Young Female Entrepreneur

The global recession has beaten a new toughness into technology startups.  Enter Marissa Louie's concept of Digital Capitalism, where companies will have a shot at becoming global corporations only if they pursue direct monetization, and where Digital Socialism (Facebook, YouTube, Digg, Flickr) is considered to be a means of production, or an enabler. Read on and you'll see how Digital Capitalism is ripe for the picking.

The new startup regime.

By Marissa Louie, June 30

What happens when technological innovation is concentrated on a business model that feels good but often doesn't pay the bills?

The downside of Digital Socialism and Freemium

The modern day equivalent of technological socialism, commonly known as Digital Socialism, is the latest darling of Web 2.0 and Social Media. Companies practicing Digital Socialism include Facebook, YouTube, Digg, and Flickr. Digital Socialism is a phenomenon that suggests the power of sharing, cooperation, collaboration and collectivism in the virtual world.  Freemium, a business model where basic services are free and advanced services have a price, is predominant within Digital Socialism. With enough organic growth and a large scale distribution, Freemium sites could offer premium priced value-added products.  

Fierce price competition for Freemium

But while the Freemium model is on the rise, the attention span of website visitors is trending down towards an average of 6 seconds per site. Competition for eyeballs on a website is so fierce that some companies fight to give their products away for free. Yet others in the Freemium space are befuddled by pricing models: Phonevite.com and Wired Magazine have unleashed pricing experiments on users without doing thorough price analysis, each admitting that it would be difficult.  This includes slashing Wired's one year subscription rate from $59.88 to just $10.00. 

Freemium doesn't scale as a company

Chris Anderson, Editor in Chief of Wired Magazine, is releasing a book on July 7 (next week) titled "Free: The Future of a Radical Price". When I asked Chris if he thought Freemium companies stand a chance of becoming global standalone corporations, he cited YouTube as a success story. However, YouTube doesn't count due to its 2006 acquisition by Google. My conclusion is that Freemium companies have a chance at success, but that they'd have a huge uphill battle towards becoming one of the largest companies in the world. Gravity could win.

Introducing Digital Capitalism

Enter the modern day equivalent of technological capitalism, something I call Digital Capitalism. Digital Capitalism is an ideology where technology companies aim towards pure profit, and where companies practicing Digital Socialism are considered to be a means of production that enable services, distribution, and more.  Digital Capitalism has a much higher chance of performing better than Freemium on many levels, such as for service- and value-based price control.  It can help lower the ratio of employees to users, and it is possible for employees to be compensated based on immediate company profits.  Using direct charge models, capitalists can run operations entirely on incoming cash flow. 

Venture Capital isn't a crutch for Digital Capitalism

Most Freemium companies and Web 2.0 startups use venture capital financing as a crutch which can enable them to take on massive debt in the hopes of eventually breaking even and reaching profit. The more successful ones can be acquired, acquire other companies, or go public on the NASDAQ.  However if you pulled the VC rug from under the feet of Freemium companies, many would perish because they are not self-sustainable.

Companies practicing Digital Capitalism can raise lesser angel and venture capital up front, or none at all. A case in point is my own company, AD-Village, which has operated entirely on cash flow for 11 months and has 20 employees, as well as a major business deal in the works.  The downturn in the economy has triggered what I refer to as technological Darwinism for startups. This time around, it's not about cool products or Freemium charge models, but rather a core focus on tangible results that translate into healthy bottom lines. Now is the time to focus directly on real and immediate cash flows.

Digital Capitalism can take cues from the Web 1.0 elements which focused on direct monetization:

Salesforce proves Digital Capitalism works

Salesforce.com is one of the few companies practicing Digital Capitalism successfully. It leverages Digital Socialism through integration with Twitter, a partnership with Facebook via FaceConnect, collaboration with Dell and Amazon Web Services, and many other initiatives. Yet it retains a core focus on a direct charge model, and does not stray from Digital Capitalism.

Digital Socialism is a means of production for Digital Capitalism

Digital Socialism isn't bound to fail.  As Salesforce has proved, Digital Socialism can be a successful means of production within the Digital Capitalism world. The means of production which Digital Capitalism does not have to own, but can use, include: online communities, collectivism, real time collaboration, rapid feedback loops, a fluid mobilization of resources and ideas, user generated content, viral marketing, customer service, scalability, transparency -- the potential is all there. Unlike traditional Capitalism, Digital Capitalism doesn't have to own or build core infrastructural components in house: virtualization, cloud computing, open source and free resources, and tools to increase user productivity are all available on the market at cost efficient prices.

Welcome to a bold new future where the traditional fundamentals of Capitalism, Socialism, and a free digital society can co-exist and perhaps achieve an outcome that boosts the global economy. Welcome, Digital Capitalism: we've been awaiting your arrival for years.
 

More by Marissa:

• -Where have all the VCs gone?
• -Senator Boxer: Small Business Advice for Obama
• -Marc Benioff's Influence on Me
• -How to Launch a Company as a Young Female Entrepreneur

Marissa has a personal blog at marissalouie.com, and is a contributor to Adotas and bub.blicio.us. Find her on Twitter: @malouie

Marissa Louie is the Founder and CEO of AD-Village, a leading provider of mobile and internet advertising. Its suite of products includes a self-serve ad platform across mobile and web, SMS text message campaigns, custom ad creation, and consulting services.

She contributes to interactive advertising publication Adotas and presents at conferences including O'Reilly ETech, The Free! Summit, REBarCamp, and the Microsoft Blogger Roundtable.

She is a member of the Top 40 Under 40 for 2009, has been on the front page of Forbes.com, interviewed Senator Boxer, and has appeared on BlogTalkRadio, Techzulu, Network Solutions, ABC, CBS, and GQ Korea.