The Long Tail

Redesign update

Thanks for the feedback on the redesign. We've now fixed the two main problems--lack of white space on the left on small screens or non-maximized browsers, and no search function. We've now got five pixels of white on the left and the search bar is reinstated in the far right sidebar. Also, note that the microblogging sidebar on the right is really just a feed from my Tumblog, so if you want to comment on any of those posts just click on the title and it will take you to the Tumblog where comments are enabled. 

My projects seem to be heading down the Long Tail

Over the past five years, I've launched project after project. I love each one and put equal effort into each. And each is successful in its own way. But I can't help but notice that my interests are getting increasingly narrow, and as a result the monthly audiences for each project are falling by an order of magnitude with each iteration.

1. Wired: tens of millions of people
2. The Long Tail (book and blog): millions of people
3. GeekDad: hundreds of thousands of people
4. DIY Drones and BookTour: tens of thousands of people

I must break this cycle lest my next project fall below Kevin Kelly's 1,000 True Fans limit.

Somehow I think FREE will do the trick ;-)

Revised: the *four* kinds of FREE

A few weeks ago, I posted a diagram grouping free business models into three categories: cross-subsidies (eg, razor-and-blades), three-party markets (ads) and "freemium" (what economists call "versioning"; in this case most people get the free version). But as I was writing through that chapter, I realized that wasn't quite right.

The problem is that they're all cross-subsidies in one way or another:

• Paid products subsidizing free products: This is a staple of business, from the popcorn that subsidizes the loss-making movie to the expensive wine subsidizing the cheap meal in a restaurant. Free just takes that further
• Paying later subsidizing free now: The free cellphone with a two-year subscription contract is a classic example of the subsidy over time. It’s just shifting phone service from a point-of-sale revenue stream to an ongoing annuity. In this case, your future self is subsidizing your present self, with the hope that you won’t think about what you’ll be paying each year for the phone service but are instead dazzled by the free phone you get today.
• Paying people subsidizing free people: From the men who pay to get into nightclubs where the women get in free, to “kids get in free”, to progressive taxation where the wealthy pay more so the less wealthy pay less (and sometimes nothing), the notion that segmenting a market into groups by their willingness to pay is a conventional part of pricing theory. Free takes that to the extreme, extending to a class of consumers who will get the product of service for free. The hope is that the free consumers will attract or bring with them paying consumers (the aforementioned women or kids) or that some fraction of the free consumers will convert to paying consumers. When you walk through the amazing interiors of Las Vegas attractions, you get the view for free on the hope that some people will stop and gamble or shop.

So here I'll try another pass at getting this taxonomy right. The below has four kinds of free, with "gift economy" as the forth. That's still a form of cross subsidy, but it's so diffuse--threading from the reputation and attention economies back to money through some long process that's often impossible to quantify (like the way I'm going to financially benefit from this post)--that I don't include money in its diagram at all.

I've also modified the first to describe it as a direct cross-subsidy, which is to say that's typically you subsidizing yourself. The others are all other people subsidizing you, or you subsidizing other people. Finally, for economic purists out there, note that what I'm calling three-party markets (FREE 2) is what economists call "two-sided markets".

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The future of business is avoiding cliched subtitles

The Long Tail's subtitle was "Why selling less of more is the future of business". Shamelessly, the subtitle of my Wired FREE article was "Why $0.00 is the future of business".

But now comes my colleague Jeff Howe's new book, "Crowdsourcing: Why the power of the crowd is driving the future of business", and the forthcoming hardcover by David Edery and Ethan Mollick, "Changing the Game: How video games are transforming the future of business."

I've had a lot of good suggestions on subtitles in this post, so I'll dig through those. But I think I can say with certainty that the book won't have the same subtitle as the Wired article.

BTW, in book industry lore, there's a big difference between "Why" books and "How" books. The first is considered a bit intellectual, while the second is considered more practical. So assuming I'm going to use one of those two constructions, I'll have to decide between smart or servicey. 

What is the connection between inflation and peas?

