The Long Tail

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.

Finding a Freemium model that works for you

I was chatting last night with the CEO of one of the biggest software-as-a-service companies about how he could release a version of his product with a freemium model. The options that seemed best for him were these four:

1) Time limited (30 days free, then pay. This is the Salesforce model)

• Upside: Easy to do, low risk of cannibalization
• Downside: Many potential customers will be unwilling to commit enough to give the software a real test, since they know that if they don't pay they'll get no benefit after 30 days.

2) Feature limited (basic version free, more sophisticated version paid. This is the WordPress model)

• Upside: Best way to maximize reach. When customers convert to paid, they're doing it for the right reason (they understand the value of what they're paying for) and are likely to be more loyal and less price sensitive.
• Downside: Need to create two versions of the product. If you put too many features in the free version, not enough people will convert. If you put too few, not enough will use it long enough to convert.

3) Seat limited (can be used by up to some number of people for free, but more than that is paid. This is the Intuit QuickBooks model)

• Upside: Easy to implement. Easy to understand
• Downside: Might cannibalize the low end of the market.

4) Customer type limited (small and young companies get it free, bigger and older companies pay. This is the model used by Microsoft's BizSpark, where companies less than 3 years old and under $1 million in revenues get Microsoft's business software free.)

• Upside: Charges companies according to their ability to pay. Get fast-growing companies early.
• Downside: Complicated and hard-to-police verification process.

 

He hasn't decided which one to choose, but I like 3 and 4 best. They allow you to reach the largest potential market with the most useful product, and then convert the ones that are likely to be the best, most committed customers.

What recession means for free

I get asked this all the time these days, so before I crash after a speaking tour of Latin America (eight cities in four days!), here are my thoughts on what a recession will mean for free-based business models.

First, let's confine this to online, which is where the most interesting free models are. There are three main forms of "real" free: Ad-supported, "Freemium", and the Gift Economy. Here how I think each will be affected:

• Ad-supported: In the offline world, advertising is going to go down. Online, where it's easier to make the case for clear ROIs, I suspect advertising growth will continue to be positive, but will slow considerably. That means that many of the companies that were counting on a rising tide lifting their boats will be disappointed, and more than usual will go bust. Result: Negative
• Freemium: This should become the favored model, since it's connected to direct revenues. But companies that have only worked out the free part but not the premium part are going to have to figure out what they can add to their products to make them compelling enough to pay for. If they don't, they will find their investors' patience with them is very limited, and many will fold. Those that get the freemium balance right should be fine: free is a good price to have when people don't want to spend, and freemium models can work well when just 5% of users convert to premium, thanks to the near-zero marginal costs of serving the other 95%. Result: Modest positive
• Gift economy: This is driven primarily by people's "spare cycles" (AKA cognitive surplus) and rising unemployment means more spare cycles, sadly. Obviously people still need to pay the rent, so many of these shared contributions are really just advertisements for the contributor's skills. But other contributions will be idle hands finding work while they look for their next job. As a result I think you'll see a boom in creativity and sharing online as people take matters into their own hands. Today, if you're in-between jobs you can still be productive, and the reputational currency you earn may pay dividends in the form of a better job when the economy recovers. Result: Positive

Agree? Disagree? The comments are open.

FREE: the cocktail party version

When you're writing a book you need to have your elevator pitch down or "What's the book about?" will become the most dreaded four words you can hear (followed closely by "how's it going?").

Obviously the one-sentence version of the answer should be something close to the book's subtitle. But I haven't nailed that one down yet, so these days I just say "The economics of zero dollars and zero cents" and hope for the best. Some people glaze over and move on at that point, but for those who stop, intrigued, and ask me to explain, here's what I say:

We all know free--it's a trick that marketers use. But free is changing. When you think about it, there are two economies, one of atoms and one of bits. In the atoms economy, which is to say most of the stuff around us, things tend to get more expensive over time. But in the bits economy, which is the online world, things get cheaper. The atoms economy is inflationary, while the bits economy is deflationary.

The 20th Century was primarily an atoms economy. The 21st Century will be equally a bits economy. This book is about the differences between 20th Century free and 21st Century free--free moving from a marketing trick to a new economic model.

