The Long Tail

The big lie about free

Whether it's pop stars or Wall Street analysts, the biggest misconception of  free is that no cost = no value.

For instance, this today from Silicon Alley Insider:

Whether it's software, patents, movies, or music, as a planet, we have decided that things that exist only in the form of atoms, or are not offered as a service, have no value.

Or this, from Sheryl Crow in last weekend's New York Times magazine (from which this photo was taken):

I’m sad that people feel like music should be free, that the work that we do is not valued.

Don’t you feel valued enough? It’s more about consciousness. When music comes free by way of friends burning CDs, there’s not that understanding of the work that goes into the making of an album.

Spot the error? It's that the only way to measure value is with money. Of course the Web is built mostly on two nonmonetary economies, attention (traffic) and reputation (links), both of which benefit hugely from free content and services. And it's a pretty simple matter to convert from either of those two currencies into cash, as a glance at Google balance sheet makes clear.

In a recent post, we listed dozens of business model built on free. All of them are based on the notion that free stuff does have value and the way we measure that is in the time people spend with them. Do I actually need to remind Wall Street analysts that time is money?

The economics (and biology) of free ice cream

From a fascinating blog post, cheekily quoted here in its entirety:

When McDonald’s introduced ice cream to its franchises operating in Indonesia, it faced a problem: many people had lactose problems and would not buy the product because it made them sick.

So what did they do? They gave ice cream cones away for free.

You’d be surprised at what people will consume when its free, regardless of the associated nausea. After repeated exposure to dairy products, the allergic reaction diminishes such that people can enjoy the dairy product without any significant consequences. So sure enough, after a while the target market in Indonesia had lost its intolerance. This made McDonald’s (and I suppose the Indonesians?) happy.

(thanks to Ryan Holiday for the tip)

"The fat tail will be human, the medium tail social, the long tail algorithmic"

Jeff Jarvis is liveblogging a DLD panel discussion between Jimmy Wales (Wikia) and Jason Calacanis (Mahalo), with Marissa Meyer (Google) in the front row. They're discussing human-driven search (Mahalo and Wikia) vs. algorithmic search (Google). And then comes this fascinating exchange:

"Esther Dyson says the problem with their model is the long tail. If she were starting a company she’d do something else. “Ok, I’m going to kill myself now,” laughed [Calacanis] He says that the fat tail will be human, the medium tail social, the long tail algorithmic. And he says that the advertising interest is in the fat tail."

As Kevin Marks and Julian Bond rightly point out in the comments here, Jason slightly mangled the nomenclature, so that should actually be "The short head will be human, the fat middle social and the long tail algorithmic" Still, that single sentence is worth another book. I won't write it, but I'll bet someone else does.

Random updates (+sex under a polar bear--for FREE!)

In no particular order:

• Yesterday we had another girl, Olivia Nicole Anderson, which makes three girls and two boys (all 10 and below). Sooner or later one of them is going be a robotics geek, right? Speaking of which...
• DIYDrones is now doing 6,000-8,000 page views a day. Who knew?
• Buy Pepsi products, get free music. In economics terms, that's "pay for the things with non-zero marginal costs and get the things with near-zero marginal costs for free." Which is really the triumph of economic rationalism. And it only took a few hundred years!
• There is now a wiki where you can help make my and Fred Wilson's Complete List of Media Business Models Built Around Free Content (TM) complete. [UPDATE: That wiki is now gone, not sure why. I'll update my own post and incorporate Fred's list.]
• Larry Lessig's four great books are now all free and Creative Commons-licensed (as they would have been from the start if it were his decision, of course, but the cool thing is that it was Random House's)
• For some reason, people keep sending me the story about the Prague brothel that will let you have sex with a prostitute for free if they can webcast the encounter. This is great, because it allows me to give this post the most ridiculous photo I've ever used, the Polar Bear-themed "Igloo Room", where you can watch strangers making like Eskimos in, well, not heat. This is the absolute polar opposite of sexy! Thanks, Bloomberg.

What does the "Media Business Model" mean?

