Business Models

As you race towards the trains at London's stations, with 10 minutes or so to spare, you can usually count on grabbing something to eat from one of the fast food stalls near the platform (thats Track to my US readers). The St Pancras station seems to offer that fast food heaven, the "healthy" option - Benugos - where you can choose fresh meats, salads etc on panini bread rather than a "burger wif' coke". Its in pole position, being closest to the ticket barriers. A licence to print money, you may think...

Hah! Let me describe the order-fulfilment process.

First, you stand in a queue to order your delightful concoction. Only problem is, there are people in it in front of you umming and ahing about what they want. For my New York readers, you need to understand that in London the servers do not move on to the next person on the second Ummm....and in fact the server side is usually undermanned. Anyway, once you have decide what order you want to sign up to, you are asked to walk to another counter, about 10m away, and.....

....join another queue to pay. Same issues with undermanning. Once you have paid, you go back to the first counter, where (hopefully) your order has been prepared (by the overloaded server system) and thus queue a third time to get it.

Now, this is probably barely acceptable except for ladies and gentlemen of leisure in normal situations, but at a railway station where people have got but a few minutes, it has two effects:

- Firstly, the slow process time reduces the rate of revenue input - a McBurgerChicken would have done 4 or 5 people in that time. So its low productivity for its high rental

- Secondly, it limits the total revenue - I, and many others in the queue/s said "sod that for a game of soldiers" and ran for the trains or other further away food options

This is, as they say, no way to run a railway cafe.

But, whats this got to do with Open ID, I hear you ask? Well, just that the method of signon is like Benugo - and in my view that is its biggest drawback for adoption. Never mind the quality (security etc) issues, just get a one-stop-shop workflow going. We are as impatient and hurried on the Inter networks as the Inter rails.

Open ID must be like Burger King, not Benugo !

This is my contribution to the discussions about User Research coming out from various worthy organisations today, and that they are looking at ways of doing single sign-on.

(I saw this great comment on WebMonkey by the way: "Why not make a firefox plugin that you can use to login to every stupid site that asks for you to register. I even have a good name for it, you could call it bugmenot. Pretty clever right?")

Was reviewing the various presentations from the Web 2.0 Expo in Berlin, when I came across this response by Tim O'Reilly about Andrew Keen (from a question by Nancy Williams)


Tim O'Reilly on Andrew Keen from Adam Tinworth on Vimeo.

To refresh - the day before, Keen had written a piece predicting the death of the $0.00 business model - this is his basic argument:

In his best-selling book, Predictably Irrational, MIT behavorial economist Dan Ariely suggests that most of us are irrational when it comes to determining the value of our labor. I’m not sure. I may not have Ariely’s grasp of behavorial economics, but I’m pretty sure, if not certain, that the idea of free labor will suddenly become profoundly unpalatable to someone faced with their house being repossessed or their kids going hungry. Being paid to work is intuitive to the human condition; it represents our most elemental sense of justice.

So how will today's brutal economic climate change the Web 2.0 "free" economy? It will result in the rise of online media businesses that reward their contributors with cash; it will mean the success of Knol over Wikipedia, Mahalo over Google (Nasdaq: GOOG), TheAtlantic.com over the HuffingtonPost.com, iTunes over MySpace, Hulu over YouTube Inc. , Playboy.com over Voyeurweb.com, TechCrunch over the blogosphere, CNN’s professional journalism over CNN’s iReporter citizen-journalism... The hungry and cold unemployed masses aren’t going to continue giving away their intellectual labor on the Internet in the speculative hope that they might get some "back end" revenue. "Free" doesn’t fill anyone’s belly; it doesn’t warm anyone up.

