Free: The Business Model

(I originally wrote this review article in 2009; as it is still relevant I am reprinting it here in an updated form.)

I am a great fan of Chris Anderson.  In July 2007 I presented a conference paper at the Australian and New Zealand Communications Association conference in Melbourne about it his book The Long Tail, where I analysed the Rural Health Education Foundation’s “long tail” effect of watching and listening to our programs online.

Anderson’s has a book entitled Free: The Future of a Radical Price.  As with The Long Tail, Anderson has done a great job at capturing a certain “cultural moment”, in terms of how we relate to information, entertainment and our connected world.  His basic concept is that if give people lots of real value free items, there are a number of business models that will allow you to make money.  Anderson summarises it thus in his book (page 3):

Therein lies the paradox of Free:  People are making lots of money charging nothing [Google being the prime example of this].  Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00.  How did this happen and where is it going?

In the Prologue of his book (pages 1 & 2), he points to the example of the Monty Python team:  claiming to be exasperated as to the amount of digital piracy of their programs, in November 2008 they posted lots of their high quality archival video material free on YouTube.  But they asked for:

…. something in return.  None of your drivelling, mindless comments.  Instead, we want you to click on the links, buy our movies & TV shows and soften our pain and disgust at being ripped off all these years.

And according to Anderson, they were wildly successful, with their DVDs climbing “to number  2 on Amazon’s Movies and TV best-sellers list, with increased sales of 23,000 percent”.

The point that Anderson is making is that providing free information and entertainment is the way the world now turns – having the “force of economic gravity”, and that organisations will need to adapt to make money off of the “free”.  Giving away lots of free samples will encourage purchase, provide training instead of selling software, sell merchandise and concert tickets and don’t worry about the free downloading of music, but instead charge for extras and add-ons and up-sells.  He makes the point that the difference between something which costs and something which is free is enormous, even if the cost is small.  An example:  Amazon’s offer of “free shipping” for orders greater than $25 (alas, not available in Australia, but that’s a whole other discussion) is wildly successful.

“Give a product away, and it can go viral”, Anderson writes.  I know this to be true.  At the Rural Health Education Foundation, where I have worked since early 2003, we give away large numbers of health and medical educational DVDs (about 23,000 in 2009/10 alone, and that was not an unusual year).  But when the Foundation offers the same product/s for sale at a price, even at extremely low prices, the orders fall away dramatically.  The business model of the Foundation is, interestingly, also based on “free”, although not the commercial model which Anderson discusses.  The model is to receive funding up front to produce and distribute the educational programs and then give as much of it away free as possible (with as little cost).  When the “free” is digital (Internet delivered) or via television (satellite or national broadcast), it’s pretty cheap to add lots of users – although in the Foundation’s experience it is not exactly zero:  there is a cost to free giveaways.

It is important to note that, like his “Long Tail” concept, Anderson builds directly on the work of others, updating it to the very current present and near future.  This sort of futurist writing – explaining what we have just done and are about to do, can be very exciting, and Anderson is a master of this, even if he is often so excited about his concepts that sometimes he sounds more like an evangelist than anything else.

The context here is important:  print editions of newspapers are disappearing in the USA, the Google search (and advertising) model is killing many of them (see the July 14, 2009 article by Peter Osnos entitled “What’s a Fair Share in the Age of Google?” at the Columbia Journalism Review or the Century Foundation (still current).  (Drawing on my work with the Rural Health Education Foundation, I presented a paper on new media business models in Brisbane in July 2009 at the Australian and New Zealand Communications Association conference.)

In his article, Osnos discusses the concept of “information wants to be free”, noting that it originally came from Stewart Brand – who said it at a computer programmer’s convention in 1984 and later detailed in his book 1987 The Media Lab: Inventing the Future, writing the following:

Information Wants To Be Free (note: capitals by the author).  Information also wants to be expensive.  Information wants to be free because it has become so cheap to distribute, copy and recombine – too cheap to meter.  It wants to be expensive because it can be immeasurably valuable to the recipient.  That tension will not go away.  It leads to endless wrenching debate about price, copyright, “intellectual property”, the moral rightness of casual distribution, because each round of new devices makes the tension worse, not better.

