RUINING THE WEB FOR EVERYONE
I wrote this as a satire of Bit.ly's non-existant revenue model! It is not real. Everything in this article is a mixture of half truths and my own deranged ideas. Hell, I cited Mark Gormley and Snopes as a source! So don't blame me because Newsweek RT'd it :)
How does Bit.ly make money, and what's the future for URL shorteners? I'd like to set everyone straight.
Intro
URL shorteners have been toyed around with since the late 1990's, although no one was sure of how to monetize them. While they're easy to create, the traffic which comes to the site directly is far lower in proportion to the redirection traffic, so operating costs tend to exceed any ad revenue from the shortener page.
It wasn't until 1999 that ICANN proposed a way of incentivizing companies to offer shortening services by paying them per redirection. And even then it took another 3 years before it came into effect. It was yet another 6 years before the market opened up to competitors like Bit.ly.
The backstory
In 1998 Kevin Gilbertson had an idea to shorten URL's, but he couldn't figure out how to operate it profitably. His first prototype, reallyshorturls.com was saddled with more server expenses than it generated in ad revenue. It wasn't until January of 1999 that someone at ICANN stumbled across the service and realized how important it was to the future of the internet. They formulated a simple plan - take a percentage of the internet cleaning fees ICANN receives and give it to a URL shortener. In 1999 it this was around $47 million USD.
3 years later, after numerous RFP's and internal discussions, TinyURL.com opened. Started as a joint venture between Kevin Gilbertson and ICANN, the service sought to revolutionize the web with short URL's for everyone. The impact was dramatic and immediate. Businesses scrambled to get easy to remember TinyURL's, which meant shortening a domain name multiple times until an easy to remember address popped up. In the case of Pepsi, each employee was instructed to create their own TinyURL and put it on their business card, thereby increasing the number of pepsi.com addresses in the system and the likelihood of someone accidentally stumbling across their page from a miskey.
Fast forward to 2006
In 2006 competition in the URL shortener market got a boost from Twitter. The service made space a valuable commodity, and tinyurl.com seemed huge in comparison to new entrants to the market. In particular, bit.ly(launched in 2007) was gaining traction among users. While complaints regarding TinyURL's monopoly status with ICANN were being raised since it's induction, they grew more frequent as it became clear that new startups like Bit.ly should have an opportunity to compete for the redirection money. Even ICANN couldn't ignore the 5-6 character savings being offered by it's competitors, savings which could allow a user to include an extra "OMFG", "IMHO", or "WTF".
Finally, in late 2008, ICANN relented and released a new proposal for shortener payouts based on usage and quality metrics. It called for the 3 top shorteners to be paid per URL redirection. And by this time, with the revenue from cleaning running nearly $1.4 billion USD a year, ICANN had the ability to inject a huge amount of cash into the market, eventually deciding to allot $600 million just for redirection.
The breakdown works like this - Payments are made quarterly and based on the previous quarter measurement of usage. The companies which fall into the top three spots split the proceeds based on percentage of usage, and two quality metrics(speed and uptime).
Here's an example:
Top response and uptime get 5% and 10% respectively, of the initial $200mil(the quarterly payment). So TinyURL would receive $10mil for response speed, and Bit.ly would get $20mil for uptime, which leave $170mil for a split based on usage. In this example Bit.ly would get a total of $96.9 + $20mil for a total of $116.9mil.
The future
It's clear that there's a great deal of money to be made in URL shortening, which has attracted some of the top talent to the market. Google recently joined the game with goog.gl, and it's only a matter of time before they reach a top 3 slot. For someone like Google, the combination of revenue with the marketing insights that can be gleaned from usage are enormous.
The good news is growing competition gives us all more choices to create easy to remember shortened URL's. One of the largest complaints of TinyURL came from its inevitable jump to a 5 character hash; it was argued that very few consumers could remember more than 4 characters, and had considerable difficulty entering 5 characters without a miskey. Now we have numerous alternatives and the opportunity to 'reset the hash' and generate short and memorable URL's again.
Want to learn more about URL shortener services? Check out these links: