Is free special?

There are two things I accept as special about free: much less transactional costs/efforts (as I can skip the payment process entirely) and the psychological appeal (of not having to pay any!). Other than that, there is nothing special about free. But it seems that free is gaining the status as a very special price. Here are quotes from Chris Anderson's Wired article "Free! Why $0.00 Is the Future of Business" and my thoughts.

“The new model is based not on cross-subsidies — the shifting of costs from one product to another — but on the fact that the cost of products themselves is falling fast.”

This is misleading. I wonder any of Google exec believes that they give away Gmail mainly because it does not cost anything to them. They do it because it helps their business. You have to make money somewhere. You cannot offer something for free forever no matter how low your cost is, unless you can make profits somewhere. You should somehow shift to or bundle with another profitable business, Whether it is very visible (buy A and get B free) or not (Google’s Gmail and Adwords).

“This difference between cheap and free is what venture capitalist Josh Kopelman calls the "penny gap." People think demand is elastic and that volume falls in a straight line as price rises, but the truth is that zero is one market and any other price is another. In many cases, that's the difference between a great market and none at all.”

I agree that free does have certain psychological appeal to people, making the demand jump at the price zero. There is a research-based book by behavioral economist Dan Ariely (http://www.predictablyirrational.com/). You may want to have a look.

“The huge psychological gap between "almost zero" and "zero" is why micropayments failed.”

No, I would not extend the psychological magic of zero price to this far. I think we just do not have a micropayment model yet that is very convenient, like cash. The price may be just one dollar, but I have to go through the hassle of entering this and that information. I actually listed this as a factor for paid music to be popular again. See http://hyokon.com/2008/02/in-addition-to-free-part-2-how-to.html. I bet we'll have more convenient micropayment toold in the future, and we'll have much more small transactions.

“Free music is just publicity for a far more lucrative tour business. Nobody thinks of this as piracy.”

No, I don't think so. I think the reason why a lot of musicians are turning to free model is that they lost the alternative. The musicians think “Why not give away our songs? They won’t pay anyway. Let’s just think of it as a promotion, and do a tour to make money.” Touring is more profitable? I am surprised. When people actually did pay for music, tour was a promotion. Not the other way around.

“Some artists give away their music online as a way of marketing concerts, merchandise, licensing, and other paid fare. But others have simply accepted that, for them, music is not a moneymaking business. It's something they do for other reasons, from fun to creative expression. Which, of course, has always been true for most musicians anyway.”

I was worried some would bring this up someday. Maybe my concerns are becoming real. Before, the pro-free argument was ‘make it free, and you will make more money.’ Now, it is ‘Don’t be sad that you don’t make money. It is not about the money, right?’ I am very sad. I want a world, where you can succeed just by being a good musician. I want to see more Beatles, more Queen, more Stevie Wonder. Someone out of nowhere becoming a star and becoming rich. I think some of the pro-free arguments are heading towards discounting the division of labor, by saying you do multiple things to make a living (or if you are lucky one thing as a job and the others as a hobby). Do we want it to happen? It is one thing that we can do multiple things, which I like, but it is an entirely different thing that we ‘should’ do multiple things. I mentioned it also at In addition to free (Part 1- Free is not a cure-all).

“In each case, the act of using the service creates something of value, either improving the service itself or creating information that can be useful somewhere else.”

I agree that this will reduce the price for the users, just like self-service hamburger can be cheaper. This is every web entrepreneur’s dream - Users doing the work for free. But is this implying that this will ultimately create a perpetual money-making machine where you as a company does not have to incur any cost? Otherwise, I wonder why this is mentioned related with the free issue.

Enabled by the miracle of abundance, digital economics has turned traditional economics upside down. Read your college textbook and it's likely to define economics as "the social science of choice under scarcity." The entire field is built on studying trade-offs and how they're made. Milton Friedman himself reminded us time and time again that "there's no such thing as a free lunch." But Friedman was wrong in two ways. First, a free lunch doesn't necessarily mean the food is being given away or that you'll pay for it later — it could just mean someone else is picking up the tab. Second, in the digital realm, as we've seen, the main feedstocks of the information economy — storage, processing power, and bandwidth — are getting cheaper by the day. Two of the main scarcity functions of traditional economics — the marginal costs of manufacturing and distribution — are rushing headlong to zip. It's as if the restaurant suddenly didn't have to pay any food or labor costs for that lunch.

