Shortly after the ad-free social media site Ello went into an invitation-only beta, things are already looking pretty grim. It’s been quickly labeled as a “hipster” online hangout too “irredeemably naive” to threaten Facebook. In fact, Ello’s modest success just proves “you’ll never quit Facebook.”
While there are strong concerns for Ello’s future—the site suffered its first outage from a DDoS attack over the weekend—the potential seems lost on much of the tech press. While Ello does need to finalize exactly how it will earn money without selling user data, there exist numerous pathways for the Vermont-based startup to prove the doubters in Silicon Valley that you can profit without selling out your users.
One such example would be, oddly enough, Reddit. Reddit consistently impresses investors while never collecting user data. In fact, the site requires astonishingly little personal information for users to participate; you aren’t even required to enter an email address.
While “the front page of the Internet” does feature old-fashioned banner ads and even sponsored content, much of its revenue comes straight from the user base itself. Both Reddit CEO Yishan Wong and co-founder Alexis Ohanian have cited premium subscription service Reddit Gold as a major drive of income (as well as the site’s gift exchange, which consistently breaks its own record for the biggest Secret Santa gift exchange ever).
This is not a model that is inherently unique to Reddit. Ello could likewise implement such a premium service model. Founder Paul Budnitz floated the idea to Business Insider earlier this week, proposing such packages as multiple accounts or specially-designed emoji packs for a few dollars each.
While not quite the soaring business plan of a company that wants to take down Facebook, Reddit, too, has never earned a profit. Never. Despite recent love from venture capitalists to the tune of $500 million in funding—not to mention record growth in the last year—Reddit has never made more money than it spends.
While that might sound scary, pretty much every big tech startup spends years being unprofitable. Twitter, founded in 2006, saw its first profit in the last quarter of 2013. Facebook, which also started ad-free and in limited release, netted its first black ink in 2009—and it had to gain 300 million users before it could even do that. If Ello goes from founding to profitable in the same time span as these two giants, it won’t have to turn a dollar until 2020 and could still be a success.
What Twitter and Facebook did have fairly early that Ello doesn’t, however, is revenue. While the premium services model holds potential, certain factors about Ello itself must change before it can be successfully implemented.
As the free-to-play gaming industry has discovered, getting users so devoted to content that they’ll continue to pay for premium content in the long term is very difficult. The infamous Zynga Studios, of Farmville and Mafia Wars, has all but folded under its inability to continue to capture the imagination of bored casual gamers, let alone get them to make in-app purchases. Shortly before its 2011 IPO, Zynga sported $839 million in revenue, mostly from premium purchases. Since then, largely due to a lack of compelling original content, that number has shrunk to $147 million.
A comparison between a social media site like Ello and a gaming company like Zynga might not seem that apt, but if the former hopes to sustain income longer than the latter, there are valuable lessons to learn. Like a gaming company, Ello must provide content intriguing enough to justify a premium or even a subscription cost. Facebook has no such obligation and is, somewhat predictably, boring.
By ditching ads, Ello should be forced to look in rather odd corners outside the typical standards of a social media site. Much to the chagrin of influential thinkers like Ethan Zuckerman and Maciej Ceglowski, advertising has become the go-to business model for tech startups because it’s easy enough to run and even easier to fool investors into thinking they’re profitable. Ello will not have this advantage
What makes Ello truly special is the vaulted certainty with which it is challenging what has become doctrine in Silicon Valley: That every app and every site can earn massive troves of money simply from advertising. But directly under the hum of billions and billions spent on young startups is the incessant fear that online ads are actually worth very little at all. Capitalizing on recent scandals within Facebook, and Ello could show the way out.
Here’s a quick calculation: If we take Facebook’s earnings from the second quarter of this year—the company’s best quarter ever—we find Facebook pulls in about $2.20 per user in revenue. To match that margin, Ello could get by charging users less than twenty cents per week.
In fact, if you spend $2 on the right to manage multiple Ello accounts with a single login—one of the ideas proposed by Budnitz—you’ve just bought yourself more than ten weeks of the site’s service and netted Ello the sort of profit margins seen by Facebook. And if Ello does choose to operate like an iPhone game, most users won’t even have to go that far. In a report from this February, app surveyor Swrve found less than half of all in-app purchases were made by less than 0.15% of users. In fact, 98.5% of users spent no money at all.
But like Zynga or King, that makes Ello a huge gamble. The tech world is frankly done with social media startups — ceding the field to already-present entities—and is slowly following Uber’s example into profiting on real-world services—hence the “Uber, but for X” meme where X is anything from pizza to drones. Financially, Ello is as subjectively risky as any other startup with no assets or revenue.
Simply because there are no traditional roads for Ello to follow does not mean it is dead before it’s even begun. Facebook has real issues as a company—see the backlash to Facebook’s treatment of LGBTQ users or its shrinking adolescent user base—and is not impenetrable. For attempting to challenge the stagnant advertising model that has turned every hot startup into Big Brother, Ello is nothing short of brave. But only time will tell if it is also stupid.
Photo via Wagner Machado Carlos Lemes/Flickr (CC BY 2.0)
