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Summary:

[qi:110] In 1988, “Saturday Night Live” aired a parody commercial deriding clumsy business models. “At First CityWide Change Bank, our business is making change,” said actor Jim Downey, portraying a naive “service representative.” After listing various ways in which his company could break a five, he […]

[qi:110] In 1988, “Saturday Night Live” aired a parody commercial deriding clumsy business models. “At First CityWide Change Bank, our business is making change,” said actor Jim Downey, portraying a naive “service representative.” After listing various ways in which his company could break a five, he explained how money is made. “The answer is simple: volume.”

More than 20 years later, I wonder if some digital entrepreneurs think the same. “Simple: we’ll make money on volume of traffic, at some future date,” they promise, even if the math doesn’t add up right now. Despite a knee-deep recession, the idea of giving away something for free and charging for something else later is bigger than ever. But is “free” selling?

Free
Although not the inventor, the chief evangelist of the “free” world is author and Wired editor Chris Anderson. Last year, before the recession hit, Anderson outlined his upcoming book in a cover story titled “Free! Why $0.00 Is the Future of Business.” A year and a half later, the final subtitle was changed to a less pretentious “The Future of a Radical Price,” “mostly because ‘why X is the future of business’ is now a cliche,” Anderson tells me.

The gist of his book: “People are making lots of money and charging nothing,” he writes (via the LA Times). In fairness, though, the idea of “Free” is a little misleading, since someone has to part with money so someone else can profit. “For most customers in the marketplace, the product is really free,” Anderson clarifies in an email. “The difference is who the paying customers are: advertisers or ‘premium’ users,” which effectively summarizes Anderson’s thesis.

The only problem? It’s difficult to cite thriving examples of either ad-sponsored or paid upgrades taking place online, at least when compared with the disproportionate amounts of money still being exchanged for offline goods and services. Google is the glaring exception, a web darling Anderson is quick to reference in his book. But even the search giant isn’t perfect — YouTube is a money pit, as part-time critic and full-time intellectual Malcom Gladwell notes in his dissenting review of “Free” for the New Yorker.

Obviously, Anderson is glamorizing a little with his endorsement of “Free.” His hardcover retails for $27. A subscription to Wired will still set you back $12 per year. And his Geek Dad blog, an admitted labor of love, is hardly capable of piquing investor interest (at least not yet), despite Anderson’s suggestion that the site is another successful example of the “Free” model.

But Anderson isn’t the only wordsmith endorsing a “Free” future. Well-read business author Seth Godin tells me, “There are 100 great companies that are using generosity as a scalable business.” He didn’t name names, but I’m sure success stories exist. Nevertheless, Godin isn’t as hasty to call “Free” the next big thing. “It is a future business model, not the future,” he emphasizes. “It’s so easy to misunderstand Anderson’s point.” Indeed.

Paid
So if “Free” is one way to skin a cat, does “paid” have an online future? For example, how about charging RSS subscribers, who enjoy instant delivery of trusted content to their “doorstep” without having to go out of their way to find it elsewhere? Anderson says no. “I doubt content companies can charge for RSS. Your content has to be incredibly unique and valuable, which may describe Bloomberg but not the average media site.”

Godin also balks at the idea, calling it shortsighted. “It’s like charging someone to go on a date. If your goal is to get married, why on Earth would you do that?”

I was unable to find working of examples of paid RSS subscriptions for this story. But there has been a cottage industry of paid newsletters since email was popularized in the ’90s. And the capitalist pig in me can’t help but think how much a 3 percent to 5 percent conversion of paid subscribers might yield. If only someone were willing to jeopardize their subscribers and try it.

Perhaps my suspicions of “Free” would have been obviated had that living, breathing economy decided not to exhale. But exhale it did, and here we are wondering what can be done to exploit the growing popularity of the Internet during times of uncertainty, amid a myriad of nascent, sometimes under-performing business models.

So until products like Facebook, Twitter and YouTube start operating on earned income instead of venture capital, the Internet might need to move to a paid system, especially if we hope to sustain intellectual property and original content produced by reporters, artists and entertainers. We might even be able to do it the old-fashioned way — you know, enticing a prospective customer into your “store” with an incredibly compelling product. Then selling it to them. Like cable TV.

  1. Isn’t this the model broadcast television and radio used forever? They give away shows and advertisers pay for it.

    1. Absolutely. And that is why they are mostly broke, and most free content (save PBS, NPR) sucks big time.

      1. Broadcast TV and radio broke? You don’t know what you are talking about.

  2. Mari Silbey Friday, July 3, 2009

    Or like GigaOM Pro. ;)

    Seriously- this is a well-written and very pragmatic post. And I love the reference to cable TV at the end given all the animosity around the idea of paying for video online.

  3. Alan Wilensky Friday, July 3, 2009

    I would like to quote a Sand Hill VC who I presented to at a seminar for startups – I had just shown him a survey of 1000 towing and mobile glass shops that I was targeting for a dispatch business on Nextel handsets:

    “we are not interested in paid subscriber businesses, we are looking for Facebook Applications”.

    My survey evaluated out to a 19-30 $ mo. subscriber base of up to 30K New England subscribers that could have evolved to a National base of nextel using automotive service independents.

    Feh.

  4. In the online gaming space where I work, it is clear that we’re moving to a microtransaction based system. Perhaps “free” with small fees for a once in a while perk might work?
    I think if YouTUbe for instance charged a small fee for larger video uploads or for VERIFIED content creators it could be on to something. Scale + microtransaction = $$$$

    I am just saying…. Just look at what Zynga is doing with it’s poker games.

