Once it became clear that ads were a bit more profitable than that, the success of Google/FB led to a tidal wave of VC capital searching for opportunities that looked just like those. So suddenly everyone is trying to give their service away for free and make it up on {ads, volume}.
I guess I feel very mixed about this, being a European who is now starting his own software company (taking a break from coding for a few mins at the moment). I remember when I was in my early 20s, before YouTube was acquired, my mother pointed at it and said, "Why couldn't you have made that?". My response was to laugh and say, mum, look, you can't pay for video streaming using banner ads. Streaming is expensive and banner ads don't earn much money.
Was I right? Wrong? I still am not sure. YouTube may or may not be profitable. It was extremely ambiguous to what extent Google's businesses outside of web and content ads made money when I was working there, although that was years ago, so of course it may be very different now. Obviously the YouTube founders did very well out of it, but their business model was basically "sell the company to someone who can save us, or die trying". Whether it's European culture or parental expectations I don't know, but deep down I didn't and still don't feel like that is a truly honourable way to create and run a business. I would feel guilty and bad if I were hiring people to a company without having the foggiest idea of how to ever pay their salaries, nor would I feel comfortable pitching to investors a firm whose business model was clearly unworkable. Yet, this is the standard business strategy in the Valley.
Years later I found myself in the offices of a16z. I wasn't there to pitch, although the receptionist assumed I was. I'd been invited to discuss an app I'd written that had attracted their attention. I told them the app was open source and I wouldn't take their money because I had no idea what its business model could be.
A mistake? Maybe. European? Very.
I could now go raise funds for my new venture, and maybe at some point I will. Plenty of investors have expressed interest. But, fundamentally, I still don't want to. It feels somehow like "cheating" to create a business that doesn't really make money. Or if not cheating then at least somehow not quite something you can be proud of. Certainly, the American way of creating a startup that loses money for years would not at all impress my friends, family or fiancé. They would in fact see that as failure, not success.
And I'm OK with that. So I'm probably destined to create another small European software company that may or may not one day sell to a bigger US firm. Don't get me wrong. I dream big. But deep down I know that if I attract too much attention I'll always be at risk of being steamrollered by a "success is failure" US VC backed company that has no idea how to become sustainable, but might somehow stumble onto a plan anyway and if it doesn't, well the VCs will force one of their other investments to make an acquihire and somehow it'll work out so that everyone can save face. Bankruptcy is after all, basically unheard of in the Valley, and spending other people's money for a decade is lionized.
