The limits of freeconomics
October 29th, 2008 Posted by: l.dewis
At last week’s Web 2.0 Expo Alan Patrick from Broadsight (strategy consultancy on Web 2.0) concluded his talk saying ‘Don’t make the user the free lunch’. He pointed out throughout his talk that free content causes problems. One example is Facebook - as they own your content they can make money from it, making you, the user, the free lunch.
He gave a really useful view on the limits of freeconomics. Free fails as every node in your network has a transaction cost. Your costs increase with growth.
Basic economics suggest that if you price something correctly in a market you can get demand. So, if you make something free does that create infinite demand? Only if something is new and unique. If everyone does free, you spend to keep your share, paying customers to come to you.
He also pointed out the problem with advertising based business models. In 2009 the total value of the US advertising market is $50bn. Google have a quarter of the market share and other major players take up most of the rest, leaving start-ups fighting for long tail advertising budgets. If everyone wants to be a $100million company, there is room in this long tail for about 100 companies globally. In addition, if you are making ad revenue from content and you don’t own the copyright, you will get sued. He argued that the YouTube business model is flawed due to the high cost of monitoring video for copyright infringement. Most people don’t have their own content, they use YouTube as a distribution mechanism for copyrighted material.
He sees the 4 freeconomics myths as :
- sustainable free content
- others will give you stuff for free
- unmetered hosting and distribution
- open free services
Digital sharecropping - the top sites harvesting profits from free labour in terms of user generated content - has been a point of discussion for years. Alan referenced Mike Arrington’s post in TechCrunch, These crazy musicians still think they should get paid for recorded music which suggests that both the content provider and the site owner get value. Arrington argues that social media sites raise the profile of the media producer and allows people to succeed based on talent and demand.
Alan said that the rise in paid-for TV is evidence that people will pay for quality content (end users and advertisers) when lower quality content floods the free channels.
He identified the main risks in a freeconomic model:
- Acquisition costs - are you more expensive to run than anyone else? Reduce costs, do something others don’t do and that people value to avoid high marketing costs.
- Distribution costs - community care costs on social networks, hosting costs on video sites.
- No added value - in the current economic climate this can’t be about cool stuff, it has to be about stuff that saves money. Do you know what users really really want (nice reference to the Spice Girls here proving his point this isn’t about the cool stuff)? Think quality and productivity. A deeper relationship between you and your user is necessary for success.
Models include:
Razorr and blade model - mobile phone companies give you something really valuable upfront to take the risk away from the purchase, then make their money back through call plans.
Freemium - supplying premium services that users want at cost. This is difficult to retrofit, as you must know what people would pay for. You can lose users introducing paid for services they don’t want. Premium services are only going to be taken up by a small percentage of your users so you need a huge user base to make money at the prices people are willing to pay.
Pay per poke - gaming model. Alan gave the example of H&M fashion in Sims2. Boys have worked out that if you dress avatars (even in girls fashion) they perform better so they are buying the fashions!
Advertising - make it easier to advertise with you and provide good metrics for advertisers if you want to get some of that long-tail budget. Consider a payment model for removal of ads.
Entry Filed under: Web 2.0, Business models
1 Comment Add your own
1. Andy Lane | October 30th, 2008 at 1:21 pm
There are many interesting points made Alan Patrick which echo many of the more recent musings of Chris Anderson on all this.
There are two major comments I have have on all these contributions.
First, how it is important to recognise that nothing is really new about publishing on the web in terms of it being a transaction whereby somebody publishes content that is hopefully their’s to publish but because transactions are so open and visible around much of the web it is easier to implicitly or explicitly codify that transaction in a way that a conversation in the street or distributing a few notes to a few other people is more difficult to do. This immediately entails issues of economics and issues of rights.
I won’t say more about the legal issues now as my second comment is around economics. Much of the discourse that Alan Patrick and Chris Anderson are involved in is a free market/capitalist market one. But just as recent events in financial and now other markets are showing us, there are at least two other ‘markets’ to consider - public markets or a public economy where it is taxpayers money that supports quite a bit of certain human activities (education is one) and social markets or the gift economy whereby individuals freely give of their time for a variety of reasons (including deferred or displaced rewards).
What we need to fully consider in freeconomics is the changing dynamics and interplay between these three ‘economies’ and where notions of free are only involved in certain types of transactions and yet there can still be production and consumption costs.
There is no free lunch since someone had to find/grow the food and prepare and somone has to clear up and clean up afterwards. It is just free to some people at some times for some contexts. The rest can be thought of as externalities but it depends upon how you draw your boundary.
Of course the tough part is turning the ideas that can flow from this broad system description to specific organisational practices and propositions to the ‘markets’ out there that generates the money that oils the wheels of the whole infrastructure.
I (might) let you know when I have cracked it for the Open University but it has to noted that we need to draw upon all three ‘economies’ in a focussed and coherent manner if we are to continue to share some of our content and knowledge riches to everyone else.
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