As a magazine editor, I understand how hard it is to turn amorphous subjects into punchy covers. But can anyone explain the cover of the August 11th issue of Newsweek International? (I have a piece in that issue, so they sent it to me. It's not the same as the US edition's cover of that week, thankfully).

The Three Prices--more than zero, zero, and less than zero

My book is mostly about two prices--something and nothing--but at dinner in NYC with Jay Walker this week, he convinced me to include a discussion of a third price: less than nothing. That's right, a negative price: you get paid to use a product or service, rather than the other way around.

This is more common that you might think. Online, you see this in things like Microsoft paying you to use their search, but it actually has a long tradition in traditional marketing. You find it instant rebates and cash back marketing, and in the cash rewards, frequent flyer miles and other payments you get for using credit or loyalty cards.

Jay pointed out that a cashback rebate invokes a very different psychology than simply saving the money in the first place. For instance, he says that studies of how people spend the $1,000 (or whatever amount) check they get when they buy a new truck (or, more to the point, finance it), show that they tend to spend it like a lottery winning--an unexpected windfall. Guys would buy golf clubs that their wife would never normally let them purchase, and their wives wouldn't stand in their way. This despite the fact, which they must know, that they'll be paying that money back over the years to come, just like a credit card debt.

FWIW, TechCrunch says the Microsoft search cashback program has not been very effective. And, as it happens, such cashback schemes may run afoul of the anti-interest provision of Islamic law.

Redesign--finally!

After four years of a Typepad template I threw together one Sunday night and never revisited, this blog has a redesign, thanks to the team at wired.com.

Aesthetically, you'll notice that it's part of the Wired Blog Network, which means that there will be one ad at the top. I've now got a proper logo, which actually is inspired by the Thai version of The Long Tail book:

 

Although I'm now migrating to more research and writing on FREE, my forthcoming (Q2) book, I've kept the name and domain of this blog the same, mostly because it's still a theme that pervades everything I do. (It's also hard to throw away that much Googlejuice--the curse of network effects.)

Functionally, the main difference is that the old sidebar, which was based on a Typelist that was hard to maintain and didn't have timestamps and comments, has been replaced with a Tumblr microblogging feed. To comment on any of those microposts, just click on the headline and you'll be taken to my new Tumblog.

My fave passionate amateur example: GeekDad

I try not to write much about my day job here, but in the context of my last post about the virtues of passionate amateurs, I have to brag about the team at our Wired parenting blog, GeekDad. They are 17 amateurs, led by Ken Denmead (manga avatar shown), who by day is a civil engineer working in San Jose. Last month they did 1.4 million page views, making them #6 out of the 12 Wired blogs, and beating out several that are written by professional journalists.

As many have pointed out in the comments, there is a third group that beats both passionate amateurs and bored professionals, and that's passionate professionals. And it's worth noting that the top Wired blogs, which include our defense, science, gadget and car blogs are written by exactly that ideal, epitomized by DangerRoom's Noah Shachtman, who is perhaps the best defense tech writer in the world. 

But it's amazing to watch the GeekDad crew go. They're just dads who volunteered for the job when I put out the call a year or so ago. They are incentivezed by all the usual non-monetary things: expression, attention, reputation, etc. But more importantly they're well-led by Ken, who's constantly suggesting ideas, encouraging participation, recognizing accomplishment and otherwise coaching like a rockstar editor. But he's not a professional editor, he's a passionate amateur. And as a professional editor, I stand in awe.

A passionate amateur almost always beats a bored professional

In the endless debate about the relative merits of amateurs vs. professionals in a world the two have equal access to the tools of production, I think people miss a key point:

Amateurs self-select for the job. Professionals are selected. For most jobs, volunteers beat draftees.

No matter how much you love your job, you will eventually end up doing something that feels like work--something that you have to do because your boss asked you to or because the market requires it. At that point, your professional skills may be negated by your lack of authentic interest.

But amateurs are by definition volunteers. They choose to spend their time on what they do, and they go exactly where their passions, interests, knowledge and personality takes them--no further. If they lose interest they move on and are replaced by someone bursting with fresh energy. Self-selection ensures engagement.