  5. Does Anderson really think *everything* should be free? Advertising leads to a profitable business only when you have a mass-market product – everyone in the whole world must use your product, often multiple times per day. Could Mathematica be given away for free and make money on ads? Could Photoshop be given away and make money on ads? Pro Tools? Although very popular, these products don’t have nearly enough users to be profitable selling advertisements. Instead, they sell products and are wildly profitable.

    Does Anderson make the distinction between absolute mass market products, and those appealing to specialized markets?

    1. I agree it is essential to make a distinction between Mass Marketing and those in specialized markets.
      However, I am not sure that Advertising works only with Mass Products, I have been successful in business and sales, including holding a Business masters degree, and found that if you know your niche and market to this specialized market it can be just as profitable. Are you familiar with Article Marketing?
      This is an excellent way to use FREE to your advantage. I have done well in business winning award trips and bonuses, and have hit some truly rough spots, and really wondered where I was going to get the rest of my rent from.
      I think free is a great way to start especially in this economy, if you have some money to invest then I would work with Ads, individuals can work with this to make income, but I agree that corporations will see bigger profits with selling the product and not just the Ad.

      Here is a great article I found on how to tell if you will loose money with all of these crazy options out there, check it out.

      http://ezinearticles.com/?Extremely-Vital-Tips—Make-Money-on-the-Internet—How-to-Tell-ASAP-If-Youll-Lose-Money?&id=2589282

  6. What a lousy article. No evidence is provided to support the non-Free position. Even cable TV at this point is more like Free than not (don’t we all pay $50 month for 400 channels, just like with our internet connections)?

    The fact that is eluding the nay-sayers is the simple economics requires Free. When the cost of delivering the good is near-zero, the price of it will trend quickly towards zero. And 0.00 is a magical number because it avoids any friction whatsoever (for example vs 1 penny).

    1. No startup can break the basic laws of economics, just like those startups claiming to break the laws of physics eventually fail. You use an oxymoron in your own comment, “near-zero” delivery costs, and “zero” price. The price can NEVER be zero if there is a delivery costs. Unless VCs pump money into you indefinitely of course.

      One can argue that giving something for free and a premium service to a few paying users can support the free stuff can work, but that’s about it. Oh, and if you think any service can be free and run on ads, look at YouTube…

  7. Don, yes he does: “I doubt content companies can charge for RSS. Your content has to be incredibly unique and valuable, which may describe Bloomberg but not the average media site.”

  8. Nothing is really Free. Anderson is selling a myth (galdwell very well recognizes that anderson’s books itself costs $27 and the wired subscription, $12). In the end consumers “pay” – either by having to filter through useless Ads (average click through rates of .1% are evidence of how much people wish to avoid ads). Second, advertisers get opportunity to needlessly push more products, which consumers end up buying.

    The paid model is a better model. Even if 1% of facebook users pay $5/mth to use extra features (over a free basic plan) then that is close to 20 million paid subscribers (assuming 200 million users) generating $100 million/mth for Facebook – that is $1.2 billion a year! And if facebook sells the plan saying that 30% of the revenue goes through for making the servers more Green, then there is added incentive for subscribers to pay. (Each “free” click on facebook means small energy burn and thus a carbon burn and in the long run we all are paying for that. )

    The same paid model can generate money for Twitter or Myspace or any such sites. And putting a price also corrects the market – a real value is easier to derive than a “speculative” value based on estimating worth purely eyeballs and Advertising.

    And the “fear” that subscribers will leave Facebook for example and join another network because there is a $5 premium service charge is not backed by evidence. I am yet to see a mass “flock” happen because of fee introduction. And there are other reasons for this to be not as big a problem as perceived. First, basic service is free. Second, building your entire social network on a new platform and migrating all your photos etc is not trivial in terms of time and effort. Its a decent barrier to attrition. Yes there may be some loss but then you are cutting the fluff anyways.

    The problem is on our VC backed mindset – “get VC cash and keep getting more users even if they really dont user the service and keep getting more page views even though no one wants to see the Ads”. Its an unsustainable model (or you cash out by selling based on speculation). Put a price and let those who really value the service, use it. In return offer good service and generate revenue.

  9. Nothing is really Free. Anderson is selling a myth (galdwell very well recognizes that anderson’s books itself costs $27 and the wired subscription, $12). In the end consumers “pay” – either by having to filter through useless Ads (average click through rates of .1% are evidence of how much people wish to avoid ads). Second, advertisers get opportunity to needlessly push more products, which consumers end up buying.

    The paid model is a better model. Even if 1% of facebook users pay $5/mth to use extra features (over a free basic plan) then that is close to 20 million paid subscribers (assuming 200 million users) generating $100 million/mth for Facebook – that is $1.2 billion a year! And if facebook sells the plan saying that 30% of the revenue goes through for making the servers more Green, then there is added incentive for subscribers to pay. (Each “free” click on facebook means small energy burn and thus a carbon burn and in the long run we all are paying for that. )

    The same paid model can generate money for Twitter or Myspace or any such sites. And putting a price also corrects the market – a real value is easier to derive than a “speculative” value based on estimating worth purely eyeballs and Advertising.

    And the “fear” that subscribers will leave Facebook for example and join another network because there is a $5 premium service charge is not backed by evidence. I am yet to see a mass “flock” happen because of fee introduction. And there are other reasons for this to be not as big a problem as perceived. First, basic service is free. Second, building your entire social network on a new platform and migrating all your photos etc is not trivial in terms of time and effort. Its a decent barrier to attrition. Yes there may be some loss but then you are cutting the fluff anyways.

    The problem is on our VC backed mindset – “get VC cash and keep getting more users even if they really dont user the service and keep getting more page views even though no one wants to see the Ads”. Its an unsustainable model (or you cash out by selling based on speculation). Put a price and let those who really value the service, use it. In return offer good service and generate revenue.
    Sorry, forgot to add great post! Can’t wait to see your next post!

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