Would you give your services away for free?

Chris Anderson’s long-awaited follow-up to the Long Tail has just hit bookshelves. Entitled Free: The Future of a Radical Price the book argues that abundance is causing prices to fall effectively to zero. Here the psychological advantage of giving something away for free actually benefits the producer – through wide-spread take-up that can lead to other revenue opportunities.

It is a fascinating, and highly contentious, thesis. Malcom Gladwell, writing in the New Yorker, dismisses the arguments. For instance, he points out that Lewis Strauss’ prediction that electricity would be free (derived from nuclear power) failed to come true due to the massive infrastructure costs of the electricity grid that required continual fees to finance. Similarly, Youtube might be successful by providing videos for free without interruptive advertising, but it is losing a lot of money.

These are sound criticisms, but there is an additional one of the Pandora’s box. If I give something away for free in order to gain revenues from new streams (e.g. giving CDs away for free and making money from tours and t-shirts), how long before these alternative sources also see their price depress to zero. Does this trend continue until we reach something that is inherently scarce?

Possibly, but nothing is scarcer than our time, yet as Chris Anderson points out, we will choose to spend our time doing something that is free.

Anderson’s reply to Gladwell was largely unhelpful. While he correctly observes that the review itself is given away free on the New Yorker website, his implication that Gladwell’s position of defending the status quo is driven by his vested interested in being a journalist is unfair.

The example of GeekDad is also misjudged. He makes money on this through advertising around an amateur community – it has been very successful and the community leader now has a book deal. People may indeed engage for “fun” or in the hope of jump-starting a writing career, but then there is no traction or quality control – I don’t believe the argument that a passionate amateur is better than a paid professional. Sometimes, maybe, but not always.

Furthermore, what happens when the talented amateurs get their book deals? They become too busy to participate, so the untalented amateurs take over. It’s a bit like a the toilet circuit in the music industry – an occasional rough gem among a lot of dross. The only difference is that ad impression revenue is more stable than door receipts.

In a comment to the post, Anderson points out that the book centres on the freemium model – it would have been better if his initial response had focused on this as it is a nice business model (though again I am sceptical of its long-term viability).

It has thus far worked for companies like Flickr as passionate photographers need more storage space than the basic account offers [updated for attempted grammar correction], and the built-in community aspects of the site have created traction. But, as bandwidth charges decrease, other services (e.g. Facebook) offer unlimited storage. Flickr only retains revenues due to the time cost of transferring photos and restarting a community. Is this sustainable indefinitely? I don’t think so.

Elsewhere, the local coffee shop occasionally gives away free tasters – but only as marketing; not as a continual persuasion tool to get me to upgrade to a full cup.

Would I give my work (research) away on the freemium model? Occasionally, I would. But only because the losses accrued from giving something away up front can be written off to PR/marketing.

This isn’t sustainable because there isn’t a continual influx of new clients – the benefits of giving reports or data away diminish each time. One could argue that information is free and opinion is scarce – and that I could give data away for free but charge for a report. In this sense, it is why newspapers are increasingly reliant on columnists.

But again, this is only valuable on occasion – at least in research. News may be free in the sense that affected parties can spread the information widely without cost. But research – the collection and collation of facts, opinions or attitudes – costs money. An entire population isn’t going to magnanimously upload all the required information without monetary or social recompense.

How about your industry? Could you survive by giving away your core product/service for free, and offer a premium version (or a diversification) to make up the difference?

I’m sceptical, but am by no means unconvinced.

sk

PS Chris Anderson is speaking at the RSA tonight. I can’t go as I’m at Bon Iver but I look forward to hearing the response

Image credit: http://www.flickr.com/photos/iirraa/

Links – 31st October 2008

Rather than a lop-sided list, here is a numbered (but unordered) overview of blogs, articles and tools I have enjoyed over the past few days:

1. Iqbal Mohammed asks a very interesting question: Could price become a skeuomorph? This segues in with an interesting point Matt Rhodes made regarding incentives – it changes the transaction from market to social. Would people prefer to pay in order to avoid any potential obligations in future – whether signing up to a mailing list or being forced into a timeshare? It also reminds me of the Severn Bridge, with its one way tolling. The Welsh like to point out that they can cross over into England for free, but are forced to pay to leave and go back home.

