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Can the 'freemium' model weather the financial storm?

I don't want to jump on the bandwagon but the latest market upset takes place at a very inconvenient time for a lot of start-ups, which aren't exactly swimming in cash.

Culture

George Carlin said that when you live in the United States, you're guaranteed a front row seat to the freak show. Events of the last few weeks only reconfirm how right he was.

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But first, think back a few years.

The deflating of the Internet bubble, which began in 2000, wasn't a one-day blowup. Instead, the pain was spread over months and only ended after dozens of one-time high-flying technology companies got obliterated.

Out of the rubble emerged a new generation of start-ups that went on to operate under the Web 2.0 rubric. And since 2002, the innovation in consumer and social-network services has been the more interesting story in tech.

But this latest market upset takes place at a very inconvenient time. (When is it not inconvenient?) It's hard to know exactly, but most of these start-ups aren't swimming in cash. Before it's over, this may become a particularly hard transition for companies that depend on Internet advertising to pay the bills. Especially companies that operate according to the "freemium" model.

What's "freemium"? Fred Wilson of Union Square Ventures nicely defines how the model is supposed to work.

Give your service away for free, possibly ad-supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium-priced, value-added services or an enhanced version of your service to your customer base.

The idea is predicated on the assumption that you'll be around long enough to collect. In normal times, that might work. Does anyone believe we're living in normal times? Even if Bush convinces congressional renegades in his party who opposed the Wall Street bailout, this economy's getting worse by the week.

If past is prologue, the technology business may emerge changed, and ready for the next big challenge. But that's the longer-term perspective. In the meantime, there's that matter of meeting payroll. "Freemium" was a grand experiment but its practitioners don't have the luxury of time any more.

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