The cost of free

The internet has fundamentally altered the business models of many industries.

One of these is the content industry. We have seen recently that the Readers Digest filed for bankruptcy. News Ltd posted a $300m loss in the last financial year.

The World Wide Web can give you almost unparalled access to any kind of information that you want. Its changing the way that we read the news and how much we pay for it. If I can access information anywhere, will I be prepared to pay for it? Will users be prepared to pay for it? And how can publishers and content producers make money from it? How does this affect online services?

At the same time, it is also altering our view of online services.

I’ve just started reading Chris Anderson’s “Free” book which has inspired me to write this as well as the current debate around this topic. The problem is that everyone now expects everything to be free. Chris Anderson’s discusses this briefly, on the divide between the older generation (30+) who are skeptical about anything offered for free, and the younger than 30 (gen x & gen Y) who have grown up in this free era.

free-chris-anderson1

Free online services but at what cost?

We get email services for free – gmail, hotmail, yahoo, et al. And these are all really good email services. There’s almost an unlimited capacity of email storage now. Gmail offers 7GB storge for free (Seven! that’s right). Sidenote: You can actually upgrade to 10GB – 400GB for $20 – $400 USD.  Except the cost of free email is advertising. And most people are willing to put up with it.

Free wifi is available in many cafes, particularly in Starbucks in the US – but there is an expectation that you will buy a Starbucks coffee in exchange for the price of free internet access. Its really an economic cross subsidy. Give me one service in exchange for paying for another, which allows the provider to make a profit margin. Free internet means you will stay longer in the cafe, sipping more cups of coffee whilst browsing the internet.

Many internet services like Huddle.net, Yammer and countless others more offer you a good service for free. They try to entice you by giving you a basic version and hoping that a percentage of users will upgrade to the paid version (when the 80/20 rule kicks in). It forces these kind of companies to be innovative and their competitors as well. Because if I’m not using their service, I could easily jump onto their competitor’s service. 20% of the paid/enterprise customers are subsidising the 80% free customers.

This is the same thinking behind the next release of Microsoft’s office 2010. They’ll give you a web version for free, most likely stripped down. Because if your not using this, your going to be using Google docs which is free.

I use Huddle, a project management software and it gives you a certain amount of capacity for free. It’s quite convenient, and I am seriously considering paying for it to use in my church for project management. I just need to investigate how it would work with many users, etc… I would consider this, because I have used the free service and seen how useful it can be.

The CEO of Box.net, which offers a similar collaboration/storage solution, said this gem of a quote:

“Free is not a business model. It is a distribution and marketing tactic”.

I agree with this 100%. You cannot last in a business environment (especially in a harsh GFC climate like now) without thinking about how you will eventually monetize your business. Free can only last for so long. Really its for marketing purposes, to allow users to sample your services and provide stickiness. If your service isn’t good enough, I’m just going to go somewhere else. So it keeps these online service providers on their toes.

With Google, they provide such superior search services (bing who?), it keeps drawing you back. They surround the organic search results with paid advertising in the form of search engine marketing on the right hand side. And I am perfectly cool with this, as are many other people. It’s done in a way that is unobtrusive and occassionally offers relevant paid results. Not that I have ever clicked on them, but someone must. Right?

free-cover

I remember hearing one of the google maps engineers who was asked why does Google provide the google maps API? It’s really comes down to advertising. The more you use google services, the more advertising you are exposed to. However is the cost of free……… advertising? In relation to Google services, yes. Because Google typically starts its services with free and needs a way to monetise its services. It’s really a advertising/media company which also has a side business selling enterprise apps =)

You can provide a free service, but there needs to be something else which is making money. Anderson uses the example of King Gillete who gave razors away but made money through the sale of blades. Wow you with one hand, take your money with the other.

Its the same example for VCR’s/Playstations/Computers, etc… Subsidise the sale of hardware, so you’ll buy the software. Its the software / videos/DVD’s which have a higher profit margin and you’ll consume more of once you have the hardware.

I actually think that they could offer the iphone for almost free or heavily subsidised. And make the money back through apps. I know there’s a group of people out there that refuse to pay for apps. But there’s enough people (a minority) that will pay, and scaled over the millions that own iphones, its enough to generate significant revenues for Apple and the developers that create those apps.

So what’s the deal with online news content?

If I want the latest news, I can jump onto news.com.au and read any of the articles. If they build a paywall around it, I’ll just go to New York Times. I’m really only one click away. Or more likely, I’ll just search in google and end up reading an article from Google news, which is the king of all aggregators. They suck in content, strip it down and spit it out.

You can’t simply just aggregate content. Because you’ll just be re-aggregated by someone bigger or some other new service. It’s a continual battle. You need to produce original content which draws people in and they want to share.

The news industry is very different to many other industries because of its dynamics which focus on content, editorial standards, readership/subscription model, rapid distribution of news, classified advertising, etc…

I spoke about it with David Meerman Scott about it briefly this morning and he had some thoughts around creating customised content based on the user’s preference. I think this idea is worth exploring. As I’ve stated before, the business model of the  news industry needs to change. The question is – to what? What will people pay for?

You can’t just give stuff away for free. Their is a cost involved. You need a cross subsidy or some way to generate income back in return – whether through advertising ala google, or a freemium model.

But give me the news that I WANT, on demand and I might pay for that. I see BBC news and also news.com.au moving to this model. They allow you to rearrange the content based on what I want to read. Allow me to select my preferences. Perhaps they can build some intelligence around my behaviour. Understand what I like to read, what is sticky to me, what engages me, what I share with my friends. What conversations I am having on facebook, twitter, etc… about your news article.

