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Free: why?

March 6, 2010
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Free, why not?

Digital marginal costs are practically nil. Economy 101 tells us that a producer should sell down to a price close to his marginal costs to maximize his profits.

Chris Anderson explains Free in this wired video.

Let’s review this “free” issue with a loupe —it may be the undoing of the media and advertising industry.

Rephrasing, economic theory states that a producer should stop his production when the price of a good is equal to its marginal cost. It makes no sense to produce more when there is no profit.

We can derive some important consequences from this statement.

First, if the price of a digital good is not higher than the marginal cost of producing one more unit, production should stop —or, we should not sell any more units.

Second, marginal costs, although insignificant, never touch “0”, they’re always greater than “0”, with the implication that the price should never be free, because it should always be higher than the marginal cost.

So, why is the media giving away its content for free?

If the media is basing its strategy on Gillette’s model, they’re giving away the razor… with the blades.

It can’t be Microsoft’s “give piracy leeway, to get a future lock-in” strategy, because the media has a shallower and hence no hook to a news learning curve.

Could it be a “free for all” to the last man battle, in a twisted “transistor versus tube” strategy, where the media is anticipating their foes with these nil prices..?

Unfortunately, the answer is none of the above. I won’t go into further detail, it doesn’t help. Let’s just say that media erred in expecting advertising to cover those costs.

The first thing that comes to my mind, is that we need to be tech savvier, —it’s why its taken us so long to figure this out—, to gain control of the distribution of our online content.

We should also get our own advertising networks in place. If not, Google and others will continue to earn the lion’s share of the online market —with commonplace accepted 70-75% commissions. Having our own ad networks would allow us to turn the tables, to potentially increase revenue three times on (text and display) contextual ads.

I don’t like walls. They hinder creativity, and they don’t work most of the time, e.g. the Nigerian terrorist’s bomb plot aboard Flight 253. But, in order for journalism to survive, we need to apply a subscription model.

We sometimes miss that a “digital good” or content is the final product. It’s not what takes place at a hardware store site, where content is given for free, but the purpose of the site is to get the visitor to pay for the hammers and nails.

There’s also the issue of reporting, interviewing, taking pictures, recording, and on and on… which are not replaced by software, as in the case of a travel agent or stock broker. In the end, producing content is costly for the news source.

Unless, of course, you’re Google News (or any other news aggregator) and you feel that you have the right to piggyback on the best news sources for free to publish an edition with select content… Don’t we all wish we could do that?

Intent, and damage to the commercial value of the work are important considerations, in the copyright protection law. So, my next recommendation is to continue to escalate the enforcement of our copyright protections, which have been much neglected, but is a movement that is starting to gain momentum within the media.

Next, and although I hear this little voice in the back warning me that we must stop all leaks, to avoid the ship from sinking, I find that the Microsoft versus open software model fits nicely with our situation.

Microsoft charges a premium on its software, and users are willing to pay the premium, because of the risks they avoid by not using an unsupported free open version.

I still feel there is a case for branded journalism institutions capable of charging a premium for reader perceived quality journalism.

Branded news institutions have a place, readers not only need to find more about something they know little about, as with searches, but they also need to know what they know nothing about… They need to go to a place where they trust they will be informed of what is going on.

Getting back to the content metering issue, I’d like to bring you back to how magazine subscriptions worked a few years ago. Their promotions were endless and their enticing offers never ceased. In other words, I feel that a similar continued enticement, with free and discount offers should candy the reader’s path into his subscription —like it used to.

Finally, since the Internet is ubiquitous, either content is remarkable —a la purple cows— or it’s focused locally, in order to be able to get paid subscribers.

There’s much more, I’m sure —love to hear your thoughts.

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