Would Twitter Be Better If You Paid for It?

There has been an interesting debate going on over the past week or so that gets to the heart of one of the deep-seated conflicts within the Web-startup community: namely, whether apps and services are better when they are free or when users pay for them. Dalton Caldwell, the founder of Imeem, kicked things off by saying he’s going to try to create a for-pay version of Twitter, and others cheered him on by saying an advertising-based approach makes a lot of services less appealing than they could be. Venture capitalist Fred Wilson of Union Square Ventures, however, argued that free and ad-supported is actually the best model for consumer services that want to achieve a broad reach. So who is right? That depends.

As my colleague Ryan Kim has explained, Caldwell’s idea of turning an existing project of his—called App.net—into a kind of paid Twitter-style network grew out of an earlier post in which the entrepreneur lamented the fact that Twitter had given up on being a kind of real-time information utility with a rich and open API and decided instead to become an advertising-supported media company (something I have argued is a double-edged sword for traditional media companies). This post got so much support, Caldwell says, that he decided to turn App.net into the kind of network he wished Twitter had become.

Caldwell rails against what he calls the “advertising-supported monoculture” that prevails in much of Silicon Valley, where apps and services are created that turn users into content rather than partners—a model that is summed up by the popular phrase “If you’re not paying for it, you’re the product.” Massive networks such as Facebook and Twitter, and Myspace before them, focused primarily on getting as much scale as possible and monetizing that user base later, and the most common method for doing so happens to be advertising. But Caldwell and his supporters argue that this is bad. As he puts it:

All of these services are essentially in the same business: vying for the opportunity to sell you/your clickstream to advertisers. … I have no interest in completely opting out of the social Web. But please, I want a real alternative to advertising hell. I would gladly pay for a service that treats me better.

Wilson, however, says that as irritating as advertising-driven services might be, a model that’s free to users is the one that makes the most sense for social- and consumer-focused businesses, simply because this is the only model that’s going to appeal to the greatest number of users. Although some argue this approach has so many flaws that it is effectively going away—as Rags Srinivasan did in a recent GigaOM post—Wilson maintains that a free model is the only way to get the kind of network effects necessary for a large consumer business. He also argues that charging users is contrary to the rationale behind such services, since the content being monetized is coming from those same users:

When scale matters, when network effects matter, when your users are creating the content and the value, free is the business model of choice. And I don’t think anything has changed to make that less true today. If anything, it is more true.

In a recent response to Wilson’s post, Caldwell says the Union Square VC misunderstood his point. The point wasn’t that some Web services can’t be free, argues Caldwell, but that large-scale platforms such Twitter’s and Facebook’s—which link users together while allowing outside developers to add value through APIs—are better when they are paid for, because the sites don’t have to worry about locking down their APIs (as Twitter has been criticized for doing) or controlling the experience in order to monetize it. The money comes from developers and users who contribute to the network, and they are the only customers who matter.

“Web2.0 built a lot of really cool, shiny things,” writes Caldwell, “but the foundational aspects of them are built on what I am arguing is a flawed premise. I am not simply criticizing, I am saying we can do better.”

So would the App.net model, in which users would pay $50 a year for an account—money that would be shared with developers who built on the API, as Caldwell describes in his latest post—be better than the way Twitter functions right now? It depends on your vantage point.

If you’re a user, the main concern (I think) would be not just what kinds of cool apps you could use, but also whether the rest of your social graph was using it. I have argued that this built-in network effect is one of the biggest weapons Twitter has, as it is for Facebook and any other large-scale social service. Of course, App.net could integrate its network with Twitter’s so messages would flow from one to the other (as they do from similar alternatives such as Identi.ca), but then all Twitter would have to do is kill its access to the API, just as it did with a project launched by Bill Gross’s UberMedia.

The ones who would stand to benefit the most from Caldwell’s proposal are the developers and startups who currently feel that Twitter is beating up on them by restricting what they can and can’t do with the API. On a service like App.net, the developers would be co-owners, in a sense, and therefore would theoretically get treated more fairly. But even so, the question of how broad such a network can get is still relevant to them. Who wants to be an equal partner in a business that has a tiny fraction of the number of users it could have?

I applaud Caldwell’s attempt to create an alternative model for a social network, and I think it will be interesting to see how far it gets. But I think in the long run, Wilson’s theory is more likely to be accurate: If users are supplying the majority of your content, it seems churlish at best to charge them for the privilege of doing so, and that leaves advertising as the only viable business model for such networks. Others, however, continue to disagree.

Also from GigaOM:

Why Facebook Must Prove the Worth of Social Advertising (subscription required)

Apple Earnings Preview: The iPad May Finally Rival the iPhone

Is a Backlash Over Sparrow’s Sale to Google Justified?

What Would an iPad Mini Mean to Apple’s Profits?

Hey, Los Angeles, Xerox Thinks It Can Clear Traffic on I-10

Before it's here, it's on the Bloomberg Terminal.