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Summary:

Freemium -– a business model that works by offering basic services for free but charging for premium features — is being viewed as the new way to do business in startup land. It has its champions and its detractors. But if you want to make it work for your startup, here are some tips.

Earlier this year, I asked the readers of this blog and those who follow me on Twitter what the one app was that they couldn’t live without. Among the most common names offered up were Evernote, Remember The Milk and Dropbox.

Since then, those three apps have become indispensable to me as well. And they all happen to be benefiting from the business model championed by venture capitalist Fred Wilson known as “freemium.” They’re not alone — numerous companies have walked down the freemium path since he first wrote about it in 2006, among them Freshbooks, Jott.com, Box.net and of course, the granddaddy of them all, Flickr.com. More recently, San Francisco-based startup Xobni eschewed the ad-supported model to go the freemium route.

One of my old editors, Damon Darlin, now at The New York Times, over the weekend wrote about the success being enjoyed by Evernote. And it in reading Damon’s article, the qualities of a successful freemium product finally became clear to me.

As Darlin notes, Evernote is making about $79,000 a month from its paid services –- not enough to turn a profit. And while just 0.5 percent of its customers convert to paying the company $5 a month (or $45 a year) within 30 days of signing up for its free service, that figure rises to roughly 4 percent if users have used the free version for closer to a year. Why? Because Evernote is a digital drawer of sorts. The more you use it, the more you cram into it until — sure enough! — you have to get a bigger drawer, and that costs money. Given how in harmony the usefulness of this app and its level of engagement are with one another, Evernore more than any other app seems poised to see its customers switch to the paid model. Now all the company needs to do is figure out how to make it even easier to digitally clip and cram content.

Remember The Milk, on the other hand, is a simple to-do list, albeit one on steroids. In other words, it has a narrow but deep focus on one single domain. Not only have the folks at RTM made it dead simple to add tasks and delete complete ones, they have seamlessly integrated the most important part of any to-do list: reminders. Remember The Milk will send you reminders of your tasks in the form that works best for you: via SMS on your mobile phone, IM or email. It even mashes up the location of your tasks with a map.

However when you use the app while on the go (such as when you’re actually out running errands), its utility grows exponentially. And that is precisely what RTM charges for: its pro version includes support for mobile phones such as iPhone, BlackBerry and the Windows Mobile devices. With it, you never have to wait to be in front of your computer in order to start making a to-do list. The difference between the free and premium offerings is very clear, which as a buyer makes your decision to pay up an easy one.

Finally there’s online storage-syncing service Dropbox. While it disobeys the most basic rule of freemium — “no downloadable apps” — Dropbox more than makes up for it by being easy to install and even easier to sign up for. You start out with 2 Gb of storage space for free, which doesn’t take very long to use up. At that point you have two options: switch to another offering or buy a premium package. But while the thought of paying $120 a year to upgrade to the 50 GB package may make you balk, chances are the $9.99-a-month subscription service looks pretty affordable.

That’s why the premium versions of some of the more popular freemium apps are really subscription services. Which speaks to point No. 6, that if you encourage your customers to use your application often, the easier it will be for you to sell them something else in the future.

A few weeks ago I decided to move all my data from Dropbox to another online service, Jungledisk. The reason: I wanted to archive all my folders and information from 2008, for which I needed more storage than my current Dropbox account could offer. It was about 45 GB of data, which meant I’d have to upload it to Jungledisk, and even with a really fast connection, it would take forever. Suddenly it dawned on me that the more stuff I put on Dropbox, the more difficult it would become for me to switch to another service. Instead, I upgraded to 100 Gb a year.

Same goes from Evernote, which is becoming more valuable to me by the minute. Again, even if I wanted to go elsewhere, it wouldn’t be that easy to switch.

I’m sure there are many more ways to build great freemium applications, but one has stood out for me above all the others. It comes from Phil Libin, CEO of Evernote, who tells The New York Times, “Our product is our marketing.” Indeed — that’s where it all starts — and ends.

