Added On: Tuesday, January 15, 2008

Free Thinker

by Steve Smith, December 2007 issue
Wired guru Chris Anderson on models for going gratis and his plan to give away his new book

How does Chris Anderson chase his own Long Tail? Last year, the editor-in-chief of Wired gave us such a compelling name and a theory for the digital economy that hardly a business plan goes by this year without dropping the term. After showing us how the Internet helps empower and monetize niche markets and tastes, Anderson will explore what he calls "the radical price of zero." Free, planned for late 2008, suggests that the new economies of abundance that he outlined in The Long Tail make it possible for companies to succeed by charging consumers little or nothing. After reviewing some of Anderson's preliminary musings on the topic at conferences and on his longtail.com blog, we put his model to the test. We asked for a free preview.

Long Tailwas about monetizing the niches, but Free seems to be about demonetizing many goods and services? How did this book evolve from the first?

It is shifting monetization, demonetizing something so you can monetize something else. A chapter in Long Tail is about the economics of abundance. The Internet is infinite shelf space, and when your cost of distribution falls to zero you can be indiscriminant about what you offer. You can have an iTunes with an infinite number of songs because the cost of doing so is zero. It's driven by the underlying technology costs.

I was sitting down with my children and asked what is getting more expensive and what is getting cheaper? It is easy to think about things that are getting more expensive, gasoline and orange juice are just going through the roof. But anything touching technology is getting cheaper. Hey, remember when phone calls used to cost money? You used to have to pay for your newspaper and now it's all free. Everything online tends to lower the cost.

I suddenly realized that we live in a world of free. We always have. Most media has always been free to air. They say that if you understand why they sell newspapers in boxes that don't limit the number of copies you can take, you understand the newspaper business. They aren't selling newspapers. They're selling audiences to advertisers. [Magazines] charge a nominal price that is as close to zero as possible to incentivize the largest number of people to subscribe, but not so close to zero that it makes the product look de-valued. But it has no relation to the underlying costs. What you're now seeing is the media model applied to other industries.

Beyond the famous online media examples of free content where do you see that model proliferating?

Software used to be something you would buy in a box. Now software is an online service that is free and advertising-supported. You may not think of TypePad as software, but it is. We took software and made it free and we sell something else. Basically the Internet has adopted the media model of giving something away to sell something else and applied it to any industry that can be put online. But that's just things that can be digitized that can leverage the underlying falling costs of Internet technology.

What about the rest of the world that isn't necessarily online? Then you realize that actually it is starting to happen there, too. When I was flying from England to France this summer, the ticket was two pounds per seat. Somehow Ryanair and easyJet made the seats free. The ultimate bill at the end of the day when we had to pay taxes and luggage fees, and after food and the rental car and the hotel and all the other extras was not that much cheaper than a regular ticket. Ryanair and easyJet revolutionized the airline business by deciding they weren't actually in the airline business. They were in the travel business and they take a much broader view of the business and give away seats to sell the hotel reservations or to take you to a destination where the city will pay Ryanair to subsidize your ticket because it brings tourists.

Kind of like the high roller model of Vegas. Give them the room because you know you really make money on the gambling.

The point here is not that you have demonetized an industry but that you have demonetized a product for the sake of a broader sense of what the industry is. It's not like the trip was free; the seat was free. And there is nothing new about razors and blades and giving away one thing to sell another. It is just that we are getting much more creative about how to do it.

Google is free but in a constant state of beta, using audiences as testers, perhaps because Google knows we're not paying for it anyway. When you give something away, then do we risk producers feeling they can get lax about quality?

I would say that is not true. We are only talking about the monetary economy. There are two other economies that are every bit as powerful, the attention economy and the reputation economy. It could not be more straightforward and head-slappingly obvious that reputation, which we measure online in terms of incoming links, drives attention, because incoming links bring things up on our search and search drives traffic, and then we monetize traffic with advertising. We play in all three economies. Online you cannot play directly in the monetary economy because you can't charge people for things, but you can play in the reputation economy.

Is the problem of media industries generally that they misunderstand the real value of their product to consumers so they are charging in the wrong places?

Take something like books. I may get in a little trouble, but my publisher also published my last book. I have embarked on this project not just to sell a book but also to try to explore new models for books. We're going to try to make Free free in every way possible. The audiobook is going to be a free mp3 download. I am not going to promise what we will do, but these are things we are talking about. The e-book can be free. Again, the marginal cost of distributing that is zero. Price follows cost. Why should I charge for the book when it costs me nothing? People who do own the e-books tend to be influential early adopters, exactly who you should be giving the book to.

But is that a sustainable model?