To me that's the difference between amateur and professional content: the first may not be polished, but it's driven by the sort of intense interest that cannot be faked. The second may be better written, spelled more correctly and otherwise competently produced, but all too often it has the arms-length perspective of a drive-by.

This is one of the problems with professional journalism: journalists go where the story is, and every day brings a new story. Journalistic skills are portable, but deep domain skills are not. Meanwhile, the amateur lives one story, their own. They make lack journalistic skills, but if you're interested in their world, there's no better guide than a native.

These days I find that more and more of what I read is created by amateurs (or at least amateur writers) talking about what they're most interested in, whether it's Spore walkthroughs or robotics tutorials.

I'll take a passionate amateur over a bored professional any day.

Barnes & Noble's Steve Riggio on Blockbusters

From a terrific New York Magazine feature on the future of the book industry, this tidbit from Barnes & Noble CEO Steve Riggio: “We buy every title published—our business is a long-tail business—less than 5 percent is from bestsellers.”

Another Harvard professor helpfully suggests that we make hits

What is it about Harvard Business School professors and their embrace of the grindingly conventional pitched as fresh contrarianism? The latest is HBS marketing professor John Quelch, who bravely argues for, well, successful products:  Long-Tail Economics? Give Me Blockbusters!

Unlike these HBS professors, I’m actually in the blockbuster industry (Conde Nast editor), and I can confirm that blockbusters are indeed great when you happen to have one. The problem is that neither we nor anyone else can predict what will be a blockbuster or how to create them with any regularity.

So we can’t do much to improve our blockbuster batting average. But what we can do is become less dependent on them. And that’s the point of the Long Tail.

But Quelch thinks we've got it all wrong. Forget spreading your bets and embracing niches. Instead, make blockbusters! Okay. How? Well, he doesn't quite get to that. Instead, Quelch helpfully identifies the "five defining characteristics of blockbusters", all coincidentally starting with "S": [My comments are in brackets]

1. Sheer size. A blockbuster has a transformational impact on a company and an industry, often opening up new markets worldwide. Blockbusters break sales records and exceed expectations. Around 100 pharmaceutical brands exceed $1 billion in annual sales. Procter & Gamble has 23 such brands. [A bit of a tautology, which says blockbusters are, well, blockbusters, but let's move on...]  
2. Speed. It's not just the sales volume; it's the speed of the sales trajectory. Remember that the original blockbuster was a bomb that could destroy an entire city block. Blockbuster brands address pressing consumer needs so well that they often enjoy vertical sales liftoff. Think Viagra. [Huh? Did blockbuster bombs explode faster than other bombs? Can Viagra destroy an entire city block? I'm confused.]
3. Scarcity. A blockbuster brand is often in such high demand that stock-outs and shortages occur in the market. Remember the consumer lines to buy the new iPhone? As imitation is the sincerest form of flattery, the speedy availability of counterfeits is another indicator of popularity. [Except for all the blockbusters that don't exhibit this unusual scarcity behavior, such as Hollywood blockbusters, music blockbusters, drug blockbusters and indeed virtually all blockbusters except for the aforementioned iPhone and a few toys around Christmas. Also, isn't widespread piracy the opposite of scarcity?]
4. Sustainability. A blockbuster brand is not a one hit wonder. It is a gift that keeps on giving. Remember Intel's Pentium chip. Or look at the seven Harry Potter books and five companion movies. Adding DVD and merchandise sales, theme parks, etc., Advertising Age valued the Potter economy at $15 billion. [Except for all the blockbusters that are one-hit wonders, from pop music to the aforementioned drugs. Furthermore, including Intel's Pentium chip in this list is risible: it was the fifth generation of a chip architecture that began with the first personal computers and grew along with the industry. It sold more than the processors before it and less than the processors after it. Does that make every component in a PC a blockbuster, simply because a lot of PCs are sold?] 
5. Sizzle. A blockbuster does not just address an important need. It does so in an exciting and accessible way. Pfizer's Lipitor was not the first cholesterol reducer but superior marketing and sales made Lipitor number one. And in the movie world, think of the magical and memorable special effects in the Star Wars series. [Comparing Lipitor to Star Wars special effects? Priceless. This is what it takes to become a Harvard Business School professor, folks]

It’s like the "Give Peace a Chance" bumper stickers on the old Volvos here in Berkeley. Good advice. If only it were so easy.

