[marrone]

Google and Yahoo can do it because they can take advantage of their scale to monetize ads, as well as their diversity of products (profitable products can help pay for the unprofitable ones).

Which is exactly the author's point. He says that small companies are forced to swing for the fences in terms of user-base because a) that is all advertisers are interested in and b) the competitors (such as Yahoo! and Google) offer free alternatives.

I dont think it reasonable to set Yahoo or Google as the measuring stick of success as those companies are clearly way out ahead of anyone

[dpapathanasiou]

Forget advertising for a moment.

Suppose you start a company to compete in an industry (any industry) where your rivals are profitable despite offering free services.

The fact they're able to do that is going to force your hand in that direction, too.

So it's the market which dictates those conditions, not your investors.

[parker]

So then by this logic, it's the market that's going to tend internet revenus to zero?

You're right. And this will lead to a massive market correction at some point. Companies that had the balls to listen to reason (a la 37signals), will be the ones that weather the storm. They'll end up being the Berkshire-Hathaway of the internet industry because they a)focus on the long-term, b) concentrate on what they know and do best, and c) fiercely execute on value, and not trends.

There's a reason Warren Buffet came through the dot-com crash unscathed. And it's the exact same reason why companies like 37signals will as well.

[dpapathanasiou]

If ad-subsidized businesses turn out to be infeasible over the long term, then yes, you'll see companies go out of business and/or start charging for their services.

Either way, though, it's not the fault of the VCs.

[pchristensen]

The market might dictate that you enter a different fight. Beating a giant at their own game is hard. Kneecapping them from the side is easier.

[hernan7]

Exactly. Just don't enter a market where the competition offers their product for free. Or enter, but be prepared to work 10 times as hard.

Another example: PC operating systems (where the cost of the OS license is subsumed into the price of the PC).

[marrone]

I tend to agree with you, I mistook your original comment as disagreeing with a problem with "free services"