Fred Wilson says: 

Most web apps will be monetized with some kind of media model. Don't think banner ads when I say that. Think of all the various ways that an audience that is paying attention to your service can be paid for by companies and people who want some of that attention.

This is the core of FREE, at least as it exists online. Both media and most online businesses are based on "software economics", where the cost of creating something of value is relatively high but the marginal cost of distributing it to each consumer is very low. So you can look at the web as the ultimate extension of the media business model to a wide range of other industries. 

But when people think of the "media business model", they usually just think of advertising. That's a big part of it, to be sure, but as those of us in the media business know, it goes far beyond that. 

Here's my start at a list all the revenue models you can find in the media industry, all based around a core of free or almost-free content:

• CPM ads ("cost per thousand views"; banner ads online and regular ads in print, TV and radio)
• CPC ads ("cost per click"; think Google ads)
• CPT ads ("cost per transaction"; you pay only if the customer brought to you from a media sites becomes a paying customer. Here's an example.)
• Lead generation (you pay for qualified names of potential customers)
• Subscription revenues
• Affiliate revenues (think: Amazon Associates)
• Rental of subscriber lists
• Sale of information (selling data about users--aggregate/statistical or individual--to third parties)
• Licensing of brand (people pay to use a media brand as implied endorsement)
• Licensing of content (syndication)
• Getting the users to create something of value for free and applying any of the above to monetize it. (Like Digg or our own Reddit)

UPDATE: Michael Cader suggests a few more good ones (some of which are exhibited in his own Publishers Marketplace)

• Upgraded service/content (ed: aka "freemium")
• Alternate output (pdf; print/print-on-demand; customized Shared Book style; etc.)
• Custom services/feeds
• Live events
• "Souvenirs"/"Merchandise"
• Co-branded spinoff

UPDATE2: Fred Wilson adds: (see his comments section for even more)

• Cost Per Install (popular with top Facebook apps who can help others get installs)
• E-commerce (selling stuff directly on your website)
• Sponsorships (ads of some sort that are sold based on time, not on the number of impressions)
• Listings (paying a time based amount to list something like a job or real estate on your website)
• Paid Inclusion (a form of CPC advertising where an advertiser pays to be included in a search result)
• Streaming Audio Advertising (like radio advertising delivered in the audio stream after a certain amount of audio content has been delivered)
• Streaming Video Advertising (like streaming audio but in video)
• API Fees (charging third parties to access your API)

Finally, one of my commenters gave this example, which speaks to how much more diverse the media business model is than people think:

"My main business is a site that sells classified advertisements. I can make money from any of 4 sources:
- The people placing the advertisements, or
- The people paying to see the advertisements (in my niche market, this is possible, although in most advertising markets it isn't), or
- Commission from sales for related products, or
- Direct sales of related products"

What other revenue models am I missing? Additions and other suggestion in the comments, please, and I'll update this list accordingly.

(image: GapingVoid)

The first "Long tail Olympics"

So said Bill Gates in his CES keynote today. From the official Microsoft press release:

Partnership With NBC Universal for the First “Long-Tail” Olympics

NBC Universal and Microsoft will raise the bar for live and on-demand Internet broadcasting through an exclusive agreement where Microsoft and NBC will deliver NBCOlympics.com on MSN, the official U.S. online home of the 2008 Summer Olympics in Beijing. In the first “long-tail” Olympics, online viewers will have access to more than 3,000 hours of live and on-demand content so they can watch their favorite athlete or sport, regardless of whether the sport has seven fans or 7 million. NBCOlympics.com on MSN will be available free and powered by Microsoft Silverlight technology, a cross-browser, cross-platform plug-in for delivering high-quality video experiences on the Web.

That's great, but a real Long Tail Olympics would include Segway polo. And cricket.

[image credit: Engadget]

How not to do a FREE calculation, Trent Reznor edition

Today Nine Inch Nails singer Trent Reznor posted on his site the results of his Radiohead-like experiment in giving away/selling the album of his protege, Saul Williams. The deal was that you could get a medium-quality 192k MP3 version of the album ("The Inevitable Rise and Liberation of Niggy Tardust") for free or pay $5 for a higher-quality version.