Recommended reading: Check out Andrew Chen’s piece on how to create a profitable freemium startups.

  1. Good article Om. Dropbox, Evernote and RememberTheMilk are three freemium services that I couldn’t live without either!

    We’ve been spending our time working on freemium within the education space. Currently we offer limited #s of free classes and a paid service which offers unlimited access to premium classes for a monthly fee.

    I think the big challenge with freemium is two-fold. First, deciding what to charge for and what to leave free. Or, as the meme spread a while back, having too much “free” and not enough “mium”.

    The other thing is realizing that free users should, if you’ve designed your service right, be more likely to convert over time (your examples of Evernote and Dropbox are evidence of this). However, that is challenging for services that are just starting as there often tends to be a “warm-up” period required before the conversion rates are significant.

    Modeling these things is tough but on the other hand they do get easier with time. Kudos to you and folks like Andrew Chen for writing helpful stuff for all of us entrepreneurs pursuing freemium and subscription biz models.

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    1. Joe

      I think the key is to actually think about free/premium models from the very beginning. In my conversations with good product managers, I have learned that good applications have strong concepts from day one and are very clear on what they are going to charge for, when the time is right.

      Dropbox guys have been pretty much on the ball when it comes to that simple focus. I think they didn’t quite know how much or what they were going to charge, but they knew what was the basic storage and how they will get people to premium tier. More storage. In their case.

      If you really think about it, what we are doing here at GigaOM is no different. GigaOM and GigaOM Pro are two distinct offerings and they are offering fairly unique services to both type of users.

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  2. Om, this is a great description of three applications that I use every day. Others that I have come to rely on include 1) Zumodrive, a Dropbox-like competitor that also allows variable amounts of local storage to be consumed, 2) Google for email and Apps (Spreadsheet, Documents, Presentations, Calendar, Tasks, Sites) and finally 3) Instapaper which has changed the way I read online content.

    My only disappointment with this article is that you left maybe the most important point for the final paragraph with no follow-up. You quoted Phil Libin, CEO of Evernote, in The New York Times saying “Our product is our marketing.” You agreed.

    We tend to forget that it all begins and ends with building a product or service that people want and need. Next it is vitally important that we deliver a flawless user experience. All of these companies do that exceptionally well. The “Free” part of Freemium must be compelling because without that, users have no motivation to upgrade to premium services. No one really wants more of a useless hard-to-use application.

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    1. Andrew,

      If you read my blog for a while, you know that I am a big fan of brevity. Sometimes, a guy just says something so perfect that you can’t add anything to it. Phil, did a great job of summing the most important point.

      Glad to see you enjoyed the article. Of course, if there are other things you would like me to write about, drop me a note. That is still a free service in gigaom land. :-)

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    2. “… it all begins and ends with building a product or service that people want and need. Next it is vitally important that we deliver a flawless user experience.”

      All done with …Marketing. Remember the important part of marketing is listening. listening to what users want and listening to their feedback in order to make sure your users (your market) are getting a flawless user experience.

      “marketing” is much more than advertising (which I’m assuming you are interpreting marketing as). My first marketing textbook had 22 chapters. only 2 chapters were about advertising.

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      1. Mike –

        I am clear on the difference between marketing and advertising. My comments were an attempt to remove them both from the equation and that was maybe a mistake. However, I think we are both saying the same thing.

        Some product guys would argue, but you are absolutely right that the listening part of marketing is what should drive the product. It’s much easier to perform the other marketing tasks when, in Phil Libin’s words, the product is it’s own marketing. My interpretation of those words is that the product is a direct response to the needs and feedback of it’s target users.

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  3. [...] one of the leading online blogs, has just posted a brilliant article on how Freemium can work for your startup. The most high profile ‘freemium‘ model in the UK market is the Globrix property [...]

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  4. [...] Om Malik looks at how to create a sustainable freemium business – GigaOm [...]

