Why Does Profit Matter Anyway?

October 22, 2010 § 4 Comments

I was rather inspired by this VentureBeat article in which Mark Zuckerberg claims that profit isn’t a big deal for Facebook.  This seems like blasphemy in light of the oh-god-we-aren’t-profitable bust of the late 90’s, but I’m noticing a trend: many startup websites taking what they call “the slow, cautious road” to profit.

For example, I recently interviewed with Yelp for an ad-delivery PM position, and I talked with them at length about the major monetization opportunities I thought they were missing.  Yelp has a few problems.  The ad inventory is tiny.   They have ad placement issues.  Worst of all, their mobile ad story is to channel users back to the mobile version of the website from the app whenever possible.  Taking users from an app to a webpage is a terrible user experience, and they are literally leaving money on the table by keeping ads out of the app.  After questioning the business director in detail, I got the same line Zuckerberg is throwing out: there’s plenty of time to make profit later.

It would be easy to under-think the ad experience and annoy users with Flash banner ads, or misplaced text ads.  So I can understand cautiousness insofar as it means getting the ad targeting and delivery user experience right.  But these days, like it or not, ads pay for the content of the internet, and barring massive innovation in the micropayment space it will for the foreseeable future.  Eventually every site needs to solve the advertising problem. 

While we’ve all seen ads done wrong, if done right, they can actually be useful to a user.  For example – if I am a mobile user searching for sushi in my area, it would be trivial for Yelp to serve up a coupon for a sushi bar down the street.  The more targeted ads get, the more users are likely to engage with them, and the more everyone profits.  And if the ads are placed correctly, users can just tune them out if they aren’t interested.

So the perfect model of internet monetization is yet to be found, but there is plenty of opportunity for innovation in the ad-delivery space, and the first dot-com to get there could have the next Google adWords on their hands.  I’d argue that this potential is what keeps Facebook’s valuation so high despite their lack of profit.

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§ 4 Responses to Why Does Profit Matter Anyway?

  • David says:

    Profit would seem important if the company was losing a significant amount of money – say if they were on a late round of funding and had no idea when they might break even… On the other hand, if the company stays focused on their vision and can make it month to month… focusing on repaying their investors is probably not the best long term strategy and steers the companies priorities away from growing their user base.

  • Angela says:

    I agree that money-making isn’t much of a long term strategy. But what is the point of growing a user base if they have no idea how to effectively monetize that user base?

    I do disagree that profit only matters if a company is in trouble. Making a profit will, at least one day, be important to investors and shareholders. I’m just confused as to why everyone sees profit as antithetical to making end-users happy.

  • David says:

    Maybe like college students, they are ok to have no money for a while but will eventually want to earn a paycheck . If I understand Yelp correctly, their effective goal is to become a business customer relationship platform. They have a chicken and egg problem where they need a very large and strong base of reviewers as well as businesses who find value in their data. From my point of view, I don’t think Yelp simply selling advertisements will be the biggest and best way to monetize their information base (it will certainly be a good source of revenue I am sure). Instead it may be in the form of selling information and services to businesses. If successful, it will be data that not even Google will be able to aggregate for free. Today that information appears to be largely free to business as they try to get them into their platform. If Yelp can become a customer relationship platform (and successfully establish a moat where they have exclusive customer and business data that rivals cannot easily get – think winner takes all), their data will be extremely valuable and they will be able to find a way to monetize it (probably by selling that information to businesses).

    Yelp still lacks the market penetration (especially in smaller cities) and probably has a long ways to go in convincing businesses that their data and platform for reaching customers is valuable.

    • Angela says:

      Yeah, I completely agree with your comment. Yelp needs to spend more time courting advertisers than looking for ad placement. Their inventory (especially, as you mentioned outside of the Seattle/SF bubble) is pretty minimal.

      I think you isolated the big problem that plagues every online service that caters to small businesses – there’s no good, scalable way to sell to them.

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