freeStartup general interest

A couple more reasons why the price of content is headed towards $0

By July 4, 2011 7 Comments

Back in 2008 Chris Andersen published his seminal book Free: The Future of a Radical Price: The Economics of Abundance and Why Zero Pricing is Changing the Face of Business.  The title is a mouthful, but the book is a monster and as I wrote when Chris published the preview of ‘Free’ I think Chris’s arguments are spot on.  I have written numerous posts on the topic since and as time has passed and events have unfolded my conviction has increased rather than decreased, and I say that in spite of the iPad, which I think at best will provide a temporary fillip to publishers but doesn’t alter the fundamentals of the argument.

I am writing all this now because my friend and 50 Questions co-author Nicholas Lovell wrote a good post on this topic last week which had a couple of new points/examples in this argument that are worth bringing out.

First Nicholas offers a recap on the central argument of ‘Free’:

As we transition from atoms (CDS, DVDs, books) to bits (MP3s, streamed movies, ebooks), the cost of making one more copy falls to zero. The original costs of content creation remain broadly the same, but distribution costs trend towards zero.

That means that charging a premium – and possibly any price at all – for that content becomes harder.

In other words the marginal cost of digital product is $0 and as basic economic tells us, in a competitive market price falls to marginal cost.

Content producers still need to get paid though, and this is where Nicholas’s two examples come in.  Firstly a great example of brand advertisers paying:

Barclaycard invested a six figure sum, perhaps as much as €250,000, into the creation of Waterslide Extreme, which took the premise of their television advertisements and turned it into an iPhone game. Over 10 million downloads later, the brand is happy and millions of consumers have had a high-quality, free experience.

If Barclaycard and other brands are now subsidising high quality games so they can be free for the consumer then to get people to pay for games becomes really hard.  I used the word ‘now’ in the previous sentence because most of the brand subsidised games I’ve seen to date have not been high quality.  Note that this model is little different to the ad funded television that we’ve been used to for years.

Nicholas’s second example draws on the new business model innovation of virtual goods.  The model itself is no longer news, but the scale of its success is now making headlines.

companies are taking advantage of close-to-free distribution to develop new business models. Zynga has a secondary market valuation of $7 billion based on a business model of allowing users to play their games entirely for free, but with the opportunity to spend money on virtual goods or faster progress in the game. ngMoco andPlayfish, both of which sold for around $400  million last year, allow users to play their games for free on the iPhone and Facebook respectively. These companies are developing new business models predicated on giving basic access to their content for free.

Nicholas’s conclusion therefore is that

on a ten year view, I don’t believe it will be possible to charge for basic access to content at all. We will all expect to have access to all the music, all the books, all the television and all the games that we could ever want. Sure, someone could invest in content and tell me that I can’t have it unless I pay. But there will be so many alternatives, both legal and illegal, that the model of paying access will be close to impossible to sustain.

I would be a little more circumspect as I believe that in some niche areas paid for content business models will remain workable, but I am fully on board with the broad thrust of this conclusion.  In the majority of areas the free alternatives to non-free content will be good enough capture a large market share, and as their share rises they make more money and the paid for folk will suffer, thereby re-enforcing the trend.

Enhanced by Zemanta