This week we saw the release of Chris Anderson’s book Free
I’d like to talk a bit about the firestorm that freeconomics (fed by
Chris’ book) has unleashed but first we need to clarify something.
The FT piece says:
possible by the internet is what Fred Wilson, the New York venture
capitalist, has dubbed “freemium”.
There was no dubbing by me. In March 2006, I wrote a post called My Favorite Business Model
in which I outlined the freemium concept and I asked the readers to
help me give it an easy handle. The word Freemium was not coined by me.
It came from Jarid Lukin, who at the time was working for Alacra, a company I am on the board of. Fortunately, we’ve got Wikipedia which has got the story straight
.
Now
let’s talk about freeconomics. I don’t believe everything will be free
on the Internet. There will be plenty of paid business models. For
example, if you want to watch Major League Baseball games live over the Internet, you’ll pay for that. If you want to use services like the FT and the WSJ
frequently (more than 10x per month), you’ll pay for that. If you want
to watch HBO over the Internet, you’ll pay for that. If you want a
Twitter desktop or mobile client, you might pay for that too.
But
we also must recognize that the cost of delivering many services over
the Internet has decreased significantly from what it cost to deliver
them in the analog world. The marginal cost of delivering a piece of
content is approaching zero. But the total cost of delivering content
on the Internet is far from zero. My partner Albert wrote a great post about this last week. He said:
The price of watching a stream on Youtube is zero. With marginal cost
zero and marginal benefit zero, from a perspective of maximizing total
social (net) benefit, free is the right price because it does not
preclude any video that could possibly have benefit from being viewed.
That does not mean that free is sustainable because it obviously
doesn’t help cover the total cost.
And,
as Albert recognizes at the end of his post, this debate is not
entirely about economics. It is about the value of various participants
in the content ecosystem.
Gladwell got pretty negative on Anderson and his book in the New Yorker piece. He said:
It would be nice to know, as well, just how a business goes about
reorganizing itself around getting people to work for “non-monetary
rewards.” Does he mean that the New York Times should be
staffed by volunteers, like Meals on Wheels? Anderson’s reference to
people who “prefer to buy their music online” carries the faint
suggestion that refraining from theft should be considered a mere
preference. And then there is his insistence that the relentless
downward pressure on prices represents an iron law of the digital
economy. Why is it a law? Free is just another price, and prices are
set by individual actors, in accordance with the aggregated particulars
of marketplace power.
These are the anti-freeconomics arguments we hear from the likes of Andrew Keen
and his ilk. Lambasting file sharers and entrepreneurs who rightly
recognize that free is the right way to build market share on the
Internet might be fun and make certain people feel good. But it’s
ignorance of a fundamental fact. And that fact is that free, ad
supported media works best on the Internet. We have seen it again and
again. I’m not going to even give examples.
Once you have built
that audience, you can deliver upsells via freemium models, you can
monetize it via advertising and you can branch out into other services
which are easier to monetize. This post by Silicon Alley Insider on Facebook’s revenues this year is instructive:
Earlier this week, we spoke to several sources who each have some
insight into Facebook’s financials (none of them know precisely).
Taking the sources’ input together, we’d estimate the company’s
expected 2009 revenue this way:
- $125 million from brand ads
- $150 million from Facebook’s ad deal with Microsoft
- $75 million from virtual goods
- $200 million from self-service ads.
These
numbers are similar enough to others that I have heard that I feel
comfortable republishing them here. Facebook has 200mm+ monthly active
users worldwide. Let’s say they are doing $50mm per month in revenue.
That’s a revenue per monthly active user of $0.25. Low for sure, but
enough to operate at breakeven. And I expect the self service ads and
the virtual goods revenues to grow strongly in the next year, more than
making up for the likely loss of some of the $150mm from the ad deal
with Microsoft.
And the next move for Facebook is to generate
transaction revenues with its payment service and off site ad and
transaction revenues from its Facebook Connect service. I’m pretty
confident that Facebook can take its revenue per monthly active user to
at least $0.50 and maybe higher in the coming years.
Facebook is
a perfect example of freeconomics at work. A woman who works for a
major media company was in my office recently. She quoted her CEO as
saying “why doesn’t Facebook just charge a monthly subscription fee,
they’d be making money hand over fist?”. Well I believe that if
Facebook did that, they’d be vulnerable to other networks offering a
free service. And certainly not every one of those 200mm+ users are
going to cough up a monthly subscription. But by offering a friction
free service, they have built a powerful and growing network that they
are now starting to monetize in various ways and that they will
monetize even further in additional ways. And they are super hard to
compete with because they are free.
I like to keep my posts
short, so I’ll end here with the observation that the Internet allows
an entrrepreneur to enter a market with a free offering because the
costs of doing so are not astronomical. And most entrpreneurs who take
this approach will maintain an attractive free offering of their basic
service forever. But that doesn’t mean that everything they offer will
be free. That’s the whole point of freemium. Free gets you to a place
where you can ask to get paid. But if you don’t start with free on the
Internet, most companies will never get paid.
(For more from Fred, visit his blog)
(Image source: c2cballoon.com)
