It's Free But It Ain't Cheap
With this week's Soundcloud news, we've all had the feeling of deja vu, and decided it was time we addressed what it means when a platform is 'free' to use, download or view. We have all used a free online platform at some point, such as Facebook (whose original advertising platform was called ‘flyers’) or Instagram (after Facebook bought them).
But are these really “free” to use? The truth is that social media platforms wouldn’t make any money if you didn’t have to pay to sign up, download, or engage on the app. And without money, they wouldn’t be able to stay online long enough for the general public to see them. So how do these platform stay alive, without charging any money? Well, we have that bleak answer for you, coming up!.
1. Inventive Investors:
Are you willing to put up the cash to host and manage a platform? Then congratulations- you may be one of the few people responsible for the conception of a new platform. These are what we like to call ‘investment relationships’.
As most organizations (as of right now) can’t be run entirely by a bot or algorithm, you have to break the bank when first starting your business. This includes paying for staff, a hosting site, or a hosting platform like Google Play or the App Store to host the actual platform. This doesn’t include the fact that the actual data has to be hosted somewhere, as well as paying any royalties for code, information, or signatures on an application. And we haven’t even touched on how you market the application for visibility.
You could always opt for the limited budget option, which involves friendly influencers and organic growth. That said, unless you have connections in the platform-making world, or a following who would gladly test your latest gizmo, this method takes too long.
And let’s be honest, no one has time to wait around for results. Your little app will probably need more updates than users actually engaging with it at first, which is why (if you’re able to swing it) investors become your best friend.
2. Alluring Advertisers:
Advertisers get a bad rap, but you have them to thank for your free services. Applications and platforms can provide their service for free to users, while they still collect money through Google Ads, or direct advertisers who let them use the space to market to targeted audiences. This revenue can be enough to keep their platform afloat- but it changes the experience for users, as they have to navigate the advertising to access the content.
3. Paying a Pretty Penny for Paid Upgrades:
Want unlimited storage on your website? How about additional customization on your blog? Well, you’re gonna have to pay for that. Many free platforms restrict what they offer to those ‘basic’ users, while providing a whole range of features to paying members. This has been a popular choice of many platforms like Spotify, who charges $10 a month to remove advertising from its service so you can stream music without interruption. Another platform that does this is Netflix, which you pay for after a free trial.
Sadly, ad blockers exist, people don’t want to pay for something they think they are already getting for free, and sometimes you’re just someone with a big dream and not a lot of influence. This is when we see some interesting platform failures. As we mentioned, Soundcloud, the music sharing giant preferred by basement DJs, cut back their staff by 40%. Why? Because it was mentioned earlier this year that they would run out of cash before the year is over. How does a platform with 175 million monthly users (as of 2016) have such a tough time? The problem was, they didn’t have a revenue plan.
Let’s examine their unique position in the industry, and what they’re doing as a platform that made them so successful, while making them very little money.
Soundcloud hits the WWW in 2007. It’s a platform for independent artists to share, upload, and interact with music, no strings attached. It was the answer to undiscovered talent that couldn’t hack into Spotify or Apple Music, or people who were fans of artists that preferred to remain independent from a major label. Chance the Rapper, and dozens of other artists release exclusive singles and albums on the platform. Things are going well, really well, and the platform expands to offices in New York, San Francisco, London and Berlin. They even sign a licensing deal with Universal Music and Warner Brothers - basically half of the “big four” record labels in the industry right now. This is only in January of 2016. So what happened in the last year and a half?
Operating costs were accounting for more than their revenue. Advertising revenue is low, there’s still no fees in uploading, sharing, liking, or having an account on Soundcloud (despite the Premier feature that doesn’t seem to have taken off). Though they are still in the top 20 apps in the App Store, the app is still free. Even though they doubled their revenues last year and were able to consolidate their offices the platform requires a lot of maintenance, people, and data to run, and that won’t pay for itself. Though they’re an extremely democratic platform, their stance on remaining independent (even after a $70 million boost from investors in January), made them miss some key monetization opportunities for growth. It’s not their fault that they were popular and stuck to their ill-advised morals. It just made it difficult to change once they got to their immense size. This is where we find them now - in the middle of intense speculation, and people stressing about where independent sound creators will go next.
Plenty of other avenues have gone a similar route though. Remember Vine? They totally revolutionized short video formatting and sharing, but once usership dropped off slightly, the immensely popular platform closed its doors. Some amazing creators came out of the platform, and the idea of keeping things short and sweet has stuck with a lot of people. The meme video is definitely not going anywhere. Twitter bought Vine for $30 million dollars back in 2012, and founder @rus expressed regret at selling it just to see the doors closed by Twitter trying to cut its own costs. Though it helped Twitter to finally bring video content integrated seamlessly into its own platform, Twitter came first, and Vine was shut down.
Vine has been closed for 9 months at the date of this article’s publishing, but the lessons learned are remembered. Unless you can monetize in an effective and efficient way, free platforms are difficult to manage. To turn a profit, you will have a tough time keeping your operating costs lower than your revenue. Even if you break even, monetizing has to either draw advertisers, paying subscribers, or investors, so it can continue to grow.
What does that mean for free platform users and advertisers? Right now, free platforms can be a unique way to engage with an audience and grow a following. The great part about free platforms is that they can present new and challenging ways to socialize. Average users and advertisers are on a level playing field in a way that promotes organic growth and interest. Once platforms begin to monetize, users that stick around can usually see improvements in service. This is when those platforms can invest in growing towards a better user experience.
Though most sites have been sticking to pop-up ads, in-stream advertising, or banner ads, the integration of advertising into content creates a more stream-friendly way for target audience integration (PROTIP: this is how ‘influencers’ often make their money). This could potentially mean growth in platforms that support creative content advertising, and influence being dispersed more democratically (and less annoyingly) into our native social streams.