Commentary
Pay Me My Money Down
- by Josh Chasin , Op-Ed Contributor, February 23, 2010
Two brothers in New York City have a truck. They decide to drive down to Georgia, buy a bunch of watermelons at a buck apiece, fill the truck, drive back to New York, and sell them all for a buck apiece. At the end they count up their money. One brother says to the other, "We didn't make any money." The other brother says, "See? I told you we need a bigger truck!"
What makes this joke funny, of course, is that the second brother's conclusion is absurd. Obviously, no matter how big the truck gets, you don't make any money selling inventory for cost.
Now, suppose I change the punch line, thusly: "See? I told you we should give the watermelons away for free and just sell advertising on the truck,"
Is it still funny?
There's a growing sentiment that everything -- and certainly everything digital, everything "made of ideas" -- should be free. Which means all media content. You know those guys billing you for cable access and selling magazine subscriptions and charging for satellite radio? Hopelessly Old Economy, every one of them. (I'm sure your company, dear reader, has long stopped charging for stuff.)
But if the content should be free, then of course the ads all this free content are designed to push should carry a premium price, right? (The premise being, free content supported by ad revenues.) Well, it turns out, not so much; ad and data exchanges are offering end-around access to publisher audiences -- even, sometimes, lookalikes of your own hard-earned visitors -- for pennies on the dollar.
So don't monetize content, and let someone walk away with the majority of your ad sales income.
Am I just hopelessly out of touch with the ways of the New Economy? Because I still think the best business model is charging for stuff.
In his book "Free" (which you can get at Amazon for 18 bucks, by the way) Wired editor Chris Anderson (the guy who brought you the Long Tail) talks about an experiment conducted by MIT economist Daniel Ariely, in which subjects were offered a choice between a Hershey's kiss for a penny, or a truffle for 15 cents. Consumers overwhelmingly chose the truffle. But knocking a penny off each price reversed the results. Suddenly, a free kiss was far more appealing than a 14-cent truffle. The conclusion being, well, the price differential remains the same -- 14 cents in either case -- but "free" is a magic price. Consumers are, to quote Ariely, "predictably irrational" about free.
I've been hearing about this a lot lately, and I have to debunk it. This is a flawed argument, made through a piece of mathematical misdirection. Yes, there is still a 14-cent difference. But the relevant relationship isn't one of subtraction, but rather one of division; at 15 cents and a penny, the truffle is 15 times as expensive as the kiss; at 14 cents and zero, that ratio becomes infinite.
This actually isn't irrational consumer behavior at all. Suppose I had 15 cents and I knew I wanted a truffle. How many kisses could I buy? In the first scenario, I can't buy any; all my money goes to the truffle. But in the second scenario, I can buy an infinite number of kisses -- a billion, say -- and still buy that one truffle, with a penny to spare.
Information, we are told, wants to be free. Well, teenagers want to eat junk food, get high and have unprotected sex, but that doesn't make it a good idea (and it sure doesn't make it a business model.) I think perhaps it's time we sat information down for a heart-to-heart.
Remember back in the '90s when everyone was calling the Internet the Information Superhighway? At the time I disagreed. I thought it was going to be the Information Supermarket: everything that could be rendered in zeroes and ones would migrate online for distribution. Admittedly, this changes the cost structure of industries. In a near-worst-case scenario, digital distribution of music undermined the record business, not because "music wants to be free," but because the record business had evolved into a manufacturing and distribution business, not a music business, and the need for physical manufacturing and distribution went away. But I have friends who are musicians, and believe me when I tell you, music doesn't want to be free.
Let's think about newspapers. Yes, the newspaper business has a problem, because readers are moving online, and it is more difficult to monetize a digital than a print reader. But this doesn't mean "journalism wants to be free." It doesn't mean "valuable local content wants to be free." All it means is that when you remove the printing press from the equation, the economics change. Personally I think newspapers will thrive when they work out a way to get over the "paper" part of their business model and focus on the "news" part. But that's tough to do with that big monster of a press thundering in the basement.
Dave McClure does a nice job, in an extremely rude and potty-mouthed sort of way (warning: it's unfiltered and there's lots of colorful cussing), of arguing in this rant that the Internet wants to get bleepin' paid on Friday. I couldn't agree more (although I could agree more politely.)
What's all this got to do with metrics? A couple of things. First, let me direct your attention, if you haven't seen it yet, to Eric Peterson's post on the coming bifurcation in Web Analytics tools (tell him I sent you.) We know that there are some free analytics tools, but Peterson talks about the place in the mix for the higher-end solutions (hence bifurcation).
Also, if you've been reading my entries here at the Online Metrics Insider (Hi, Mom!) you know that I've written often about the value of branded, differentiated content, and about the branding value of display advertising (as opposed to click-throughs) as delivered by online advertising. Content matters, context matters, engagement matters, branding impact matters. All these things have value, and ultimately that value can be measured.
But I think there may be a bigger issue here. We all know the economy needs stimulation right now (although we may disagree on how to accomplish that.) But what does economic stimulation mean, exactly? I was talking about this recently with a couple of colleagues, over at Taco Tuesday at Lucy's across the street. See, there isn't suddenly less money in a downturn; it's just that the money stops moving. In a robust economy, money moves. If you pay a dollar to the dry cleaner, and then he spends that dollar at the coffee shop, and then the coffee shop guy spends it with the contractor, and the contractor goes and buys groceries -- it's still just the one dollar, but the circulation is good for the entire community.
