image In the second half of 2006, a slew of start-ups in the space that would come to be called "Voice 2.0" were very much in vogue and attracted an impressive amount of VC funding. GotVoice, Jajah, Snapvine, Jangl, GrandCentral, Jaxtr and others raised over a $100m from A-list firms like Draper Fisher, First Round Capital, Lehman Brothers, August Capital, Draper Richards, Mayfield and others.  Fonolo was just getting started at this time and we were incredibly motivated by all this attention and funding. It was an exciting time.

Most of those companies launched with the "freemium" business model (basic service for free, premium services for a monthly fee) that has proven successful for many Internet start-ups. Some even launched with what I call "proto-freemium" models (service is free now, we’ll add premium services later). Two years later, against a much darker economic backdrop, many of them are facing a reckoning.

Jott was part of that group, funded by Draper Richards and Skype founder Niklas Zennstrom, among others. They launched their product December of ’06 and I became an early user. Over time, they added features regularly, and created a very compelling offering.

As a Jott user, I can dial local phone number (which I have on speed dial) and then say things like "Remember to get bread and milk and eggs". When I’m back at my desk, those bits of info show up in my inbox transcribed into text. You can also send messages to other people, update your Facebook status, post to twitter, add an entry to your Google Calendar and several other things.

Their premium service, which costs $4/mo, had an impressive 30% conversion rate, according to the company. Nonetheless, the transcribing of text (which requires human labor), is expensive, and the revenue from paying customers was still not balancing out the freeloaders. So yesterday, Jott announced that they were abandoning the freemium model for the "premium model", i.e. there is no more free service. If you want Jott, you have to pay.

See coverage on TechCrunch and Lifehacker.

Part of Jott’s plan was to offset the cost of non-paying users with online ads. Writing on the company’s blog, their CEO John Pollard explains,

the [ad] model is not viable right now. This is true for several reasons: 1) it would have required plastering the product with so much advertising that we’d ruin the experience; 2) ads are a terrible fit for important features like email delivery, Jott Links, and Jotts to Others; and 3) all indications are that advertising rates are going to see an even bigger hit in the next year. We don’t want to bet the company, and the utility that tens of thousands of you pay for, on a model that is not sustainable right now.

There are a lot of interesting lessons here for a start-up like Fonolo, also betting on the freemium model. It’s mostly positive news: a 30% conversion rate and "tens of thousands" of paying users, in under two years.

In addition to internal discussions, I had an great conversation with serial entrepreneur Antony Brydon yesterday. He had some great insight which you can now read in his blog post The implication of Jott’s discontinued free service for your freemium service. He doesn’t think that ad market softness is really the story here.

… the most that advertising could contribute per user per month is a fraction of a dollar. Hit a user once per day at a $10 CPM and you’re making only $0.30 per user per month. The ability to offset the human transcription costs with advertising seems challenging in good and bad ad markets alike…I suspect the costs of the free service are more significant than the reference to the ad model suggests and the profits on the paid service aren’t near what’s needed to offset the marketing expense…

The big missing variable here is what it actually costs to do human transcribing, a number that Antony admits he doesn’t know, and I don’t either. The real problem is that it is a cost that doesn’t benefit much from economies of scale: more users doesn’t mean cheaper transcribing. Antony continues:

It seems more likely that the struggling venture market and the difficulty of raising capital in this environment drove the decision. If the free service is bleeding cash and the margins on the paid service can’t fund the expense, the company is not running a self-sustaining freemium model and needs venture capital to fund the loss. At the same time, they are showing investors a model that loses more money as it scales. This is much less attractive than in 2005 and 2006, where growth metrics were more important to many venture investors.

And there’s really the heart of the matter: the flavor of VC funding has changed sharply from 2006 and "Voice 2.0" plus "freemium" is no longer an easy sell.

Two companies that should be pleased with the news: ReQall and DialToDo. Both are companies with similar functionality to Jott and both are at the "proto-freemium" stage, so users unwilling to pay Jott should be heading their way. I hope they are ready!

Given that they too have to pay for transcribing (and lets assume that they won’t get much cheaper rates than Jott) they too will be facing a "de-freemiuming" point when growing audience meets dwindling cash. (And yes, I made up the word "de-freemiuming".)

 

6 Responses to Thoughts on Jott’s de-freemiuming

  1. Wallen's says:

    It’s indeed an interesting news. But one could argue that it was predictable. The key point is indeed the lack of sufficient economies of scale of Jott’s cost drivers.

    IMHO, it’s key to distinguish between “freemium” models where 1) marginal costs of serving “free” customers is zero (or is offset by revenues directly attributable to the “free” users, e.g., ad) and 2)those where marginal cost are way above zero. The former is a real business model in the sense that it can be sustainably profitable. On the other hand the latter is just a mere marketing technique similar to the traditional free sample/trial distribution. A given marketing technique is part of a portfolio of other marketing techniques and a company changes the mix of these techniques over time. Jott clearly falls in the second category. In other words, they executed a 2 year “free trial campaign” to acquire new customers.

  2. Shai says:

    Wallen, thanks for your comment.

    I like your breakdown of “freemium”. But I don’t agree it was inevitable that Jott shuts off freemium. A number of things could have happened to make this work out differently:
    1) Transcription service could have gotten cheaper (possibly by switching to an automated system)
    2) Advertisers might have been smitten with Jott’s audience and targetting ability and offered up big CPMs
    3) The upsell percentage might have been bigger.

    - Shai

  3. Wallen's says:

    I don’t know enough about Jott’s specifics and “voice 2.0″ in general. From your 3 points, #1 and #2 may have been good bets 2 years ago (I trust you on that front). #3 however falls into the marketing technique bucket.

  4. Mark MacLeod says:

    Hey Shai,

    I agree that it was inevitable that Jott would abandon free. Just like the free VoIP services (mobivox, Jaxtr, Jajah, etc.)that had to pay termination costs for every minute of free calling, Jott has a real cost to each user. And unless they’re paying these people per transcription, that cost is fixed not variable.

    Freemium really only works from a cost perspective when the incremental cost of free is near zero. Without airing dirty laundry, all I can say is I was saying this a lot while I was at Mobivox.

    Mark

  5. Shai says:

    Thanks for the comment Mark.

    Re: Mobivox. I met their new CEO a few months ago, and he quickly said to me “Free is dead!”. He’s nothing if not direct!

    It’s important to note that call termination costs are orders of magnitude less than call transcription costs, on a per minute basis. And call termination can be near zero for calls done on a network you own e.g. Rogers or Comcast.

    - Shai

  6. [...] The guys from Phonetag launched a "developer environment" for voice apps called Grid.com. James Siminoff: "What’s stopping us all from innovating is the contracting process with vendors… too much friction in the suppply chain." They are offering "wholesale pricing" on SMS, VoIP, Whitepage look-ups, billing and (their personal specialty) voice transcription. They are partnering with Voxeo (for the IVR hosting I presume). Voice transcription is still one of the pricier building blocks in the Voice 2.0 toolset. It’s the main reasons services like PhoneTag, GotVoice, SpinVox and Jott can’t be offered for free (at scale) or ad-supported. I wrote about Jott’s transition away from "freemium" here. [...]

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