Hal Varian: 14 Free business models

I had a great interview today with Google's economist-in-residence Hal Varian on the economics of free. He pointed me to a 2004 paper he wrote on the changing economics of content and copyright in a digital world. It includes 14 business models that allow content creators to make money even if they cannot stop the content from being distributed for free. Here they are:

"Most information is born digital and that digital information is typically very easy to copy and distribute, it is conceivable that copyright laws may become almost impossible to enforce. Are there ways for sellers to support themselves in such an environment? It is worth considering some of the options. Here is a brief list of business models that might work in a world without effective copyright.

Make original cheaper than copy. This is basically the limit pricing model described earlier. If there is a transaction cost for a copy-a direct cost of copying, an inconvenience cost, or the copy is inferior to the original in some way-then the seller can set the price low enough that it is not attractive to copy.

Make copy more expensive than original. The "cost of copying" is partially under the control of the seller, who could use a "digital rights management system," some anticopying technology, or threats of legal action which would increase the cost of copying and, therefore, increase the price that it could charge for its product.

Sell physical complements. When you buy a physical CD you get liner notes, photos, and so on. Perhaps you could get a poster, a membership in a fan club, a lottery ticket, a free T-shirt, as well. These items might not be available to someone who simply downloaded an illicit copy of a song.

Sell information complements. One can give away the product (e.g., Red Hat Linux) and sell support contracts. One can give away a cheap, low-powered version of some software and sell a high-powered version.

Subscriptions. In this case, consumers purchases the information as a bundle over time, with the motivation presumably being convenience and perhaps timeliness of the information delivery. Even if all back issues are (eventually) posted online, the value of timely availability of current issues is sufficient to support production costs.

Sell personalized version. One can sell a highly personalized version of a product so that copies made available to others would not be valuable. Imagine, for example, a personalized newspaper with only the items that you would wish to read. Those with different tastes may not find such a newspaper attractive. Selling works with digital fingerprints (encoding the identity of the purchaser) is an extreme form of this. (Playboy has allegedly put digital fingerprints in online images.)

Advertise yourself. A downloaded song can be an advertisement for a personal appearance. Similarly, an online textbook (particularly if it is inconvenient to use online) can be an advertisement for a physical copy. There are many examples of materials that are freely published on the Internet that are also available in various physical forms for a fee, such as US Government publications (e.g., The 9/11 Commission Report, or the National Academy of Sciences reports.

Advertise other things. Broadcast TV and radio give away content in order to sell advertisements. Similarly, most magazines and newspapers use the per copy price to cover printing and distribution, while editorial costs are covered by advertising. Advertising is particularly valuable when it is closely tied to information about prospective buyers, so personalization can be quite important. In an extreme form, the advertisement can be completely integrated into the content via product placement.

Monitoring. ASCAP monitors the playing of music in public places, collects a flat fee, which it then divvies up among its members. The shares are determined by a statistical algorithm. The Copyright Clearance Center uses a similar system for photocopying-a flat fee based on an initial period of statistical monitoring.

Site licenses. An organization can pay for all of its members to have preferred access to some particular kinds of content. University site licenses to JSTOR content, Elsevier content, or Microsoft software are examples. This is particularly relevant when there are strong network effects from adopting a common standard, such as in the Microsoft example.

Media tax. This a tax on some physical good that is complementary to the information product (i.e., audio tape, video tape, CDs, TVs, hard drives, etc.) The proceeds from this tax are used to compensate producers of content. For example, the Audio Home Recording Act of 1992 imposes a media tax of 3 percent of the tape price.

Ransom. Allow potential readers to bid for content. If the sum of the bids is sufficiently high, the information content is provided. Various mechanisms for provision of public goods could be used, such as the celebrated Vickrey-Clarke-Groves mechanism. This could be used in conjunction with the subscription model. For example, Stephen King offered installments of his book The Plant on his web site. At one point he indicated he would continue positing installments if the number of payments received divided by the number of downloads from his site exceeded 75.6 percent. His experiment did not succeed, perhaps due to the poorly chosen incentive scheme.