In other words, a lot of the "free" work to date has been done by people making money elsewhere, and when they lose their jobs or benefits this will stop. (What Nick Carr calls "Digital Sharecropping" is currently being funded by benign employers or national social security systems)

I was also quite surprised that Tim called him out as "an idiot, and flat out wrong", as Tim said not that dissimilar things in his own presentation at the Expo event the night before - ie that startups will need to think of ways to make money, the funding for frivolity wasn't there, and value needed to be added. Not only that, he gave me the stage at the conference to point out things not dissimilar to what Keen was saying about the economics of $0.00 business models (see my talk here). In fact, I was talking at his conference at the same time as he was talking in the above clip. He also put the very sensible but possibly optimistic Martin Varsavsky on and took the devil's advocate position. In other words, Tim is doing more than his fair share to get the message out as well, and I think his recent posts pulling people back to the original meanings of Web 2.0 are a great step in the right direction - its was never all about social media esoterics, useless widgets and rivers of user generated cr*p.

So more to the point, whats going on when two guys seem to be diametrically opposed, yet in fact are saying much the same thing?

The quick take is that maybe both are parsing the credit crunch from their own positions and moving to a similar endpoint without realising it, like those movies where two protagonists are backing up and bump into each other, only to turn round and recognise the other - Aaaaargh!.

The longer take is no more subtle, but it is more brutal - its the race for the high ground going forward. To an extent, both needed the pre-Crunch world to hold the poles apart in the polemic. With bubblenomics gone though, the more silly excesses of Web 2.0 are going / gone, but so therefore is the ability to gain kudos by lampooning those same excesses, because the underlying Web trends are very real. What will the "During and Post" Crunch Tech Meme look like. Will Web 2.0 look like another spent force lying among the fallen dot.com daisies - or will Keen look like the sort of guy who called the falling sky with every breath, but now it has fallen people will say "OK now what have you got - is that it?"

It is at this time that new voices will emerge, as the Zeitgeist shifts, and this is the risk both sides' A list protagonists now face. I suspect that those who have been beating either too fluffy, or too pessimistic a drum, will both be seen to be part of "yesterdays story", their pages yellowing on the interwebs as people pass them by. (I think this was what Dennis Howlett was really getting at - the big picture has changed, but some people's narratives haven't)

But what shall replace these Old Tales then?

I have remarked a number of times on this blog on how hard it's been to hold an analytical middle ground in the last year or so - the hypemonkeys are so far off the planet ( heads up in the Cloud - don't get me started....) that just being realistic makes you look like you are a hopeless pessimists, while the pessimistic counterpointers have been able to scare the cyberchildren with their tales of the bogeymen in the digital woods. I hope the time for more reasoned council returns.

We need it.

(I do predict far fewer companies with silly names with 2 "oo"s in them going forward thank heavens - in fact my first recommendation to any VC is NameChange in these more sober times)

At the O'Reilly Web Expo in Berlin, there was an interesting session about women on the 'Net chaired by Suw Charman Andersen (Adam Tinworth covered it here). In the session Janet Parkinson showed some of the research she has been doing on the subject over the last few months. I'm familiar with some of this work as I've been collaborating with Janet on this - another useful byproduct of Lloyd Davis' (who was also on this session) Tuttle Club initiative.. These are Janet's notes:

Women represent a good half of the number of users of the web and even more on social networks.

They make over 80% of all real world consumer purchases and according to a recent survey conducted by Mastercard run across 7 countries recently, women now shop more online than men – though they spend less. Some of the reasons for this being security issues and bad website design.

As Justin Drummond notes in Brandrepublic ‘It is recognised that women, more so than men in the US and UK, are culturally encouraged to be more inclined to discuss their purchases with friends, recommending items they are pleased with and asking for advice from peers in decision-making; “they utilize the powerful marketing tool: word of mouth” (Source: www.alternet.org). This goes hand in hand with an expectance of openness to information about goods they wish to purchase, and makes them harder customers than men in many ways’.

The Web 1.0 online hard sell “Point-Click-Purchase” approach doesn’t always work, and given the choice women often prefer to browse, dig deep and get to understand our choices. Perhaps this is the reason for the success of sites like Etsy http://www.etsy.com/ which offer more of a shopping experience – with social networking at its core.

