The Long Tail

Dear Malcolm: Why so threatened?

It’s now clear that the bane of my next year will be questions about the future of the newspaper industry from journalists. I don’t blame them—newspapers are indeed one of the industries most affected by Free (although that’s just one manifestation of their larger problem: having lost their monopoly on consumer attention). And neither I nor anybody else has any good answers, other than the newspaper business is probably going to shrink but not go away, and that the business model will have to change.

But since journalist Malcolm Gladwell has somewhat parochially decided to make the Future of Paid Journalism the focus of his review of Free (which is, ironically, free on the New Yorker’s website; perhaps this is something Gladwell should take up with David Remnick?), I’ll try to respond in a bit more detail.

Gladwell (who, by the way, I both like and admire, so let’s call this an intellectual debate between corporate cousins) writes:

“[Anderson argues that] newspapers need to accept that content is never again going to be worth what they want it to be worth, and reinvent their business. “Out of the bloodbath will come a new role for professional journalists,” [Anderson] predicts, and he goes on:

“There may be more of them, not fewer, as the ability to participate in journalism extends beyond the credentialed halls of traditional media. But they may be paid far less, and for many it won’t be a full time job at all. Journalism as a profession will share the stage with journalism as an avocation. Meanwhile, others may use their skills to teach and organize amateurs to do a better job covering their own communities, becoming more editor/coach than writer. If so, leveraging the Free—paying people to get other people to write for non-monetary rewards—may not be the enemy of professional journalists. Instead, it may be their salvation.”

Anderson is very good at paragraphs like this—with its reassuring arc from “bloodbath” to “salvation.” His advice is pithy, his tone uncompromising, and his subject matter perfectly timed for a moment when old-line content providers are desperate for answers. That said, it is not entirely clear what distinction is being marked between “paying people to get other people to write” and paying people to write. If you can afford to pay someone to get other people to write, why can’t you pay people to write? It would be nice to know, as well, just how a business goes about reorganizing itself around getting people to work for “non-monetary rewards.””

Well, I wouldn’t propose this as the future of all newspapers, but my model comes from personal experience. About three years ago, I started a parenting blog called GeekDad, and invited a few friends to join in. We soon attracted a large enough audience that it became apparent that we couldn’t post enough to satisfy the demand, so I put out an open call for contributors. Out of the scores who replied, I picked a dozen and one of them was Ken Denmead (at right, with Penn of Penn & Teller).

Ken is, by day, a civil engineer working on the BART extension in the SF Bay Area. But by night he is an amazing community manager. His leadership skills impressed me so much that I turned GeekDad over to him entirely about a year ago. Since then he’s recruited a team of volunteers who have grown the traffic ten-fold, to a million page views a month.

So here’s the calculus:

• Wired.com makes good money selling ads on GeekDad (it’s very popular with advertisers)
• Ken gets a nominal retainer, but has also managed to parlay GeekDad into a book deal and a lifelong dream of being a writer
• The other contributors largely write for free, although if one of their posts becomes insanely popular they’ll get a few bucks. None of them are doing it for the money, but instead for the fun, audience and satisfaction of writing about something they love and getting read by a lot of people.

So that’s the difference between “paying people to write” and “paying people to get other people to write”. Somewhere down the chain, the incentives go from monetary to nonmonetary (attention, reputation, expression, etc).

It works great for all involved. Is it the model for the newspaper industry? Maybe not all of it, but it is the only way I can think of to scale the economics of media down to the hyperlocal level. And I can imagine far more subjects that are better handled by well-coordinated amateurs than those that can support professional journalists. My business card says “Editor in Chief”, but if one of my children follows in my footsteps, I suspect their business card will say “Community Manager.” Both can be good careers.

Malcolm, does this answer your question?

[Image at top from The New Yorker. Photo of Ken Denmead from GeekDad.]

Corrections in the digital editions of Free

As some of you may have seen, VQR rightly spotted that I failed to cite Wikipedia in some passages in Free. This is entirely my own screwup, and will be corrected in the ebook and digital forms before publication (and in the notes, which will be posted online at the same time the hardcover is released), but I did want to explain a bit more how it happened and what we’re doing about it.

