Freeconomics – maybe people will start paying for things

The folks at Chinwag were kind enough to ask me to chair a panel on the topic of freeconomics last night.  I’ve written extensively about ‘free’ as a business model extensively before, but to recap the argument for free is that more and more goods are being delivered digitally, the marginal cost of delivering a digital good is $0 (or pretty close to it), and that in a competitive market over time the price of goods trends towards the marginal cost of distribution.  Hence digital goods should be free to consume and companies will have to make money from advertising or by selling related goods – e.g. bands give away their music for free and make money from gigs and t-shirts.

The counter argument is that the only reason we have gotten used to getting stuff for free on the web is because VCs and large corporates have subsidised those services in a rush for market share, and that for most companies you can’t make enough money from advertising, or the other areas to make the free business model work – so it is unsustainable and we will all have to get used to paying again.

For the most interesting/surprising thing to come out of the discussion was a much greater degree of willingness to start paying for services than I had expected.  A lot of that was couched in terms of ‘if there was no free alternative I would pay’ which of course begs a very large question, but it will be intertesting to see what happens when people are actually asked to start paying, because I think they will be.  Subsidies from VCs and large corporates are drying up, if they haven’t run out already, and despite the fears of what it might do to their businesses I expect many companies to start experiementing with charging more aggressively.

The other takeaway that I hadn’t considered fully is that for many services in reality the marginal cost of delivery is not zero.  This was made most forcefully by panelist Alan Patrick, but also by panelist Bruce Daisely of YouTube who made the point that the worlds favourite video service now accounts for 10% of total bandwidth consumption – which I’m sure costs Google a lot of money.  This point knocks a sizeable whole in the ‘free’ argument, although ‘free’ fans would argue that these costs are going down all the time.

  • Gavin Simpson

    Hi Nic, interesting debate. I think that neither model will win outright. There's always going to be a ballance between free and paid for content depenant on the cost of content production and potential revenue generation from advertising and tangible goods. Bands can give music away for free which effectively markets gigs and tshirts etc but this isn't going to work for films for instance due to massive up front costs even though the cost of delivery is relatively cheap. Kids films may be able to sell toys etc on the back of a free film but more adult oriented movies won't. The same probably goes for games… Just my tuppence worth.

  • Andy Thomas

    As a start up we have spent time developing our concept so that it has a revenue model that does not rely solely on Advertising. I have never really understood the argument for Freeconomics. Yes I can see that chasing volume can give you the tipping point where you can then try and monetise your customer base, but the expectation that the service is free is firmly imprinted on peoples’ minds therefore creating a natural human resistance to any change. Meanwhile, you have been potentially incurring significant costs, as you alluded to in your post. I have taken the view that we should create a model that requires the customer to pay something because at least this gives me room to manoeuvre moving forward. You could also argue I suppose that a smaller group of customers paying something is better than a larger group that expects everything for free. It’s also not just the infrastructure costs that hit a business, it’s also the development cost’s to improve the service, add new features etc. How do these get funded especially when there is a shrinking ad pool? Surely tech start ups need to have a model that can sustain itself, albeit with slower growth, without the need for external funding or an obsession over chasing volume.

    We go live in May so the irony is I may be posting a very different message later in the year:-)

    @mistersmeetme

  • By the way, thanks for the kind words about my blog for fathers everywhere. You've prompted me to write some more and you can now get to it at http://www.mersonperson.blogspot.com

  • BTW, did you get the comment I did on the panel last night? I'm not sure it I sent it through correctly which is not clever. Let me know via Twitter – lepapa

  • It came through on the old commenting system. I will approve it tomorrow. Tks, n

  • Nic, good to see you again last night and to be on the panel. One of the points I was making (yes over and over again) is that free has a place. Free in itself is not a business model. It is one part of an offering and companies would do well to understand where it fits in to their overall offering. In my view, “free” should not be a cynical package designed to suck you in and upgrade you. Free should be a version of your product service that works for a subset of people that need to consume your product but who can never pay for it or who will use it to evaluate your product prior to paying for it. If you profile user bases and understand the value points to each segment you define, you can quickly identify what is useful/relevant to one segment that another will not need/care about. In our case, we understand why we have a free package, who it should be used for and what these value points are that mean that it offers just the right type of fuctionality for our “free” segment and means that our “Paid” segment understand why it will not work for them.
    It is not always about giving more of the same when you pay either. If you truly understand how your target segment will use the service you are targeting at them then you will understand what it is they will pay for and what they won’t.

