MONEY facebook

Why You’ll Never Leave Facebook for Ello

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Berger & Föhr is a graphic design studio in Boulder, Colorado. Its partners, Todd Berger & Lucian Föhr are Co-founders of Ello. Ello

It’s hard to build a large network using a freemium strategy.

By no means was Facebook FACEBOOK INC. FB 1.3167% the first major social network, nor will it be the last. MySpace and Friendster predated Facebook, and Twitter came after it. There’s a new social network in town now positioning itself as the “anti-Facebook,” and its primary pitch is the notable absence of any ads. Should Facebook be afraid?

Say hello to Ello.

Why now?

Over the past few days, Ello’s popularity has soared, even though the service launched in private beta in March. One reason why some users are now flocking to Ello is that Facebook has recently begun to crack down more on enforcing its longtime “real name” policy. That’s created tension within specific communities, such as the LGBT community, that prefer not to use their real names for personal privacy and protection.

The service is currently invite-only, but requests for invites have skyrocketed in recent days, particularly as media attention escalates. The site was created by artists and designers, and offers a minimalist interface. The company’s “manifesto” outlines Ello’s philosophy quite clearly:

Your social network is owned by advertisers.

Every post you share, every friend you make and every link you follow is tracked, recorded and converted into data. Advertisers buy your data so they can show you more ads. You are the product that’s bought and sold.

We believe there is a better way. We believe in audacity. We believe in beauty, simplicity and transparency. We believe that the people who make things and the people who use them should be in partnership.

We believe a social network can be a tool for empowerment. Not a tool to deceive, coerce and manipulate — but a place to connect, create and celebrate life.

You are not a product.

Interestingly enough, the language is very similar to Apple CEO Tim Cook’s recent letter on privacy, which was a clear shot at Google: “A few years ago, users of Internet services began to realize that when an online service is free, you’re not the customer. You’re the product.”

An ad-free social network sounds differentiated and idealistic, but should Mark Zuckerberg be losing sleep over Ello’s entry? Nope.

Ello’s monetization strategy is questionable

Fact: every company needs a viable monetization strategy. Most social networks and free Internet services to date have all relied on ad-based revenue. If Ello hopes to expand its service and grow its user base, the required funding will have to come from somewhere. Data centers and software engineers aren’t cheap.

Ello has raised $435,000 in venture capital funding from Vermont-based FreshTracks Capital. Ello’s founders still own over 80% of the company, so FreshTracks can’t quite call the shots yet. FreshTracks isn’t looking to make a quick buck, and has bought in to the value proposition that Ello is pitching to users. Namely, that Ello will not sell user data or insert ads.

Inevitably, Ello will need to make money somehow, in part to satisfy the return requirements of its venture capitalists, even if FreshTracks has a long time horizon and is willing to wait it out. It turns out that Ello hopes to use a strategy that’s been taking over mobile gaming: freemium.

Ello’s strategy will be to offer higher-value services and features that users will have to pay for. The basic service will be free, but the company will try to upsell and generate its revenue directly from users. This strategy is questionable at best, but it can theoretically succeed with a niche audience. Mainstream users are likely not willing to open up their wallets to use a social network.

Seemingly every year, speculation arises that Facebook is preparing to charge monthly fees, and every year these hoaxes get shot down. Facebook then added, “It’s free and always will be.” to its homepage back in 2011 just to put the matter to rest.

There’s even one that originated from The National Report circulating right now, claiming that Facebook is preparing to implement a $3 per month fee. The National Report may not have the same brand cachet of The Onion, but it’s similarly a satirical news site. The report quotes a likely fictional Facebook spokesman as saying, “There’s so many pictures of cats, and all of those costs add up, we just can’t foot the bill any longer.” That sounds legitimate.

It’s also worth noting that Facebook itself effectively has a freemium business in the form of its payments segment. This segment is mostly comprised of Facebook’s cut when developers sell digital goods, but also includes revenue from user paid services such as promoting personal posts, among others. Guess which business is doing better.

Source: SEC filings

While Ello is unlikely to begin selling virtual tractors, it’s debatable whether or not it can build a large-scale social network using a freemium monetization strategy. It could work on a niche scale though.

