Chris Anderson: 'Maybe Media Will Be a Hobby Rather than a Job.'

Chris Anderson on the Economics of 'Free': 'Maybe Media Will Be a Hobby Rather than a Job' - SPIEGEL ONLINE - News - International

Maybe it won't. What he said has some truth, but I wouldn't go as far as to compare journalists to blacksmiths. I think journalists are more like photographers. Thanks to developments in production (digital cameras and PC) and distribution (Internet) tools, anyone can show off their photographs. But it does not make every photographer part timer or hobbyist. The most talented and devoted ones remain full-time.

The business model (or job description) may change, but not like automated machines replacing blacksmiths. The participation of amateurs will increase, but the better ones among them will become pros. Actually, we are already seeing them. Is Michael Arrington an amateur or a part-time hobbyist? You could say that he is a blogger, not a journalist. But I believe Chris Anderson shares my view, which is "what's the difference?".

My assessment of some key freeconomics arguments

(Originally written as a comment on Fred Wilson's blog. http://www.avc.com/a_vc/2009/08/some-serious-freeconomics.html#comment-14635342)

Rather than commenting on 'another' perspective, here are my key points on free, which I have been repeating over and over here and there. I think there are too many fuzzy (and sounding fancy and deep) statements when it comes to discussing freeconomics. So, I stated using 'right' and 'wrong' to make it as clear as possible.

1. Ever decreasing marginal costs naturally lead to free. (Wrong)
First, the marginal cost is never zero. Unless you invented a perpetual motion machine, there will be costs of electricity, network, computers, storages, etc. Small price times many units, which is necessary if you want to make profits, are still a lot. Most importantly, living expenses of people involved, whether you classify it marginal or not, is substantially over zero.

Second, even if we assume the marginal cost was really zero, it does not justify zero price. There is always the economic cost, which is called opportunity cost, cost of capital, etc. Put simply, you don't want to do a business just because you are not making loss. Unless you make certain level of income, you have no reason to do it over a long term.

2. You should give away contents, and make money giving services, consulting, lectures, performances. (OK, if it's your philosophy. Wrong, if it is your logic.)

I think those who argue for this are generally against the idea of 'idea being sold at any price'. Because it's their value and philosophy, we cannot discuss it analytically. You cannot say I am wrong, because I like rock music more than jazz. So, if you don't like paid contents, you don't have to justify it analytically.

But if you are saying 'that's the only way to make money with contents', that's an analytical statement. And a wrong one. When you have two things to sell, you can make one loss leader and the other profit leader. Assuming piracy is reasonably controlled, it makes as much (or often more) sense to give lectures/consulting for free and make money with contents.

3. Free can be a powerful element to have in a business model. (Right)
First, as someone commented quotating Dan Ariely (though I think it is too obvious to quote an economist), free seems to have a powerful psychological appeal. So it will bring more than usual increase in demand.

Second, free actually saves costs other than the price itself, namely transaction costs. By pricing a product as free, you don't need payment process, which costs time and money. So it is possible that free is economically better than a really low price.

4. Freemium is the best business model for many content and web services. (Not much to comment)

I generally agree with this statement, but there is little to argue for or against. Free samples are almost necessary and have existed always. And it is very efficient to give away free samples on the web. I think the statement should be more concrete, like having some quantitative threshold or distinguishing between what's just tradtional free samping and what's new freemium. For example, is HBR freemium or just traditional paid model with some free samples?

5. You should make contents free for occasional reader and charge niche contents consumed by heavy users. (Not sure, yet.)

This is difficult for me, as it appears to conflict with loyalty economics. In my view, loyalty economics is more solid and lasting management theory than RMS-ROS, BCG matrix type of scale-based strategies. Loyalty says loyalty of your customers, not scale per se, makes your business grow and healthy. And many problems of modern companies occur from the fact that they are nicer to new customers and focus too much on sales. You are treated best when you are a new subscriber, and they milk you over time.

I like loyalty economics, not only because it is analytically solid but also because it's morally high-road. Basically, you give back to whom you owe your living.

