I am currently thinking about how web2 monetization models will evolve to web3. This post talks about two prominent revenue / monetization models for software companies. If you have thoughts on how web3 companies will monetize, would love to hear from you!
Note: This post does not talk about transaction fee revenue models like ecommerce, app stores, etc. They are a big part of software monetization but I chose to focus on the other ones for today.
Traditional social media / ad based companies
Monetization is a function of time spent i.e. more time spent on the product == more revenue generated by the company — sort of like a linear graph (it’s not actually linear, I’m just over simplifying for the sake of this comparison). This analogy applies to companies like FB, IG, TikTok, etc.
(y = mx+c; m=1, c=0 in illustration below)
Take a look at Facebook’s ARPU over the years (source):
Here is how time spent on FB family products has changed in the last few years (source). Although FB main blue app time has decreased, it’s been matched by an increase in time spent on IG — at least till 2020, and relatively stable since then. Don’t have Messenger, WhatsApp and Oculus in this image because ad revenue from those products is still negligible for $META even though their time spent has dramatically increased in the last few years.
What this means is that in this case, companies are incentivized to keep increasing user time spent in the product to increase their profit margins. The more data they have about users, the more engaging content they can serve them. More the users engage, greater the ARPU because monetization scales linearly as a result of time spent in the product. Linearly scaling monetization means that these companies / products are on a never ending hunt for user attention.
Subscription products
Compare this to subscription products. Subscription products fall into a few broad categories. Products that have
a free ad supported tier e.g. Spotify
no free tier and users must convert to paid e.g. Apple Music, Peloton
products that have discrete usage tiers e.g. iCloud storage
Subscription products like Netflix and Spotify also need user data to serve engaging content (think Netflix recommendations or Spotify’s Discover Weekly) to keep users coming back to the platform. However, the monetization function does not seem to be linear here. Imagine the follow scenarios:
user who does 4 Peloton bike rides per week vs a user who does 6
listens to 1 hour of Spotify vs 1.5 per day
watches 30 mins of Netflix per day vs 45
In all three above examples, both users (for each Peloton, Spotify and Netflix) have crossed the barrier to remain a subscriber. They are engaging enough to build a habit of using the product and not unsubscribe. Monetization follows a function similar to
y = nlog(x) || y = {n, if a <= x <= b
where ARPU increases up to the point of the highest subscription tier and then stabilizes. The function can be discrete or continuous based on free tier vs not, and number of tiers.
This results in two main themes for subscription drive companies:
they are not hunting for user attention infinitely and ARPU is fairly stable once users are retained
their revenue is far more dependent on total subscriber numbers (declines in which is why Netflix stock has plummeted)
For subscription products with free (probably ad supported) tiers, once the free tier user population reaches a certain usage retention, they are very likely to self select into the paid tier to make their own experience better. So overall, ARPU tends to normalize asymptotically around the subscription fee.
In some cases, tiered subscription products (e.g. cloud storage, cloud computing, etc.) get prohibitively expensive in the higher tiers. This somewhat pits users and products against each other since price conscious users / entities are trying to use the product less while the service provider is trying to get more usage and thereby more revenue. This is why large corporations start building infrastructure inhouse because it becomes cheaper to build than buy the service once a certain scale is reached.
web3 monetization
web3 products largely don’t monetize with ads today. Instead of being separated into subscription discrete tiers, their usage price is determined by the supply and demand of the market (more like a commodity e.g. oil). This results in more elastic and transparent pricing for consumers but also increased volatility — for both consumers and businesses. The experimentation in this space is just beginning with new tokenomics models tested all the time — all in pursuit of finding a monetization scheme that works long term for all participants in the ecosystem.
web3 / crypto mixes technology, art, culture, economics and politics. I imagine web3 monetization will leverage all these axes to create a new business model — a mix of subscription (web3 domain registration fee), usage (chain network fee), time spent (web3 ads), financing (storing assets on platform), etc.
What models am I missing? If you have thoughts on the above, you can find me @rish on Farcaster.