The freeconomics/freemium discussion generated this tweet from Mark Cuban (actually, he’s quoting someone called “wjousts,” whoever that is):

You are not the customer of companies like Google and Facebook. You are the product. The advertisers are the customers.

This little gem was largely overlooked, but I think it’s a HUGE distinction, one that many struggling Web 2.0 startups still don’t get.  For example, most people think that Google’s product is the search engine and that we, the searchers, are the customers.  Wrong.

By definition, a customer is someone who pays you money for your product.  Last time I checked, Google search was free.  So, we are not the customers.  Likewise, at least in a business model (how you make profit) or revenue model (how you make sales) sense, the product is not the search engine.  As Cuban/wjousts said, you, or, more accurately, your searches and clicks, are the product.  Google sells access to your searches and clicks to advertisers, who are the real customers.

Make no mistake, Google is an advertising company, not a software company.  At least, they are until they come up with a revenue stream that rivals their search business.  And that’s going to take a while, since Google is the biggest and most profitable advertising company in history.  They made $1.4 billion in profits last QUARTER, and the bulk of that was generated by their search business.

A lot of Web 2.0 startups are run by product development people — product managers, product marketers, engineers, and designers — who think of the product as the web application they’re creating, and their users as their customers.  As the shakeout continues, the successful ones will be those who can turn that idea on its head if needed.  Google had to.