I have been thinking about the psychologically of making money out of free online services largely as a result of having developed services that have attained healthy traffic, yet failed, like many others, to make any profits.

Using free!

Using free as a business model is easily one of the fastest ways to gain traction, However, if the solution provided is too efficient, no new pain will be created and thus there will be no opportunity to make any profits.

Unintended Consequences.

Rarely there are unintended consequences which arise out of new solutions. These ultimately manifest as a new pain for the users and oddly, it is precisely these events which need to be carefully considered during the planning stages of the new concept if it is going to be successful!

Intended Consequences

When providing considerable value to users and thus gaining traction with a free service, I argue the intended consequence should be to create a new pain. Then one simply charges for the resolution of this new pain.

Interesting Case Studies:

Company : MegaVideo
Value : provides great value with reliable video streaming, a large library of content and good image quality.
Pain: limit of 1 hour free viewing, demanding payment (20 euros = 3 months access) to watch the last part of a film!

Company: Plenty of Fish
Value: provides free online dating networking service.
Pain: creates pain for competitors who then pay to advertise.

Company: WordPress
Value: provides free blogging software.
Pain: spam, users invest considerable energy into the platform, then suffer huge comment spam issues, resolved with the askima plugin (cost 49 euros).

Summary

Each of the above are interesting examples of companies who have intentionally or unintentionally created services which have gained considerable traction out of free, which has then resulted in a new pain being experienced by either their competition or their users, many of whom have payed for that pain to be resolved.

Is it ethical and does this matter?

Maybe and maybe not (depending on the variables), but what matters more IMO is the resolution of problems and the advancement of technology. I’m sure some will cry foul and accuse thee of simply looking for ways to exploit others pain which is true, but before you can exploit the new pain you have to solve another problem and/or provide considerable value to the target which is the the primary hook, so the end justifies the means and as long as there is added value then most people should be happy…

KillerStartups has been in the news recently as a result of buying the domain name Startups.com.

TechCrunch reported that they may have paid somewhere in the realm of $500K for that name, (following suggestions from the company). This caused skepticism in the comments and most interestingly Zoli Erdos, Editor-in-chief of Cloud Ave and friend of Michael Arrington, called into question the $499 monthly charge they are offering companies to access the data they have on other companies (similar to what Crunchbase offers free).

You can call me a skeptic too, given their total funding was reportedly ‘only’ $250k it seems unlikely they have $500K to splash about (at this time) on a PR4 domain name with no content and no CMS. Especially since their original funding comes from South American domain-name entrepreneur Matias de Tezanos, who’s obviously in the domain name biz.

CEO of KillerStartups Gonzalo Arzuaga says the site is attracting 1.5 million uniques a month. He adds that the acquisition was funded from cash flow! So if we are to believe the $500K price tag for startups.com, that suggests the $250K investment in KillerStartups is paying off big time. But is it?

Lets start with the stats: KillerStartups is proud of their user statistics and has left these open for anyone who is interested to view online. Here are a few interesting figures that stood out to me:

434,841 visits over 2 minutes (per month)

I.e. probably real visits not robots or widgets, and a healthy number it is! But this traffic is NOT enough to generate $500K of ‘cash flow’ simply from advertising.

2353 searches for “killerstartups” (per month)

(0.1 % of total) – a good indication of how well the brand is growing and if people are actively looking for the companies content.

7692 searches for hotmial (0.4 % of total)
4499 searches for hotmial.com (0.2 % of total)

I would imagine someone would fix the spelling if not for the traffic!

Browse the stats yourself

Here are all the referring sites and the search phrases traffic from search engines, all for this month. See if you can find your company among the list!

As the stats change monthly and the above links are for November only, I have put up a backup copy of the stats for October which are more detailed for the summery, top referrers and search phrases.