[thanks to Robin Koskinen for the tip]

The truth about "too cheap to meter"

On of my chapters begins with the story of Lewis Strauss, the head of the Atomic Energy Commission, who in 1954 famously said "It is not too much to expect that our children will enjoy in their homes electrical energy too cheap to meter."

He was wrong. But what if he'd been right? How different would the world be? Today we have three technologies--processing power, digital storage capacity and bandwidth--that touch nearly as much of the economy as electricity, and they really are becoming too cheap to meter, and this chapter is about the implications of that.

In the course of writing this, I did a little research on the origins of the phrase, and like all famous quotes, it's wildly misunderstood. So here are five things you may not have known about "too cheap to meter", some taken from this great history page:

1. He was probably talking about hydrogen fusion, not uranium fission. Then, as today, fusion was decades away from being viable. Fission (what's known as "nuclear power"), on the other hand, was already in the works and everyone, including Strauss, knew that it probably would be more expensive than coal, given the high capital costs of setting up the plants.
2. "Too cheap to meter" doesn't mean free: it just means too cheap to monitor closely. Indeed, some building built around that time, including the World Trade Center, were designed without light switches in each office. Instead, building managers could just turn on and off whole floors, like a Christmas Tree. Electricity was expected to be too cheap to bother thinking about.
3. Strauss was strong proponent of the hydrogen bomb, which put him in conflict with Robert Oppenheimer, the regretful father of the atomic bomb. He famously testified against Oppenheimer in a congressional witch hunt that led to Oppenheimer losing his security clearance. "Strauss told President Eisenhower that he would only accept the position of AEC chair if Oppenheimer played no role in advising the agency. He explained that he didn't trust Oppenheimer partly because of his consistent opposition to the superbomb. Within days of being sworn into office in July 1953, Strauss had all classified AEC material removed from Oppenheimer's office." [source]
4. He got his comeuppance: "Over the years Strauss' arrogance and his insistence that he was always right made him unpopular on Capitol Hill. In 1959, after two months of exhausting hearings, the Senate rejected his nomination to be Secretary of Commerce. The ordeal was publicly humiliating for Strauss, especially after he was caught lying under oath."
5. The whole quote is part of a slightly over-the-top space-age rhapsody on the ability of science and technology to improve the world, which he gave in a speech to science writers in New York: ""It is not too much to expect that our children will enjoy in their homes electrical energy too cheap to meter; will know of great periodic regional famines in the world only as matters of history; will travel effortlessly over the seas and under them and through the air with a minimum of danger and at great speeds, and will experience a lifespan far longer than ours, as disease yields and man comes to understand what causes him to age. This is the forecast of an age of peace."

That free music Nokia phone? not so much

If the Nokia phone with a year's worth of free music that we wrote about the other day sounded too good to be true, it's because it was. According to Engadget, pre-order pricing at UK retailers suggest that the "Comes With Free" phones will have a $150 premium over the same phones without music. That's a lot for music that you don't own and can only listen to for a year.

Google: The all-time biggest company based on free

I've always assumed that Google was the best--and biggest--example in history of a business model based on free, but until today I hadn't actually run the numbers. Before I get to those, let's definite what "built on free" means.

Until the advent of the Web, the biggest companies built on free were broadcasters in radio or TV ("free-to-air" services, where a third party--the advertisers--pay for content to be free to consumers). In the rabbit-ears broadcast era, these were pure free plays: virtually all their revenue came from direct advertising payments or syndication revenues from their local affiliates, who were just passing along their own advertising revenues.

This is what's commonly referred to as "the media business model". Sometimes it means that advertisers subsidize 100% of the content costs, other times they subsidize just 70-80% of those costs, as in the case of magazines and newspapers.

