Paul Berberian, chairman and founder of Raindance, wrote a provocative post today called Free Conferencing is Theft. Paul knows this business extremely well – I was an early investor in Raindance (I left the board two years ago and am no longer involved in the company – but I continue to be a strong supporter and fan of it).
While Paul’s position is influenced by his role as a major investor in a leading web conferencing company, he describes clearly how the regulatory economics of the conferencing business works as well as the loophole that free conferencing companies are taking advantage of. He makes the point that someone is paying for this and – eventually – if the cost gets big enough – “someone” will notice and the dynamics will change.
Paul refers to the free Internet access business as an example of a bad business model that wasn’t sustainable that tried to take advantage of a shifting a cost disparity. I know this all too well as an early investor in PeoplePC (now owned by Earthlink and a paid service) – we spent a lot of money and acquired 600,000 customers on the path to having a non-sustainable business model. Part of our problem was the cost arbitrage we were trying to take advantage of – we thought we could provide retail ISP services at free prices but make up for it through our share of margin on computer sales, partner rebates, pull-through e-commerce sales, advertising revenue, and credit card incentives (all of these were revenue opportunities that we had that were associated with each new subscriber we acquired.) While we weren’t arbitraging regulatory issues (as with free conferencing), we applied a business model that required scale to a well-established business infrastructure, and ultimately failed. In hindsight, if we’d merely charged a commodity price for Internet access, we would have likely had a sustainable business.
Ironically, one of the very visible free ISPs (NetZero) has turned into a very successful paid ISP (United Online). The successfully transitioned enough of their large free customer base to a paid customer base – along with some smart financial engineering and good operational management – to use their initial “free” arbitrage position to create a sustainable and successful business. For those of you enjoying “free conferencing calls” today – don’t get too used to “free”.