Free* (or, how to give away the store without giving away the store)
Posted by Greg on February 10, 2009
In an earlier post, I criticized Chris Anderson for eliding the problems of using free as a business tool. The reason this omission was such a crucial mistake was that comparing free-dependent business models that do work with those that don’t helps define the underlying principles.
The two main types of “free” Anderson discusses are the media model (e.g., broadcast TV and print) and freemium (giving away a base product for free and then upselling to a premium version). I’ll start with the media model, and address freemiums in a subsequent post.
Media model
Anderson does have one key insight into what makes the media model unique: instead of a two-way transaction between buyer and seller, the media model relies on a three-way transaction between publisher, audience and advertiser. The publisher provides the content which aggregates the audience; that aggregated audience’s attention is in turn valuable enough for the advertiser to pay to reach.
However, where this model frequently breaks down is when it ignores stakeholder theory. In short, when publishers focus too heavily on one party at the expense of the other, the system becomes unsustainable. Usually, this takes the form of publishers favoring the interests of paying stakeholders (advertisers) over the supposed “free riders” (the audience). Though I have some issues with his ultimate conclusions in the piece, Walter Isaacson’s recent cover story in Time lays out the problem with this approach:
In an advertising-only revenue model, the incentive is perverse. It is also self-defeating, because eventually you will weaken your bond with your readers if you do not feel directly dependent on them for your revenue.
A good example of this dilemma in action occurred in the ’90s, when Clear Channel Communications began gradually increasing the number of advertising minutes per hour on its radio stations. Yet if Clear Channel thought it could ignore the needs of its “free” audience, it clearly miscalculated. The audience’s power may have been less direct and more diffuse, but when a large enough number of listeners made the individual decision to start avoiding Clear Channel stations that played too many commercials, it had a definite impact on the company’s bottom line, forcing Clear Channel to do an about-face and institute its “Less Is More” initiative in 2004.
(Incidentally, Clear Channel’s original ad policy also ignored another set of stakeholders: indirect competitors. Execs may have figured that, as long as other radio conglomerates were following their lead, listeners would have nowhere else to go. But they ignored the fact that new technologies, including ad-free satellite radio and iPods, would allow music fans to tune out broadcast radio altogether. A similar dynamic was in place with television and Tivo.)
The reverse dynamic is less common these days, but was prevalent in the dot-com era, when companies were giving away everything from Internet access to computers to cars, all supported via “advertising”. But by collecting an audience made of mostly people who were actually freeloaders without offering advertisers anything special, they were shortchanging the interests of those advertisers. Oh sure, they’d make noise about how they would collect enough data on their users to allow for “behavioral targeting”, a technology that has never managed to live up to its promise on anything approaching scale.
In order to make the media model succeed, companies need to think of innovative ways to serve the interests of both their audience and their advertisers. One intriguing example I recently heard about is Skyblox, which works with merchants in a neighborhood to offer free wi-fi to the merchants’ customers, then creates a portal that hotspot users have to go through featuring targeted local advertising. I don’t know enough about the business to say whether it’s going to work, but from a stakeholder perspective, they’re definitely taking the right approach. Customers get free wi-fi and relevant, targeted information about their neighborhood. Merchants get an advertising vehicle that outperforms ads in local alt-weeklies (which is what most of them have been relying on to date). Even indirect stakeholders benefit — by creating a local portal, Skyblox provides a collective good for the neighborhood.
Obviously, a business like Skyblox isn’t relying on the traditional “content” model used by newspapers or magazines. But that’s the point. Smart businesses are going to need to rethink the tired method of pairing articles with ads and then trying to manage the inherent tension. How they do that is, of course, the question every media company is struggling to answer right now.
jetwit.com - The JetWit Business Model? said
[...] his post on The Digitalists titled Free* (or, how to give away the store without giving away the store), Greg comments on Wired editor Chris Anderson’s new book Free and a possible direction the [...]
Dave Payne said
My name is Dave Payne and I run SkyBlox. Thanks for the mention. While we have the typical startup problems, our model has been well received for the reasons you mentioned.
To reply to your larger argument from my vantage point, new media models (like SkyBlox) start from very different places. We are EarthLink’s former Wi-Fi group, so we began from the Wi-Fi angle. That allowed us to view local content as “free.” Or free until we built-up the necessary traffic to think otherwise. This is a luxury that the dot-com era startup didn’t have (or traditional media for that matter).
From where I sit, traditional media (like the alternative weeklies or city newspapers) are becoming irrelevant because each part of their business is being taken over by sites like mine. Classifieds are now Craigslist. Editorial content is now Outside.In. Coupon inserts or Savvy Shopper deals are now offerings like SkyBlox.
These days I receive more relevant, desirable local content from my Twitter feed than any website.
Here’s some recent observations about one local paper…
http://blog.skyblox.com/?p=366
Dave
Greg said
Good points, Dave. For a perfect illustration of the obliviousness of those in the newspaper industry, check out this desperate plea for relevance from the New York Times’ Eduardo Porter, who mindlessly conflates “newspapers” and “independent media”.