The Free Model

Fortune has an interesting discussion from Davos:

Bill Gates, Eric Schmidt, John Chambers and Niklas Zennstrom are talking about the next phase in the tech revolution, and how they’re making it pay.

Zennstrom, who recently sold his Skype Internet phone service to Ebay for $2.6 billion, says that Skype has been in business for 3-1/2 years… and in that time has signed up 75 million users. I’m floored by the sheer scale of that, until Gates brings us back to earth. He jumps in and asks, How many of the 75 million are paying customers? Zennstrom doesn’t say (or mumbles it out in a way I can’t catch) but their exchange launches a terrific conversation about building free Web products that generate truly enormous user bases then monetize them.

The free model, observes Google’s Eric Schmidt, “generates a great deal of good will for your brand.” (FORTUNE is deploying the concept right now on this Web site.) To monetize it, or course, you either sell ads against the eyeballs (like Google and this Web site do) and/or get a subset of your free users to pay a fee for enhanced service. (Hotmail and Skype do it this way). Get enough folks to pay, say, $30 a month, says Gates, and pretty soon you start to have a business. You can have one group of employees servicing the free base and another group figuring out how to monetize them. “It’s neat,” he says .They all nod.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.