First, as readers of my writings know, I’m a supporter of using Wikipedia as a source (not the only one, of course, and checking the original source material whenever possible). I disagree with those who say it should never be used. But the question is how to use it.

In my drafts, I had intended to blockquote Wikipedia passages, footnoting their URL. But my publisher, like many others, was uncomfortable with the changing nature of Wikipedia, and wanted me to timestamp each URL (something like this: http://en.wikipedia.org/wiki/Chris_Anderson page viewed on July 8th, 2008), which struck me as clumsy and archaic. So at the 11th hour we decided to kill the notes and footnotes entirely and I integrated the attributions into the copy.

In doing so, I went through the document and redid all the attributions, in three groups:

• Long passages of direct quotes (indent, with source)
• Intellectual debts, phrases and other credit due (author credited inline, as with Michael Pollan)
• In the case of source material without an individual author to credit (as in the case of Wikipedia), do a write-through.

Obviously in my rush at the end I missed a few of that last category, which is bad. As you’ll note, these are mostly on the margins of the book’s focus, mostly on historical asides, but that’s no excuse. I should have had a better process to make sure the write-through covered all the text that was not directly sourced.

Also note the VQR is not saying that all the highlighted text is plagiarism; much of is actually properly cited and quoted excerpts of old NY Times articles and other historical sources. And as you’ll see, in most cases I did do a writethrough of the non-quoted Wikipedia text, although clearly I didn’t go nearly far enough and too much of the original Wikipedia authors’ language remained (in a few cases I missed it entirely, such as that short Catholic church usury example, which was a total oversight). This was sloppy and inexcusable, but the part I feel worst about is that in our failure to find a good way to cite Wikipedia as the source we ended up not crediting it at all. That is, among other things, an injustice to the authors of the Wikipedia entry who had done such fine research in the first place, and I’d like to extend a special apology to them.

So now we’ve fixed the digital editions before publication, and we’ll publish those notes after all, online as they should have been to begin with. [UPDATE: A draft version is here. The final version will live in the right column of this blog permanently] That way the links are live and we don’t have to wrestle with how to freeze them in time, which is what threw me in the first place.

Here’s the statement that my publisher, Hyperion, released yesterday:

We are completely satisfied with Chris Anderson’s response. It was an unfortunate mistake, and we are working with the author to correct these errors both in the electronic edition before it posts, and in all future editions of the book.

“Waste is Good”. FREE excerpt in Wired

We published an excerpt from the book in Wired this month. Here’s how it starts:

“In 1969, the Neiman Marcus catalog offered the first home PC, a stylish stand-up model called the Honeywell Kitchen Computer, priced at $10,600. The picture shows an aproned housewife caressing the machine, with this tag line: "If she can only cook as well as Honeywell can compute." That image should be on every cubicle in Silicon Valley; it's a testament both to what technologists get right and what they get badly wrong.

To their credit, they understood that Moore's law would bring computing within the reach of regular people. But they had no idea why anyone would want it. Despite countless brainstorming sessions and meetings on the subject, the only application the Honeywell team could think of for a home computer (aside from the perennial checkbook balancing) was recipe card management. So the Kitchen Computer was aimed at housewives and featured integrated counter space. Those housewives would, however, require a programming course (included in the price), since the only way to enter data was with binary toggle switches, and the machine's only display was binary lights. Needless to say, not a single Kitchen Computer is recorded as having sold.

Today, of course, we have computers in every home—and in every pocket and car and practically everywhere else. But one of the few things the average person doesn't use them for is managing recipe cards.

Don't blame Honeywell—blame the computing world of the 1960s. In those days, computers were expensive mainframes. Because processing power was so scarce and valuable, it was reserved for use by IT professionals, mostly working for big companies and the government. Engineers both built the computers and decided how to use them—no wonder they couldn't think of nonengineering applications.

But as the Kitchen Computer hinted, computers would soon get smaller and cheaper. This would take them out of the glass boxes of the mainframe world—and away from the IT establishment—and put them in the hands of consumers. And the real transformation would come when those regular folks found new ways to use computers, revealing their true potential.