Anything free in the atoms economy must be paid for by something else, which is why so much traditional free feels like bait and switch--it's you paying, one way or another. But free in the bits economy can be really free, with money often taken out of the equation altogether. People are rightly suspicious of free in the atoms economy, and rightly trusting of free in the bits economy. Intuitively, they understand the difference between the two, and why free works so well online.

Today the online world is a country-sized economy built of free. The most interesting business models are in finding ways to make money around free. Sooner or later every company is going to have to figure out how to use free or compete with free, one way or another. My book is about how to do that.

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 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?

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."

The surprising derivation of the word "free"

In English the word "free" is fraught with ambiguous meaning, which is why the open source world has to make the distinction between free as in speech vs. free as in beer. In Romance languages, such as Spanish, French or Italian, the twin meanings munged into the English word "free" are split between two words, one derived from the Latin "liber" (freedom) and the other from the Latin "gratis" (contraction of gratiis "for thanks," hence, "without recompense”, or zero price).

In these languages, "libre" is usually an alloyed good, while "gratis" is often considered a marketing gimmick.In English, marketers take advantage of the ambiguity to use the positive connotations of freedom to help past suspicions over the truth of the pricing meaning.

But that still leaves the question: what's the derivation of the English word "free"?It's actually fascinating: "free" comes from the same Old English root as "friend".

The path is this:

[They both come] from the Old English freon, freogan "to free, love." The primary sense seems to have been "beloved, friend, to love;" which in some languages (notably Gmc. and Celtic) developed also a sense of "free," perhaps from the terms "beloved" or "friend" being applied to the free members of one's clan (as opposed to slaves).

The sense of "given without cost" is from 1585, from notion of "free of cost."

[A fun example of freedom and free combined is in the poster shown above, which Larry Lessig found at an open source conference. The Free Beer this refers to is a recipe that is free to all. But if you want the version someone has already made, you've got to pay for it. This is another example of the time/money business model of free.]

I wish people would stop using "economy" as just a smart-sounding metaphor

Economists use incentives to explain human behavior. In traditional economics these are mainly monetary incentives, but the expansion of the field to behavioral economics in the 1970s introduced other factors, such as risk minimization and social rewards, that weren't directly tied to money but could influence actions all the same. The current vogue for all things economic has encouraged the Freakonomics crowd to use the same language to explain the emerging online world: today we use the sweeping terms "attention economy", the "reputation economy" and "gift economy" to explain the extraordinary rise of non-monetary phenomena such as open source or Wikipedia.

There is only one problem with that use of "economy"--I'm not sure what it means, and I don't think most of the people who use it do either, since they rarely bother trying to take it any further than a metaphor. But if attention and reputation really are economies, shouldn't we able to quantify them, using economic equations?

What is the money supply of reputation? What is the currency conversation rate from of one form of attention into another? How would you measure wuffie inflation?  

Don't look to academics for the answers. Late last year Yale held a two-day conference on "Reputation Economies in Cyberspace".  I suppose the cringe-making term "cyberspace" should have warned me off, but I've just spent an hour reading all the papers submitted by the 30 academics who spoke, but there isn't a proper economic analysis amongst them. (Another tip-off: most of the participants were lawyers).

There have been some clever attempts to use the language of economics to describe attention markets, such as this nifty pirouette from 1999:

If the attention I pay to others is valued in proportion to the amount of attention earned by me, then an accounting system is set in motion which quotes something like the social share prices of individual attention. 

It is in this secondary market that social ambition thrives. It is this stock exchange of attentive capital that gives precise meaning to the expression "vanity fair" .

But when it came time to quantify it back then, the author had only "a person's presence in the media" to measure. A 2001 book called The Attention Economy didn't get much further. 

I think we can do much better today. Now we have a NASDAQ of reputation--it's Google. What is the currency of reputation online other than PageRank, which measures the incoming links that define the network of opinion that is the Web? And what better measure of attention is there than Web traffic? 