Social media is becoming more of an integral part of websites – and, as Business Week reports the use of social media is particularly attractive to women.

Web design and online marketing companies which are areas generally dominated by men are having to adapt to social marketing. Having more women involved with their eye for what women want can only be a good thing.

Moving on to advertising, Martha Barletta in her book ‘Marketing to Women’ comments that 91% of women say ‘advertisers don’t understand us’,and IPC Media reveals that within the ever growing market of women over 35, 36% feel that advertising aimed at them is patronising.

I must admit that I’m getting particularly fed up with the marketers and product designers assuming that the way to get me to buy some piece of tech is to make it in pink!

But there are a few glimmerings of hope with Dove, M&S and a few others having launched highly successful campaigns aimed at the older woman.

But my favourite to date has to be Harley Davidson which has added a section on its website dedicated to women motorcyclists. Women now buy 12% of all Harleys sold, and in an article in the New York Times, Jerry G. Wilke, Harley-Davidon’s vice president for customer relationships and product planning comments: “I think 12 percent is just the beginning…. The opportunities to cater to women are endless, and we will continue to do more.”

The video games industry is an area worth watching too with 40% of all gamers being women – though they represent just 12% of the industry.

This is still just the beginning though, and the money is starting to appear.
Advertising on, and traffic to, women-specific sites has increased rapidly and the big boys are starting to get in on the act:

Comcast recently bought the shopping and entertainment site DailyCandy for $125 million;
Peacock Equity and Venrock invested $5 million in BlogHer;
Yahoo created Shine http://shine.yahoo.com/ .

So where do we go from here? With the majority of internet shopping being done by women, and women also being the majority users of socical networks it’s odd that only 16% of women are involved in designing and building websites. And although roughly half of staff in advertising are women, men still monopolise the all important creative director roles which is odd considering that they are trying to influence women.

I would have thought that with these serious facts and figures behind us, now would be the right time for women to really start to make their mark.

In short, Janet's research indicates there is a big arbitrage opportunity in the Webspace - given that women are such big users, it would seem intuitive that if more women were involved in the supply side (as they are in many Brick World retail businesses) then the experience would be better - and more interestingly, "men only" UI/UE designers probably (i) wouldn't be able to build these attractive services and (ii) wouldn't be able to "grok" why women built ones worked better, giving those a competitive advantage for longer.

That this is not immediately obvious (I thought it was compelling, you see) was brought out for me at Web Expo - just before this session, I came into the speakers' lounge to see Janet in discussion with a very sceptical Ben Hammersley. I listened in for a bit, but as best I can gauge it, his argument consisted of the view that he didn't believe it, so it couldn't therefore be true (shades of Pythonesque "No it Isn't" reasoning I thought). For what its worth, the data re gender "convention" and "reality" is similar to that with respect to age. Rory Sutherland of Ogilvy made a similar point a few months ago when he showed that advertisers still target young people today, even though all the money is with the baby boomers who were young in the 1960's (where the "youth" practice started). Sutherland pointed out that this occurs because today the Ad world is full of young people who don't understand (and don't want to understand) old people, despite the underlying economic shift.

If a similar issue exists with Gender, then the arbitrage is probably even bigger than Janet imagines!

One of the joys of consultancy is that you can undo as well as do. This piece is a great guide for corporate un-development (we do this sort of work, but haven't for a few years now - looks like its coming back though). Some nuggets:

It’s really shocking.

“Shocking” is being polite. It’s earth-shattering. We’re back to one or two calls a day, which is translating into three of four new engagements a week. To put that into perspective, from 2002 through 2008, we were maybe getting five new deals a month. But now, all these calls are building up. We got a call yesterday to help a company and today, the request changed; it went from, “Can you help the company” to “we need you to close the company” because one of the investors is not going to ante up.

Have you seen other investors pulling out of deals?

We saw this years ago; it’s just starting now.

The role of PR:

Is PR cheaper than advertising? The answer is yes. Are you better to have a third party tell reporters how great your product is? The key is to negotiate. I’m not a believer in cutting public relations if the machine is well-oiled and people are reading about you. It takes three to six months to get public relations up and running. Why throw it away?

