CNET News:

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.

Photo by weirdvis.

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