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Browser Trends: Business Models

May 14, 2008 – 11:32 pm

Commercial web applications must overcome a vexing business dilemma: how to make money in the face of so much free competition. This is a symptom of the VC-fueled internet economy that has prevailed since the dot com days. Venture capital firms provide companies with money based on some woolly half-baked business model but with the tacit understanding that they will get acquired and folded into some larger firm’s portfolio if they attract enough “eyeballs”. Anyone with the temerity to charge money for access to their site enters the battle at a distinct disadvantage.

In the web browser space the situation is similar, but the main reason in this case is competition from operating system vendors. Apple and Microsoft provide a serviceable browser as part of OS X and Windows, respectively. Some percentage of the cost of buying an operating system (whether shrink-wrapped or OEM’ed with a new computer) could be considered payment for the bundled browser. This is makes it very difficult for an independent browser vendor to survive in this market, as Netscape learned in the late 90’s.

And yet there are a number of vendors attempting to do exactly this (and, to various degrees, succeeding). The most prominent example is Firefox, which has thrived through a combination of low costs (thanks to an open source development model that reaps free labor from a large fan community) and, famously, an agreement with Google to feature its search engine prominently in the browser’s user interface. Opera generates a similar level of revenue (about $50 million in 2006 versus Mozilla’s $66 million) through licensing to device manufactures, other software licensing, search partnerships and its Webmail service. Flock makes most of its money from a search deal with Yahoo.

Search partnerships form the bedrock of these companies’ income. Licensing looks to be an increasingly tough row to hoe, as there are two excellent open source browser engines (Gecko and WebKit) available for free, and both are aggressively targeting mobile and other devices. There are a number of other potential models that would help vendors grow their revenues, however. Assuming, of course, that they continue to innovate and attract users despite the fact that a built-in web browser is bundled with every major operating system.

Advertising

Search partnerships rely indirectly on advertising, but vendors could potentially make more money by hosting ads directly in the browser. The biggest obstacle is user acceptance of these ads; Opera gave up on in-browser ads in 2005 due to resistance from users. It’s a pretty safe bet that no one is going to be plastering banners willy nilly across their product’s UI. On the other hand, browser developers have a big efficiency advantage over web-based ad platforms because they have access to so much information about users’ surfing patterns. If this data can be used to provide highly targeted ads, the value to advertisers would be enormous, and if the ads are relevant enough users might even seek them out willingly.

Web services

In their role as the gateway to the web, browser vendors are in a perfect position to offer paid web services. Opera’s Webmail service is one example. Paid storage is another; it would be easy and convenient for users to buy online storage (for backup, media sharing, etc.) directly in their browser rather than seeking out a commercial service online. While Mozilla has given no indication that it intends to charge for web services in the future, its Weave project (which aims to explore “the blending of the desktop and the Web through deeper integration of the browser with online services”) would serve as a perfect platform should it choose to do so.

Freemium

Charging for a more advanced version of a free product (”freemium“, if you will) works well for many software products. Why not for browsers? As with advertising, Opera employed this model for years but eventually gave up under pressure from Firefox and less unusable versions of Internet Explorer. To attract a significant number of paying users, a browser would have to offer truly compelling advantages. And if I knew what these might be I’d be busy working on my own browser product instead of writing this.

Servers/Corporate

Netscape attempted to employ this model: provide the browser for free (once they gave up on charging for it) but license their server products to companies for a fee. The strategy failed because web servers became commoditized almost as fast as browsers had, subjecting Netscape to the deadly combination of competition from both Microsoft (with its Internet Information Server) and open source (most notably Apache). But there are plenty of server products that companies do pay for (messaging, content management, ERP, CRM, etc.). A tightly integrated browser/server combination could provide a vastly superior user experience and thus a profitable product in the enterprise market. Microsoft is very active in this space, but there is plenty of room for others to carve out a niche.

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Right now all of these models seem a bit far-fetched, and it’s easy to believe that the browser market will fall into a stable triopoly where Microsoft and Apple cater to anyone satisfied with the browser preinstalled on their computer and Firefox provides an alternative for everyone else. Mozilla can survive indefinitely off the kind of money it is getting from Google, and its managers feel (with some justification) that their huge user base would make it easy to find other search partners if the current relationship ever falls apart. But seemingly stable, mature markets have been stirred up before. The kinds of business models mentioned above (and the many that I have doubtless overlooked) provide ample motivation for future startups to enter the market with something brilliant and unexpected.

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