of course, we need our own nomenclature, hence freemium. In freemium, I have multiple tiers of service. The basic tier is free, while higher tiers – greater capacity, more service, more security, more options, etc. – are available for a higher fee. Examples include FreshBooks, Amazon Web Services, and of course Google Apps for your Domain/Business.

Google’s start was in Multi-Sided Markets. Actually, it started with a free service and didn’t know how it was going to make money, until it came across advertising. As such, it isn’t surprising that built into its DNA is an interest in making something free for users, and getting money on third-party.

Gmail started and remains this way: gmail is free, with contextual advertisements on the side/top. In addition, it is strongly believed that Google performs in-depth analytics on gmail data to help drive its search business.

At one point, users began clamouring for the ability to use gmail for their own domain. You could always get johnsmith@gmail.com, but what if you wanted john.smith@mybusiness.com? Google, realizing that the popularity of gmail mean that email was broken not only for consumers but for businesses that run their own domains as well, stepped up to the task and offered Google Apps for Your Domain. Now you could run mybusiness.com email off of gmail.

For years, Google offered this service as a freemium model: the base service – up to 50 users per domain – was available for free, while higher tiers of service – unlimited accounts, higher capacity mailboxes, advanced spam filtering, email auditing for compliance, etc. – were available for a fee, usually $50/person/year. For small home users that is a lot, but for a business of 1,000 people, to run all of their email for only $50,000/year is an absolute bargain. Many companies, large and small, jumped on the bandwagon, to a large extent driven by the many employees, especially in technology, who already had experience with free Google Apps on their small business or personal domains.

Then Google cut the maximum users on the free tier to 10. And last month, they announced that the free tier is ending. Existing domains are grandfathered in, so no one is being kicked off, but no new accounts will be set up. Similarly, it is stopping offering Google Sync – the Microsoft Exchange-compliant sync protocol that allows iPhones, Windows Phones, and many Desktop apps easily to sync mail, contacts and calendar, including the only form of push email that works on many of those devices – except on fully paid accounts.

The question: where is Google going? Clearly its freemium model has worked, as Google Apps adoption, at least anecdotally, has been quite large. Google does not share actual numbers of accounts as far as I know, and certainly not free vs paid, but the numbers are there. Of course, revenue pales in comparison to its advertising revenue – total non-advertising revenues in the last quarter are less than $1BN – but it is driving users in.

Some possibilities:

  • Cost: The cost of maintaining and supporting the free version is too high for the paid revenues it drives, i.e. conversion rates are too low. I am skeptical, since it has put significant effort into merging its Apps and its Gmail products, to the point that they are essentially the same. This does not appear to be about operating cost, it is about product marketing.
  • Brand: Google believes that its Google Apps brand is sufficiently strong that it no longer needs freemium and can drive sufficient demand based on its existing brand name. This is possible, but is disconcerting. Google reports in every single annual report the risks due to “fickleness” (my word, not theirs) of users; consumers are always one click away from searching via Yahoo or Microsoft (or Facebook or Twitter). Gmail is sticky, Google Apps is very sticky. This may be their thought process, but it is an erroneous one in my view.
  • Culture: Google may believe that its future is in many sold products, rather than its free-based multi-sided markets, and is trying to force a cultural shift inside the company – and in the market – to accept its future. I have seen zero indication of this, but it is a possibility.

I would like to see others.

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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