And remember this was written more than 22 years ago.

Esther Dyson (see http://www.edventure.com/ for her latest activities) was also another pioneer of thinking in this area, particularly with her December 1994 article (from Release 1.0) entitled “Intellectual Value” (available at Wired magazine archives).  Dyson wrote at the time:

Chief among the new rules is that ‘content is free’.  While not all content will be free, the new economic dynamic will operate as if it were.  In the world of the Net, content (including software) will serve as advertising for services such as support, aggregation, filtering, assembly and integration of content modules, or training customers in their use.

Discussing media and entertainment, she accurately predicted the rise of Google:

The payments to creators are most likely to come not from the viewers, readers, or listeners, but from advertisers….  The challenge for advertisers is to make sure that their advertising messages are inextricable from the content.

That was now seventeen ears ago.  Like Brand, she too was an early evangelist.  And her predictions were wildly optimistic:  they were not wrong, just way too early.  As Nobel Prize winner Paul Krugman pointed out in the New York Times on June 6, 2008:

The predictions of ’90s technology gurus are coming true more slowly than enthusiasts expected – but the future they envisioned is still on the march.  In 1994, one of those gurus, Esther Dyson, made a striking prediction: that the ease with which digital content can be copied and disseminated would eventually force businesses to sell the results of creative activity cheaply, or even give it away. Whatever the product – software, books, music, movies – the cost of creation would have to be recouped indirectly:  businesses would have to ‘distribute intellectual property free in order to sell services and relationships.’

There is an interesting rule here:  the predictions of “technology boosters” (Dyson, Brand et al) are almost always overly optimistic (has broadband reached all of rural Australia yet?), but most do come good … eventually, however only if you wait long enough.

Mark Cuban has an interesting (July 5, 2009) blog post on the topic of “Free” entitled “When you succeed with Free, you are going to die by Free”, where he points out that “The problem with companies who have built their business around free is that it is far from free to remain successful.”

Cuban’s point is that the more success there is, the harder it will be to stay on top.  All “freemium based content plays” will have a company that replaces them, their “Black Swan” (from the Nassim Nicholas Taleb book of the same name) competitor that will appear and replace them:  Myspace to Facebook, even Google:

We don’t know who their Black Swan company will be.  But we all know it will happen don’t we?  The only question is when.  Of course Google knows it as well.  Which is exactly why they invest in everything and anything they possibly can that they believe can create another business they can depend on in the future.

Do you think Cuban is wrong?  Remember AOL (also known as America Online)?  Some years back it was so big it bought Time Warner, movies and all.  And where is AOL now?

Reportedly, Anderson’s book Free also made The New York Times list.  And Anderson truly “puts his money where his mouth is” (as they say) – offering it, as they say, totally FREE, through SCRIBD.  According to Anderson, by late July 2009 the free digital version had already been downloaded “between 200,000 and 300,000 times”.  And yet people were buying it as well, helping Anderson to prove his point that “free” can be an effective business model.

By the way, Free is NOT available “free” in print form for those of us who live in Australia – and presumably in most other places outside the USA.  Back in July 2009 I went to the “Free” download page on SCRIBD and was given the following message:  “Sorry, this content is geographically restricted.  Due to our agreements with our publishing partners, the document you requested is only available to users located in the United States.”  So “Free” is not necessarily … free after all.  It was also offered free for a brief period on Amazon’s Kindle (not available in Australia at that time), Sony Reader and iTunes.  You could, however, download the audio book free (I did this, so it works, note 285 MB zip file – not an insignficant file size) by going to Wired magazine of 17 July 2009.  As far as I can tell, as of this writing (19 May 2011), there is still no preview available on Google books.

By the way, SCRIBD has a little sting to its website tail.  Once you are on it, the site will not let you go back to your previous website if it was in the same browser window.  It’s irritating.  So open a new window every time you go there.  You’ve been warned.

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