    The other point I’d like to make is just because the marginal cost of supply has fallen to £0, that doesn’t mean that the VALUE has. It just means that a company can be more profitable. I don’t buy in to the argument that if marginal cost of supply = £0 then that should be passed on in its entirety. Web businesses are businesses and deserve to make money. They provide employment, valuable services, tax revenues etc. So with that in mind, companies whose sole offering is “free” should think about how they will make money from whatever it is they do. This takes time and is complex and in itself is a barrier to entry but is well worth figuring out in advance.

    Finally, looking at newspapers, will we see the broadsheets becoming hardware manufacturers as a vehicule to distribute their new digital papers and to own the end user? Will all of them club together to go entirely online and cut out huge costs of production from their bottom line…

    Thanks for listening.

  • Can you approve the comment?!

  • Sorry Charlie – I thought I had

  • Charlie Blake-Thomas

    Nic, good to see you again last night and to be on the panel. One of the points I was making (yes over and over again) is that free has a place. Free in itself is not a business model. It is one part of an offering and companies would do well to understand where it fits in to their overall offering. In my view, “free” should not be a cynical package designed to suck you in and upgrade you. Free should be a version of your product service that works for a subset of people that need to consume your product but who can never pay for it or who will use it to evaluate your product prior to paying for it. If you profile user bases and understand the value points to each segment you define, you can quickly identify what is useful/relevant to one segment that another will not need/care about. In our case, we understand why we have a free package, who it should be used for and what these value points are that mean that it offers just the right type of fuctionality for our “free” segment and means that our “Paid” segment understand why it will not work for them.
    It is not always about giving more of the same when you pay either. If you truly understand how your target segment will use the service you are targeting at them then you will understand what it is they will pay for and what they won’t.

    The other point I’d like to make is just because the marginal cost of supply has fallen to £0, that doesn’t mean that the VALUE has. It just means that a company can be more profitable. I don’t buy in to the argument that if marginal cost of supply = £0 then that should be passed on in its entirety. Web businesses are businesses and deserve to make money. They provide employment, valuable services, tax revenues etc. So with that in mind, companies whose sole offering is “free” should think about how they will make money from whatever it is they do. This takes time and is complex and in itself is a barrier to entry but is well worth figuring out in advance.

    Finally, looking at newspapers, will we see the broadsheets becoming hardware manufacturers as a vehicule to distribute their new digital papers and to own the end user? Will all of them club together to go entirely online and cut out huge costs of production from their bottom line…

    Thanks for listening.

  • Can you approve the comment?!

  • Sorry Charlie – I thought I had

  • Charlie Blake-Thomas

    Nic, good to see you again last night and to be on the panel. One of the points I was making (yes over and over again) is that free has a place. Free in itself is not a business model. It is one part of an offering and companies would do well to understand where it fits in to their overall offering. In my view, “free” should not be a cynical package designed to suck you in and upgrade you. Free should be a version of your product service that works for a subset of people that need to consume your product but who can never pay for it or who will use it to evaluate your product prior to paying for it. If you profile user bases and understand the value points to each segment you define, you can quickly identify what is useful/relevant to one segment that another will not need/care about. In our case, we understand why we have a free package, who it should be used for and what these value points are that mean that it offers just the right type of fuctionality for our “free” segment and means that our “Paid” segment understand why it will not work for them.
    It is not always about giving more of the same when you pay either. If you truly understand how your target segment will use the service you are targeting at them then you will understand what it is they will pay for and what they won’t.

    The other point I’d like to make is just because the marginal cost of supply has fallen to £0, that doesn’t mean that the VALUE has. It just means that a company can be more profitable. I don’t buy in to the argument that if marginal cost of supply = £0 then that should be passed on in its entirety. Web businesses are businesses and deserve to make money. They provide employment, valuable services, tax revenues etc. So with that in mind, companies whose sole offering is “free” should think about how they will make money from whatever it is they do. This takes time and is complex and in itself is a barrier to entry but is well worth figuring out in advance.

    Finally, looking at newspapers, will we see the broadsheets becoming hardware manufacturers as a vehicule to distribute their new digital papers and to own the end user? Will all of them club together to go entirely online and cut out huge costs of production from their bottom line…

    Thanks for listening.

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