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.