In economic terms, we convert from the Reputation Economy to the Attention Economy to cash by using this formula: The economic value of your site is the traffic your PageRank brings from Google's search results for any given term, times the keyword value for that term. (Higher PageRank means more traffic, since you'll appear earlier in the search results). And you can convert that traffic into plain old cash by simply running AdSense ads. 

For example, my UAV site, DIY Drones, has PageRank 6 (out of 10). That means it appears on the first page of results for the search term "UAV" (albeit low on that page). Right now that gets me about 60,000 pages views a month from Google (which is about a third of my total traffic).  The search term "UAV" is currently worth about $0.20 per click. 

So let's express this in economic terms [note: the following are totally back-of-the-envelope calculations. I'm hoping that they're within the right order of magnitude, but I'm not promising anything better than that]. 

• My reputational wealth is 6 out 10. [Note: this is just for DIY Drones. The Long Tail site has higher PageRank (7) and Wired has higher yet (9), but for the sake of this analysis I'm pretending that there is no reputational transfer between these different parts of my life.] Assuming that reputation wealth is distributed like monetary wealth, which it to say a Pareto distribution, my equivalent net wealth in dollars would be around $200,000. That's comfortably middle class. 
• My income is my share of the attention economy. There are, estimates Kevin Kelly, 100 billion clicks per day on the Web. The US represents about 20% of global web traffic, so we'll call that 20 billion clicks a day or 7.3 trillion clicks per year. I get 2 million of them, or 2.74x10^-7 of US web traffic 
• To make an analogous leap to the monetary economy, the US GPD is around $14 trillion. If I had the same share of that as I do of the Web, my annual income would be around $3.8 million. Which means that I'm richer in attention than I am in reputation for some reason (or, more plausibly, that PageRank is somehow undercounting my reputation). 
• But I'm not making $3.8 million. The conversion rate between these non-monetary currencies and real money reflects the size differences between the online economy and the offline economy. In reality, my 2m annual page views will only make me about $3,800 in Google AdSense revenues per year, so the conversion rate from real dollars to attention dollars in my world is 1,000 "Web credits" to the dollar.

Okay, this is admittedly a very poor attempt to quantify the Attention Economy and the Reputation Economy in real economic terms. But that's only because I don't have enough data and skill to do it properly. Inside Google, two offices down from CEO Eric Schmidt, sits former Berkeley economist Hal Varian, who has both the data and skill to do this right. And trust me, he has. 

It is possible to move beyond the woolly metaphors and treat Attention and Reputation like real economies. So when are we going to stop using the word "economy" as rhetorical smoke when we describe non-monetary markets and start measuring them like the economy they really are? If there's is a secret formula to Google's success, it's in doing exactly that.

The time/money formula of free

At some point in your life, you will wake up and discover that you have more money than time. And you will then realize that you should start doing things differently, which means not walking four blocks to find an ATM that doesn't charge a fee, driving for miles to find cheaper gas, or painting your own house.

This same calculus is the foundation of a big part of the "freemium" economy. We see it a lot in free-to-play online games, such as Maple Story, where you can buy things like "teleportation stones" to let you get from one place to another without a long slog or wait for a bus. Most of these paid digital assets don't make you a better player, but they do allow you to become a better player faster.

If you're a kid, you probably have more time than money. That's the force behind MP3 file trading, which is kind of a hassle and but is free (albeit illegal, of course!).  As Steve Jobs famously pointed out, if you download music from peer-to-peer services, fixing the messy metadata as you go, the time it takes to avoid paying means you're working for less than minimum wage. Nevertheless, that works if you you're time-rich and money-poor. Free is the right price for you.

But as you get older, the equation reverses and $0.99 here and there no longer seems like a big deal. You migrate into a paying customer, the premium user in the freemium equation.

As some of you may know, one of my other side projects is an open source hardware company (developing and selling aerial robotics technology), and so I've been following the emergence of the open source hardware world closely. It's a really interesting example of how to make money from free, one that adds a new dimension to the open source software world because it's about atoms (which have real marginal costs), not just bits.

The way most open source hardware companies work is this: all the plans, printed-circuit board files, software and instructions are free and available to all. If you want to build your own (or, even better, improve on a design), you're encouraged to do so. But if you don't want the hassle/risk of doing it yourself, you can buy a pre-made version that's guaranteed to work.

