2008-02-24

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.

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