The free model tells you to maximize your reach. A smaller percentage of a larger number is a good thing. I believe a physical book is the best way to read a book. Nobody wants to read 300 pages clicking on a screen. The medium is a high-resolution page with a long battery life; portable, light and self-contained - a very compelling thing. That said, I also think that different people want to consume in different ways. Audiobooks are a really interesting offshoot of the iPod phenomenon. I think of my audiobook audience as being a combination of people who got the physical book and just want to read it in a different way and people who only want the audiobook. In every physical book there is going to be a code and the code allows you to download the audiobook for free. This is my best customer. I don't want to punish my best customer by making them buy it twice. I want to reward them by giving them the book in different formats for free because I can. It doesn't cost me anything.

And then there is the question of making a Web version of the book free and ad-supported. And then is it possible to make the physical book free as well by making it advertiser supported, getting a sponsor to put an ad in the inside front cover, inside back cover and maybe one in the middle. If you want the ad-free version it is $24.95, however, if you want it for free here it is as well.

You've also floated the idea that authors could monetize free books via personal experience.

Here is a thought experiment. The problem with me and an imaginary publisher is they are in the book-selling business and I am in the me-selling business. My job is to promulgate my ideas as far and wide as possible, to create monetization opportunities. I don't do all of these things but I could: speeches, consulting, board seats, better job offers. People write books to market their speaking engagements. We make a lot more money from speaking than from books, an order of magnitude more. The problem is the publisher doesn't benefit from any of that. The best way to sell me is to get my ideas spread as far and wide as possible and yet they are only participating in books. So the natural solution would be to cut them in for a share of my revenues regardless of where they come. I am not saying I am doing this, but you could make my book free and I give you 30 percent of all my revenues-speaking, consulting, whatever. You could take the agency model; our client is you and we're going to monetize you in every way we can and we'll get a percentage of that. It basically aligns the interests of the publisher and the writer.

NBC's Beth Comstock recently wondered whether there are enough ad dollars out there to underwrite all of these fragmenting media projects, but wouldn't making other industries ad-supported only spread limited dollars thinner?

I think we are redefining what advertising is. A rough guess is that about a half of [Google's] advertisers have never advertised before or at least never advertised nationally. They expanded the pie by lowering the barrier to entry. It's a five cent per click DIY model totally ROI based, so it's a no-brainer and it scales beautifully down to small and medium-size businesses and even to individuals in a way that my sales force and yours does not. So I think Google has demonstrably grown the market of advertising as well as taken a whole lot of share from the traditional market. The advertising pie will grow, because we are both increasing the number of participants in the market and instituting a pay-for-performance [model] that is so clearly attached to revenues. In the end the sky is the limit.

Lightning Round

Okay? Ready. Set. Go: What media will go free. Music?

I think most music will be free, yeah.

Games? I still pay $60 for Halo 3.

Games totally. I have a voice part in Halo 3. If you kick the shit out of a marine he screams like me. It was the most awesome moment. When I look at what my kids actually do online they don't pay. They are playing at Club Penguin or online role-playing games. They tend to move online, and none of those games cost any money. Once again you have two models. You have the traditional paid model, and that will continue, and then you have the emergence of the new free model, which is redefining the business model for what games could be.

How about premium TV and pay radio?

I think there's always going to be an opportunity for the paid premium model. Think of free as a free sample. You can have your free version of TypePad or if you want more features and capacities you pay for the premium one. A tiny fraction of consumers pay for the premium one, but because it is on such a large base it's good business. So I think the notion of a free and paid pairing, where the free model is a sampler for a large audience and the premium one is for the hard core is a very natural business model, and I wouldn't be surprised if we in the media industry work harder at finding ways to offer value-added services that are worth paying for.

Film?

Hollywood will be the last to fall for a couple of reasons: First, piracy has a tendency to bring sense to markets very quickly. Piracy reveals underlying economics very, very quickly. Unlike CDs, where the physical products had no DRM, DVDs have always had DRM so there is a higher barrier to ripping than there is for music. [With] CDs, the current generation is the last physical generation; there is no other disk coming after the CD. DVDs have at least one more generation with high-def. They both make sense for the consumer and also increase the file size such that it is impossible to download. That is going to give them another five, probably 10 years to figure out their next business model.

And I don't think free will be the only model. I think you are going to see a wider range of business models and pricing models, up to and including, free in almost all industries.

Contributing writer Steve Smith is a longtime new-media consultant and columnist, and current editor of Digital Media Report for MinOnline.com and Mobile Media Report for TelecomWeb.com Contact him at popeyesmith@comcast.net.

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