For instance, take the great Arduino open source microprocessor that our autopilots are based on. You can build your own, with full instructions. Or buy one. Most people do the latter. The Arduino team make their money from a certification license fee they charge the companies and retailers that make and sell the boards.

You can build a good business on this model, as Limor Fried (AKA LadyAda, picture above), has shown with her electronics kit retail/design/community AdaFruit Industries. She and her business partner, Philip Torrone, explain the economics and tactics in a presentation here (good summary here).

Short form:

1. Build a community around free information and advice on a particular topic.
2. With that community's help, design some products that people want, and return the favor by making the products free in raw form.
3. Let those with more money than time/skill/risk-tolerance buy the more polished version of those products. (That may turn out to be almost everyone)
4. Do it again and again, building a 40% margin into the products to pay the bills.

As Torrone said in an email, "I can't imagine doing a book, a video, a magazine unless I had a community that would rally along the way. In the end it always seemed to be about a story, people like to see the beginning, middle, end and plot of something -- and if there's a buy button somewhere, they sometimes click it and reward us for working hard."

Presto: a free business model that scales neatly from bits to atoms. It's exactly what we'll be doing at DIY Drones, too. Not just because it's free, but because it works better than anything else out there. It's not a bad way to think about writing a book, either ;-)

How big is the free economy?

Here's a question I get all the time: how big is the free economy? That's harder to answer than you might think, for both definition and measurement reasons. But here's a first pass at doing it anyway.

(Note: I'm just using US figures below, unless marked otherwise)

There are at least three classes of free:

The first is the use of "free" as a marketing gimmick: "buy one, get one free", "free with purchase", "free phone if you commit to the two-year service plan", etc. All basically cross-subsidies or loss leaders--sooner or later you'll pay. I suspect that there isn't an industry that doesn't use this one way or another. There's no new economic model there and it's totally impossible to quantify, but arguably it touches every bit of the entire consumer economy itself, which is to say trillions of dollars a year. And thus it's a meaningless number. So I'll move on....

The second form of free is the "three-party market", which is to say the world of advertising-supported free media. That's most radio and broadcast television, most web media, and the proliferation of free print publications, from newspapers to "controlled circulation" magazines. For the top 100 US media firms alone, in 2006 radio and TV (not including cable) advertising revenues were $45 billion.

Online, almost all media companies make their offerings free and ad-supported, as do many non-media companies such as Google, so I'll include the entire online ad market in the "paying for content to be free to consumers" category. That's another $21-$25 billion.  Free paper newspapers and magazine are probably a billion more, and there are no doubt some other smaller categories I'm omitting and a lot of independents not included in the numbers above. Let's call the total of offline and online ad-driven content and services $80-$100 billion.

Finally, there is what I call "real free".  Products and services that don't cost most consumers anything at all, either in cash or ad clutter. (Most of this is online, where the marginal costs are near zero). This includes companies that use the "freemium" model (where a minority of paying customers support a majority of non-paying customers, as in Flickr and Flickr Pro or the growing world of online games), all those companies that are in the pre-revenue part of their evolution, and the entire "gift economy", from Wikipedia to the blogosphere. 

This last category is impossible to properly quantify, especially since much of it has no dollar figure attached at all, but I'll break out some interesting subcategories that do have some numbers attached:

Open source software (service and support around free software):

• The "Linux ecosystem" (everything from RedHat to IBM's open source consulting business) is around $30 billion today.
• Other companies built around open source, such as MySQL ($50m annual revenues) and Sugar CRM ($15m), probably add up to less than $1 billion.

Free-to-play videogames:

• These are mostly online massively multiplayer games, which are free to play but make money by charging the most dedicated gamers for digital assets (upgrades, clothing, new levels, etc). They started in South Korea and China (where they're now a $1 billion business) and have now come to the US, with games like Runescape and NeoPets.
• The "casual games market" (think everything from online card games to flash games) is now at nearly $3 billion.

Free music:

• How much of Apple's iPod $4 billion in annual sales should be credited to the libraries of "free" MP3 that created demand for gigabyte storage devices? How much of MySpace's $65 billion estimated value is due to the free music bands put there? How much of the $2 billion concert business is driven by P2P file sharing?