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  5. I have recently become a heavy Evernote user and by the 2nd month I dropped my $45 on the table for a year’s premium membership. Not only is Evernote great, and it certainly is and you should try it if you haven’t, but I continue to own my data. I can get at it whenever I like. Should they go belly up 2 minutes from now I have a synched copy on my desktop. Should they start charging too much I can keep accessing my local data, export it to another application and even use their API to do the work for me.

    For me it isn’t just about getting me hooked its about knowing that I’m not stuck. I never would have signed up if I thought I was going to tied to it in the long term (unless I want to be). I like the freedom of knowing I can “take my toys and go home”, plus I think it gives the company the motivation to keep innovating and making the product better. Its just like a cell phone company. You get much more responsive service when you only have 2 months left on your contract compared to when you have 2 years. Maybe I’m just more sensitive to this kind of thing, my cell phone is prepaid after all.

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    1. Joshua

      What our describing is a new rule: how to make data be your best friend and help you build a great business. The customer have access to his or her own data is important and should be the key component of any data-based service.

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      1. Therein lies the dichotomy. A primary reason for switching to a paid subscription for many freemium services is the entrenchment of a user’s data … yet the lock-in, IMHO, is also a primary deterrent given that so many startups fail in the first place. After all, the only thing worse than using a free service you love that goes belly up is paying for a service that goes belly up.

        I believe that adoption rates would be higher if companies focused more effort on instilling confidence that the startup’s business model is as safe as the data you’re uploading to their web site.

        Something tells me I’m not the only person who sees a new site and questions even investing the time/effort of loading information into it because I question if they’ll be around in 6 months.

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  6. The validity of the Freemium model does not require further proof, what is required is proving the free model. the one Sun uses- where it basically gives stuff for free and expects customers to only as an insurance policy of something going wrong. More here http://blog.gandalf-lab.com/2009/03/death-of-billion-dollar-opensource.html

    The key in Freemium is to have a forced pay option once you know that the customer is hooked on

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  7. [...] post by Om Malik this morning has me contemplating an idea that I realize no one who can make the decisions will buy [...]

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  8. Keeping customer acquisition cost at or near zero is key. This allows the company to allocate resources to developing the product which is ultimately the marketing engine. And while you can predict what the paid features will be it’s important not to build them too far in advance of your user base because you can’t tell which users you will be able to economically attract. And, of course, that means know your customer!

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  9. Your 10 commandments are spot on, at least based on our experience at PBworks. One subtle nuance is that the key to data lock-in is not actual lock-in, but lock-in based on convenience.

    As you noted with DropBox, you could have gotten your data out, but it’s more convenient to simply pay. Same holds true with us…our customers can download a backup of all their data at any time, so they don’t need to fear hard lock-in, but we try to make it so that it’s just more convenient to keep paying us.

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  10. [...] I just read about this “freemium” approach to web startups. Basically, you build a cool app, make it free, build up a bunch of users, then find a way to “monetize” later. D’oh! Why didn’t anyone tell us about this when we started in 2001? We wasted all this time building a strong, profitable company with an awesome product and over 100,000 users, when we coulda been just giving it all away?  We’ve got to make up for lost time, people! [...]

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  11. You don’t necessarily have to keep user acquisition costs at or near zero — it all depends on the relationship between your paid model option and your freemium model option and its relationship to the conversion rate. Read more: http://news.cnet.com/8301-13505_3-10314283-16.html?tag=mncol;title

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    1. Michael –

      I’ve flagged your interview on cnet news for all my colleagues. Fantastic insight and analysis – thank you! If you all haven’t read this already, you should.

      BTW, interesting stuff you’re doing with Engine Yard.

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  12. [...] värdet av historik och hur det saknas i realtidswebben Hoppa till kommentarer Gigaom har en läsvärd artikel om freemium där de tar upp några viktiga egenskaper som nästan alla fungerande freemium-tjänster innehar. [...]

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  13. [...] How Freemium Can Work for Your Startup (tags: startup business freemium) [...]

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  14. [...] Om Malik looks at how to create a sustainable freemium business – GigaOm [...]

