Harvard Business Publishing

Today's tough economic climate is surfacing an interesting debate: should emerging Web 2.0 disruptors prioritize financial results or audience growth?

Yes, this is a trick question.

Companies really should focus on a third variable: learning that helps them iterate towards a sustainable, scalable business model.

A pair of recent articles highlighted different approaches taken by emerging Web 2.0 leaders. One article, in the most recent BusinessWeek, focused on social networks. The article described how Facebook recently reduced its revenue targets to focus on growing its user base. One board member told BusinessWeek, "If we stopped growing, we could make money, but it makes no sense for us to stop growing."

On the other hand, leading rival MySpace, which is owned by the News Corp conglomerate, has more of a profit focus. It has a smaller overall audience than Facebook (and Facebook's lead is widening), but a stronger overseas presence and about twice Facebook's revenues.

The other article, in The New York Times, talked about emerging models in so-called microblogging, where users blast short updates to friends, family, and followers. Twitter has become an industry leader, with users raving about the transformational power of its no-more-than-140-character "tweets." More than three million people have tried Twitter, but the company lacks a clear business model.

"If we spent time monetizing early on," its Chief Executive told the Times, "it would have meant we weren't doing other things that made the product better for users."

Rival Yammer, on the other hand, has only 60,000 users. But it has a clear revenue model. It plans to charge corporations who want to use its micro-blogging offering to efficiently distribute internal information or facilitate collaboration. By paying one dollar a month for each authorized user, companies get more security and the ability to control how employees use the system.

The guidance in Chapter 9 of Clay Christensen's The Innovator's Solution--"patience for growth, impatience for profits"--would suggest favoring Yammer and MySpace. However, there's an important nuance to that guidance. Sometimes a company can follow a route to quick profits that actually lowers its long-term potential.

Remember, disruptive businesses often require distinct business models. A push for early profits could lead a company to default to a known model that provides short-term results but stunts experimentation that leads to more long-term value creation.

Consider, for example, how newspapers approached the Internet. When newspaper companies first went online, they had an easy path to profits: "up-sell" existing print advertisers to their Web offerings. Some even had "forced" up-sells, where they'd take a portion of print revenue and allocate it to their online business--even if an advertiser expressed no interest in online advertising!

The seemingly easy money hid the fact that the real value in the online space rested in reaching new advertisers and embracing new models, such as paid search.

Might MySpace be falling into the same trap? The company has built a larger revenue base (and presumably greater profits) by sticking closer to its parent's company core business model. While it is targeting smaller advertisers than traditional media companies, it largely is following the traditional media model of building an audience to serve to advertisers.

On the other hand, Facebook is actively experimenting with different models. Admittedly some of those approaches, such as advertisements tied to recent purchases on other Web sites, have drawn significant criticism. Maybe MySpace's more traditional model is the right one for social networking. If it is not, however, the odds are high that Facebook's focus on experimentation will pay off in the long run.

Yammer's focus on financial results is less troubling, as it seems to be following a distinct model that fits the unique nature of micro-blogging and could create a reasonable position from which to scale the business.

On the other hand, Twitter constantly seems to be six months away from developing a business model. The problem isn't really that it doesn't have a viable model; it is that it doesn't even appear to even be experimenting with different approaches. Of course, the company's real model might be to draw the attention of a large acquirer that incorporates its service into other offerings, which would make this an academic discussion.

The reason why Christensen pushes for early profits is because those profits serve as a proof point that a disruptor has a viable business model. Companies that have iterated towards what looks like a successful model should absolutely ensure that the model actually works. But prioritizing profits over learning when the right business model isn't yet known can be a strategic mistake.