Reznor says he's "disheartened" that a bit less than 20% of the 154,449 who have downloaded the album since it was released a few weeks ago paid the $5.

So let's do the math: 28,322 people times $5 = $141,610

In the same issue of Wired where we interviewed Reznor about this experiment, David Byrne ran the numbers on traditional music publishing. He reports that for a $16 CD, the artists should expect to get $1.60. Reznor notes that Williams' previous record was released in 2004 and has sold 33,897 copies. So for that previous album, Williams personally made $54,235.

But in the direct download model, which bypasses label distribution, the artist can keep everything, as Radiohead did. I don't know how Reznor and Williams are splitting the money, but between them they made $142,000 this time, some two-and-a-half times more than Williams did last time.

What's so disheartening about that?

For those of you who didn't get Rock Band this Christmas

(Thanks to Duncan Rawlinson for the spot.)

How not to do a FREE calculation

I love Bear Stearns analyst Spencer Wang, but he can do better than this. According to PaidContent, Wang calculates that if the Wall Street Journal online goes free, as its new owner Rupert Murdoch has said it will, it would have to increase its traffic 12x to make up for the lost subscription revenues.

WSJ.com revenue is currently pegged at $78 million annually, based on an estimated 989,000 subscribers paying $79/year. Including non-subscriber traffic, the company claims 122.4 million monthly page views. Based on an estimated CPM of $6 and a few other assumptions about sell-through rate and ad impressions per page, Wang arrives at the 12x conclusion.

The problem, Wang concludes, is that going free would only increase its traffic 6x. Thus a downgrade of 1 cent a share, which Bear Stearns made today.

Now putting aside the fact that a $6 CPM is absurdly low for a site like wsj.com (and the more important fact that I haven't read the whole report, which may be more subtle than it appears in these reports), there is one thing clearly missing in this analysis: the indirect benefits of the Wall Street Journal reappearing in the online business conversation that it has largely ceded to others due to its subscription wall.

For instance:

• What about the new newspaper subscriptions that a 6x increase in web traffic will generate? (Print subscribers are typically worth five times what online viewers are worth, due to the higher effective CPMs of print media.)
• What about the increased buzz and respect that the ability for bloggers everywhere to link to wsj.com stories will engender, bringing the paper back to the front of mind of media buyers and thus bringing in more ads?
• What about the fact that, in a fierce competitive battles with its cross-town rival, the the New York Times, once nytimes.com went free, wsj.com had no choice but to do the same to maintain mindshare with an audience who are increasingly shifting online?

I don't know how to quantify any of those factors, but I know they're all non-zero, and in the case of second, at least, could be large.

And then there's the small matter of simply migrating a powerful twentieth century brand into the twenty-first century, by understanding the forces at work in the new media landscape. It's ironic that it took a septuagenarian oligarch to understand that free will be the only viable price for mass media online in a world of information abundance and attention scarcity. But as a fan of the WSJ who doesn't read it often enough because it doesn't show up in my RSS feeds, I'm glad he did.

Why give away your book?

Charles Sheehan-Miles, who wrote "Republic: A Novel of America's Future", explains why he's giving away his ebook in any way, shape or form you want it:

No more sample chapters, partial books that end in the middle, none of that. You can download and read the complete book. Share it with your friends, email it, do anything you want with it except sell it.

Here's why: the biggest challenge most authors face isn't online piracy. It's not people out there diabolically copying their works and distributing them for free. In fact most authors (including yours truly) suffer from a different problem entirely -- no one has ever heard of them. After all, literally hundreds of thousands of new titles come out every year, and only a few hundred writers in the entire United States (if that many) actually live off their books full time. So, by giving away the book, I hope more people actually read it.

Tim O'Reilly was the first to say that the enemy of authors isn't piracy, it's obscurity. For the vast majority of authors, being read is actually reward enough. How to turn that recognition into a living is a whole other process, and not necessarily one that depends on the traditional book industry to deliver. Good thing, too, since it so rarely does.