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  15. Excellent thoughts. Freemium is a wonderful concept – and is being put to good use around the internet world. I believe Flickr to be one of the best examples, and prosperous example at that – of Freemium. Also – thanks for sharing the information on the services you use.

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  16. Good article, I enjoyed it! Freemium model is not too far from the camera and instant film of older days. If you have the camera (maybe given to you for free or at a ridiculously low cost) you will buy the instant film for years too come!

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  17. OM good commentary – but the title is misplaced – it should be “how good products win”.

    From a paid customer perspective it leaves out a few important things – although you did leave it to the readers imagination with the quote from Phil Libin. It is about the product – and the product achieves Nirvana when people call it a trusted product.

    “Data is the ultimate lock in” – when it comes to web offerings – I would suggest – “TRUST is the ultimate lock-in”. And people pay for trusted (real of percieved) products.

    Most free users are not real customers – they are marketing tools – they guys that wear free T-Shirts without ever buying the product. The focus for companies must always remain on the paid products.

    I hate the word Freemium – it was coined by VCs who do the “spary and pray” investments. And even the religious will tell you – praying will only get you Preachers Nod – never a Bankers Note.

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  18. [...] Om Malik looks at how to create a sustainable freemium business – GigaOm [...]

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  19. [...] and comment on it. Apparently Jason Fried of 37 Signals didn’t agree with something I wrote about the freemium model. Using it as a springboard, Fried argues in a blog post of his own that “the bar for success in [...]

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  20. [...] Google needs to have access to as many devices as possible. Colonizing those devices now with “free” is a way to build out the platform and train consumers to look to Google for [...]

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  21. Om – great post.

    We’ve discovered many of the criteria you mention to be true, only through trial and error. Some businesses naturally migrate toward the freemium model, while others seem to stuff themselves into this model because they think it’s “the new black.”

    I co-founded a company called ClearFit.com. Our business is the type that naturally migrated into the freemium model. We’ve invented (patented) a recruiting software tool that helps any person or any business predict employment success, based on personality and experience, so employers can hire people who fit and improve their employees’ performance.

    Since our mission is to make the science of predicting employment success accessible to all people and all businesses, the freemium model was a good fit for us.

    We’ve actually found that people’s behavior changes somewhat when you provide them with a really valuable free service with no strings attached … they make excuses, based on the value they’ve already consumed, to justify moving to the paid version. For instance, with our app, we pack a huge amount of value into the free version that you can use to hire people for one job, so when our users want to pay to expand to a second job, they “rationalize” that cost over both jobs, instead of just the new one. So the pricing sometimes works retroactively in their minds – kinda cool I think.

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  22. [...] How Freemium Can Work for Your Startup [...]

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  23. [...] storage so give them such a ridiculous amount of storage that you know they’ll pay for it. Om has a great post on freemium with an example of exactly how this works for dropbox. You give people a ridiculous amount for free [...]

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  24. Great post. I especially like the list of what it takes to be successful with a freemium model.

    Another question. Why is the freemium model successful?

    Answer- The freemium model is successful because it expedites your ability to build a large customer base, which increases network effects and efficiencies resulting therein.

    Some other good ideas around freemium models in Windows applications- http://blog.w3i.com/2009/02/13/learn-how-the-freemiumtrial-business-model-can-increase-your-revenue/

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  25. In CloudBerry Lab we employ a different approach to compete on the crowded online storage market. CloudBerry Backup is just a desktop client to Amazon S3 and it is one time purchase. Besides there is no proprietary format and you can access your data using any other Amazon S3 client. In other word we don’t want to build an unfair competitive advantage by locking our customers to proprietary technology. Although it might be not very rewording for the company our customers find it compelling. At the end our customers win and this is what we only really care about.

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  26. [...] such as the BlackBerry and the iPhone. I recently wrote about Evernote in my post about startups that are using the concept of freemium — that of providing basic services for free but charging a small fee for those that are [...]

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  27. [...] approccio cozza infatti contro il nono comandamento delle applicazioni premium di successo, decalogo recentemente stilato da Gigaom: “Make sure what you started offering for free, remains [...]

