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Back in 2008, online social networking startup Ning couldn't give away free, hosted social networks fast enough.

The company, which was co-founded by Marc Andreessen of Netscape fame, reportedly estimated that by New Year's Eve 2010, it would host approximately 4m social networks. Social networks which would produce billions of daily page views for the startup. Ning's projected trajectory excited investors so much that they invested more than $100m in the company.

But it wasn't to be. Last month, Gina Bianchini, Ning's CEO, resigned. Now we know why: it turns out giving away and hosting free social networks isn't such a great business after all.

Ning is now laying off 40% of its staff and ditching 'free' altogether. That's right: the thousands upon thousands of users who run a social network will either have to pay up or move out.

Yesterday, TechCrunch published an internal company memo from Ning COO Jason Rosenthal explaining the changes:

My main conclusion is that we need to double down on our premium services business. Our Premium Ning Networks like Friends or Enemies, Linkin Park, Shred or Die, Pickens Plan, and tens of thousands of others both drive 75% of our monthly US traffic, and those Network Creators need and will pay for many more services and features from us.

...We will phase out our free service. Existing free networks will have the opportunity to either convert to paying for premium services, or transition off of Ning. We will judge ourselves by our ability to enable and power Premium Ning Networks at huge scale. And all of our product development capability will be devoted to making paying Network Creators extremely happy.

In short, Ning is switching teams. Instead of trying to be really, really big with a free service, it's going to try to make money providing a service it hopes some of its biggest users will be happy to pay for. Needless to say, that transition won't be easy, and the fact that it is cutting staff will almost certainly scare some of its users into looking for a new home.

Make no doubt about it: Ning's move is significant. That's not because the company itself was ever really important. It was never Facebook or MySpace, for instance. But it was a Silicon Valley poster child for Web 2.0 and the social networking craze.

Started by internet royalty, Ning was one of the most well-funded social networking startups around, and one of the few that raised money from Wall Street-type investors. And the fact that it was giving away the farm for free was always promoted as a positive.

Case in point: a glowing article in Fast Company entitled Ning's Infinite Ambition. The article's author wrote:

Mass audiences on that scale obviously carry the potential for serious money. At the very least, if your strategy is to get big and get bought, you can auction off yourself (and your millions of users) to the highest bidder -- and let the next guy worry about wringing revenue from your audience. This was the chosen route for MySpace (bought by News Corp. for $580 million) and YouTube (Google, $1.65 billion), as well as PayPal and Skype (eBay, $1.5 billion and $2.6 billion, respectively). Or you can try monetizing those bodies yourself: Lehman, in its latest report, predicts that the domestic online-ad market will grow 23.6% in 2008, to $26.2 billion. Ning's "billions" of predicted page views would leave it poised to claim a nice slice of that revenue.

...Ning wants to foster millions of little networks with narrow channels, each delivering the kind of targeted advertising that Google rode to vast riches. Because in this new phase of Webonomics, it's not just the eyeballs, stupid, as it was before the dotcom crash. It's the kind of eyeballs you collect and how you can slice, dice, and model them.

[Ning] displays the kinds of ads Web surfers are accustomed to seeing on blogs, news sites, all over the Internet, especially tailored to their particular social-net niche. Extreme skiers see ads targeted to extreme skiing, and so on. Right now, Google places Ning's ads, but eventually, Bianchini and Andreessen plan to serve their own.

At one point, the article went so far as to state, "once a company attracts a certain number of users, it becomes all but unstoppable." In the real world, of course, Ning is evidence that once a company attracts a certain number of users, its decline becomes all but unstoppable if it isn't able to find a way to operate profitably.

From this perspective, Ning's fall is perhaps one of the best signs yet that the second internet bubble and its unhealthy focus on 'free' are finally coming to a close. While there's nothing inherently wrong with 'free', free is tough, and there's nothing wrong with 'paid' either.

As the global economy finds its footing, let's hope this lesson isn't lost on a new generation of startups: you can only give away so many free lunches before you go hungry and broke yourself.

Photo credit: fczuardi via Flickr.

Patricio Robles

Published 16 April, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2380 more posts from this author

Comments (5)

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Penny

I guess that until the news spreads officially, most network owners will not know about this for some time (the announcement is not yet official)

There are going to be a huge number of network owners regretting not having chosen SocialGO over ning, but will ning make it possible for them to transfer their data and membership? I doubt it...

over 6 years ago

Mike Stenger

Mike Stenger, MikeStenger.com

Ning just didn't have a profitable enough strategy. There's free services out there right now that can and are making money. Speaking of Ning, I found it interesting that Webs.com took advantage of the news that Ning will no longer be free, and offered their free social networks to existing Ning users. Apparently they have a profitable enough strategy...

over 6 years ago

Ed Stivala

Ed Stivala, Managing Director at n3w media

Great post Patricio and totally agree with you.

The first .com bubble clearly demonstrated that the web does not redefine basic economics and what we are seeing now is that even adding the magical social tag the web *still* doesn't redefine basic commercial principles. Apparently it doesn't matter how young and trendy you are, how hard you screw your eyes up and hope or how tightly you clench your fists - if you are supposed to be running a business then you are supposed to make a profit. It has been interesting over the past few weeks watching some investors reminding other social networking businesses of this rudimentary principle. 

Free trial offers and the various other time proven gambits (online and off) are all well and good as sales and marketing tools, but at the end of the day you need to find a core market that will actually *pay* you more for your service then it *costs* you to deliver it. Otherwise at best you have a public service or hobby but you certainly don't have a business. 

Simply having a lot of consumers happy to utilse your service for free is hardly a mark of success, especially when the more you attract the higher your infrastructure costs go and therefore your break even point constantly moves away. 

I guess people will get it eventually.

over 6 years ago

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Anonymous

This Web 2.0 bubble is sure to burst just like Web 1.0 did with the dot.com crash. This blog post and the video at the end of it says it all about most Web 2.0 enterprises: http://www.azam.info/dotcom-internet-boom-returns/

over 6 years ago

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basal thermometer

Grace thank you for this note. I want to share something with you. It's what I wrote for my Facebook update from last Saturday night: "...abruptly left a department store tonight. Every TV and stereo on display were synched together blasting Michael Jackson. Hit after hit. I caught the eye of another customer waiting in line like myself, a woman about my age somewhere in her forties-- the songs played pretty much spanned across our entire life times. Tears rolled down her cheeks I think before she even knew she was crying.

almost 6 years ago

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