Since the advent of cable TV and satellite radio, the media business model has evolved. TV broadcasters are bigger but they're also more diversified, with a mix of revenues from traditional ad-supported free media and paid content, from DVDs to pay-per-view. Only terrestrial radio remains purely free. 

Meanwhile, the pure free-to-consumers media business model has moved to the Web, but mostly in the shape of companies that don't fall neatly into traditional definitions of "media", such as Google or Yahoo.

So to properly see how the Web free companies compare to the broadcast free companies, we'd have to carefully tease out just the free parts of the broadcasters's revenues. Fortunately, we don't have to bother because it's really no contest.

Google, at $17 billion in annual revenues last year, is larger than any broadcaster in history, free and non-free elements combined.  The biggest broadcasters, ABC, CBS and NBC, are all in the $14-$15 billion range. The biggest radio network, Clear Channel, had revenues of $7 billion. Meanwhile, on the Web, Google's closest free competitor is Yahoo, at $7 billion.

So congrat, Google. You are indeed the all-time biggest company built on free. And a good thing, too, given how much time I've been spending at the Googleplex of late.

Nick Carr on why Google makes the "complements" to its core business free

Nick Carr has an awkward role to play in the world. He is one of the most insightful thinkers about technology's impact on the world, but he has also chosen to be this era's most erudite technology curmudgeon. 

In practice, this boils down to a love/hate relationship with Google, which Carr both understands on a really deep level and constantly frets about. You might argue (with reason) that those two are not mutually exclusive, but there is such a gap between the rigor with which he approaches the first and the hyperbole he uses in the second, that one has to wonder if the second is just for show. 

Anyway, he's always worth listening to, and his post on the occasion of Google's tenth anniversary is no exception. Here, he explains why Google, the cathedral of free, gives away most of its products: to reinforce the market for the few products it charges for:

Google’s protean appearance is not a reflection of its core business. Rather, it stems from the vast number of complements to its core business. Complements are, to put it simply, any products or services that tend be consumed together. Think hot dogs and mustard, or houses and mortgages. For Google, literally everything that happens on the Internet is a complement to its main business. The more things that people and companies do online, the more ads they see and the more money Google makes. In addition, as Internet activity increases, Google collects more data on consumers’ needs and behavior and can tailor its ads more precisely, strengthening its competitive advantage and further increasing its income. As more and more products and services are delivered digitally over computer networks — entertainment, news, software programs, financial transactions — Google’s range of complements expands into ever more industry sectors. That's why cute little Google has morphed into The Omnigoogle.

Because the sales of complementary products rise in tandem, a company has a strong strategic interest in reducing the cost and expanding the availability of the complements to its core product. It’s not too much of an exaggeration to say that a company would like all complements to be given away. If hot dogs became freebies, mustard sales would skyrocket. It’s this natural drive to reduce the cost of complements that, more than anything else, explains Google’s strategy. Nearly everything the company does, including building big data centers, buying optical fiber, promoting free Wi-Fi access, fighting copyright restrictions, supporting open source software, launching browsers and satellites, and giving away all sorts of Web services and data, is aimed at reducing the cost and expanding the scope of Internet use. Google wants information to be free because as the cost of information falls it makes more money.

There’s one more twist. Because the marginal cost of producing and distributing a new copy of a purely digital product is close to zero, Google not only has the desire to give away informational products; it has the economic leeway to actually do it. Those two facts — the vast breadth of Google’s complements, and the company’s ability to push the price of those complements toward zero — are what really set the company apart from other firms. Google faces far less risk in product development than the usual business does. It routinely introduces half-finished products and services as online “betas” because it knows that, even if the offerings fail to win a big share of the market, they will still tend to produce attractive returns by generating advertising revenue and producing valuable data on customer behavior. For most companies, a failed launch of a new product is very costly. For Google, in general, it’s not. Failure is cheap.

