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Summary:

Long Tail author and Wired EIC Chris Anderson explains why the “zero sum” model doesn’t work alone in this economy — and teases his next bo…

imageLong Tail author and Wired EIC Chris Anderson explains why the “zero sum” model doesn’t work alone in this economy — and teases his next book Free — in Saturday’s Wall Street Journal. The argument: “free” wasn’t enough before for all but a few and it’s not going to work now without a pay component, whether it’s “freemium” — “free as a form of marketing to put the product in the hands of the maximum number of people, converting just a small fraction to paying customers” or flat out charging for the bulk of goods and services. (The essay itself exemplifies “freemium” — free for anyone who wanders by WSJ.com, not just to those of us who pay to subscribe to the site’s full content.) It works for the consumer, or as Anderson puts it, “It’s a consumer’s paradise: The Web has become the biggest store in history and everything is 100% off.” Of course, that’s until the products they use disappear because the money isn’t there. A couple of excerpts:

– “What about those companies trying to build a business on the Web? In the old days (that would be until September of last year) the model was pretty simple. 1. Have a great idea. 2. Raise money to bring it to market, ideally free to reach the largest possible market. 3. If it proves popular, raise more money to scale it up. 4. Repeat until you’re bought by a bigger company. Now steps 2 through 4 are no longer available. So Web startups are having to do the unthinkable: come up with a business model that brings in real money while they’re still young. … What about the oldest trick in the book: actually charging people for your goods and services? This is where the real innovation will flourish in a down economy. It’s now time for entrepreneurs to innovate, not just with new products, but new business models.” Anderson admires Tapulous, which is gives away its general iPhone app Tap Tap Revenge, but charges for band-specific versions with add-on songs.

– Working through the list of major usual suspects (Twitter, Digg, YouTube, Facebook) that haven’t yet figured out how to turn massive amounts of users or traffic into equally major money, Anderson follows: ‘A year ago, that hardly mattered: The business model was ‘build to a lucrative exit, preferably in cash.’ But now the exit doors are closed and cash flow is king. Does this mean that Free will retreat in a down economy? Probably not. The psychological and economic case for it remains as good as ever — the marginal cost of anything digital falls by 50 percent every year, making pricing a race to the bottom, and ‘Free’ has as much power over the consumer psyche as ever. But it does mean that Free is not enough. It also has to be matched with Paid.”

Your thoughts?

  1. What an idiotic piece of crap.

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  2. How does he keep getting away with it? Anderson has apparently changed his stance since his "Free" Wired article in which he was much more optimistic about the chances of zero prices. Both that article and this new one are free of any form of business sense whatsoever. It's either stuff we already know (strat 101) or utopian nonsense. Enough already.

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  3. "Freemium" was and is a VC propaganda concept. It was and is ridiculous to imagine a tiny percentage of users getting enough value from a 'premium' version to subsidize the vast majority of 'free riders.'

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  4. I completely agree with Anderson on this one. In the case of Web 2.0 businesses, there just isn't enough advertising out there. For example, if you're a large advertiser, how can you advertise on Facebook and make sure that you reach your targeted audience? You just can't. And, if an advertiser can't do that, the free services can't be supported. At this point, a free service has to be a niche service, that is designed for advertisers.

    On the other hand, some of the larger web 2.0 companies wouldn't be around if it wasn't for free services. Would consumers pay for Facebook, MySpace or Digg? I think the answer in most cases is 'no.'

    – Aanarav

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  5. Um…maybe this would have worked in 1999. I think they called it, AOL? "Premium content" that users couldn't get anywhere else, I think the story was. Problem was and IS, there will always be another source for information or services on the net (or somewhere in the cloud) that will be as good or better than anything you would pay a subscription for. Frankly, that's the beauty of it.

    Advertisers and publishers just have to do a much better job of connecting their common objectives. Advertisers have to position themselves as enablers of experiences on sites that target and draw valuable audiences. It is just a dumb waste of time to see those branded advertiser pages/microsites on facebook. (Anyone joined the Mazda or the Miller Lite fan page lately?). Why can't facebook sales come up with better solutions for brands to weave into the facebook experience? Really wouldn't be that difficult, to be honest, given how much facebook knows about its users and the amount of time they spend engaged in the experience.

    Paid subscriptions can work where there is true additional value provided. (LinkedIn is a good example of this.) But, there remains enormous *untapped* potential for brand advertisers and publishers to come together on new marketing solutions that will drive more value, brand recall, product development and higher CPMs. They just have to try harder to get there. Anderson's solution seems like he's just giving up and saying, "just get the money by charging users," and all else remains the same.

    And, in agreement, one of your readers says, "There isn't enough advertising out there." Come on! Silly. Try harder.

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  6. He's confusing free with deflationary trends. Give us examples of what he is talking about. It's absurd to generalize so quickly. It seems his work is based on anectodal evidence.
    For the longest time, businesses have given away (or reduced margins on) some products to sell others.
    This free period is temporary. Once all the free-giving companies go out of business, then we'll be done with that stupid thinking. If there is value provided, value has to exchanged, sometimes directly and sometimes indirectly.

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  7. What's strange is that the same industry that eyes big companies for exit also seem to enjoy tearing down their models (or watching them fall apart). They write about it, talk about it, devote panels to it as if it's a triumph…. yet, it's their exit…

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  8. I am glad I found this post while using google. It gave me the information I needed.

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  9. People generally think of the Internet as a free platform. Free information, free music, free movies, free books, and free communication. Anything that can be digitized will be free, or so it's assumed to some degree.

    Obviously both good and bad things have emerged from excessive Internet freedom, the good: educational, banking, and travel and the bad: distraction, piracy, and the emergence of the non-professional.

    I think it's the non professionals, e.g. the bloggers, user musicians and actors, that are contributing the most to this concept of free content on the web. This is because for the first time marketing and distribution to the world costs nothing. Free user content gives people the misconception that legitimate content should also be free. The debate evolves though when authors who run blogs like Seth Godin put out books for free or Nine Inch Nails gives whole albums away for free.

    The Internet is then a mix of both legitimate and user content, paid and unpaid. We shouldn't claim it unfair when content producers want to sell legitimate content and make money. At the same time, we should expect small tastes of free content here and there to get us excited. The right answer for content owners is in giving away product to generate sales of a bigger package.

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  10. Freemium makes no sense at all. What does make sense is the complete reverse. Make the service free to users who contribute comments, reviews, content. Make the service paid subscription or paid for all those who now really want to get in but are too lazy to contribute (which is probably 95% of users).

    Then, once there is actually sufficient traffic to justify it – go free with an ad-supported model. At this point, you really need recognition/reputation tools for your contributors – plus you've got to be loving them in other ways.

    But anyway, that's the cookie cutter recipe for monetization/buzz building. But BTW – it's got to be something people care about…if not – then it shouldn't be a business to begin with

    BTW – one of the best executions is in a business that has been overshadowed by the stupid/criminal behavior of its founder. TheEroticReview's model should be studied by more – just get beyond that it's Dave Elms and his tawdry behavior.

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