It feels a bit naughty looking at their stats…tut tut, but for some it will be more interesting than other content they offer and may even increase their unique visitors…

Gasoline for the hype

However this type of BS which is often pandered about ‘that so and so just made $X000,000′ is typical of the hype that fueled the first dot com boom & bust and which is now leading to a New World Order in the financial markets, because it is all fueled by hype and BS alone!

I first came across Derek Sivers (founder and director of CD Baby) about one year ago. He had done an interview a few years prior on Venture Voice which I thought it was one of the most interesting among that collection (another that stands out in my mind was with Jason Fried) but they are all excellent.

Derek Sivers is now back in the news and was again interviewed on Venture Voice to talk about the recent sale of CD Baby for more than 20 Million USD. By the time of sale CD Baby had grown to 85 staff and a turnover of about 100 Million USD. Derek chimes in on the discussion that ensued on HN “Although of 85 people, 50 of which were in the warehouse $8/hr pick-pack-ship, 28 were customer service answering emails, and only 6 jobs were “other”, such as bizdev, tech, or management.”

“No Stress!”

I asked Derek a few questions for this article which I hoped might reveal some clues to his success. One of those being, “How did you deal with the stress of running and building such a company”, his answer was very surprising: “No stress, either. I always make sure situations are to my liking, and make me happy. If they’re not, I change them. That way, work is just play, not work”.

In a day and age when stress seems to be rampant, not only does Derek build a company from scratch without VC capital nor any large investments, but he does it without breaking sweat! Nearly every entrepreneur I have come across has grappled with the problem of stress, even the mighty Mark Cuban who doesn’t seem to have found his businesses nearly as painful, talks about his worst moments in the TC50 Calacanis interview.

On the opposite of side of the fence, we have the maverick Michael Robertson who has had a long string of successes followed by stress. He formally started MP3.com and lost it to legal assaults in the first bubble and now is again in the midst of yet another legal wrangle with EMI who have been at him and his latest business MP3Tunes like a dog with a bone, currently demanding everything from his home to the toilet paper he uses in the mornings!

So what is Derek’s secret to NO STRESS. Derek says he reads a lot then “wisdom sinks in and just becomes unconscious decisions”. He has written an ebook packed with advice for fellow musicians on how to be successful, which should no doubt be mandatory reading for entrepreneurs, as it contains many useful insights which are not limited to musicians.

So what is the master of ‘no stress’ going to do next? To lower the stress of artists that’s what! He’s next venture is aptly called MuckWork and he is pitching to do the dirty work for musicians so they can concentrate on their art. As Paul Graham says: “Where there’s muck, there’s brass!”

Is the secret to no stress, not to tackle anything that is groundbreaking, rather to muck about doing the donkey work that others cannot stand, in doing so cleaning up?

To edit a website’s design is currently a real hassle, as a developer you have to constantly fath about in a sort of trial and error mode, adjusting one color or parameter at a time. Of course once you change one, that changes everything so you often end up going around in circles for hours until you no longer know whether you’re coming or going (in my case it’s mostly the latter).

Styling is a very time consuming task which generally causes many arguments and frustrations between developers as they try to attain a unique, fresh and interesting look for their projects. With a product like Stylizer this pain is alleviated and the cream works in minutes. One can control the styles in a live fashion seeing how they change the overall look while simply turning knobs and watching the changes take place before your eyes.

As a nuts and bolts developer I personally struggle tremendously with creating a fresh clean look for my own projects. Only after attempting to create graphics yourself do you really gain respect for graphic designers. Earlier in my design carrier I have been constantly disappointed with graphic designers thinking they overcharge, are slow, produce substandard work, etc. In many cases it is often true and one area where I struggled to find a outstanding professional artist. Though I did eventually it is clear to me they are few and far between.

What is now also clear to me is how frustrating and difficult this task really is, I am certainly in the market and will pay good money for an elegant solution to this personal pain, hint, hint, Stylizer Mac version please!!! It is also a little odd that there is not a Mac version of this software (unless there is by someone else and I dont know of it?) given all graphic designers I have ever worked with only ever used Macs.