But while Google has an odd business model, it's not an unprecedented one. The company it most resembles is, ironically, its archrival, Microsoft. Just as Google controls the central money-making engine of the Internet economy (the search engine), Microsoft controlled the central money-making engine of the personal computer economy (the PC operating system). In the PC world, Microsoft had nearly as many complements as Google now has in the Internet world, and Microsoft, too, expanded into a vast number of software and other PC-related businesses - not necessarily to make money directly but to expand PC usage. Microsoft didn't take a cut of every dollar spent in the PC economy, but it took a cut of a lot of them. In the same way, Google takes a cut of many of the dollars that flow through the Net economy. The goal, then, is to keep expanding the economy.

The whole post is worth reading. Check it out here.

Putting a price on the Cricket Diaspora

One of my more theoretical Long Tail examples was sports which are hits in their place of origin but niches elsewhere, something that applies as well to most college football as it does to the example I chose, cricket. The "Cricket Diaspora", which is millions of people, mostly from current and former Commonwealth countries who now live elsewhere, was a perfect example of how Long Tail tactics of reaching distributed demand could tap new markets.

Now, a couple years later, this is actually turning into a big business. From PaidContent:

"Reliance ADA Group, the Indian telecom and media conglomerate, has bought a 70 percent stake in Willow.tv, the Cricket webcasting site based in Sunnyvale, CA. The price was undisclosed, but according to Rajesh Sawhney, president of Reliance Entertainment, the company will spend about $60 million to $70 million in this acquisition and expansion together, quoted in WSJ.

Willow TV has been around for about five years, and named after the tree from which Cricket bats are made. It was among the first to start live webcasting cricket matches for expatriate audience worldwide, though a big part of its audience is South Asians in U.S. (including me). It charges anywhere from between $10 for a short series to $150 a full cricket tournament, depending on the countries and number of games involved. In 2007-08, the site has streamed most of the major tournaments live, including the Indian Premier League, Australian, South African and English cricket."

Clay Shirky on the weird things that happen when things suddenly become abundant

A few months Clay Shirky gave a terrific speech (scroll down past the introductions for the full transcript) that got the most attention for this important lesson from a little girl:

"I was having dinner with a group of friends about a month ago, and one of them was talking about sitting with his four-year-old daughter watching a DVD. And in the middle of the movie, apropos nothing, she jumps up off the couch and runs around behind the screen. That seems like a cute moment. Maybe she's going back there to see if Dora is really back there or whatever. But that wasn't what she was doing. She started rooting around in the cables. And her dad said, "What you doing?" And she stuck her head out from behind the screen and said, "Looking for the mouse."

Here's something four-year-olds know: A screen that ships without a mouse ships broken. Here's something four-year-olds know: Media that's targeted at you but doesn't include you may not be worth sitting still for."

But if you read the whole thing, you'll find an equally important lesson about why it takes a generation or two to figure out how to properly use some resource that used to be scarce but is now abundant. In this case that resource is time, which we got more of in the prosperous decades after the Second World War. For the first few generations, we chose to fill that time with television. Only now are we learning to fill it more productively, and to greater satisfaction. To use Clay's term, it took fifty years for us to learn how to tap the cognitive surplus that came after the five-day work week.

"I was recently reminded of some reading I did in college, way back in the last century, by a British historian arguing that the critical technology, for the early phase of the industrial revolution, was gin.

The transformation from rural to urban life was so sudden, and so wrenching, that the only thing society could do to manage was to drink itself into a stupor for a generation. The stories from that era are amazing—there were gin pushcarts working their way through the streets of London.

And it wasn't until society woke up from that collective bender that we actually started to get the institutional structures that we associate with the industrial revolution today. Things like public libraries and museums, increasingly broad education for children, elected leaders—a lot of things we like—didn't happen until having all of those people together stopped seeming like a crisis and started seeming like an asset.

It wasn't until people started thinking of this as a vast civic surplus, one they could design for rather than just dissipate, that we started to get what we think of now as an industrial society.

If I had to pick the critical technology for the 20th century, the bit of social lubricant without which the wheels would've come off the whole enterprise, I'd say it was the sitcom. Starting with the Second World War a whole series of things happened—rising GDP per capita, rising educational attainment, rising life expectancy and, critically, a rising number of people who were working five-day work weeks. For the first time, society forced onto an enormous number of its citizens the requirement to manage something they had never had to manage before—free time.