Feed that loop back in. Know that I am interested in sports, particularly basketball & football. Hip hop music, international affairs, quirky news articles, etc… Make sure these kind of articles rise to the top. Create me an igoogle type portal or a popurl interface.

popurl

I would consider paying for this type of service. Would I consider paying on a ala carte basis per article? No. I would pay a monthly fee and consume as much as I could. If it works for Pay TV, this could work for news as well. Even though there is free to air tv, people pay for premium tv services that offer a greater variety of shows, and latest movies. Give me somethign superior to what is free, and I believe users will pay. It works for huddle, yammer and other online services. Why can’t it work in the news industry (despite its different dynamics)?

I don’t believe that the news industry should solely rely on advertising to monetise content despite the advances of advertising technology. Consumers are sick of pop-up ads, pop-unders, take over ads, pre-roll ads, banners. That stuff doesn’t work anymore.

If you know me, I’m a big fan of Mark Cuban’s blog, and he’s also got some ideas around this which are worth reading.

I’m out like free content,

Matt aka Inspiredworlds

8 thoughts on “The cost of free

  1. Great post Matt. Or should I say essay? You make some really great points we are seeing with new business models develop a free killer service Someone can’t live without, and subsidize it with ads/commercial data/ additional access or benifits etc. Which is interesting as I remember mcdonalds marketing case study about turning customers around in 8 minutes, how times change.

    Give it two years and there will be a model in place around quality news content online possibly a subscription model tied in with a cross Chanel access – I see mobile a key player with data portability and easy billing access. Great post!

  2. The Internet screwed up everything because it broke down the fundamentals of economics – supply and demand. The geographic barriers to competition were eliminated and now there is an infinite over-supply of everything. And there is always someone who’ll do it cheaper. So if you want to make money, you need to be damn good at what you do. And hope that Google doesn’t enter your industry! 🙂

    Not sure you’re comparing apples between the news industry and a tech start-up such as Yammer or Huddle. The greatest problem for the news industry is that they are people driven. News cannot be produced without journalists. People create news, and the people cost is now exceeding their advertising revenue. A tech start-up typically has minimal overheads, typically relying upon a small team of developers to maintain the technology.

    Perhaps the answer is to link journalist remuneration to performance. Pay journalists based on eyeballs generated by their work. Then there would a clear incentive to produce high quality content & develop a clear understanding of reader needs. With so many free content producers, journalists need to deliver extraordinarily high quality content to justify payment.

    I’ll close with this quote from Seth which I love, and is highly relevant to the news industry:

    “Free is creating lots of attention, but marketers haven’t gotten smart enough to do something profitable with that attention.”

  3. To James

    I like the idea of performance based journalism. Interesting concept!

    But, I think that some journos will argue that it may degrade the quality and integrity of the news articles out there.

    ie. Why post an investigative in-depth article into the intricacies of the war in Iraq when a funny article about some Youtube movie will get more clicks and eyeballs?

    The solution is probably to have defined audience target (for remuneration) for each “type” of journalist.

    For example, entertainment (gossip) journos may have to hit higher audience targets than say, a specialised tax news journalist.

    I’m not a journo so there will be others that will flame on about journalistic integrity, blah blah blah…

    I’m looking at it from the finance point of view of measuring the performance-based remuneration. (^_^)

  4. Matt, with all these news sites moving to a pay-content system….

    What’s stopping someone from subscribing for the service with say, news.com.au and then distributing it to the masses for free or a fee?

    They will effectively act as “wholesalers” of news content.

  5. @james you make a good point. the news industry has different overheads. the cost structure is different – more staff overheads. i just considered whether some of the online business models for services could be used for online news content.

    I also like the idea of CPM basis. You could have a baseline of remuneration (fixed) and also a performance fee on top.

    @ daniel yes, very legitimate concerns re journalistic integrity. How do we value journalism and news readership? If its performance based does it cheapen the service?

    With wholesalers of content, I would consider that aggregation sites are presumably this – like Huffington Post, All top, Feed.ly, Google News. Someone will develop a pay model around this – delivering customised content to you on demand.

    I think that the news industry (and the music industry) will be very interesting in the next few years, as they battle / harness the power of free and develop new business models to support their content.

  6. @inspiredworlds Yah, I’m seeing interesting parallels between the news & music industry in their battle against “free”.

    The music industry started the war in ol’ days (in Net terms) of Napster and have adapted to a certain extent. Its still pretty schizophrenic though.

    On one hand, you have new talent being unearthed on Myspace and Youtube. Whilst on the other, you have major record labels suing regular folk for downloading music illegally.

    I think the news content industry will follow a similar path. Some will adopt “FORTRESS AMERICA” style defence whilst others will be more liberal and innovative.

  7. Remember how we were talking last night about how Chinese websites are dominating their Western counterparts in China?

    Check out this article on FT.com…

    Its an interesting line in with your blogpost re news content too…

    Traffic for China’s social networking sites come thru via either games or NEWS CONTENT (ie. side product). Western users focus solely on social networking.

    http://www.ft.com/cms/s/0/cc852718-9724-11de-83c5-00144feabdc0.html

    For those who say, “Who cares about China?”.

    I think 340 million online users (and rapidly growing..!!) is reason enough to care.

    Wish I could read Chinese..!

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