Now, do you need an inside marketing person? Probably not at $150,000 a year. Also, outside PR probably has a wider net.

And the lessons from experience?

Meaning you have to make all of your cuts at once? Can’t it be an iterative process?

I’ve been doing this for 30 years and if you do it strong and deep one time, everyone complains for a period of time, then gets over it. Also, I’ll be honest with you, I’ve terminated people and two weeks later, I’ve brought them back and apologized for cutting too deep. Usually, they come back. It’s acceptable to be human as long as you’re not a jerk.

I’m almost afraid to ask, but what kind of severance packages are startup employees getting?

Sadly, right now they’re minimal. Two weeks is a maybe.

The termination thing is different in UK/Europe by the way, its harder to get rid of people just like that - and bringing them back in 2 weeks is tantamount to getting a major lawsuit, so its far harder to overcut and make up.

Presented a talk today on the "Limits to FreeConomics" at the O'Reilly Web Expo in Berlin (the slides are on slideshare as below):



Three thoughts:

Firstly, what a difference a month makes - when i wrote the initial posts on the "Limits to FreeConomics" several months ago (which was in itself a summation of posts we've been writing for a year or so), the view that FreeConomics had limits - and in fact probably was closely linked to Bubblenomics - was near - heresy in the Web 2.0 community. However, yesterday at the plenary here, Tim O'Reilly here pretty much said the same thing (see here)

Secondly, it was great to get real life feedback (from European Broadsight readers at that), so here are some responses to the questions:

(i) Is this the Death of Advertising - No, my point was more that there is not enough online advertising for every Web 2.0 startup, and the likely "best future" is to work with customers to find out what they really, really want - in which case advertising will be more like information.

(ii) I only mentioned the "Offset Economics" of using the online presence to aid making money elsewhere - like we do out of consulting - in passing, as I felt it wasn't a major game (yet?) in the new media space (not to say it isn't being used by Google et al)

(iii) It was quite nice to see the backchannel was by and large complementary - not sure what it would have looked like if I'd done this a month ago

If anyone else ha questions from the session, or from reading the slides, feel free to post below on the comments line.

Thirdly, its been interesting trying to tune into the Post Crunch Zeitgeist in Europe as opposed to in the UK - my take so far, 1/4 of the way in is that even though there may be implosion in the centre, models with working services that are executed in different (non- English) languages are still probably quite viable.

Update - I see Dennis Howlett reckons this conference is just last year repeated, same stuff, people etc etc. One addendum - I wasn't there last year, and I can pretty much guarantee no-one was talking about the limits to the economic assumption sunderpinning a lot of the 2.0 startups then either! (Dennis has since replied in the comments, I agree with his point re eyeball counts being discredited)

Update II - I had various other comments from people during Web 2.0 Expo, some perceptive ones here:

- Nancy Williams and Adam Tinworth on the difference between what I was saying vs Tim O'Reilly's round table (and previous evening's presentation) to all the invited blogger corps - nancy thinks Tim essentially argued the FreeConomics was not possible post-Crunch, whereas my argument is that it is not sustainable long term in any situation. (See Adam Tinworth's summary of that session here)

- A number of people noting with amusement during the TechCrunch pitches that everyone now has a Freemium sort of slide tacked on the end of the presentation - the shape of things to come?

All in all had a great time, met lots of interesting people (including The Real Tim O'Reilly), and my thanks to the organisers for a fascinating conference in an intriguing location (AlexanderPlatz being the hub of old East Berlin)

Fred Wilson feels moved to apologise for a comment he made re Twitter's business model - or rather its lack of a shiny new one now that Free is no longer as fashionable (aka less people are willing to write the next funding cheque). He said:

“It’s like the stupidest question in the world: How’s Twitter going to make money?," said Union Square Ventures’ Fred Wilson, another investor. "It’s like 'How was Google going to make money?'