And what did we do with that free time? Well, mostly we spent it watching TV.

We did that for decades. We watched I Love Lucy. We watched Gilligan's Island. We watch Malcolm in the Middle. We watch Desperate Housewives. Desperate Housewives essentially functioned as a kind of cognitive heat sink, dissipating thinking that might otherwise have built up and caused society to overheat.

And it's only now, as we're waking up from that collective bender, that we're starting to see the cognitive surplus as an asset rather than as a crisis. We're seeing things being designed to take advantage of that surplus, to deploy it in ways more engaging than just having a TV in everybody's basement."

This is the same phenomena that I described earlier, using a computer science analogy rather than an economic one, as the "awesome power of spare cycles."

The three kinds of FREE

One of the themes of the book is untangling the confusion over different kinds of free,which can range from a simple marketing gimmick to a radically new economic model. I've taken a quick pass at doing this visually, but we'll really have to pretty these diagrams up (perhaps with cute restroom-style figures for the various parties, rather than the Ps and Cs below?)

 

Here's the first, which dates back more than a century. It's the razors-and-blades model, as well as loss leaders of all sorts, from "free gift inside" to "free toaster for opening an account":

 

The second is the media business model, ranging from free-to-air broadcast radio and television to all ad-supported content online today:

 

 

The third is the new one, enabled by digital markets where the marginal cost of production and distribution is close to zero. This is the one that allows the "freemium" business model, where 90% of the users get the basic product for free and 10% chose to pay for a premium version. In economics this is called "versioning" and is a form of using price discrimination (where the main price is zero) to maximize both the consumer utility and the profit in a market. In this model, charging a small percentage of a large user base beats charging a large percentage of a small user base.  Obviously best for consumer products with potentially large appeal, it's the main Web 2.0 business model and can be found everywhere from Flickr and Flickr Pro to open source's "support included" commercial versions of Linux.

 

Any ideas on how to improve these or otherwise present them more clearly and engagingly in the book?

Pricing sweet spots: $0 and $Lots (Yet another reason to forget micropayments)

Cory Doctrow writes: My latest Locus Magazine column is live: "Macropayments" explains why I don't have a tipjar:

Two columns back, in "Think Like a Dandelion," I talked about the reproductive strategies employed in species where reproduction is cheap, like dandelions. Unlike humans, dandelions don’t worry about the disposition of each of their children — they only want to be sure that every opportunity for success is fulfilled, that every crack in every sidewalk has a dandelion growing out of it. It’s a damned successful strategy, for dandelions at least. You’d be hard pressed to find a lawn, no matter how carefully tended and how thoroughly poisoned, that doesn’t have a dandelion or two sprouting on it.

To concretize the metaphor: I don’t care about making sure that everyone who gets a copy of my books pays me for them — what I care about is ensuring that the everyone who would pay me decent money for a book has the opportunity to do so. I don’t want to hold 13-year-olds by the ankles and shake them until their allowance falls out of their pockets, but I do want to be sure that when their parents are thinking about a gift for them, the first thing that springs to mind is my latest $20-$25 hardcover.

Macropayments [Read the whole thing, which is great, and also read Cory's previous article on the freeconomics of book distribution: Think Like A Dandelion]

Michael Moore to release his next film free online

[My take: I'm not so sure that Moore is giving up tens of millions of box office revenues on this one, as AP suggests. Getting theatrical distribution for a documentary is hard, even for Moore, and it maybe this one just didn't look like it was going to sell well enough to justify that. So it may really be a case of free online vs straight to DVD. And for Moore, for whom political impact is as important as cash, the mass reach enabled by free could mean more than whatever DVD revenues he'll forgo during the online distribution window. ]

NEW YORK (AP) — Inspired by Neil Young and Radiohead, Michael Moore will release his new film online and for free.

The film, "Slacker Uprising," follows Moore's 62-city tour during the 2004 election to rally young voters. It will be available for three weeks as a free download to North American residents, beginning Sept. 23. An official announcement of the film is planned for Friday.

