Friday, July 6, 2007

Way to make money off of “freemium”

In my e-mailbox Tuesday night was an e-mail from GrandCentral Communications founders Craig Walker and Vincent Paquet, announcing they had sold their 1½ year-old startup to Google. As Doug told me Friday (during our iPhone outing), the acquisition has been long-rumored.

GrandCentral got the cool name from its VC, Halsey Minor, who had it left over from an earlier venture. You may not know Minor but you probably know his most famous startup, CNet, which once brought him a paper net worth approaching $1 billion. Minor put an estimated $4m into the startup, while the cofounders had money from their turnaround and sale of Dialpad to Yahoo. Although Minor, Walker, Paquet & Co. did not specify their haul from this week’s deal, some speculate they grossed $50 million.

I know Vince casually as our kids go to the same elementary school and we’re working together (indirectly) as Lego Robotics coaches. This is one of the cool sort of social overlaps that I thought would happen when I moved to Silicon Valley, but (frankly) is more the norm for those living in the Peninsula (esp. Palo Alto) than us peons living in (relatively) affordable housing in the South Bay (i.e. South San José).

As with a lot of Web 2.0 companies, I grok the value creation part of GrandCentral’s business model but not the value capture. Still in beta, GrandCentral gives me an incoming phone number (free) that forwards to my other phone numbers (free) and the ability to ring different numbers for calls for different callers (free), as well as voicemail (free) that sends me e-mail when I have a new message (free). This will come in handy, as I want to forward some calls to my cell phone but not others, as well as be able to find out about voicemail when I’m away from the office.

Did I mention the service is free? The value to me as a customer is pretty easy to get. So where’s the value capture? A couple of weeks ago, Vince said that once the free service was done, they had plans to dangle lots of cool features available only in the premium service. He called this the “freemium” business model, a term I’d never heard before. Google’ing around, I was surprised that “freemium” already has a Wikipedia entry (but not surprised to see the quality of the entry). My old friend Tom Evslin apparently used it more than a year ago, at which point it had already caromed around the blogosphere.

To me, Skype is the quintessential freemium service. I’ve used the software (free) to make PC-to-PC calls (free) and even WiFi handset-to-PC calls (free). And last December, when my flight from Eindhoven to London got fogged out, I spent €5.00 to be able to SkypeOut to fix my travel arrangements (and I think I’ve recharged it once). So for several years of free calls I’ve paid for a little bit of local PSTN termination at rates generally cheaper than any non-VoIP alternative.

We’ll never know about how GrandCentral’s freemium business model would have worked. Instead, the GrandCentral revenues, cost and acquisition price will non-material figures (i.e. trade secrets) lost in the wads of cash being gathered and handed out through Google’s ever-expanding tenacles.

GrandCentral (like blogspot) makes Google’s properties more sticky — exactly as with Yahoo and Microsoft’s acquisitions (e.g. eBay buying Skype). It seems that the aggregation value (economies of scope) to Google are more compelling for its mobile phone portal than its PC-based portal. Others speculate that Google will use the GrandCentral infrastructure to more directly challenge Skype.

But I worry about how GrandCentral contains even more private information about social networks that Google can mine: if I say “x family calls always get forwarded to my cell” but “y friends get voicemail if I’m not at my desk,” that is not just linkages between individuals but also very useful tie strength. What will Google do with this information? The GrandCentral and Google privacy policy today seem rather benign — they only want to target ads. I can deal with the prospect of getting more Hawai‘i ads if my wife (or friends) click on Hawai‘i ads. Some of the other prospects I find more unsettling.

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