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  28. Great info (as usual) on this exciting and successful biz model, Om.

    For anyone who’s interested, our Freemium.com domain is available for acquisition.

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  29. [...] make-or-break moment for these services, especially with Spotify entering the fray by applying the “freemium” model. If ubiquitous music access doesn’t revive the subscription service, nothing [...]

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  30. [...] Malik over at GigaOm has put together a list of 10 commandments for a successful freemium [...]

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  31. [...] online. Pundits debate the possible return of “pay walls” to the web, the prospects for “freemium” products that coax some subscription revenue from a larger pool of non-paying users, and the [...]

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  32. [...] Malik at Gigaom and Andrew Chen have both provided some invaluable advice on how Freemium can be a great way [...]

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  33. [...] platforms. At present the app works on Android, iPhone, Blackberry, Mac, PC and Palm’s WebOS. As you all know, I am a big fan of the application and its freemium business model. It probably is the single most useful app on my computer and my phones. (Related articles from [...]

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  34. [...] freemium – a business model in which some basic services are provided for free, with the aim of enticing users to pay for additional, premium features or content [...]

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  35. [...] freemium – a business model in which some basic services are provided for free, with the aim of enticing users to pay for additional, premium features or content [...]

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  36. This could mean great things for the software prototyping world.

    Imagine a day sometime in the future present now, when you could design form imagination to prototype mock up in function and with all junction, a simple weblet for your site, and a profitable one at that for you as a matter of customs.

    A simple interface designer with a freemium for me, and a place to stash the spin job on it (computer disco lingo)

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  37. [...] freemium – a business model in which some basic services are provided for free, with the aim of enticing users to pay for additional, premium features or content [...]

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  38. [...] freemium – a business model in which some basic services are provided for free, with the aim of enticing users to pay for additional, premium features or content [...]

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  39. [...] freemium – a business model in which some basic services are provided for free, with the aim of enticing users to pay for additional, premium features or content [...]

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  40. [...] freemium – a business model in which some basic services are provided for free, with the aim of enticing users to pay for additional, premium features or content [...]

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  41. [...] service by taking away music from people’s playlists are very good options, and violate the 10 commandments of freemium. Building a premium ad-free desktop, browser-based or mobile service would merely put MySpace in [...]

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  42. [...] be clear, Mr. Malik’s post is titled  How Freemium Can Work for Your Startup , in which he discusses three startups, EverNote, RememberTheMilk and DropBox and on their ability [...]

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  43. [...] rest of SiteVisibility, they’ll quickly get addicted and progress to the premium version of their freemium [...]

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  44. [...] has raised over $16.5 million in funding from Morgenthaler Ventures and other investors. It is a poster child of the Freemium business model. : Evernote, Freemium, N900, Nokia 0 0 0 0 [...]

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  45. [...] doesn’t work well enough to please record labels, it sure does work for consumers — and taking away what used to be free has never sat well with them. Back to the drawing [...]

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  46. [...] to gain users. There’s a useful discussion on freemium being used by start-ups by Om Malik here – including the interesting stat that 0.5% of Evernote users convert to fee paying. [...]

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  47. Great article. I’d love to hear your take on our new approach to the freemium model, using a free-pass approach rather than a 30-day trial http://blog.1daylater.com/post/430390913/the-wondaylater-golden-ticket

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  48. [...] online. Pundits debate the possible return of “pay walls” to the web, the prospects for “freemium” products that coax some subscription revenue from a larger pool of non-paying users, and the [...]

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  49. [...] Paywall – bloquear el acceso a la parte de un sitio web que está sólo disponible para suscriptores. [...]

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  50. [...] continua ad essere completamente gratuito per chi offre e per chi cerca servizi: come recita il nono comandamento delle applicazioni Freemium di successo, recentemente disatteso da Ning, “Make sure what you started offering for free, [...]

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  51. [...] make money with StartTalking? There’s plenty of potential for additional speech services and that’s where a “freemium” business model comes in. The company won’t charge for the base functionality of text message communications in [...]

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