Hive Blog

I was sent an article in the New York Times about Markus Frind, profiling his success in creating a free dating website Plenty of Fish.

Markus took the formula “find a service which every competitor is charging money for use and give the service away for free and display advertising to pay for the service” and made it work in a big way for Plenty of Fish. The site boasts over 1.7 billion page views and 70 million visitors per month. That’s pretty good for an operation whose entire staff count can fit in a broom closet.

If you don’t know by now how the big fish makes his money, it’s really quite simple: advertising while keeping expenses low. He can get away with advertising on his site since all the other competitors charge money for the same service.  Users of Plenty of Fish tolerate the ads because they are offered a service they would  have to pay real money for elsewhere.

In fact, I would say the users tolerate a lot more than just advertising. They tolerate a poor layout, bad asthetics, confusing linkage and a few features that don’t quite work as well as they could.

I’m not trying to hammer Markus for these defects. I’d go so far as to say that he’d be the first to acknowledge them.

In fact, he has little incentive to fix these issues. The advertising is cleverly inserted into the site everywhere. In fact, it’s hard to distinguish where an ad begins and where the site continues. That’s bonus for Markus since users are more likely to click his advertising links by accident, thinking they are part of the site, especially when you factor in that knowing where to click is confusing at times. Not that I should need to spell this out, but increased click through rates equals increased revenues from advertising.

Markus has to keep his costs down, so spending money on making the website pretty and perfect cut into his profits. Make no mistake, Markus is a true businessman and he’s there to make money. Since the users will tolerate lower standards (and free dating does often require lowering standards), why should he raise them only to raise their expectations?

Further, glitches like distorted thumbnails cause people to click through to the real profiles, increasing page views and presenting more advertising. Why would he ever want to fix that issue? He would surely rather his fishies swim quickly than drown slowly.

Somehow, I don’t peg Markus as a dumb guy, in fact from what I read he seems refreshingly smart and remarkably candid which makes me discount the accusations that he is a liar when it comes to his revenues. Besides, you can confirm his stats yourself. If you haven’t installed Alexa toolbar, go do it now. On Firefox, it installs itself in the status bar which is wasted space anyway.

It’s not in any dating site’s interest to actually find most people a match. Yes, they do have incentives to find some matches for the referral factor, e.g. “my friend tried the Plenty of Frogs site and found her prince charming, you should give it a try too!” It’s good to have a few testimonials but bad if the site is so effective that everyone hooks up quickly. Besides, there is plenty of advice from youtube users on how to increase your dating chances, so don’t blame Markus entirely.

The success of such a free site comes as a double edged sword for Markus. The Plenty of Fish founder is discussing how he is letting millions of dollars in paid dating revenue slip through his fingers.

This is where his own perverse incentives will come back to bite him and his users like a Purana. Given that he has a good business mind, I doubt he will fail, but I think it’s important to understand incentives and the human animal to avoid the pitfalls.

What else drives up the ad hit rate for Plenty of Fish? For one, failure to find a good fish. Most users who are finding success won’t have much incentive to try other paid sites. The barrier to entry for new users on Plenty of Fish is pretty low and standards are kept down.

With the announcement that Match.com is abandoning paid dating in favour of free dating, Markus will face new competition and he acknowledges the likelihood of others to follow. A good deal of his advertising revenue comes from other online dating sites. If he improves the quality of his site,  advertising hit rates will drop. If he fails to improve on quality, competitors could be eating some tasty catfish. Although being the biggest does offer some protection, there is nothing preventing users from creating joint profiles using other free services. After all, there are plenty of fish in the sea.

If Markus promotes his own service from Plenty of Fish, he will lose advertising revenue. The more he promotes his site, the more revenue he loses. Additionally, advertisers might become less willing to advertise with him once he has a competing paid site promoted on his own site. This may not be an issue if he makes more money off his paid site than he loses in a free site.

Markus may face revolt from his user base who will be plenty aware of his incentive not to deliver the best free site in hopes of promoting his paid service and these users may end up swimming upstream to other competing free services.

If Markus sees a competitive advantage for a feature, he can add it to Plenty of Fish right now. He can do so and kill off his competition. He can improve Plenty of Fish to compete against other free sites. With a paid site, he will have to debate adding the feature or improving his free service to kill competition or risk leaving the competition alive to fight another day in favour of keeping the improvements in his paid site.

Markus likely has money in the bank and maybe his best bet would be to lose his advertising revenue and promote his own site exclusively for a short term loss with a long term gain. This is a big risk strategy though; once advertising is gone from his site, his users won’t tolerate it coming back, so he has to make sure that his own advertising is as annoying as the advertising his users already tolerate.

Finally, Markus may suffer a  lifestyle change. He is used to a small staff. Running a big staff is far different than running a small staff. If he goes down this path, I recommend he find someone who has experience to run such a team and allow himself to concentrate on what he does best: business.

Why in the world would I call Twitter, who just turned down  half a billion dollars ( in mostly stock from Facebook ), a worthless idea? Simple, because that’s exactly what most of us would have thought if we had come up with the idea ourselves.

