I have been writing a lot about the problems I see with the current main stream web 2.0 business model. Free but ad based services. There are several issues with that business model that I summed up in a post called “$16 Bln reasons to get out of the advertisement trap”. But what is worse about it is that since the major web companies use that business model, new web initiatives follow that lead without thinking about other possibilities. Current web 2.0 thinking is mediocre, lazy and opportunistic.
I am not an expert on these matters. I tend to look at the effects the free business model has on the customer. We are all affected by this business model. While it arguably has several benefits for customers it also comes with very distinct downsides. One of the most important problems with the free business model is that it leads to customer lock-in as, which is the opposite of customer freedom. Consider for a moment the possibilities that would arise if we would think the opposite of free. It might sound like dreaming, but there are many benefits to this, the major one being customer freedom. Everyone talks about the importance of data portability, open networks, open API’s etc. The focus is mostly on the technical aspects, as if we are trying to solve an incredibly difficult technical puzzle. But we tend to forget what purpose it has. It basically resolves two issues, customer freedom and putting the responsibility where it belongs.
Don’t take my word for it, rather read the stuff of experts in the field on it.
I came across several posts that discuss this business model and I thought it would be good to provide you with an overview. Chris Anderson has a nice overview of free discussions here. Kevin Kelly has written several great posts about free. His post called “Better than Free” sums up 8 excellent possibilities to charge services to customers. He really sums it up in just one punchline:
When copies are free, you need to sell things which can not be copied.
But he continues to deepen this thought and offers 8 ways to go about this. I’m going to try and summarise it a bit. Read his excellent article to get into the details:
Immediacy – Sooner or later you can find a free copy of whatever you want, but getting a copy delivered to your inbox the moment it is released — or even better, produced — by its creators is a generative asset.
Personalization — A generic version of a concert recording may be free, but if you want a copy that has been tweaked to sound perfect in your particular living room — as if it were preformed in your room — you may be willing to pay a lot.
Interpretation — As the old joke goes: software, free. The manual, $10,000. But it’s no joke. A couple of high profile companies, like Red Hat, Apache, and others make their living doing exactly that.
Authenticity — You might be able to grab a key software application for free, but even if you don’t need a manual, you might like to be sure it is bug free, reliable, and warranted. You’ll pay for authenticity.
Accessibility – Ownership often sucks. You have to keep your things tidy, up-to-date, and in the case of digital material, backed up. And in this mobile world, you have to carry it along with you. Many people, me included, will be happy to have others tend our “possessions” by subscribing to them.
Embodiment — The music is free; the bodily performance expensive. This formula is quickly becoming a common one for not only musicians, but even authors. The book is free; the bodily talk is expensive.
Patronage — It is my belief that audiences WANT to pay creators. Fans like to reward artists, musicians, authors and the like with the tokens of their appreciation, because it allows them to connect. But they will only pay if it is very easy to do, a reasonable amount, and they feel certain the money will directly benefit the creators.
Findability — The giant aggregators such as Amazon and Netflix make their living in part by helping the audience find works they love. They bring out the good news of the “long tail” phenomenon, which we all know, connects niche audiences with niche productions. But sadly, the long tail is only good news for the giant aggregators, and larger mid-level aggregators such as publishers, studios, and labels. The “long tail” is only lukewarm news to creators themselves. But since findability can really only happen at the systems level, creators need aggregators. This is why publishers, studios, and labels (PSL)will never disappear. They are not needed for distribution of the copies (the internet machine does that). Rather the PSL are needed for the distribution of the users’ attention back to the works.
Alex Iskold continues the discussion with an excellent post called “Beware of Freeconomics”. He ads 2 interesting points to the free business model discussion. The first point Alex provides us is that free leads to a monopolistic market. Google has come, conquered and now rules the free market. While everyone has benefited from this, and Google continues to provide us with new innovations, it has one major drawback. Who can still compete with Google? They have the market, the money, the innovators, and basically kill off competition before it is born. You might have a great idea for a new startup, but how can you possibly compete with that?
As a side step, according to Comscore Google’s incredible growth is possibly endangered as they show a lower US click performance rate in January 2008. While I personally do not think Google’s growth is really in danger it does perhaps show that they are reaching a limit on their basic search revenues. Google is already anticipating on this by making some bold moves into the mobile and social network markets.
A second point mentioned by Alex Iskold is that free leads to additional complexity. For example, you need indirect ways to make revenues when you provide services for free. Alex provides an example of the ad network as a middle man between the service provider and the customer. You offer an ad based product, but no one wants to pay for ads. Even though your user base might grow, you still lose money.
Free isn’t a holy grail for the user, the service creator, the advertiser, the investor. Free is basically a clever disguise for a bounded world in which we are all handcuffed and tied together in this catch 22 trap. It leads to customer lock-in, monopolistic behavior, the death of innovation, spoiled customers, monetizing network value instead of customer value, data hogging, and walled gardens. But worst of all it leads to the loss of focus on customer value. The free business model isn’t really “free”. Free always comes at a cost.
Free is a clever disguise for a concealed trap we are all locked into.