Wednesday, October 5, 2011

A Business Model For Digital Creators? 3

We conclude with our series of the new world of the Freemium.

The essence of the model we are going to present is this: Give away what is abundant so you can charge for what is scarce.

In an information world information is abundant, nearing the point of zero cost.Nicholas Carr in his book The Big Switch, stated, "Google wants information to be free because as the cost of information falls it makes more money."  Anderson explains the pain in this transition in society towards "de-monetization" of society.
From the coal miners of Wales to the automotive workers of Detroit, this race to the cheapest, most efficient models has a real human toll.  As Jeff Zucker, the head of NBC Universal, put it, the TV industry is terrified of "trading analog dollars for digital pennies."  Yet there seems little he or anyone can do to stop it: TV is a scarcity business (there are only so many channels), but the Web is not.
 Like any other changing market, new winners are created and yesterday's leaders (if they do not change) will slip to obscurity.  The money has not been lost, it has been redistributed.  As Chris Anderson said, "Just because products are free doesn't mean that someone, somewhere, isn't making lots of money, or that lots of people aren't making a little money each."  Anderson continues,
The point is that the Internet, by giving everybody free access to a market of hundreds of millions of people globally, is a liquidity machine.  Because it reaches so many people, it can work at participation rates that would be a disaster in the traditional world of non-zero marginal costs.  YouTube works with just one in a thousand users uploading their own videos.  Spammers can make a fortune with response rates of one in a million.
Using the free to to shrink one industry while opening another one was called by Fred Wilson a "zero billion dollar business."  Past empires like Britannica are examples of this.  They were dramatically shrunk before encarta or wikipedia came along in 1993.

There is a paradox with this model of the free.  There are short -term negative consequences of de-monetization.  Companies like Google could destroy the very content makers that it uses to make its money from ads place in the web searches.  Anderson continues about Google,
...it needs those other companies to create information that it can then index, organize, and otherwise package to create its own business.  If digital free-demonetizes industries before new business models can re-monetize them, then everyone loses.
Pay What You Want
This "network effect" can work very well if one has the numbers to offer a free model where the user can contribute what he thinks the product is worth.  Radiohead did this with their famous event in 2007 where they offered for free with the announcement that their album "In Rainbows" would be available for just the credit card fee.   The results were spectacular. Radiohead.  They sold 1.2million copies.  They made more money from this album since they had no middleman, no record company to share the income with.  Radiohead was not the first artist to do this.  Prince offered his album 3121 for free in the UK.  It sold 73,000 copies this way.  Some movie theaters have offered this on selected movies.  Panera Bread tried this in 2010 with selected restaurants where people were asked to pay what they wished for the food and put the rest of the money in a box to feed the needy and poor.

Is there a magic business model for the new digital age?  Not yet.  There may never be just one.  But that such business models are necessary and will be invented is for certain.  Maybe you will be the one who will discover one.

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