I was shocked. I could not believe that the most fundamental of economics is being declined here. I don't know how to respond. Let me just say that I do believe that there is no free lunch. Even the most low-cost Internet business of the world cannot go on very long providing 'only' free products. They do have trade-offs. (By the way, Friedman did say that there is free lunch, which is free markets and private property. http://www.cato.org/speeches/sp-mf050693.html And on this free lunch, I agree with him.)

Two last points. First, free is not the lowest price. There can even be negative price. Heard about ‘get paid to use’? Try search it on the web, and you’ll find quite a few. When a customer is more valuable to you than your product is to your customer, you’ll even pay the customers. As traditional mass marketing becomes less and less effective, businesses will try to spend money directly to customers. And we'll see more of these.

Second, digital products are not always different from physical products in terms of marginal costs. Let’s say you are a car manufacturer. You just produced 1000 cars and have them as inventory. What is the marginal cost of giving away the car? (I am ignoring the opportunity cost here, which by the way is present even in the case of free-to-produce digital products.) Zero. Internet is not really different at all. When do you occur your costs? When you bought servers and hired people to develop your service. After that? Yes, it is near zero. But you still have the ultimate marginal cost, that is keeping vs. shutting down your business. There is no such thing as no-cost business. If you give away all your products thinking "The marginal cost is zero. Therefore I am OK", you will go bankrupt sooner or later. Even if all you have is just some magically free servers and no staff, you still have costs. That is, 'you' have to eat. There is nothing magical here.

To be fair, I do accept that free has some special qualities. One, it has psychological appeal that seems to boost demand. Two, when you buy a free product, usually you don't have to go through the payment process. Which makes it cheaper than free otherwise.

Still, we are not having another new economy. We don't have to write the economics again. We do live with trade-offs, no matter how cheap microprocessors become. Or, maybe we do have a new economy, only until when we enter a negative-price economy.

In addition to free (Part 3: An alternative free model idea)

In Part1, I said that a few issues with the current free models. Now I would like to propose an alternative free business model. The goal is not to replace all the current free models, but to complement them. Done right, this could be the main free model, and the current models could be the source of extra income for more dilligent and multi-talented ones.

Here is the idea.

• Your new content is distributed for free.
• You (or someone) monitor usage of your content. By usage, I mean using a storage (PC, iPod, hosted storage, etc.) or transferring online (streaming, downloading, p2p transfer). You probably cannot cover all these in the beginning, but will increase coverage over time.
• With the usage index, revenues of the hardware/service/network companies are shared with you and then divided among creators, based on agreed-upon formula (e.g. % of revenue for all contents times % of usage among contents).
• For efficiency, you may need to have a central agency who does monitoring, overall negotiation with hardware and service companies for content creators, and distribution of the revenue to content creators based on the usage statistics.

I have a theory that when there is a demand, there is a profit. It is a matter of where in the overall value net, which is all the players involved to provide certain goods. Profits tend to move around. When ecommerce began booming up in Korea, the first online shops made money without much competition. Then came a lot of new entrants, and the profits disappeared. However, because of the growing online shopping industry, courier service businesses were making a lot of money behind the curtain. Once people realized that courier services were the beneficiary, a lot of entrants came in and the profits were gone.

You may not think the courier example is relevant to the free issue here. But free is nothing special but a zero price. It is not even the lowest price. We have negative prices as well. Try googling "Get paid to try", and you will find that there are companies who pay you for using their new products. Price is determined by supply and demand. And when you need customers more than they need you, it is absolutely natural that you pay them. I have done it myself, and probably will do it again.

(Note: The lowered price of computers is not fundamentally different from the zero price of contents. I would actually argue that in both cases they have set 'the price for their ideas' zero. It just happens that physical products have more material ingredients to be paid for than contents do. This is another topic itself. Let me just say that I believe a price of any goods and services include the share for the ideas, of which creation is the role of entrepreneurs, creators included. I think 'idea' is a better representative of the market economy than capital.)

So, what I am saying is that there should be profits around free contents, as we know there is demand. The issue is where.

(Note: Years ago, when Cysco was the hottest company, I used to joke that Cysco may be funding the porn industry, which was contributing a big chunk of the Internet traffic. Not real... right?)

Now, it is apparent who is profiting from free, legal or illegal, contents. You need an access to Internet to begin with. So, ISPs are profiting. You buy MP3 players, PCs, external hard drives. So, hardware companies are. You subscribe to storage services. So, hosting companies are (and the ISPs and hardware vendors who profit from them are). Presumably, the free digital contents contributed to the growth of Internet usage in general.