2. There has been an interesting teté a teté on network effects between Nicholas Carr and Tim O’Reilly. While the argument is largely focused upon semantics, several interesting issues are raised. And not entirely unrelated, Faris links to a video of Clay Shirkey talking about Solidarity Goods – items that increase in value as more people use them.

3. Japan’s census looks great. Rather than a straightforward survey, everyone also has to fill in a time diary showing what they are doing throughout the day. Tokyo Tuesday is a fascinating look at the aggregated lives of the salarymen, cyberpunks, samurai and other assorted Japanese stereotypes that one might want to throw into the mix.

4. Can Hulu’s (No.4 on Time’s inventions of the year) current single-ad-per-break model continue? If they are buying content in and paying for their bandwidth then I’m guessing not. Premium positioning only stretches so far. But product placements and other new formats can mitigate the losses from restricting inventory (New York Times)

5. A study commissioned by the Association of National Advertisers suggests that the brand does not influence business decisions in two thirds of the companies questioned. CMOs with an axe to grind against the beancounters, or a realistic assessment of current corporate thinking? (Marketing Charts)

6. A bit old now but Brian Solis has a very thorough overview of the state of Social Media in 2008, and the outlook for 2009

7. An argument in favour of training over talent (CNN) – sounds good to me. An ability to remember trivia can only take one so far in life

8. A digital planning checklist (Katie Chatfield). Does exactly what it says on the tin. Succinct and insightful.

9. Mashable has a nice collection of social media gurus owning up to their biggest mistakes

10. Seth Godin has put the presentation of his latest book – Tribes – onto Slideshare

11. An epic attempt at integrating all of one’s personal data (Kiwi Tobes)

12. A tool that lets you look at the traffic statistics for Wikipedia pages

Enjoy…

sk

Measuring the success of free music

As an addendum to my prior post on free music, Kevin Kelly has posited a “true fan” model. He argues that having a core following of around 1,000 people per artist would bring in enough revenues to sustain a career. Nine Inch Nails appear to have managed this – their run of 2,500 deluxe ($300!) editions of their latest release sold out straight away, and John Otway has sustained a career this way. Of course, this requires either your fans to grow up with you, or a constant stream of new fans to replace disillusioned ones. NIN’s early music was quite angsty – will their fanbase remain loyal as they enter maturity? The evidence so far suggests they will.

I’m interested in how one can make this a robust business model. In TV land, there is increasing talk about moving from eyeballs to engagement. It is no longer enough for someone to have a TV programme switched on – they need to be attentive, to be interested, to interact. But measuring this is tricky. With music, as the methods of distribution increase, it becomes more difficult to know exactly who owns, or who listens to your music. What proportion of tracks owned by music lovers came into possession through legal (and measurable) methods? And how does ownership intersect with passive listening – through TV, radio, Myspace and so on.

Could musical success be measured by engagement? If the Seinfeld Curve is borne out, the record labels (or their successors) will need greater certainty in predicting ticket sales, not to mention advertising on artist websites and other revenue streams. A minimum number of units sold will be meaningless. Some artists (I can’t remember their names) are now getting people to pay up-front for tours or CDs. If enough people sign up, it happens. If not, the transaction won’t take place. This may work in the odd case but is too rigid to be sustainable for the majority of the market. A model of engagement therefore needs to be found.

A lot of data is already available on music consumption and engagement, but it is proprietary. Could iTunes or Last.fm become an industry currency? If they asked all of their users whether they would be willing to share their data with the music industry, a lot of people would refuse. Understandably so, given the amount of pirated and leaked music available. But if incentives were offered, I believe a a reasonable number would. Interested users could fill in an additional form for demographic information, and this can then be calibrated to the wider audience for greater accuracy. If this became an industry standard, there would be no competitive advantage. The more parties that sign up, the cheaper subscriptions could be and the lower the barrier to entry

Some of the possibilities of data analysis this could offer include:

  • Knowing number of plays, not just number of units shifted
  • Finding out the top rated tracks for each artist
  • Seeing how quickly new tracks are forgotten about and never played again
  • Profiling the most avid fans
  • Segmenting these fans by geography to plan tours
  • Getting similar artists to join the tour
  • Measuring the speed at which new music travels globally
  • Tracking and predicting popularity of different genres
  • Last.fm event attendance can be correlated to music libraries
  • Using the messageboards to gather information on buzz
  • Surveys can be used to gather opinions to supplement the raw data

