Monetizing the Byproducts of Your Technology

February 5, 2013

When an oil field is depressurized during the act of drilling, it quickly releases a stream of natural gas into the atmosphere. For a rig operator primarily interested in the well’s oil, there are two possible solutions for dealing with the accidental gas byproduct. One is to simply burn the gas as it leaves the ground, which is what many operators do, especially in remote locations without access to a pipeline.
Of course, this solution leaves money on the table. Natural gas is a $70 billion dollar market in its own right, and if dealt with correctly, millions of cubic feet of natural gas can be a lucrative second revenue stream for the operator. Whenever possible, oil companies try to unlock their byproduct’s value by processing it themselves, or selling it to somebody who can.
In this respect, the software industry is no different. There are many byproducts of the development process, and the vast majority are never fully monetized.
Sometimes this is unavoidable, when the costs of bringing a secondary product to market are overbearing. But if your company has the resources, byproducts can be a major source of revenue.
Here are three examples of valuable products that spawned from what was originally an accidental byproduct:

1) Amazon Web Services

As the world’s premiere internet retailer, Amazon needed an infrastructure that could handle huge global traffic volumes, with high performance, secure payment processing, and minimal downtime. To fulfill this, they had to build a world-class network of data centers, that could scale with their rapid growth in traffic.
In this case, their byproduct was an infrastructure network on a scale that only a handful of companies can match, and AWS was how they monetized it using existing assets.

2) Twitter’s Firehose API

When the founders of Twitter originally sketched up a business plan, they probably foresaw consumer advertising as the social network’s primary source of revenue. They likely never imagined that Twitter’s massive scale and cataloguing system would yield a treasure trove of data for marketers. Twitter has been able to monetize this data by offering ISVs like Hootsuite unfettered access to their API in exchange for revenue share or licensing agreements.

3) CrunchFund

After achieving moderate success as an entrepreneur, Michael Arrington struck gold in 2005 when he founded TechCrunch, a tech news blog. The website quickly became one of the most prominent sources of news and information for Silicon Valley.
With his frequent contributions and public appearances, Arrington himself also built a strong personal brand and a powerful entrepreneurship network. It wasn’t long before Arrington sought to monetize these assets in another relationship business, venture capital, by launching CrunchFund in 2011.

Benefits and Potential Drawbacks of Monetizing Byproducts

Monetizing a byproduct is a large endeavor, and shouldn’t be taken lightly. If you’re not ready, it can act as a distraction and compete with your core product for resources. That’s a problem for early-stage companies. If you aren’t sufficiently focused on your main product, there’s no way it will be able to compete with your larger competitors.
That being said, it pays to at least think about the byproducts your technology is creating, and how they can be cultivated for future monetization. If you have data that you may someday want to monetize, you may want to think about organizing your architecture around APIs that could eventually be opened to external applications. If your valuable byproduct is internal software, consider designing an architecture that could scale to many more users given additional computing resources.
Small adjustments ahead of time will make it much easier to productize the asset down the line.

What am I missing? Are there any other reasons why companies should or shouldn’t consider monetizing byproducts?

Behavioral Data Analyst

Nick is a Behavioral Data Analyst at <a href="https://www.betterment.com/">Betterment</a>. Previously he analyzed OpenView portfolio companies and their target markets to help them focus on opportunities for profitable growth.