On the other hand, it is probably necessary to give away some samples to non-users. And when you have very innovative products, the ones who do the most favor to you are the ones who dared to use your products initially. I think in this situaltion, they are the loyal ones who deserve your special treatment. However, the problem is that, when you distribute your most popula contents for free, most of the users are not the brave early adopter who risked their valuable time and efforts.

My hypothesis is that this is a problem of degree or subtle business model design(free which content to whom and how much). Just like how much focus on sales and how much on caring loyal customers are a subtle degree issue.

I hope Fred Reichheld, Bain partner who started Loyalty Economics, to think about this from loyalty perspective. He seemed to find it interesting, but it would be really nice to listen to his perspective.

Dilemma of free (and freemium)

Defined too loosely, Freemium is pointless. I wonder whether that's not what some people are trying to do, by arguing that News Corp's move is Freemium. Maybe true, but then what's not so Freemium? Free samples existed forever and everywhere.

Freemium was the savior of the original (more radical) Freeconomics, which had too much intellectual flaws. (Near zero marginal cost naturally leading to zero price?) People seemed excited, but some in the free camp seemed to realize its ground was weak. Then came Freemium, which was reasonable, and did not have much controversial arguments. We all know it worked, even before Internet. It just has a more aggressive, modern, and digital feel. However, there is one problem. It is not as controversial as the original radical free. And because free samples were with us forever, Freemium was there to be defined. As a special and new way of using free or as a new terminology for an old practice.

Make the concept sharp and the camp looses Rupert Murdoch, who everyone knows is tough and smart, or make the concept loose (thereby boring) and you still have him as an ally. Dilemma?

Is Freemium against loyal customers?

In addition to economic problems I have with freeconomics, the loyalty aspect came to my attention recently. This time it is with freemium, a business model which I view as rather reasonable unlike other more extreme free arguments, and so the issue is more subtle.

I was a business strategy consultant at Bain, and 'customer loyalty' is one perspective of Bain that I really like and agree. I even translated Loyalty Rules by Fred Reichheld into Korean edition while working at Bain. (You may think this is obvious for an ex-Bainee, but I have not always been very enthusiastic about perspecitives that came out of Bain. For example, I do not fully agree with 'profit from the core'.)

So, why do I think at least some variation of freemium conflicts with customer loyalty? First of all, loyalty economics says that if you care more about your loyal customers you are better off. Sounds too obvious? Maybe. But this has a very strong warning against focusing too much on acquiring new customers. Typical businesses spend too much money on marketing and sales, and too little on caring loyal customers. So what happens very often is you give discounts and all those benefits to new customers, while claiming full price to your loyal customers. Loyalty economics, as argued by Fred Reichheld, says that this is economically destructive as well as morally low-road.

Let's have a look at freemium. Some argue that you should give away your most popular contents for free and make money by making niche contents paid. This model has a strong possibility of compensating free riders (apparently not your loyal customers) with your loyal customers' money.

In theory, the free users may not be free riding. They may be contributing a lot as marketing agents, linking to your sites and talking about your contents. But the issue remains, if majority of free users are just free riders. And I am guessing that is the case.

I have not thought through this yet. So, let me just ask some questions.
- Does this freemium model have conflicts with customer loyalty as I described? Why or why not?
- If yes, is this conflict inherent and common among all freemium models or just some kinds? To put differently, is customer loyalty in conflict with 'free for a month and paid afterwards' model? What about 'free for limited features and paid for full features' model?
- How can we make (freemium or not) change the business model so that we compensate loyal customers better?

Freeconomics or Freeligion?

There are discussions about freeconomics, triggered by the publication of Chris Anderson's book. I have already written quite a few times about why its economic logic is flawed. See them here.

I cannot help asking this question. Do advocates of freeconomics think that free is the most economically effective price, or that free is the most morally right price?

I hope the former is the case. But price being determined by supply and demand, they seem arguing too passionately for for the only ultimate price. If they believe strongly that it is morally (or socially or by any viewpoint) right to price at free, they can say so. But it's different from saying 'free' is inevitable because of economic forces.

Let me step back a bit. You can be excited to find a truth that confirms your philosophical or religious beliefs. In those cases, however, you should be especially careful not to be too confident with insufficient logic and evidence.