Fred feels this is wrong, and in a sensible, hard ars*d business way it is.

But there is another side to the Twitter Question - how does a service so unreliable, so derided and scoffed at, still continue to grow strongly and delight its users? Like Google, it has a certain something going for it which anybody looking at it can see is extra-ordinary. There is clearly something about its user experience which works. And that means it is potentially very valuable.

As to a business model - well, I don't think its just a social network, I see it also as more of a "2.0" style Unified Comms system - think email with pictures - and its in that intersection where - imho - its eventual business model will lie. But I don't think it has all the facilities that you need in a "New Telco", so to my mind that implies its not a standalone business, unless it can find revenue by being integrated into multiple service stacks.

I've noted before that mobile players could do worse than use it as a traffic driver, selling it into their service bundle - imho its ideal for mobile Socnetting - and UC for that matter, its a built-for-m2m-service too imho.

However, endgame must be to find a large player who would get strategic benefit from owning Twitter (eg that mobile traffic) - there has to be a sale of some sort. Telcos, Telco wannabees and media Co's with global aspirations come to mind.

I was listening to an article on BBC Radio 4 about people who have bought theatre and music tickets from eBay, only to find they were false. The people who were stung in the article were paying 4x the cover price.

But what really interested me was that they noted that about 40% of the UK ticket market goes through touts (people who buy tickets at face value, typically from organisations that get allocated tickets and then on-sell them). This creates the calculation below, where there is clearly far more money in touting than in actually being a musician.



Shown here is the economics of a show where the market price is 3x higher than the cover price. The musician will make a % of the overall 100% of tickets - say 40%.

The tout industry will make, at 3x cover, an extra gross profit of 80% of the original 100% value from all tickets at cover price, ie twice what the musician is making. So for example, if you sell 500 tickets at £20 each (£10k gross income) and make 40% as the artist (£4k), the touts are likely to make £8k profit ( £12k sales less £4k ticket costs )

Two obvious conclusions:

(i) The tickets are underpriced in the market, the musician and promoter clearly should be extracting more revenue and selling the tickets for more

(ii) The Musician is probably better off being a tout and making music in their free time

What interests me about touting is its been around in London for the 20 years odd I've lived here, and probably far longer - you would have assumed, given the size of it, that the industry would try to stop it to get their hands on the surplus being given away.

So, I received my set of MOO bizcards this morning, in time for the Berlin Web 2.0 Expo next week* (they are the normal sized ones, I don't like those get-lost-in-the-trouser-seam little things ) . They are truly beautiful to behold. I even heard MOO's Richard Moross speak at Future of Web Apps 2 years ago, and he is very good. But as I looked at the cards, I thought to myself - why is MOO even at a Web 2.0 conference - I mean, they aren't a Web 2.0 company really.

And by this I don't mean that they are not a digital media business, and are instead a good old physical world manufacturer and retailer**

No, its because they do something else, something unheard of in the Web 2.0 world, something that is potentially totally anarchic, even revolutionary, in the sector. You see, along with the cards came another, very digital product. It was an invoice!

Yes, a real invoice - for real money - that I actually had to pay, or else they wouldn't give me the goods!

Talk about a new paradigm! Imagine the total destabilisation of the Web 2.0 ecosystem if companies all invoiced us for their services and we had to pay - Twitter would have a business model instantly!***

What it would do of course is rapidly sort out the "real" businesses, that added sufficient value that people were prepared to pay, from the chaff.

Of course, a proper Web 2.0 consultant would soon see them right, and insist they move to an Ad model - MOO banners on the Bizcard, google Adwords on the back, that sort of thing. And blog, blog blog it all

*Where I'm speaking, on limits to Web 2.0 business models etc funnily enough

**the main lesson with MOO is in fact what a Good Ole business can do with a great online presence - Enterprise 2.0 in action!