So if your in the same boat, struggling with creating a shit hot look and feel for your own sites and you use PCs, give Stylizer a shot and let me know if this software is really as good as it looks! Do also do let me know if there something out there similar for the hardened Mac users.

P.S. This article was written by a human not a machine and following on from last weeks huge outcry about the automatic article generating software, we at The Next Web have pledged never to use such software, but the question remains! are the top blogs actually using it? As many sources I have spoken to still think they are :).

Many of you have been surprised by the sheer number of articles that we have been publishing on TheNextWeb recently so I’m going to let you into a little secret on how we managing it. It’s all due to a new piece of software that we oversaw a Techcrunch writer using (we wont say which one – see if you can guess) at the TC50 conference called Datapresser.

Industrial espionage is common in all businesses and we feel it is important in the blogsphere to do anything we can to “keep up with the Joneses”. Thus upon seeing TC using it and curious as to its functionality we forthwith conducted a due diligence investigation.

Once we set up this software, we were astonished to see that its function is to create articles for blogs automatically. Yes believe it or not, this tool uses the latest technology to create unique articles for WordPress. All you have to do is select a topic of interest, add in a few links you would like to be included in the article and press go.

So how does it work? It uses something called Mad-Lib (pattern replacement) technology which works like this:

{|Custom|Suzy, Sally, John, Jacob}
{|Custom|is, was, will be, wants to be}  
{|Custom|a Doctor, a Nurse, an Actor, an Acrobat}

Here are the results of that Mad-lib script

John wants to be a Nurse.
Or
Sally was a Doctor.
Or
Suzy wants to be an Acrobat.
Or
Jacob wants to be an Actor…etc.

Now what Datapresser does is take this process to a whole new level, not only do they have a massive database that you plug straight into which allows you to mix and match content until your hearts content but also they have a number of other tools which when used in conjunction with Datapresser, further enhance the uniqueness of the articles.

“Wellscripted content made by Datapresser can pass human inspection by Google or anyone else!”

It’s a numbers game

Many might ask what is the point of creating so many articles, well if you was a diligent TC reader you would have noticed the recent article on TC, entitled The More You Post, The Higher You Rank. See it’s a numbers game.

“The more you post, the more chances there are that someone else will link to one of your posts. (Technorati rank is based on the number of recent links to your blog).”

Remix the top ten

So while we’re happy that our visitor numbers are rising rapidly we also realize the only hope we have in this race is to use the same software as the major players in order to keep the quantity equal to theirs. So for the last two weeks all the articles we’ve published have been made using it and we’ve had really good results, plus no one has even noticed!

Even this article your reading was made using Datapresser (with only a few tweaks as it tends to go on and on about itself).

What we have done is set it up to automatically read the rest of the main blogs in the morning, then Datapresser rehashes the theme of the top 10 articles and recompiles these into unique blog posts on the same topic. It’s bloody marvelous. It means that we can set it to publish 10 or even 20 articles a day while we sit back and got on with other work.

It’s what all the top blogs are doing these days but they’d never admit it, as once the cat is out of the bag everyone will be at it…

At The Next Web conference earlier this year, those tech savvy entrepreneurs Patrick, Boris and the rest of the crew set up live streaming for everyone who like me could not attend in person but didn’t want to miss out on all the fun. It was a great first, having a tech conference using tech to globalize the attendees list.

Well as all good things must be copied (evolution) MA @ TC did the same for the recent TC50 conference. Which again was a great first for Techcrunch. However, there was one little glitch, (OK there was more than one but lets stick with one). Their Internet connection was lame and as a result many of the nervous entrepreneurs royally screwed up their presentations of a lifetime.

