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My idle thoughts on tech startups

Is “Data” a Business Model?

Lee Hower
March 30, 2012 · 3  min.

Several years ago I wrote a post about the three business models of the consumer web: commerce, advertising, and user-paid premium services.

The consumer web landscape has changed meaningfully since I wrote that in 2006.  But I still firmly believe the overall framework holds true.  Some believe that there are “new” revenue models being created by consumer web companies, like virtual goods or “freemium” services.  But virtual goods are simply new flavor of a premium, user-paid service… it’s like paying for a game in intermittent installments, rather than an up-front license (e.g. most console games) or a monthly subscription (e.g. MMOs).  That’s why Zynga assiduously courts and coddles its whales.  And a freemium model is similarly a type of premium service, or potentially a hybrid between premium and ad-based business.

We’re witnessing a new wave in “big data” that extends far beyond just the consumer web.  That phrase means different things to different folks, but broadly speaking we’re now in an era where there’s vast amounts of data “exhaust” being generated by a wide range of activity… from consumer web browsing patterns to financial trading to social media content to purchasing behavior.  Lots of people more forward-thinking than me have rightly said that data is a powerful asset and aggregating, mining, and making it useful will be a core element of many businesses currently being built.

So is “data” now a new business model, as some suggest?  After all there are various ways to monetize data assets.  The good folks at IA Ventures have a primer slide deck publicly available, as big data is the core element of their investment thesis, and they divide the world into companies that sell data, those that compute & sell data, and data driven products.

But for consumer web companies, I think the short answer is not really.  At the end of the day, the actionable insights that come from various forms of data are capitalized through existing business models like commerce, advertising, and to a lesser extent premium services.

Let’s take a look at some examples:

  1. Twitter – I recently argued that Twitter is essentially a media company, despite their protestations to the contrary.  Clearly the data within Twitter is a valuable asset both for the actual content of tweets and the meta-data around tweets (who, where, when, etc).  That’s why Twitter’s initial revenue came from licensing the firehose to search giants Google and Microsoft to increase the breadth of their search and potentially improve targeting of search ads.  So regardless of whether Twitter is a media company or not, even if one considered them a “data” business they’d essentially be an enabler of other advertising businesses.
  2. Dropbox – Most people wouldn’t consider Dropbox a “big data” company per se, but clearly their product’s success is directly tied to the ever increasing data storage needs of consumers and small businesses.  That’s why even if Dropbox didn’t add a single new user this year, their 2012 revenue would still double from existing users increasing their premium storage needs (truly phenomenal).  But at the end of the day Dropbox’s business is as a premium service, and in fact what they do is essentially raw storage rather than generation of insights from the massive store of data they sit on top of.
  3. Pinterest – Pinterest is capturing tons of data about consumers’ interest in products… what they like, how they share and influence others, what they categorize in relation to other products.  Their first revenue stream is simply inserting affiliate links to e-tailers into the pinboards that users create.  In the future they might sell data and data-driven insights to brands or e-tailers to help them better target their products and advertising, or they might engage in commerce themselves.  But at the end of the day Pinterest will monetize all of this data either directly on their site or indirectly through others via commerce and/or advertising.

There are countless B2B companies pursuing big data opportunities as well, and at NextView we think this is an incredibly exciting area of innovation.  That’s why we’ve invested in companies like InsightSquared, Hyperpublic, and Objective Logistics and are looking at many more opportunities in this vein.  Broadly speaking though, these B2B companies are essentially “picks & shovels”  businesses that are creating products and services to empower businesses to capitalize on internal and external data assets.

The enthusiasm for data-driven businesses is well founded, and I heartily share it.  Data is clearly an asset that can be monetized either directly or indirectly by driving more commerce, advertising, and premium services.  But “data” isn’t fundamentally a new business model, especially for consumer web companies.

Lee Hower
Lee is a co-founder and Partner at NextView Ventures. He has spent his entire career as an entrepreneur and investor in early-stage software and internet startups.