***In fact, reflecting further, the only other "Web 2.0" labelled people who actually charge money are conference organisers. Its the old jeans and gold rush analogy again methinks

Jason Hiner on C:Net has a good "They Say / We Say" piece on the Gartner "Top 10 Technologies to Watch" List (see below):



I am going to copy...er I mean flatter Jason by doing the same:

1. Virtualization

They say: Server virtualization is already in process. Today, the two biggest opportunities in virtualization are in storage and desktops. Storage virtualization offers simplified access by pooling systems and can save big money with storage deduplication. Desktop virtualization allows users to have a portable personality across multiple systems, delivering a thick client experience with a thin client delivery model.

We say: The issue is not in the hardware, it is in the middleware - allowing these systems to operate in an integrated way, especially in the delivery of services and applications. We think the OSS/Provisioning layer for Virtual services is a major issue / opportunity here

2. Cloud Computing

They say: You need to be very careful about all of the hype, but you need to take it very seriously as well. They think 80% of Fortune 1000 companies will be using some form of cloud computing services by 2012. They encouraged IT leaders to consider the back-end infrastructure and policies of cloud providers and to carefully the development models.

We say: The Pay-per-Drink economics are attractive, the reliability and security still have a ways to go. We expect to see hybrid rather than pure Cloud services as an interim step., as the PC inventory is still increasing. Jason noted that " the one reason why a lot of IT leaders will eventually adopt cloud computing: It can allow IT to move a significant chunk of money from capital expenditures to operating expenditures."

3. Servers: Beyond Blades

They say: Blade servers introduced a shared a computing fabric that allowed some recombination of components and some efficiencies. The fabric-based server of the future will treat memory, processors and I/O cards as components in a pool, combining and recombining them into particular arrangements to suit the needs of the server load.

We say: This is just additional evolution of an existing trend, the virtualisation issue is not about the hardware, its about the management of it - ie the Middleware. One increasing issue is/will be heat removal per square foot if systems get any more efficient - it may be necessary to have dispersed systems (higher transmission loss, lower cooling costs)

4. Web-Oriented Architectures

They say: Expect Internet, Web and cloud-based concepts (such as SOA) to increasingly drive mainstream architectures and development models.

We say: As for Cloud - we expect to see hybrids first

5. Enterprise Mashups

They say: Mashups mix content from multiple sources by using feeds from public application programming interfaces (APIs). Enterprises are now investigating taking mashups from cool Web hobby to enterprise-class systems to augment their models for delivering and managing applications.

We say: There is undoubtedly a huge market for free flowing enterprise data - the issue that has to be solved first is getting at the data, and putting it in a form to be mashed up usefully. And the real value is between enterprises in a supply chain, and between enterprise and consumer - which requires even higher levels of open-ness. Barriers to open-ness are not just technical, but organisational.

6. Specialized Systems

They say: Specialized server appliances can save IT time because they are largely preconfigured, but they also are not as flexible and can’t be reused as easily. A new category called heterogenous systems is emerging that offers mix-and-match hardware. Heterogeneous systems are prebuilt and supported by vendors, rather than custom-built by IT departments.

We say: Specialised appliances tend to be an interim stage in a market, between new software ideas and stuff being put "in the knitting" Look at Load Balancing Hardware or XML accelerators for example. At some point these disappear into the standard infrastructure. They are built by for solving a short term problem - and if an outside vendor won't build it, the IT department has to - and we don't see the need for all sorts of these interim systems disappearing anytime soon.

7. Social Software and Social Networking

They say: Your organization is an entity in the broad Social Web. Get to know Facebook, Twitter, FriendFeed, LinkedIn and other social sites and applications. Listen to the language of social media, before starting to speak.

We say: Social Networking has its uses, but can also be a massive time sink - and many (most) of the consumer based, low security, peer based, low criticality systems referenced today do not easily fit into the more hierarchical, secure, critical delivery systems of enterprises. Its a moot point as to who is right, but current enterprises won't buy in bulk until much better ROI cases are made. We expect to see penetration initially around the customer handling end, and internally in more peer based subcultures.