Now Dropbox is a great little company I have been tracking for a while, they have managed to garner an almost cult like following while in Beta, but like many others who found themselves onstage but with an intermittent connection they dropped the ball during their pitch and public launch. See below for the most scary moment of any entrepreneurs life. The ball started rolling away at about 3 minutes:

Dropbox should have used a Jumpbox!

Now Jumpbox may have been the ideal solution to the lame Internet connection problem. Jumpbox is a little startup who are actually making money! But explaining what they do is also a little scary. In a nut shell they make open source applications run in virtual environments, and one of their products is a virtual LAMP stack. Now for the English version.

Imagine your a small group of developers and you want to build an app in an isolated test environment, but don’t necessarily want to go through the pain of setting up a Linux distribution for your LAMP or Rails app (believe me, you don’t) or going even further the Linux distribution then some other open source software. So instead you simply install virtualization software such as VMware or Parallels then you install your Jumpbox LAMP distribution. It’s a 1, 2, 3 process and you’re all done.

So in the above nightmare scenario, you could bring your ‘Mac’ intending to demo on that and realize once you get there that their Internet connection was unstable or even that their A/V setup for whatever reason for whatever reason requires that you have to run it on their PC.

So you just download the free VMware player, put your LAMP or Rails JumpBox containing your app on a USB stick and move it to their system. Then you have an isolated and movable application which is stable. You can also clone it and give a complete copy to the guy running the projector while you’re still futzing with your copy. Heck you could give all your audience members a demo to take away on CD if you really wanted to.

Here is a quick demo of Jumpbox to get some idea of it’s power:

Such a simple solution has obviously found a wounded market place who are gravitating to Jumpboxes to help them set up a whole host of open source applications (ready out of the box) and for developers it’s almost a dream come true and a nightmare avoided!

Recent buzz and hysteria surrounding overnight success stories of applications built for the iPhone seem to have been garnering almost more hype than that which surrounded those early Facebook applications (though those stories, were and still are about numbers of users not numbers of dollars).

Of all the ‘iPhone apps’ one stands out as a particularly interesting case. This app cost 1K USD did nothing and is probably the simplest and most elegant ‘app’ “ever” developed designed. It made the owner 5K in pure profit before Apple decided to pull it. Reasons for it being pulled amount to 2 pissed off buyers complaints who pressed ‘buy it’ by mistake ‘apparently’. I’d personally quote a saying me old man taught me ‘a deals a deal’.

This ‘app’ will gain no respect from the hardcore hackers who are proud of their ability to make the world dance from their command line, nor from those who have invested millions into developing complex offerings that flop at the box office. But why not? Why does something so simple and elegant not deserve respect in this field?

I am also guilty of “once” believing that if an application was built for a ‘fiver’ and over the weekend it was not worthy of any acclaim, but come on, isn’t that simply jealousy by an overzealous developer? What counts at the end of the day is what the market makes of it and in this case six rich bastards and two retards liked it enough to press that dangerous buy it button.

If this teaches us anything, it’s that what counts at the end of the day is not the technology used, nor the effort surmounted, but rather the idea and the idea alone.

All too often we hear that so and so has secured x.000,000.00 of financing in round (x). What we don’t hear much about are quiet little companies who make niche products that people are actually willing to pay for, built by small teams and who are actually profitable and largely grow organically.

A new weekly series

Therefor I am starting a series of weekly articles covering companies ‘who actually make money’. Given I’m an application developer, the companies I like will be nerdy techie types. If you have some tips for companies you particularly like (in other sectors maybe), please let me know in the comments.

Expensive web control panels

One such company that I am in love with is called Virtualmin. Virtualmin is a web control panel on Apache for system admins. Built on top of the Webmin platform, Virtualmin allows complete control over (and the creation of) virtual servers.

If your asking ‘what is he going on about’, let me tell you the problem. Every web app / site sits on a server, but configuring servers is very complicated. Knowledge of Linux is needed along with an army of tools which are utilized through the command line. Control panels like Virtualmin help to sanitize the process by offering friendly user interfaces and doing much of the donkey work for you.

