The software industry’s newfound love for the “freemium” model is a really bad idea, a prominent figure in the business just told us.John Powell runs Alfresco, a successful maker of content-management tools. He’s the former COO of Business Objects, sold to SAP in 2007 for about $5.8 billion.
He says he’s lived through one tech bubble and says we are smack dab in the middle of another one. (He’s not the only one telling us this—we’ve been hearing the same concern from lots of other tech startup CEOs.)
What worries him most is the value being placed on grabbing lots of free users with what some call the “blackmail” model—which more polite folks call the “viral” or “user-driven” model.
“I think there’s a moral obligation to question some of these things going on. It feels like there’s another bubble happening,” he says. “It’s not good to have a bubble burst—no question in long term, bubbles are bad.”
He points to the Yammer acquisition as an example. Remember, that viral model is one of the reasons that Microsoft spent $1.2 billion on Yammer, Steve Ballmer said at the time. The idea is that employees sign up for free cloud services and then IT is forced to come along and pay for enterprise subscriptions to get management and security features.
Alfresco also uses the freemium model, but that’s not its main source of revenue. It offers open-source software for file sharing and collaboration—meaning anyone can download it and install it. But it is IT people who typically do that, as it takes some technical expertise to fire up a server and load software onto it.
When IT people bring the product in-house, they are far more likely to pay for it. To date, Alfresco has sold more than $160 million of subscriptions to its software, Powell says, and has over 6 million users, 70% of whom are paid enterprise users.
Compare that to the average freemium conversion rate. In 2010, Evernote CEO Phil Libin famously revealed that after two years, about 6% of his users will have become paid users.
70% versus 6%—that’s pretty compelling.
And it says a lot about how the IT industry has got its focus on the wrong thing. “In the make believe land of VC valuations and strategic acquisitions … getting free users and having viral features to get more free users currently equates to value,” Powell says.
“A lot of these tech decisions are actually being driven and pioneered by IT guys and we’re trying to throw them under the bus as having failed, and we don’t need these IT guys,” he explains, characterising the view of freemium proponents.
In reality, he says, “they are actually the people leading the charge.”