According to this post, P2P is making up more than 50% of Internet traffic. And video is the most popular category downloaded with P2P, followed by software and audio. I am actually surprised at the average file size of 1 gigabytes. I guess the entire movies are travelling.

I saw a lot of criticism against Paul McGuinness, U2 manager, who spoke about digital music in Cannes. I finally read it today, and found little that is very wrong or evil, as I imagined after reading some critical blog posts, in his arguments. Maybe his using the words like theft and police annoyed some, but if you read carefully his main point is that the tech companies who are benefiting a lot from free, unintended by the music creators, music should share revenue with music creators.

Anyway, presumably huge profits are being contributed to ISPs and hardware vendors by free contents. (In fact, ISPs seem to think they incur losses from top p2p users, but let's not get into too much details and just take the aggregate demand here.) Let the creators share some! I have seen some discussions titled like music tax. I don't like the term tax to begin with (no government regulation please), but the idea seems to share some similarity to mine. ISPs are not the only one. Your iPod does not care whether your file is free or not. So, why not share profits with hardwares as well? And music is not the only one. All digital contents are in the same position.

If this is possible, free content will be a very compelling business model for the creators. They can focus on creating contents that people like. And they have the viable choices of making it free or non-free. If they want to make extra income, they could still do other things. But a shy studio musician can have the hope that he could make a living as a musician.

The difficulty is whether we can efficiently monitor the usage. This is a bigger issue if you have to measure at the final consumer level, such as iPod usage. So, it would be better to measure at the business level, like ISPs, music sites, file sharing sites, etc. If we indeed need to measure at the final consumer level, there are two ways. One is to measure all usage, and the other sampling. I don't know if there are good technologies for tracking all usage available now. If not, sampling could be done. As long as the content creators can agree and trust with each other in dividing the pie based on sampled data, sampling may work fine.

• Part 1: Free is not a cure-all
• Part 2: How to revive non-free
• Part 3: An alternative free model idea
• Maybe more

In addition to free (Part 2: How to revive non-free)

We need to have the 'paid' business model as well. In most cases, if not all, more choices are better than fewer in a market. Here are some things that I think we need to do to make it viable.

We should control piracy.

I have not had this conclusion for a long time, ever since I got interested in the digital content business model around 2000. Not because I was not sure about the value of intellectual property, but because I thought that the cost of stopping piracy would be too high.

But now I believe that with proper measures, piracy can be effectively contained. We won't be able to remove all piracy. We don't need to. We only need to make 90% (or 95%... Suffice to say "high enough") of the market safe to protect creators' (of paid contents, of course) compensation from being materially affected.

Based on experiences of Korea (see the table in part 1), which is still far and probably farther than the US or Japan from piracy-free, piracy control does increase the total content markets. I have read Sheryl Crow interview, but it is much worse in Korea. Here is Haechul Shin, who is a well-known rock singer in Korea

"Let's say we harvested 10 crops. Thieves steal 9, and the 1 left is divided and distributed. And the thieves sometimes give us a lecture." Also, "They call the buyers of CDs fools, but they are the ones musicians really thank. But we have so few of them. I wish there were at least 2 or 3 times of them who could be guards to keep the minimum."

I don't think it is a good idea for us, the audience, to make the musicians frustrated and angry.

(He also said that some musicians just use a Melodeo instrument, which seems like a kind of a musical synthesizer, to make a song targeted at the ring-tone, the most commercially viable format for the past few years in Korea. No orchestra, no band because you cannot tell the difference anyway in the ring-tone. Having played guitar in a rock band myself, I will be very disappointed if this is the future of music.)

We should have more standardized copyright options.

One point I want to make clear again is that I am not against 'free' models. Innomove Lab, which is my business, has free web services. And I am personally writing Mass Niche openly. I am just against using non-free contents without paying the price.

I like Creative Commons concept in that it gives more options than "nothing can be done" or "you can do anything". I am still learning about it, but it seems to me that we need more licenses. All CC licenses seem to allow non-commercial use of the entire content (and grant some other rights or not). However, for many musicians and other creators, this may not work, as I said in part 1.

I think we need to have something like "Sampling/quotation is fine. But using the whole work, for commercial or non-commercial purposes, is not." That way, creators who want to encourage people to create more creative works using parts of their work (quoting paragraphs of a book, sampling a melody of a song, etc.) without going through complex clearance process. Creators may apply this to non-commercial and/or commerical purposes.

If we have this kind of license and probably more options, I am certain that there will be much less tension between free vs. non-free camps. "We have all spectrum, now it is your choice."