So I'm puzzled that so many in the digital space are so quick to embrace economic constructs that suck the money out of the business. Moving money around: that was the true promise of the Internet, the Information Supermarket, all along. Digital facilitates commerce. That's an important message; I'm thinking of having it printed on T-shirts. That's why the digital space revitalized the American (and global) economy in the '90s; that's why it is robust in an otherwise soft advertising market today. So what do you say, let's not all be so quick to jump on the "free is the new black" bandwagon. It's not good business, it's not good economics, and it isn't even true.
Good stuff!
Good Free Stuff (supported to some extent by display ads).
See you when you get back from Georgia.
I like the way you think. Article winds around a bit and I'm not sure everyone will follow but I like your conversational writting style -- a bit like mine. We should work on something together.
Ken
While I agree with you, I think this is one of those things that's easy to say and hard to accomplish--like diet & exercise!
Josh,
Interesting article but I disagree with your assessment that "There's a growing sentiment that everything -- and certainly everything digital, everything "made of ideas" -- should be free." This was the view for a long time, but we're seeing a shift in thinking from both publishers and consumers about consumers' willingness to pay for content (on the music side see MOG, Pandora, and the demise of free sites like iLike and Imeem, on the book side, see the rise of the Kindle where content is not free, and on the newspaper side, see the Wall St Journal and soon to be behind walls, NY Times). The freemium model also works well (see ESPN, Flickr, etc). What publishers need to do better is determine where the line is of what people expect for free, what consumers can get elsewhere for free, and what is truly your value add that consumers are willing to pay for. Publishers also need to do a better job of getting more money from advertisers. This means directly speaking with potential advertisers and/or having better quality, targeted advertising options.
To Ken:
yes. I'm sure Fulgoni would be thrilled.
;-)
Thought provoking piece, thanks for sharing. To paraphrase Joplin "freemium is just another word for nothing left to lose." :-)
Thanks for sharing, Josh. I like the way you think but I also agree with Susan - it's easy to say but hard to accomplish - especially when consumers are already so used to getting "free" online content.
On an individual basis about paying for information has some merit. When you make that 10, 50, 100 things that when the theory becomes flawed. There gets to a point where affordability rears its ugly head and just for the average person whose disposable income is shrinking, but the more expensive information is, the more shut out those who cannot afford it and may need it most. Yes, people who work on/for the "information highway" need to be paid let's say fairly, then the schism has to potential to become broader. The goose that lays the golden egg is the one who can find the proper balance.
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I just finished reading Free. Anderson actually did make the book available for free on his web site, and I think this illustrates a key point you've missed.
Online - where the costs of digital distribution are almost zero - it makes sense to distribute information for free, in order to increase reach. It doesn't cost you anything. Your time is a sunk cost in developing the material, and the challenge is to get creative enough to monetize the add-ons to make that up and more. I'm sure Anderson makes his money back and then some from speaker fees.
If you want a hard copy - as you mentioned, the book is $18 on Amazon - there are real costs associated with the distribution, and people understand that when you get something physical, you have to pay for it.
The key point is that the world has changed - people won't pay for something they know costs nothing. So - you have to differentiate what you're doing to justify what you're charging. Anderson makes a specific point about the music industry and the artists in Brazil and China – who encourage piracy as a way to increase attendance at paid concerts and merchandise sales.
This of course benefits newcomers the most; The New York Times cares more about money than reach, which they have plenty of. And it's of course a huge challenge to adapt to, especially for very old, very large companies.
However, the same forces that are trending towards free and the ones that are opening up the world for vastly increased competition and outsourcing. And I think doing what is necessary to adapt now - finding out what your customers *really* value and charging for that - is a far better strategy than waiting for someone else to figure out how and take your business.
A clever and witty article, thanks Josh! There's that other old saying in this debate: you get what you pay for. Information may be free, knowledge will always command a premium.
Cheers,
Eric Porres
CMO, Lotame Solutions, Inc.
http://www.lotame.com
Right on Jason - if Chris Anderson gave his book away for free it would have been at least a more genuine message. Love the Hi Mom reference. Made me laugh.
I don't think consumers really expect that all content will forever be free. I do think that we haven't come up with pricing models that align with consumers' needs and wants. One problem with the subscription model is that it often provides too much content that the user doesn't want, making the price for the relevant content too high. I would rather pay a buck or two for access to a really great article than $20 for that article plus a bunch of content I don't care about. In other words, I think an iTunes-like approach to news and other content could be very attractive.
Information does not "want to be free" any more than a consumer wants to consume an "infinite number of Kisses." The logic is flawed all around, not just among the people who don't have the math skills.
The "muscle of the truffle" is not in its superior value ratio, nor is the lure of Kisses in the "magic" of "free." Instead, they choose 'free' penny kisses, over 14-cent truffles because they are "afraid of missing out on a familiar 'known' thing for free, by paying for an "uncertain thing". Try the experiment with pennies. Put 1-cent in one stack and 15pennies in the other, or "zero" pennies and "14 pennies. There you will see "rational choice." With Kisses and truffles, you still see "reasoned" choice, and it is still rational, it just isn't optimized for "penny metrics."
To use the same science for the "stimulus" program, give all the money to poor people. They will immediately begin to spend it, jump starting the economy. They will not hold onto it fearful of loss or waiting for a better return. It will percolate, and in short order, some of us will have Kisses and others will have truffles. -dh
Free is not a business model, unless we are all guaranteed an unlimited supply of advertising dollars to subsidize our virtual adventures.
It is sort of like thinking that taxing businesses will pay for every free entitlement we can create the real world.
There is a limited supply of advertising, so we should start selling things on the internet for a profit, just like in the real world.