The cost of ‘free’?

How one Wired editor drew attention to the ways we perceive cost

MAC309robert.jewitt@sunderland.ac.uk

http://twitter.com/rob_jewitt

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Chris Anderson

•Editor-in-chief of Wired

•The Long Tail: Why the Future of Business Is Selling Less of More (2006)

•Free: The Future of a Radical Price (2009)

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Scarcity vs abundance

Shift from an economy marked by scarcity to an economy of abundance

Digital goods (abundant) Zero reproductive costs

Physical goods (scarce) Expensive to produce and reproduce

Race is on to round down to zero

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‘Too cheap to meter?’

1. Computer processor power2. Digital storage3. Bandwidth

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‘Too cheap to meter?’

‘Semiconductor chips roughly double the number of transistors they can hold every eighteen months

Hard drive storage is getting better even faster: The number of bytes that can be saved on a given area of a hard disk doubles about every year

But the fastest of all three is bandwidth: The speed at which data can be transferred over a fibre-optic cable doubles every nine months’

Anderson, 2009: p77-78

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‘Too cheap to meter?’

‘For each of these technologies there is an economic corollary that is […] even more powerful: Costs halve at the same rate that capacity, speed, etc., doubles. So that means that if computing power for a given price doubles every two years, a given unit of computing power will fall in price by 50 percent over the same period’

Anderson, 2009: 78

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‘Too cheap to meter?’

‘Never in the course of human history have the primary inputs to an industrial economy fallen in price so fast and for so long. This is the engine behind the new Free … In a world where prices always seem to go up, the cost of anything built on these three technologies will always go down. And keep going down, until it as close to zero as possible’

Anderson, 2009: 78

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‘Anticipate the cheap’

‘When the cost of the thing you’re making falls this regularly, for this long, you can try pricing schemes that would seem otherwise insane. Rather than sell it for what it costs today, you can sell it for what it will cost tomorrow’ Anderson, 2009: p79

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Free + premium =

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Free + premium = freemium

A business model that works by offering basic services or product for free, while charging a premium for advanced or special features

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Free + premium = freemium

A business model that works by offering basic services or product for free, while charging a premium for advanced or special features

"Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.”▪ Fred Wilson, 2006, Venture Capitalist

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4 ‘freemium’ models

1. Time-limited2. Feature-limited3. Seat-limited4. Customer-type limited

See Anderson 2009, p245-6

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4 ‘freemium’ models:Time-limited

+ Easy to do Low risk of

cannibalisation

- Many potential

customers will be unwilling to commit enough time to really test the software as they know they’ll be cut off after 30 days

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4 ‘freemium’ models:Feature-limited

+ Best way to maximise

reach. When customers convert to paid, they’re doing it for the right reason

Most likely to be loyal and less price-sensitive

- Need to create 2

versions If the free version is

good-enough no one will convert to paid

If the free version is feature-less it might put people off

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4 ‘freemium’ models:Seat-limited

+ Easy to implement Easy to understand

- Might cannibalise the

low end of the market

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4 ‘freemium’ models:Customer type-limited

+ Charges companies

according to their ability to pay

Entices the new fast growing companies

- Complicated and

hard-to-police verification process

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Not just applicable to computing

Gillette razor blades Radiohead, Nine Inch Nails, etc News Netbooks

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Free CD

In July 2007, Prince debuted his new album, Planet Earth, by placing a copy — retail value $19/£12— into 2.8 million issues of the Sunday edition of London's Daily Mail. (The paper often includes a CD, but this was the first time it featured all-new material from a star.) How can a platinum artist give away a new release? And how can a newspaper distribute it free of charge?

A) Prince spurred ticket sales. Strictly speaking, the artist lost money on the deal. He charged the Daily Mail a licensing fee of 36 cents a disc rather than his customary $2. But he more than made up the difference in ticket sales. He sold out 21 shows at London's 02 Arena in August 2007, bringing him record concert revenue for the region.

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Free CD

In July 2008, Prince debuted his new album, Planet Earth, by placing a copy — retail value £12— into 2.8 million issues of the Sunday edition of London's Daily Mail. (The paper often includes a CD, but this was the first time it featured all-new material from a star.) How can a platinum artist give away a new release? And how can a newspaper distribute it free of charge?

A) PrinceB) The Daily Mail boosted its brand. The freebie bumped

up the newspaper's circulation 20% that day. That brought in extra revenue, but not enough to cover expenses. Still, Daily Mail execs consider the giveaway a success. Managing editor Stephen Miron says the gimmick worked editorially and financially: "Because we're pioneers, advertisers want to be with us."

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Free CD

Anderson neglects to mention an important issue here. Prince charged for most tickets at £31.21 for the ordinary fan. But Ticketmaster offered a range of exclusive ticket packages.

•The "VIP reception and gold circle" ticket packages cost £235

•There were also “stage suites" at £250 each. These were exclusive seating areas "integrated into Prince's stage" that gave people the opportunity to "view the show from the closest vantage point". Plus, you got complimentary drinks

•Source: Rupert Jones, 2007, The Guardian

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Free webmail

For years, webmail users had to pay for extra storage.

As the cost to store data continued to fall, Google went after new customers by offering 1 gigabyte free to every user.

In 2007 Yahoo responded with the ultimate offer: infinite free storage.

Since each page of webmail comes with ads, more users means more revenue.

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Free DVR

Phone companies sell calls; electronics companies sell gadgets. But US cable giant Comcast is in both those businesses and a lot more besides.

This gives it flexibility to cross-subsidize products, making one thing free in order to sell another. To that end, Comcast has given about 9 million subscribers free set-top digital video recorders.

How can it make that money back?

#nb This is the equivalent to free Sky+ boxes

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Free DVR

A) Add hidden fees. Comcast charges a $19.99 installation fee to every new DVR customer.

B) Charge a monthly subscription. Comcast customers pay $13.95 a month to use the DVR box. Even if Comcast paid $250 for its DVRs — a very high estimate — the boxes would pay for themselves within 18 months.

C) Upsell other services. Comcast hopes to win over new customers with its free DVRs and then interest them in other services — like high-speed Internet ($43 a month for 8 Mbps) and digital telephony ($39.95 a month). And that doesn't count the pay-per-view movies, which cost DVR users about $5 each.

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Free air travel

Every year, about 1.3 million passengers fly from London to Barcelona. A ticket on Dublin-based low-cost airline Ryanair is just £14.99. Other routes are similarly cheap

Ryanair's CEO has said he hopes to one day offer all seats on his flights for free (perhaps offset by in-air gambling, turning his planes into flying casinos).

How can a flight across the English Channel be cheaper than the taxi to your hotel?

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Free air travel

A) Cut costs: Ryanair boards and disembarks passengers from the tarmac to trim gate fees. The airline also negotiates lower access fees from less-popular airports eager for traffic.

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Free air travel

B) Ramp up the ancillary fees: Ryanair charges for in-flight food and beverages; charges extra fees for preboarding, checked baggage, and flying with an infant.

It also takes a share of car rentals and hotel reservations booked through the site; charges marketers for in-flight advertising; and levies a credit-card handling fee for all ticket purchases.

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Free air travel

C) Offset losses with higher fares: On popular travel days, the same flight can cost more than $100.

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The ‘cost’ of ‘free’?

Traditional business’? Choice? Diversity? Privacy? Expectations? Piracy?

See also BBC2, The Virtual Revolution, episode 3

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Quick reads

Chris Anderson, 2008, ‘Free! Why $0.00 Is the Future of Business’, Wired

Chris Anderson, 2009, ‘Free: An excerpt from Chris Anderson's book’, Wired UK