Hating ads is not enough

Having a philosophical disdain for ads is misplaced and perhaps naive. Hating ads assumes that users derive absolutely no value from them, which couldn’t be farther from the truth. A small percentage of people do end up clicking relevant ads that appeal to them, and they end up purchasing something that they value. For the rest of us, the ads are a more viable way to fund the underlying free service.

Facebook expects to spend $2 billion to $2.5 billion on capital expenditures this year to build network infrastructure, construct data centers, and purchase servers. Without the backend infrastructure, the service would suffer terribly. If Ello’s user base begins to explode, and it lacks the funds to beef up its infrastructure, the service will suffer and users will return to the familiar Facebook.

Then there’s the basic tenet that social networks derive all of their value from network effects. Let’s say you loathe Facebook’s ads, which can admittedly be obnoxious at times, and are looking for an alternative place to post about what you ate for lunch.

If you choose a network where none of your friends or family have joined, no one will ever know what you ate for lunch. Your contacts have to hate ads just as much as you do, and that’s a tall order to fill in this day and age where netizens have developed a practiced apathy for ads in exchange for free services.

Facebook has nothing to worry about.

MONEY Tech

Why This “Tech Bubble” Isn’t Like the Last One

Sure, Silicon Valley is booming, but this isn't 1999

Venture capital investment—that is, money flowing into companies before they go public—is on a tear in the technology sector. At least in nominal terms, investments are at levels not seen since 1999. The comparison to the turn-of-the-millennium is a bit less impressive adjusted for inflation, but the recent trend remains boomy. (Hat-tip to Business Insider for pointing us to this data.)

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SOURCE: PwC/NVCA Money Tree Report

So how is this boom different from last one? To borrow from blogger Joshua Brown, if it’s a bubble, it’s “a rich man’s bubble.”

Not only are you and your friends (mostly) not getting into the excitement by chasing hot IPOs — such as this week’s public offering from the Chinese e-commerce giant Alibaba — you also aren’t sharing in the boom in a much more tangible way. The late-1990s boom was a pretty great time for job seekers.

fredgraph

Remember the last boom: The build-out of the Internet was part of a high-pressure economy with plentiful jobs. New web retailers were opening warehouses and distribution centers, and fiber optic cable was going in the ground (much too fast, it turned out). In my own little corner of the world, newspapers and magazines were setting up big digital newsrooms that ran alongside still staffed-up print teams. Information technology was raising productivity in surprising places—big-box retailers reaped many of the gains—and for a time business was so competitive that employers had to share more wealth with workers. Unemployment dipped below 4%.

The latest influx of cash, and the speed with which companies are burning through it, in Silicon Valley has a lot of people worried we’re in a new bubble, perhaps fueled by the Federal’s low interest rates. A few months back, BI’s Joe Weisenthal made the contrary case: Venture money isn’t flowing as strongly into other industries, so this isn’t only about cheap money burning holes in investors pockets. Rather, something’s going on specifically in tech: With a fairly small investment in resources and people, a tech company with a great idea can quickly scale up to be a huge business. Think Whatsapp, or for that matter Facebook, which become a giant media company by leveraging free content provided by its users. Investing in these ideas is a high risk lottery, but great for the investors who win it.

The flip side is that it doesn’t seem to be much of a jobs engine outside of the expensive parts of northern California, or unless you count odd jobs from Task Rabbit. Do we have a bubble? Maybe. Maybe not. Do we have a well-balanced economy? No.

TIME Tech

Reports Say Snapchat Is Valued at Roughly $10 Billion

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Lionel Bonaventure—AFP/Getty Images

If reports are true, this represents an enormous valuation for a company that has effectively no revenue source

Multiple news outlets are reporting that Snapchat is raising funds from investors based on a $10 billion valuation for the disappearing-messaging service.

The Wall Street Journal, citing unnamed sources, reports that the venture-capital firm Kleiner Perkins Caufield & Byers agreed to invest in the app maker at a valuation of nearly $10 billion. Bloomberg News, also citing unnamed sources, reports that the startup is in talks for a round of financing at a $10 billion value. TechCrunch is reporting a similar figure.

The valuation could not be confirmed by TIME and does not suggest that any single buyer intends to pay that amount. The company uses the valuation to determine the share of ownership it gives investors.

