The Dog Ate My Business Model

Here's the problem: Between February and April, traffic to your Web site soared by 400%, to about a million visitors a month. But you have no idea how to make money out of this coup.

You'd love this to be your problem, and maybe it is. What's for sure is that it's the problem facing Twitter in an age when business models are fundamentally changing.

Twitter is a blockbuster social messaging service. It's free, too. Meanwhile, as Twitter's managers and investors wrack their brains trying to figure out how to make money from it, others are falling in love.

In the two years since Twitter entered of the lives of thousands, tens of thousands, hundreds of thousands, and now tens of millions of Internet users, external technological entrepreneurs have created applications to improve and enhance Twitter's user experience.

Some have managed to drum up revenues, and one, Summize, made its founders and investors considerably richer: Twitter upped and bought their company, thus gaining an on-site search engine.

MySpace, which has been around a lot longer than Twitter, was born in August 2003. Still the largest social network in the United States, MySpace has earned hefty revenues from advertising. At the same time, it has also created tremendous value and revenue for tens of thousands of independent artists, primarily musicians, who have used the site to find very large audiences.

MySpace has an advertising contract, worth hundreds of millions of dollars, with Google. The contract will soon run out, and it has become clear that the new contract, if it materializes, will be considerably less generous toward MySpace.

However, the artists it hosts, many of whom thought they never would be able to work with a traditional recording company, are continuing to prosper.

Thus, Twitter's major financial value was created outside the Web site itself, and a considerable portion of the financial value MySpace generated has benefited not just the Web site's owners, but also its users.

The same thing has happened at Facebook. While the world's largest social network has huge revenues - approximately half a billion dollars a year, the thousands of external application developers have generated earnings that compare very favorably with those of Facebook.

The mechanism that has enabled third parties to link up to Twitter and Facebook's huge user pool (as of April, Facebook had 67.5 million in the U.S. alone) is called open API.

API stands for application programming interface, and open API gives outsiders access to the inner workings of the Web sites, in order to develop their own programs using the Web site's own data.

The Internet in general and open API in particular are having a powerful impact that is not limited to Twitter, MySpace and Facebook, or even to other Internet companies.

Many traditional business models are based on physical market frictions. An excellent example is marketing, especially distribution.

Many products, primarily media, are physical (newspapers, CDs, and so on), and they reach the consumer only after having passed through long distribution channels between the factory and the consumer's front door or the store.

As far as digital products are concerned - and most media products can be stored digitally - online distribution is not physical. More significantly, it is significantly cheaper than more traditional means of distribution.

Since online distribution is so easy, the advantages and market obstacles that served the traditional media giants in the past no longer exist.

The Internet has created the potential for a massive centrifuge.

At the center is the old business model. More and more parts of this model are simply whirling off that center, destabilizing the entire model.

To deal with this pressure, some players simply isolate themselves. Others, primarily those with an active Internet presence, do the opposite: They let the centrifuge spin off as many parts of the initial business model as possible, at optimal speed. The most widespread vehicle for facilitating this process is open API - letting the public in.

The (perhaps unconscious) goal is that, after this process ends, the business model will retain only its hard, resilient core, which cannot be further dismantled.

Others aim to collect those detached components and use them to build new business models. Thanks to the Internet's unique capabilities, and open API, business models can be taken apart and then reconstructed.

Not every promising business model will prove itself. But those who oppose the process may find themselves outside the game at a very early stage.

Currently, the phenomenon is limited in its scope. It focuses chiefly on media and support applications for Internet companies.

In the future, it could expand to include both a wider range of companies and more parts of their business models, such as planning, personnel recruitment, marketing, service provision, and perhaps even management.