I realise this is just a pie-in-the-sky idea and that there are many barriers to this actually being implemented. But if music does become the loss leader to the experience’s premium product, then there is no point in restricting the distribution to official methods. If the music can be democratized, can the information?

sk

Nine Inch Nails and free music

Free music

Photo by http://www.flickr.com/photos/mightymightymatze

As the world and his blog is now aware, the latest Nine Inch Nails album has been released over the Internet, in a variety of formats and prices. Rather pointedly, Trent Reznor remarked, “I’m very pleased with the result and the ability to present it directly to you without interference”. However, the most interesting thing about this (press) release is the following quote:

“Now that we’re no longer constrained by a record label, we’ve decided to personally upload Ghosts I, the first of the four volumes, to various torrent sites because we believe BitTorrent is a revolutionary digital distribution method.”

Furthermore, the album is being released under a Creative Commons licence that permits sharing. So, while the music has been made available for purchase both digitally and physically, the band are essentially saying that it is OK to distribute for free. They are not concerned with revenues or royalties on the release.

This leads back to a couple of prescient posts from some very authoritative figures. Firstly, Chris Anderson started the PR campaign for his latest book with a preview in Wired entitled “Free! Why $0.00 Is the Future of Business”. He highlights how Prince was able to release his album for free (or the price of a newspaper, with a free Mail on Sunday bundled in) by making money from live performances. That he could have sold out the dates without the CD is seemingly incidental. I was at one of the O2 gigs and while the performance was fantastic, the CD has had one listen.

The free hypothesis ties in with Seth Godin‘s Seinfeld curve (the second link is a must read):

If you like Jerry Seinfeld you can watch him on television, for free, in any city in the world two or three times a day. Or, you could pay $200 to go see him in Vegas. But there is no $4 option for Jerry Seinfeld. This is death. You can’t make any money in here. Because if you’re not scarce I’m not going to pay for it because I can get if for free. And one of the realities that the music industry is going to have to accept is this curve now exists for you. That for everybody under eighteen years old, it’s either free or it’s something I really want and I’m willing to pay for it. There is nothing in the center-it’s going away really fast.

As Seth points out, digital makes scarcity obsolete. There are no longer finite units – when I lend or share music, I still have my copy. With infinite supply, the price gravitates towards zero.

The traditional business model of the record label is in ruins. Seth suggests that we are moving from brand/artist management to tribal management:

That the next model is to say, what you do for a living is manage a tribe…many tribes…silos of tribes. That your job is to make the people in that tribe delighted to know each other and trust you to go find music for them

I think the Seinfeld curve is genius but, through my interpretation at least, tribal management is flawed. It is saying that niches need to be identified – almost isolated – while an editor of sorts suggest music for the tribe to select. Evidently people can be in multiple tribes, but a tribe – traditionally based on kinship – is the primary social identification. There is a hierarchy. Musical influences don’t conform to this. And if music is free at the point of entry, why should people choose bundles?

Furthermore, musical movements shift faster than general societal trends (where is crunk these days?). Newspaper editors can predict and adapt to shifts, but in this sphere it would be far more difficult. A Nick Denton type mogul could emerge and preside over an ever-shifting portfolio of niche movements. But can this trust last? Gawker hasn’t had the smoothest of rides recently.

I am not nearly as clever or insightful as Seth, and I do not have an alternative answer. What is clear is that the Internet is brilliant for musicians to disseminate their creations virally. More people are listening to more music through more methods than ever before.

And for businesses? In a free economy, one needs a combination of creativity, luck and finance to be heard over the cacophony. And with less control over distribution, it becomes more difficult to judge the success of a release, to measure a return on investment, and to forecast future finances. Dull perhaps, but integral to a healthy business. Guy Hands must be in his worst nightmare. However, this can be where the Seinfeld Curve comes in. The live arena offers a unique, finite experience where supply and price can be controlled. So will CDs become the loss leaders – the razors to the blades?

From a research perspective, the future is fascinating. With no accurate measurements, how can we assess succcess and forecast for the future? As well as music, it raises fascinating questions over the future of TV. I will return to this topic later in the week with a few further thoughts.

sk