Another reason why I like CC initiative is that it makes copyrights understandable to people. I guess you could custom make your own copyright terms, but small businesses or individuals don't have that kind of knowledge or resources. Having standardized licenses from which one can pick is such a great thing for them.

We need a DRM (or call it differently, if you hate the term) that is associated with a person, not a device.

One interesting survey I found was done by mybytes.com. If you look at week2 poll, you will find that most students think they should be allowed to burn a CD whenever they can.

I am with them. If you don't want me to make copies and give them away to other people, I would not (maybe other than to my family. Maybe another license for 'sharing with family allowed' needed?). But, if you say I cannot burn a CD so that I can enjoy it in my car, I am going to say 'you know what'.

But it seems many of current DRM solutions do not allow you to move your content around between different devices. I can understand what they are worried about, but it is just so inconvenient. In this case, the price of an MP3 music, which is usually lower than that of a CD, suddeny appear too high. Rather than trying to change our behavior and sense of what is right and wrong, I recommend developing solutions that are more in line with our common sense.

I know that there are people who want to remove DRM completely. They seem to think protecting something, which otherwise can be shared by everyone is wrong or at least a waste. I would like to point that people like to share but not everything. Sometimes we want to get compensated for sharing something, and other times we don't want to share at any price (e.g. privacy). And talking about waste, there are so many wastes we would not need if we could change our protective behavior: fence, your locker in the gym, private meeting rooms, and to some degree your bank accounts.

If you think that kind of behavior is wrong and we should be educated or forced to share more, I have nothing to say. That is a topic for politics or philosophy. I am just thinking about business models to satisfy existing needs. If you want to change (or regulate) people's needs, go ahead and do it. But meanwhile, please allow solutions for them to be developed.

We need a more user-friendly micropayment solution.

I often meet contents, that are priced like 5 dollars. I am tempted to buy, but often do not. And the primary reason is not that I think the price is too high. I don't like to spend time taking out credit card from my wallet and entering my information. In my mind, that time costs a lot more than 5 dollars. Also, I don't like giving out those sensitive information here and there. I am sure many of you are similar.

I wish there were something like offline cash on the Internet. Take out my cash, give it, and I am gone with the purchase. It takes just a few clicks and there is no sensitive information given. It is just like you going into a convenience store and buying a can of cola with cash.

I know there have been a lot of attempts at micropayment business models, but haven't heard anything successful yet. PayPal is probably close, but not efficient enough. Companies like Mobilians and Danal (at which my colleague Chihyung worked) in Korea provide simple mobile phone payment which is quite close to my ideal solution. The problem is that they are widely used in Korea but not globally available yet. I hear they are developing businesses in China, the US, etc.

Anyway, if there were such a solution, I would certainly be buying a lot more contents. And I believe there are many people like me.

Other parts:

• Part 1: Free is not a cure-all
• Part 2: How to revive non-free
• Part 3: An alternative free model idea
• Maybe more

In addition to free (Part 1: Free is not a cure-all)

"Digital contents should be free. Anyone who resists is clueless."

That was the overall impression I got after reading various blog posts recently. Here are some of those blog posts.

• Kevin Kelly - Better than free
• Techdirt - Publishers Jumping On The Free Book Bandwagon (Somewhat, But Not Fully)
• Chris Anderson - The big lie about free
• Techcrunch - Free (legal) P2P Music Downloads? Told You So.
• Mark Cuban - Music and Movies - Give Away the Soundtrack
  

Many of the suggested business models are basically giving away digital contents for free and get compensated for something else like paper books, lectures, consulting services, etc. This does work. In many cases, it could be better than selling digital contens for a price. However, I don't think this is a cure for all. It works only in certain conditions. Here are some of them.

It works when the paid market is large and highly correlated with the free market.

This is obvious. The after market should be big enough to keep you motivated, and hopefully bigger than the 'free' market so that you have not given away too much. However, I wonder if all contents markets have enough after markets. What about comics, novel, poem or photo? It would be interesting to see a research based on many (not just a few eye-catching experiments of an already well-known people) cases.

In addition, the paid market popularity should be correlated with the free market popularity. If you are sure that more popular free contents result in more revenue in the after market, many people will go this route. The problem is, it is only 'expected' to be correlated. On average it can be fair and correlated. But it is not like the old model of selling CDs or paper books for a price, in which popularity 'is' revenue.