Pure public provision. Artists and other creators of intellectual property are paid by the state, financed out of general revenues. This is not so different from public universities where research and publication is considered integral to the job.

Prizes, awards and commissions. Wealthy individuals, businesses or countries could commission works. The patronage system achieved some notable results in Europe for several centuries. The National Science Foundation or the National Endowment for the Humanities are examples of modern day state agencies that fund creative works using prizelike systems."

Comments

[Gerd Leonhard]

Chris, thanks for bringing Hal's work back to life - great stuff here. Just yesterday, I posted something very much related on my blog, "The Future Revenues for Content Creators: Attention Revenues UP, Copy Revenues DOWN -- get used to it" >> http://www.mediafuturist.com/2008/09/future-revenues.html

A snippet: it looks like we are indeed heading into a future of Attention Revenues exceeding Copy Revenues - and I am talking within 3-4 years here, and probably much sooner in Asia where 'selling copies' has never been the #1 money maker for content creators.

A Future where all kinds of attention-based revenues (i.e. not just advertising-as-we-knew-it but revenue sharing of flat-rate offerings, next-generation '2.0' advertising, up-stream selling and marketing, sponsorships and branding, linking and referring, etc) will very likely surpass copy & unit-sales revenues. A Future where many content creators of all kinds, in all locations, and within all levels of accomplishment will make more money based on what their brand stands for, based on their fans aka users having real, meaningful experiences with or through them, and based on who pays attention to them, when and where.

Selling enough copies of one's work (whether physical or digital, whether books, songs, movies, software or games) to make this the sole pillar of one's livelihood has in reality always been reserved to those very few creators that are at the top of the heap (i.e. not in the so-called longtail or even the body). And of course, being hit-driven, the companies that have marketed those that can sell millions of copies globally are the ones who will have the most to lose in the short term and during this paradigm switch-over - Hollywood's latest disaster movies are not going to be themost-watched movies in India, China and Brazil in the future, anymore.

In our immediate future as content creators and companies that serve them, it's all about gathering and converting Attention - at least until the world is so well-served with feels-like-free content in return for attention that physical copies become desirable again (and they will)....

[John Banfill]

Another model would be to Improve a core product. An author writing a book can test their material and get comments on it before the book is finalized.

A penny saved is a penny earned. Money can be saved by offloading maintenance and improvements. Sun open-sourced Star Office -> Open Office to have an office suite available for UNIX.

[Moggio]

This paper by Hal Varian has been published in the Journal of Economic Perspectives, Vol. 19, No. 2, Spring 2005, pages 121-138.

[hoffmang]

The factor I often see missed when the general argument is made that since the cost of copying is near zero, that the revenue potential is zero is the factor of time. Time is not free to it's experiencer. As such, there is almost always an ability to monetize the time you save a customer in access, acquisition, retention, and ease of use.

The opportunities are around combining "Subscriptions" with "Sell information complements." When we stop concentrating on the digital widget and instead concentrate on the value creation that the digital widget is simply a carrier of, we can get past "all information wants to be free" to "this information and information provider creates real value for me the consumer and I'm quite willing to pay him because paying is easier.

Music services a mood, books either service an entertainment mood or educate. Either way, focusing on what these widgets actually do and offering the services around them creates commerce models for content producers and better experiences for end consumers. Ask yourself which one is easier to use - Pandora or Bittorrent? If you write an e-book, ask your fans to subscribe to you and gate them new content and access to you (online chat, etc.) Then, trust your users by making those digital widgets work as widely as possible for as many uses as possible. Trust tends to get returned...

I will add a shameless personal plug for Vindicia where we're taking that philosophy and actually making it easy to build and scale content and service offerings.

[Miguel Barbosa]

Thanks for this great article. I have already linked to it through my blog. I love how your content helps people become more well rounded citizens. Take care.