All this was possible because Alan Kay, an engineer at Xerox's Palo Alto Research Center in the 1970s, understood what Moore's law was doing to the cost of computing. He decided to do what writer George Gilder calls "wasting transistors." Rather than reserve computing power for core information processing, Kay used outrageous amounts of it for frivolous stuff like drawing cartoons on the screen. Those cartoons—icons, windows, pointers, and animations—became the graphical user interface and eventually the Mac. By 1970s IT standards, Kay had "wasted" computing power. But in doing so he made computers simple enough for all of us to use. And then we changed the world by finding applications for them that the technologists had never dreamed of.

This is the power of waste. When scarce resources become abundant, smart people treat them differently, exploiting them rather than conserving them. It feels wrong, but done right it can change the world.”

Read the rest here

My Letter to the Economist

To the Editor,

As a former Economist technology writer, I understand the attractions of “simplify, then exaggerate”. But in the case of your article on freeconomics (“The end of free lunch—again”, March 19th), you have done a bit too much of both.

First, where is your evidence that online advertising is a failing model?  To be sure, the crisis has dramatically slowed its growth (like that of every other industry) but unlike most others, it’s still positive. The worst forecasts for the year that I’ve seen predict that it may drop by a few percent from last year’s record figure. That’s a lot better than the offline advertising market and hardly supports your hyperbolic claim that “the demise of a popular but unsustainable business model now seems inevitable.”

Second, there is more to free business models online than advertising. The big shift since the crisis has been the rise of “freemium” (free+premium) models, where products and services are offered in free basic and paid premium versions. Think Flickr and Flicker Pro (more storage), virtually all online games and even your own site (some free and some paid content).

Finally, your scorn blinds you to the fact that this crazy idea of giving away content for free and supporting it by advertising is nearly a hundred years old. It is the basis of the standard radio and television broadcast model (“free to air” content) and countless other companies, from the free daily and weekly newspapers to the vast majority of media websites, including all of our own at Conde Nast. It works great—The Economist should try it!

Regards,

Chris Anderson

Editor in Chief, Wired Magazine and author of the forthcoming “Free: The Future of a Radical Price”

My Two Cents on Charging for Content

Time, the New York Times and others with their back against the economic wall are now reconsidering that whole free thing.

Ann Moore, the CEO of Time Inc, told a British newspaper:

“Who started this rumour that all information should be free and why didn't we challenge this when it first came out? I say this in college classrooms and they start to throw their shoes at me.”

And so on…

My take: I actually don’t think it matters what Time or Newsweek does on the web: they both seem to be trending towards insignificance:

 

 

But some of the other Time Inc properties, such as People.com, are doing much better online. And the NYT is doing great. Should they charge?

I think they should—but not for everything and not for everyone. The old WSJ model got the Freemium model about right, I thought. For such premier titles, which can credibly claim to be papers of record and thought leaders, there is clearly a class of readers who will pay what it costs to get that content.

But what WSJ.com used to do was to offer a backdoor to free content for another class of consumer: the social media maven. Paying subscribers could make content free to others by clicking on an icon that created a URL for a free version of the story that they could use for blogging or to submit to sites such as Digg or Yahoo Buzz.

The deal was essentially this: these often influential word-of-mouth generators could trade reputational and attention credits for free content. The content would be part of the online conversation, not walled off behind a paywall, and presumably some fraction of those who followed the links to free content would recognize the value in the premium content around it and subscribe. A very nice Freemium model, in other words.

Sadly, the WSJ doesn’t seem to do that anymore. The social media links it creates just go to short excerpts of the stories, and you have to subscribe for the whole thing. I suspect that this has had the effect of discouraging people from using those links, since it’s going to result in disappointment for most of the people who follow them. I certainly don’t see the WSJ mentioned much on Digg or Reddit, and that may be why.

But as the NYT considers a Freemium strategy, I’d encourage it to revisit the model that the WSJ abandoned. The old Times Select paywall kept its columnists out of the public debate, which annoyed them and diminished the Times’ influence. A more social media-friendly alternative would avoid that dead end, while reintroducing a direct revenue stream. Free may be the best price, but it needn’t be the only one.