Moore said he considered releasing "Slacker Uprising" theatrically as "Michael Moore's big election year movie" as he did with 2004's "Fahrenheit 9/11," which was highly critical of President Bush.

Instead, Moore opted for a symbol of gratitude to his fans as he approaches the 20th anniversary of his first film, 1989's "Roger & Me."

"I thought it'd be a nice way to celebrate my 20th year of doing this," Moore said. "And also help get out the vote for November. I've been thinking about what I want to do to help with the election this year."

The 97-minute long "Slacker Uprising" will be the first major film to be released in such a way. Last December, "Jackass 2.5" was streamed online and for free, but that was only a collection of left over material from "Jackass 2." Companies like ClickStar, which Morgan Freeman co-founded, have made films still in theaters — such as 2006's "10 Items or Less" — digitally available for purchase or rental.

If history is any measure, "Slacker Uprising" could have made a decent sum in theaters. His last two films, "Sicko" ($24 million) and "Fahrenheit 9/11" ($119 million) are two of the three highest grossing documentaries ever.

Read more here.

[Thanks to Brandon Buck for the heads up]

Microblogging update: Tumblr feed

[Housekeeping:] I've been trying to figure out how to integrate my urge to microblog interesting free examples here without cluttering the central column too much and otherwise mixing thoughtful posts with thoughtless ones. In the current blog design I've got a Typelist on the left, but it's a pain to create and manage Typelists (which is why I let it go fallow). What I want is a microblogging widget that will let me write longer posts than than Twitter and Del.icio.us do but still be quick, easy and flexible. I've settled on Tumblr, so we'll be postponing the site redesign for a week or so while we create a left column that will be my Tumblr feed. 

Why does it take a week to tweak a template? Because I'm actually writing the freakin' book, and in a rare act of discipline I've asked some colleagues to do it for me. And they're busy.

37 Signals: Charge for your products, Dummy!

[File under respected opposition] David Heinemeier Hansson, Jason Fried’s business partner at 37signals, begs to differ with the notion that Web companies shouldn't charge for their products. In a very entertaining speech (video below), he makes his case:

Forget using free to go mass and hope you'll become Facebook (or be bought by them). Instead, he says, focus on a small market and charge money. There are many ways to have a price in web software, he says, and he gives a few examples:

• Subscriptions (37Signals)
• Charge per use (Campaign Monitor email campaigns)
• Simply selling the software (Fogbugz)
• Flat fee for tiered service (Faxitnice)

He says that 37Signal's secret is not to target consumers (who don't like to pay) or big companies (that's a crowded space). Instead, they target the "Fortune 5 Million"--small companies with specific needs that are underserved (AKA the Long Tail).

 

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."

Buy the phone, get the music library for free

From Silicon Alley Insider:

Next month Nokia will launch its "Comes With Music" subscription service in the U.K., ahead of 2009 launches in Europe and Asia. Your new Nokia phone comes with a "free" year's worth of music -- an all-you-can-eat selection of 2.1 million songs, which is about 25% of Apple's iTunes library. After that, you can pay to keep using the service, or cut it off and keep your original song files.

Unanswered questions: How much will the phone cost? Will this come to the US? Will Apple do the same with the iPhone?

Microblogging random examples of free

I'm back from the family vacation (the beach at Stinson was perfect aside from the 12ft Great White) and am now entering the last two months of crunch book writing. We'll be launching a blog redesign tomorrow, and the focus will shift to mostly FREE material (although the name of the blog will remain the same--there's too much Googlejuice there to give it up).

To replace the sidebar in current blog, I'll be microblogging random interesting examples of free as I come across them. Here's today's, from Marginal Revolution:

A Danish chain of gyms is now offering membership free of charge, with the only caveat that you have to show up, in order for the membership to be free. If you fail to show up once per week you will be billed the normal monthly membership fee for that month. This should solve the problem with incentives that gym-membership normally carries - there is suddenly a very large (membership is around 85$ per month) incentive to show up each week.