Confession time: I don’t use Twitter (yet). In fact, until recently I didn’t truly understand what all the hype regarding Twitter was about. Sometimes products like this sound so fanciful that it’s hard to separate hype from reality and I have a knee jerk reaction to fads. Twitter has the hallmark signs of a fad if you listen to only the hype.

Every generation has its fads and seemingly crazy fixation with such fads and the 80s seemed to bring out the worst and cheesiest of them all; leg warmers over jeans, big hair, early-electric pop music and Atari. On second thought, I liked the Atari.

The 2000s saw the onslaught of reality TV (and coincidentally coincided at the same time I pretty much stopped watching TV). There is nothing realistic about this fad where ordinary people make public buffoons of themselves when put into completely unrealistic environments. Yet, people watch reality TV with an almost strange obsession and loyal dedication.

The success of Twitter and reality TV have much in common if you understand the twisted psychology behind the mystery.

What makes this kind of viewing so popular? People!

There is something ingrained in humans as social animals to want to watch people, follow them, talk about people’s lives, sometimes live through them and tie our association to them. Why is gossip popular? Because we love to know what goes on in other people’s lives and talk about it. Why do people refer to sports teams when they win as “our team won” and when they lose “they lost – those losers”? Because people associate themselves with winners and distance themselves from losers! Why do people follow celebrities? Because they associate themselves with whom they see as winners, at least as status symbols. People love to boast and brag about what they have, what they do and who they know. People  love to seek attention.

Twitter has all of these aspects. Twitter lets people know what other people are up to all the time and receive that need for gossip directly. Twitter allows people to voyeur the lives of others. Twitter has social status and allows people to associate themselves with those of status, i.e. the winners. Twitter permits people to follow the lives of other people, including beloved celebrities and sports icons. Twitter makes it possible for people to gain status by gaining a following. Twitter allows for bragging rights like “kids had fun at Whistler today.” Twitter allows for attention seeking, e.g. “bad hangover - rough night!”

Reality TV instantly gives those on the show a form of celebrity status (sometimes for good reasons, sometimes for bad) and allows viewers to associate  with the winners and distance themselves from the losers as people follow their lives in a most unreal situation. It also permits the most softhearted of reality watchers to cheer for the underdog and take a certain form of pleasure in seeing an unlikely person promoted to a social status on a TV show that they might not have been able to achieve in “real life”. These people become the new gossip point amongst people watchers and a way for some to live beyond their own lives.

Obviously, Twitter is not without its legitimate uses. Rather than send out a message one at a time to everyone you know in your family or social group, you can send a broadcast message, for example “I arrived in Hawaii today. Plane ride was bumpy!” Twitter is an instant message broadcast system. Rather than annoy people with a message that pops up in their face as an instant message would, Twitter permits people to choose to monitor these messages, thus the system is completely voluntary and non-intrusive.

Why only 140 characters? Because that’s probably all that is actually required to get information across and more importantly, grab attention as a headline would, inspiring people to want to know more.

So, why is Twitter an insane worthless idea? Because Twitter is not a solution to an obvious need and won’t make money directly. Needs like “online dating services” or “sport score tracking” are much more obvious than “people watching, family and friend gossip, association, attention seeking and bragging rights”. Before anyone jumps down my throat, I’m not implying anyone who uses Twitter does so for only those reasons. Everyone has their own reason for using Twitter, but in my opinion, the social animal reasons are a huge driving force as to why the site is popular.

If I were to have sat down with my business partner or colleagues only to have come up with “Twitter”, I’m not sure I would have pursued the idea. Surely someone would have suggested it to be a dumb bird of an idea. Even if I did think up the human need for Twitter, as a business model, it’s not exactly the best model. Produce a free site… ???… huge profits. That’s something even Twitter hasn’t managed to figure out; how to make revenue – not yet at least. If Twitter had charged for the service, nobody would have paid. If Twitter had put advertising on the site, it would have been their downfall because someone else would have produced an ad-free Twitter in a month which would have made them dead dumb birds.

Why are they worth $500 million in mostly Facebook stock? Simple, they have huge popularity. Internet companies will pay big bucks for companies with wide audiences. Wide audiences make free services valuable as loss leaders and as a method to promote services which earn revenue. The problem is often over-inflation of valuation placed on popularity. Will popular sites translate into money earned? Will they end up being a huge expense? Worse, will the transfer in ownership and changes to the site drive the users that made the site valuable away?

Twitter will have to figure out how to make their site a loss leader for those who can make money from their users. Advertising and paid placement might be one way but they have to be very careful not to drive away their user base in the process. In fact, advertising might be so delicate a subject that it might be unworkable. Imagine ads showing up in RSS feeds mixed in with messages? Revolt! When sites start off with ads, it’s easier to maintain and explain them but when sites add ads in after, often users will rebel. The only way Twitter might be able to do so is through voluntary methods, much like YouTube or if they pleaded on the humanity of people to forgive them for needing revenue to stay a flight or force them to shut their doors.

Would anyone go into business with a service with zero revenue potential in the hopes that the user base will be large enough to be bought out by a big company one day? Or do so in blind faith believing that some magic process will suddenly show up to turn users into revenue? Well, the Twitter people did! Would most of us have done so? Probably not. Most of us would have thought the idea completely insane, worthless and without wings, unless we knew the magic solution of how to turn it into a loss leader for something else.