“Matter”: Marketing by sending people free stuff

Britain’s Royal Mail is trying something new with direct mail: sending people a box of free stuff. Called “Matter”, the first one went out in mid-December to 30,000 people who had signed up to receive it. The box contained books, DVDs, CDs, shower products, a candybar, a pre-paid SIM card and a few other goodies.

The idea is that you try them, maybe give some to your friends, tell people about the one you like and otherwise interact with products in a way that’s more interesting than traditional direct-mail advertising.

The project was a collaboration with Tim Milne, who started the arts collective Artomatic. He says that the challenge so far has been getting advertisers to look past traditional direct mail. He told me:

“I've long believed that printed matter will gain new value in a digital world as everyone begins to crave the more physical / tactile / emotional nature of printed stuff.

Matter is revealing some interesting, unexpected behaviours. Matter is very social–people take the items (and sometimes the whole box) to work, to the pub and tell their friends and family about the cool things
they'd been sent. It fact, even though it's a physical medium, it behaves more like a digital channel.

The underlying concept–that if you give people nice things they'll better towards you is certainly true. What we're beginning to discover is how the simple act giving people something nice triggers a whole range of responses–using the objects, telling their friends and telling us what they think.”

The next box goes out in April.

The best selling MP3 album of the year was free

Cool news: The best-selling MP3 album at Amazon in 2008 was Nine Inch Nails’ Ghosts I-IV, which was released free under a Creative Commons license.

The album made more than  $1.6 million in revenue for NIN in its first week, and hitting #1 on Billboard’s Electronic charts, Last.fm has the album ranked as the 4th-most-listened to album of the year, with over 5,222,525 scrobbles.

The Creative Commons blog notes:

NIN fans could have gone to any file sharing network to download the entire CC-BY-NC-SA album legally. Many did, and thousands will continue to do so. So why would fans bother buying files that were identical to the ones on the file sharing networks? One explanation is the convenience and ease of use of NIN and Amazon’s MP3 stores. But another is that fans understood that purchasing MP3s would directly support the music and career of a musician they liked.

The next time someone tries to convince you that releasing music under CC will cannibalize digital sales, remember that Ghosts I-IV broke that rule, and point them here.

[Hat tip to Phllip Torrone]

Guest post: Acting as a non-monetary economy

Adam Gurri wrote in with this excellent observation:

“When I think of something that is so abundant as to be available for free, I think of acting.

It's no secret that are are more actors in New York than there are productions to put them in.  Economics helps us understand the consequences of this to a certain extent; obviously a gigantic supply will result in lower wages per actor.  What interests me, however, is how this works in practice.  People think that a gigantic sector of a specific workforce could not possibly work for free, because they need to feed themselves and pay their bills, and so forth.

The thing about acting is that the labor force (actors) actually value the ability to do work in that field that they are willing to take on work for nothing and take on other jobs as a sort of cross-subsidy.  There is a sort of demand for employment in theater, which makes competition among actors so fierce as to actually drive down wages (at time of entry at least) to zero or near zero.

There is a parallel between this old story and what's going on in the content industries today, I think.  It used to be that professional economists, physicists, statisticians, historians, and software programmers were too busy doing their jobs to write about it for the general public.  As a result, newspaper and magazine writers--the majority of whom had no technical training or experience in these areas--none the less had a comparative advantage when it came to writing about these topics for broader audiences.

Today, the cost of writing on a blog that is out in the public to be seen by anyone interested in it is nearly nothing.  Russ Roberts can blog about economics, Google employees can blog about their projects, and so on.  The internet has made it possible for the content industries to look more like the acting industry: people giving away content for free because they enjoy it, while making money with a paying job.”

The miraculous power of scale

In this talk at UC Berkeley, Google's Sergey Brin confesses (at minute 1:27) that he thought Wikipedia couldn't work. Most people wouldn't contribute, he rightly assumed, and it would never reach critical mass.