8. Unified Communications

They say: Enterprises are realizing that they have multiple products and vendors performing the same communications functions, and that this redundancy creates additional expense, makes it more difficult for users to learn, and increases the complexity of integration.

We say: There is currently a big divide between desk based and mobile based capability (and systems), and systems have to be run for the weakest link in the chain. UC is undoubtedly a major issue, the key is to have aggregation systems that can glue it together seamlessly (Twitter being a good early example)

9. Business Intelligence

They say: Business intelligence (BI) is one of the most powerful things you can deliver to business decision makers. Even though we’ve all been doing it for years, we’re not doing it very well because too much of the data is stuck in silos. Companies need to get serious and systematic about implementing BI and performance management solutions because they fuel smarter decisions and better results.

We say: It always has been key - the problems these days are often not in getting the data, but in understanding what it means - and internally, getting it to flow without being manipulated by interim stakeholders (The old "Everything is Shit to Garden is Full of Roses" transform applies).

10. Green IT

They say: Consider potential regulations and have alternative plans for data center and capacity growth. Many are looking at energy efficiency or ‘green’ products simply for the practical advantages in energy savings. Some companies are emphasizing green activities as part of their social responsibility. A socially conscious CEO may have funds to support some IT changes that result in a greener company.

We say: In the past, "Green Awareness" hass usually been a feature of "top of boom" conditions, we expect it to decrease as an issue in the next 2-3 years. Not to say we don't think Green is Good, its just that companies are now looking at survival in a market red in tooth & claw - no Green ROI, won't happen. (The ROI could be market image based, but we suspect that pressure will decline now)

And one we'd add.

11. Predictive Systems

Something we don't think Gartner clocked - On the Web, there is a huge amount of data in a closed system, crunching that to predict or influence future activity will be a huge trend. Google et al's Datamining is just the start. Also, intelligently Filtering this datastream will be more important than collecting the data.

Gawker Media is a live laboratory for Blogonomics - in an interesting restructuring announced today, they are cutting some areas and redoubling their assets in others:

Here's the heart of it: we are cutting 19 of our 133 editorial positions and suspending bonus payments at the start of next year. With the savings, we are increasing base pay and hiring 10 new people on the most commercially successful Gawker sites.

In essence, they are going where the money is, ie where the big PR & Ad budgets are. Consumer service based enterprises, who nobody with an Ad budget wants to fund, are getting the chop. So blogs such as Valleywag (the Private Eye of the Silicon Valley Scene) and Consumerist are on the skids:

Sites such as Consumerist, whose success has been measured more in traffic and recognition than in revenue, now need to cover their costs. I can't underline enough that this harsh commercial judgment is no reflection whatsoever on the editorial teams that are being cut.

Each of these sites performs a vital function. Consumerist provides an outlet for disgruntled consumers that exists nowhere else on the web; Valleywag has given puffed-up Silicon Valley the prick it's long needed.

.

In other words, if the punter ain't paying, and the pied piper don't want to play, then the music stops.

If you ever needed a clear sign that the "Neutral Net", that claimed the Blogosphere was a community of colleagues, was a complete chimera - well, this is it. If you've ever read Animal Farm, this - along with Matthew Ingram's earlier post - is the point where you notice the New Media is wearing decidedly Old Media trousers.

As we have noted before in our essays on the Limits to FreeConomics (start here), at some point the consumer has to pay up for services run mainly in their interest, because (i) commercial enterprises are not charities and (ii) the content producers by and large do not vote for the "starving in a garret" option if they have an eye on their longer term survival.

But the other big lesson here is "Don't rely on Online Ad growth" either. As Gawker CEO Nick Denton notes:

But now the credit crisis is clearly going to affect every sector of the economy. Advertising buys typically plunge after the Christmas shopping season, and 2009 is obviously going to be exceptionally difficult. We have to prepare for the worst, now, rather than when the worst comes upon us.

He's just being a smart businessman. But it's a strong signal to the the Web 2.0 community that Ad based biz models are not going to float many (most?) of their boats, its time for a rethink of that biz model.