It works when your market is segmented in a way that the free digital market is different enough from the paid markets. (Differences of demands)

It is easy to imagine this case. You are a digital generation, but your father is not. He is not used to downloading MP3 files or using music services or reading on screen. Ideally, the market is different, but not entirely separate so that the consumers in the paid market can 'hear about' what is hot from the free users. Effectively, you used the free market users as marketing agents to promote your products in the paid market.

However, this tends to be temporary. Usually it relies on the fact that certain people are effectively blocked from a new market because they have not heard about it or do not have the skills to use it. Over time, this separation will probably decrease.

It works when your paid product has significantly different value propositions than the free contens. (Differences of supplied products)

In this case, 'you' are two markets. You buy the paid version when you already have the free version. You heard "The band is so good at live concerts. You cannot get it by listening to the recording". Or you want the feeling of seeing your favorite book on the bookshelf, though you have read it online already. Or you read a free book about tax-saving principles, and seek for a consulting from the author. (By the way, the book you read was titled 'All you need to know to save tax by 30%'. Realizing you cannot do it yourself, you pay the author to do that. How generous...)

I predict the different value propositions that atom-made contents have won't last long. A CD has many other values that an MP3 file or an online music do not have: sounds better, looks good when you have CDs in your living room (or wherever is your home theatre), and has beautiful jacket design (though it was already diminished compared to LP). Nevertheless, people are not buying CDs. Certainly not in Korea, where CD market decreased to about 15% of what it used to be in 2000. See the table below.

Korean music market size (Billion Korean Won. 950 won = 1 USD)

	2000	2001	2002	2003	2004	2005	2006	2007
CD/LP	410	373	286	183	134	109	85	65
Mobile (ring tone, etc.)		89	129	177	191	225	230	220
Online		2.1	3.8	4.4	20	37	120	150

If you were a musician, would you give away your online music for free and get paid with CDs? I wouldn't. What if the same thing happens to the book? At the moment, we are lucky. People seem to love paper books much more than music CDs. As the displays quality improves and we have more books digitized, however, it will be a matter of how quick and how much.

By the way, you see the rapid increase of online music in Korea in 2006? That is about the time when Korea became tough on illegal download/p2p sites, thereby removing a lot of free option for people. And yes, there are still a lot of piracy.

It works when it is doable for creators to use the after market.

Currently used and suggested models require extra work in addition to making the original contents. I believe that the more efficient market is in which division of labor is well-developed so that each of us can focus on what we have a passion for and what we do best. There, people who do not have multiple skills or affluence will have a better chance. Of course, if you want, you could do multiple things. I am just saying you 'can' do onething well and still get paid, not you 'should' do one thing only.

Division of labor is a great thing. Because we don't have to build blogging software (and manage servers, manage network, and on and on) ourselves, we can enjoy reading so many interesting writers around. Because YouTube does the nitty-gritty job of showing a video, we are impressed by creative people. I call this kind of market, which is driven by creative crowds, Mass Niche (or longtail by longtail), which I believe is, and hope to be, the future of market economy.

I wonder how easy it is for a poor and unknown artist, not a Harvard Professor or a famous rock band, to plan and execute after-market activities. Is having live concerts easy for an unknown musician? Is lecturing (not to mention consulting) easy? First of all, you may not be able to afford the time it takes from creating the content to monetizing in the paid market.

Even if you have a day job so that you can wait longer, you need to have extra skills. I have done consulting for over 10 years, and I know I can do that but writing a short book, though the topic was business, was horribly difficult. Any extra work requires extra skills. Should we all become talented in multiple things in the future?

To be continued:

• Part 1: Free is not a cure-all
• Part 2: How to revive non-free
• Part 3: An alternative free model idea
• Maybe more

Re(?)starting this blog

It seems that I opened this blog on May 26th, 2003, as I have a post as of that date. But I have not done anything with it ever since then. I have done some writing and blogging (mostly with my company blog), but not with this one.

Now, I would like to start blogging with this in English. I like the idea of being part of broader and more diverse global community, which means better chance of engaging in exchange of interesting ideas and viewpoints. Also, as I have some web application projects that are (hopefully) for anyone in the world, I thought I needed a communication channel with which to have conversations with people on the net.

I am amazed at people, except full-time bloggers, who post several times a week, not to mention who post more than once everyday. I don't think I can do that, except for when I am very inspired or angry. I am also amazed by the pace of an issue rising and falling. I also like to talk about current topics, but I usually need some time to think (and to have the courage to publish in English) to express my thought on that. So, I may often respond to someone's thought after most people left the issue already.

Enough introduction and time to start blogging. Welcome to my blog!