He was in good company. In the classic "free rider" problem, you imagine an elementary school class with 20 students. If only two parents (10%) agree to volunteer to  help out as room parents and drive on field trips, the whole system breaks down: there aren't enough helpers and the two parents get angry at the others for not joining in. And that's exactly what Brin assumed would happen with Wikipedia.

But he was wrong, he says, because he--even he!--had underestimated the way scale can change the game. Sure, the experts say only 1% of Wikipedia's users actually contribute to making it better. Indeed, if you do the math, it's even worse than that: probably closer to 0.01% (today, Wikipedia has 75,000 active contributors out of 684 million visitors). But that 0.01% have created 10 million articles.

Most people don't contribute, just as Brin had feared, but it doesn't matter because the tiny fraction that do are a tiny fraction of an absolutely whopping number.

The lesson is that more is different. The Internet, by giving everybody access to a market of hundreds of millions of people, can work at participation rates that would be a disaster in the traditional world of non-zero marginal costs. YouTube works with just 0.1% of users uploading their own videos. Spammers can make a fortune with response rates of 0.00001%. (To give you some context, in my business of magazines, response rates of less than 2% on direct-mail subscription offers are considered a failure.)

This is the underlying logic of the Freemium business model, which uses the near-zero marginal cost of online distribution to reach the maximum possible audience, converting just a tiny fraction of them to paid users.

That's impossible for traditional products, which usually have non-zero marginal costs. You can't mail a brownie to everyone in the world on the hopes that a tiny fraction of them will come back for more. But on the Internet, it's not only possible, it's the smartest strategy.

That's why Freemium is so new (it was waiting for a zero-cost distribution method), and so counterintuitive to many people. Freemium doesn't work with the small numbers we're used to in daily life. Getting 5% of 100 people to pay for your software is no business, and in the traditional world it takes expensive marketing to reach more people than that.  But getting 5% of 100,000 people to pay for your software is a very nice business indeed, and online it costs virtually nothing to reach that many potential customers.

This is the point that everyone seems to miss: Free is not a business--it's zero-cost marketing for a business. And it works best at the largest scale: a small percentage of a big number is a big number.

Freemium math: what's the right conversion percentage?

In my original Wired article on Free, I described Freemium as the opposite of the traditional free sample: instead of giving away 1% of your product to sell 99%, you give away 99% of your product to sell `1%. The reason this makes sense is that for digital products, where the marginal cost is close to zero, the 99% cost you little and allow you to reach a huge market. So the 1% you convert, is 1% of a big number.

But that was just a hypothetical percentage split, to make a point. In the real world, what's the right balance? The answer varies from market to market, but some of the best data is in the games world.

In online free-to-play games, companies aim to structure their costs so they can break even if as little as 5-10% of the users pay. Anything above that is profit. Which is why these numbers from Nabeel Hyatt are so impressive:

• Club Penguin: 25% monthly uniques pay, $5/mo per paying user 
• Habbo: 10% monthly players pay, $10.30/mo per paying user 
• Runescape: 16.6% monthly uniques pay, $5/mo per paying user 
• Puzzle Pirates: 22% monthly players pay, $7.95/mo per paying user

As the blog notes, that compares very well to the 2% of the casual downloadable game market that pays, or a 3-5% that a lot of "penny gap" free trial web startups get. Estimates for the number of free Flickr users that convert to paid Flickr Pro range from 5-10%. Ning says 3% of its 500,000 social network creators pay for the premium version. And shareware software programs often see less than 0.5% of users paying up.

But others companies are able to do much better. Intuit, for instance, offers basic TurboTax Online free for federal taxes, but charges you for the state version. Company officials tell me 70% of users opt to pay for that version. That's a special case--practically everyone has to pay both federal and state taxes--but it's evidence that some very high conversion rates are possible in the Freemium model.

For the typical Web 2.0 company planning to use Freemium as its revenue model, my advice would be to set 5% as break-even, but balance the mix of free vs. paid features with the hopes of actually converting 10%. More than that, and you may be offering too little in your free version and thus not maximizing the reach that's possible with free. Less than that, and the costs of the freeloaders start to get significant, making it difficult to make money.