But if true, $10 billion would represent an enormous valuation for a company that has effectively no revenue source. The Snapchat app, which does not have ads, is the third most popular app among millennials after Facebook and Instagram, according to Bloomberg, and marketers see potential in using the app to reach out to millions of the coveted young-people demographic.

The Los Angeles–based tech firm was valued at $2 billion just one year ago, according to the Journal, and its owners reportedly turned down a $3 billion offer from Facebook last November.

“The valuation of our business and our capital requirements are the least exciting aspects of supporting the Snapchat community. We have no further comment at this time,” an unnamed spokesperson for Snapchat told the Journal. A spokesperson for Kleiner declined to comment to the Journal.

TIME Innovation

Five Best Ideas of the Day: August 4

1. Making the punishment fit the crime: A better way of calculating fines for the bad acts of big banks.

By Cathy O’Neill in Mathbabe

2. Lessons we can share: How three African countries made incredible progress in the fight against AIDS.

By Tina Rosenberg in the New York Times

3. Creative artists are turning to big data for inspiration — and a new window on our world.

By Charlie McCann in Prospect

4. We must give the sharing economy an opportunity to show its real potential.

By R.J. Lehmann in Reason

5. Technology investing has a gender problem, and it’s holding back innovation.

By Issie Lapowsky in Wired

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Venture Capital

Ride-Sharing Firm Lyft Raises $250 Million, Eyes NYC Expansion

Lyft Car
A Lyft customer gets into a car on January 21, 2014 in San Francisco, California. Justin Sullivan—Getty Images

Lyft is facing resistance from entrenched transportation interests in cities around the country

Lyft, the fast-growing, pink-mustachioed San Francisco-based car-sharing service, has raised $250 million in a new round of venture capital funding, the company announced Wednesday. Lyft will use the cash infusion to continue to grow domestically and expand internationally, company co-founder John Zimmer told TIME in an interview.

The new round of funding which was led by New York-based investment firm Coatue Management and joined by Alibaba, the Chinese e-commerce giant. Existing investors Andreessen Horowitz, Founders Fund and Mayfield also participated in the latest round, which brings Lyft’s total venture capital funding to $333 million. Zimmer declined to comment on Lyft’s latest valuation, but a recent report said the company is now worth more than $700 million.

Lyft is a mobile-phone application — available on Apple’s iPhone and Google’s Android devices — that allows riders to “order” a driver to their location in minutes. Since its launch in August of 2012, Lyft’s community of drivers and riders has exploded in popularity. The company, which now has 240 employees, has facilitated over one million rides, Zimmer said, and this week launched in Tampa and Tucson. The service is now available in 30 cities nationwide.

(MORE: Lyft Hits the Gas Pedal in San Francisco)

“It was important for us in this round to ensure that capital would not be a constraint in growing the community,” Zimmer said. “We’re seeing more and more cities saying this is a great way to help build public transportation very quickly.” Zimmer said the company is not planning an initial public offering at this time, but rather is focused on its domestic and international expansion.

The new funding comes as the ride-sharing market is booming, with upstart firms like Lyft, Uber and Sidecar using smart phone technology to provide alternatives to traditional transportation options like taxicabs and rental cars. These services are examples of the emerging “peer-to-peer” economy — which includes Airbnb for lodging and TaskRabbit for everyday chores — in which people connect online to exchange services and get things done.

Lyft’s drivers are regular people with cars who want to make a few bucks by giving someone a ride. All drivers are subjected to DMV and criminal-background checks and are required to undergo in-person interviews, vehicle inspections and a two-hour training session.

Like its rivals Uber and Sidecar, Lyft continues to face legal and regulatory headaches, driven in part by entrenched commercial transportation interests. “Existing industries are really trying to put a stop to this new innovation,” Zimmer said. Several states are considering legislation to regulate companies like Lyft, Uber and Sidecar, and San Antonio police recently sent Lyft a cease-and-desist order, saying the service violates a local ordinance. The city’s police chief says Lyft drivers risk arrest.

Zimmer said Lyft has plans to expand into New York City in the near future, where the company will no doubt face stiff resistance from the taxi industry. “It’s a massive opportunity in a really large market that’s unique from a transportation alternatives perspective,” he said. “There’s a really entrenched existing industry with a lot of money tied up in the medallion system. But this is the year for Lyft in New York.”

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