These days, I hear this phrase all the time in reaction to the launch of a new Web-based company. In fact, as a result of this attitude most users have, the vast majority of Web companies that recently launched have no intention of charging their users. They know their users won’t pay, so there’s no point in stunting market adoption by even trying. Such businesses, those that don’t involve a transaction from which they can take a cut (eBay, PayPal), are built to generate cash flow through advertising revenue - at least for the forseeable future until a better revenue model is stumbled upon (or better yet flip the company to GYM before you need to deal with the revenue issue).

Why is it that many people have this attitude towards Web-based services? I think a big part of it comes from the fact that the Web is advancing at such a fast pace. No matter what the product category, barriers to entry are being broken down at an ever-faster pace. This means that whatever the product is, there is likely to be significant competition. And, in the rare case, that the product is the first of its kind, you can expect a couple formidable competitors to be right around the corner. Competitors will often try to gain an edge by charging users less for the service or offer it for no-charge at all.

This phenomenon is now very familiar to most Internet users. When I see a service that sounds useful but costs money, I’m either thinking:
a) Let me try to find a similar service that’s free, even if it’s not quite as good OR
b) I’ll just wait a little while for a competitor to launch the same service and give it to me for free.

Further contributing to this trend is the “lets launch it and see if it sticks” attitude of many Web businesses, especially in the now “Web 2.0″ culture of building simple, user-centric applications. Such applications are generally cheap to develop, launch, and operate. This allows for revenue generation to take a back seat to market share growth. This is reminiscent of the dot-com bubble except that now the cost of failure isn’t that high.

The good news in all this is that people are still more than happy to be profitted off of through advertising. We tolerate long commercial breaks in our TV programming, full-page ads in magazines and newspapers, and chunks of webpages dedicated to text and banner ads. Even though there is the AdBlock extension for Firefox, which effectively blocks most ads, I notice that most people don’t download and use it. But can you really build a big business on the Web that relies solely on ad revenue? From what I can tell, the answer is generally no unless you have tremendous scale (Google) or your service is closely tied to a transaction (Shopping.com).

What’s going to happen is that because, most products aren’t going to “stick”, competition in any one market will shrink significantly. Either of two cases will happen. The first case is that because competition will shrink down to just a couple players, all players will start charging and consumers will be forced into paying. The companies that do survive will have a kick-ass product that you won’t mind paying for (or willing to pay for “premium” service). The second case is that the product will continue to be offered for free by YGM with the intent that they will upsell one of their other premium services to you.

Side Note: An interesting trend that is sprouting up is sites such as Squidoo that will let you earn advertising revenue off of the content that you contribute to the site. As far as I can tell, the site isn’t blowing up with users or content. Contributing content involves me spending time. The amount of money I expect to earn must be significantly greater than the time-value I will invest. A big problem is that most people don’t really understand online advertising and are unlikely to see much dollar value potential in a couple AdSense text ads next to their content.