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September 21, 2006

Zecco - Is "Free" a Business Model?

posted by MR WAVETHEORY at 9/21/2006 06:12:00 PM
The hot startups today all seem to have one thing in common today - they all have "FREE" as a business model. That is why when I read about Zecco.com, the free online stock trading site backed by the funder of Skype, my eyes rolled over. Have I heard this story before or what? Once and for all entrepreneurs, I would like to address the question that is on every Web 2.0 entrepreneur's mind: Is "FREE" a business model?The History of "FREE" as a Business Model
Going back about to the annals of venture capital, one of the more spectacular Internet businesses that I can remember offering "FREE" as a business model is NetZero, a free ISP. NetZero offered users free dial-up Internet access at a time when AOL was charging $19.99 a month for a 28.8 kbps connection which then became 56 kbps. NetZero was going to crush AOL by offering you free service and take away all of AOL's subscribers. In return for free access, NetZero would download a client onto your computer and serve ads. Watch advertising, get free access. Does that sound familiar to the "ad-supported" offers being hawked by Zecco today?

Fast forward roughly 5 years, and what has happened to NetZero? Check out the NetZero homepage and you barely hear a peep from them about free dial up. In fact, you have scroll all the way down to the bottom of the page to find the free Internet access offer. Instead of free Internet, NetZero is trying to hawk you dialup at $9.95 per month.

Can FREE Ad-Supported Services CoExist with NOT SO FREE services?
When two services, one free and another not so free, compete head to head, I would bet that the one which is not so free will win out in the end. The service that is free cannot afford to invest in a high quality user experience, because it is not generating revenue and income. The service that is charging users can afford to constantly upgrade, hire, and invest. Even free services like Skype are not so free - they charge for calls too.

What does FREE mean for Zecco?
I commend the investors and entrepreneurs behind Zecco to have the courage to launch a free online trading service. It certainly has gotten alot of press for a service that has yet to launch. However, the financial services business is rife with costs. Trading, unlike IP telephone calls ala Skype, is not free. There are clearing fees, exchange fees, quote fees. Everything around trading as service costs money. Furthermore, these are costs than cannot be controlled - they are externalities - costs which you cannot cut. That is not all.

Where the F*CK is my MONEY?
When it comes to handling financial information and money, customers demand accountability. If a trade is misprocessed or needs to be reversed, you can be sure the customer will be calling you non stop until the problem is resolved. Take a service like Paypal. It's not free. Guess what is the most frequently comment to customer service representatives when they call. You got it. It's the subtitle of this paragraph. Customer service fees can kill Zecco whether it wants to address it or not. If not, then litigation and regulation will kill it. Peace of mind is a big selling point for customers of Charles Schwab, E*Trade Financial Corp, and TD Ameritrade.

So, is "FREE" a Business Model?
As a venture capitalist, I think Zecco is an interesting concept. However, I don't think "FREE" is a business model. It is a great marketing pitch, but at some point, I expect Zecco to become a service you have to pay for one way or another.

Link: Frank Barnako' Zecco.com to offer free online stock trading
Blog: Morten Lund Talks About Zecco , More about Zecco

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10 Comments:

Anonymous Alfredo Gutierrez said...

Good article, I enjoyed reading it.
Our business model does not depend exclusively on ad revenues or "Free Trades" there are three legs to the revenue model. If you look at Etrade’s 10-K, http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0001193125-06-045154&Type=HTML page 68, you can see that of their $1.7 billion in revenue only $458 million came from commission revenue. 49%, $871 million, of their income comes from margin spreads and interest income. Fees and service charges come up to about $135 million. The other leg is higher margin products that do cost. Zecco will follow this model by generating revenue on margin trading and interests on accounts. I believe the business model is rather solid … and we’re certainly looking forward to put it to the test. Also, Etrade ends up spending $6 per transaction in sales and marketing costs and we spend nothing on marketing but instead give away a $2 trade and rely on word of mouth to get the word out … then we are doing three times better than Etrade on customer-aquisition costs per trade.

The advertising is just gravy. However, advertising revenue may be more sure than commissions and don’t lock with the market.

Thanks for the comments, and feel free to ask any questions. We would like for you to come join us all for our online launch party on Oct 9th.

5:42 PM  
Anonymous Anonymous said...

Stock trading software http://www.stocktrading.angelcities.com

4:58 AM  
Anonymous Soren said...

Duuuh, dude. Free for the consumer just means they are not ripping of people like E*Trade. Get it? The actual cost for a trade is $ 2 or less (depending on volume). The big guys charge $12 or more because the need to make approx $6 pr. trade to offset their advertising costs. Zecco on the other hand spends $Zero on advertising and in return can serve up 'free' trades at 1/3 less cost than the other guys. Get it now?

11:57 AM  
Anonymous Steven Burda said...

This is great!

-Steven Burda

7:40 AM  
Blogger chadpatrick said...

Boy has this company changed since this post. I was once a fan of a fan, but their recent decietful business advertising has really ruined their goodwill. Beware if you plan on using this website, as its rarely consistent plus theres been other discrepancies with their business.
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