There are a few companies offering control panels (Cpanel, Plesk etc.) they can be expensive and while looking pretty, cost is very important to bootstrapped start ups (especially me) and this where the Virtualmin GPL (free) version excels.

When I had to move my own app up to a larger server, I found this wonderful company called Linode offering great deals for high quality / capacity services. Being a bargain hunter I signed up for a basic account then soon realized the catch. There was no control panel like on other virtual servers, in a nut shell, you had to know Linux. eerk.

Did I really need to learn how to use Linux?

The first response I had was to run, did I need the headache of learning all this when all I wanted was a bigger server? Hanging around for the duration turns out to have been one of the better decisions I have made along this windy unlit road.

Having control over every aspect of your own set up is overwhelmingly powerful, there are too many benefits to list but the breadth of tools I now have available make all the difference between a site that fly’s and one that grinds to a halt.

Companies who are looking for scalable and cost effective solutions to hosting their apps with 1 million visitors per month etc. would do very well to sign up for a Linode and install Virtualmin. The support on Linode has been exceptional and coupled with Virtualmin I think the combination is the best hosting solution on the market today.

Being a web developer and system admin for my own network, I have more sympathy than most when it comes to problems with scaling and general system admin. But this is Paypal I’m talking about and being the ‘premier’ service provider of online payments it is simply unforgivable.

I’m actually generally very fond of Paypal, since my last rant about their ineptness they actually contacted me and followed up with some useful tips on resolving some idiosyncrasy’s with their system. As I had long since given up with their standard customer service (which is generally considered to be non existent) it was a welcome interjection of support.

They have even implemented at least one of my suggestions that I made which would IMO improve their system (glade to hear their listening) and it was a great improvement. Alas, as of the last 4 weeks (at least) paypal has been suffering with consistent rounds of intermittent downtime (in Europe only I’m told). I have emailed my contacts (some higher ups in France) who have explained they have been having some issues with ‘cookies’ and some localized issues that were thought to have been resolved.

Well I can assure you Paypal they have not been resolved. I have spent most of the day (trying) to test a shopping cart function for a new application and Paypal has been intermittently down for much of today (very annoying). Even more worryingly for the last month every time I have checked the site for one reason or another I have had issues ranging from some features not working to complete downtime.

But for companies trading using Paypal as their sole method of payment these ongoing troubles are tantamount to denial of service attacks. The effort companies go to actually get a customer to the checkout is huge and extremely costly, to have the checkout girl throw a wobble at the last minute and tell the customer to **** off could rightly be called a sackable offense!

Facebook is under attack with numerous phishing scams. It looks like the network effect is coming into full swing to allow the prolification of these scammers to spread virally. The worrying thing about these scams is that they are increasingly sophisticated.

Even Firefox’s alert warning “Get me out of here” did not work on this site (the second time it did), I can find no trace of the domains IP address as it is not listed on the whois.bizcn.com (who are their registrar).

This is the URL: FACEilBOOK.com.

How the phishing attack works

You’ll get a message from one of your friends saying to log in, then if you do, you compromise your default username/password. What worries me is that many people are lazy and use the same passwords for their other online accounts (such as Paypal etc.). Therefore, these attacks can become extremely malicious.

This is the information I have on this above scam:

Registrar: BIZCN.COM, INC.
ns1.4everdns.com
ns2.4everdns.com
changfeng zhang
03783306601 fax: 03783306601
kaifenghuanghedadao246hao61
kaifeng henan 475100
cn

Clearly these are dangerous people. If you do compromise your password, you could find yourself in one big identity theft mess.

UPDATE: Looking for the five questions for start-ups category?

The guy who submitted this post to Digg (thanks by the way), has picked a somewhat awkward thumbnail – the one of our Five Questions for Start-ups category. It actually is a cool category, especially when you interview some crazy Dutch guys who start talking about sex immediately.