So what's the bottom line? By a strict definition of free (just the third category), it's pretty easy to get to $50 billion total revenues. Include the next most interesting free market, online ad-driven content and services, and you're around $75 billion. Expand that to the traditional ad-supported media, and you can get to $150 billion. Go worldwide, and you can easily double all those figures.

Whichever definition you like, there's a lot of money to be made around free.

How long will the WSJ keep its pay model?

I'll admit it: it bugs me that Rupert Murdoch hasn't yet followed through on his plan to make the Wall Street Journal's website entirely free. It's the last big holdout in the all-web-media-must-be-free trend, and as the guy writing the book on free, people keep throwing it in my face. So I sighed when I saw in today's headlines that traffic at WSJ.com, with still just a small fraction of its content free, nevertheless grew by 45% last year, to 150m page views per month. Damn. Can pay really, well, pay?

Before we get into the data, let's revisit the argument for web media being free to consumers. It's simply that free sites get a lot more traffic than pay sites, and experience suggests that making money from advertising on a big user base is easier than making money from subscriptions on a small base. Why do free sites get more traffic, aside from the obvious reason of no barrier to entry? Because third-party sites (blogs and other news sites) will typically only link to sites that are free and Google only searches and drives traffic to sites that its crawler can get into. And on the Web, if you're not in Google and the blogosphere, you're not in the conversation; for much of the audience you simply don't exist. The trickle-down effects of such invisibility are felt in other aspects of your business, from customer acquisition to PR.

Here are the traffic figures for WSJ.com versus the New York Times, which went from the pay to free model in September of last year:

Both have grown over the past year, but in August last year, when both websites were behind pay walls, the NYT had about 5 million more users per month more than the WSJ. Now that the NYT is free, it has about 10 million more users per month. (Don't be misled by percentage figures; they always make growth from a smaller base look bigger).

If the NYT has the same 10-to-1 ratio of page views to unique visitors as the WSJ, those extra 10 million visitors account for an extra 100m page views, which at a modest $15 CPM, two ads per page and 50% paid inventory, are worth about $1.5 million a month, or $18 million a year. (Needless to say, that's just a back of the envelope calculation; the NYT may very well get a higher CPM)

Meanwhile, WSJ.com has subscriptions, which are nominally priced at $89. We don't know how many people currently pay for them, since that wasn't part of the latest press release, but last time the company reported numbers, there were about 1 million paying subscribers to WSJ.com. That's $89 million a year, right? Wrong.

Here's a screen shot from the WSJ's subscription page. As you can see, the recommended offer is the combo deal that leads to only a $10 online subscription fee. 

  

As the footnote in Dow Jones's last 10Q notes, "WSJ.com subscription figure now also includes subscribers who selected to pay for both the print and online products as part of a bundled offer and registered to use WSJ.com."

So odds are that the online subscription revenues are now closer to $10 million a year than $89 million as people go for the combo offer. It might even be less than the $18 million more the NYT makes with ads online (using the above napkin-scratching numbers). If the WSJ dropped its pay wall, would it get as much traffic as the NYT? Maybe not. But it would at least be betting on the faster-growing part of the market.

Indeed, there's good reason to think that the subscription numbers are not growing at all. Felix Salmon from Portfolio (our Conde Nast sibling) observes:

If you look at the Mediaweek story, there's one statistic conspicuous by its absence: what has happened to the number of subscribers to wsj.com over the past year. Betcha it hasn't grown at all, and that substantially all of wsj.com's new uniques are there for the free content only. (That would help explain why pageviews are growing much more slowly than uniques are.)

Felix is betting that the WSJ pay wall will come down, sooner or later. I agree. I give it 24 months.

Free Dailies: The one bright light in the newspaper industry

While all is not well in the newspaper business,  the global picture is far better than the US one, according to stats released today by the World Association of Newspapers. Overall circulation is up nearly 3% globally, mostly thanks to Asia. Even in the US 62% of adults read a paper every day. Although that's declining, it's still a pretty big business. 

But the one unambiguous growth area in the industry? Free newspapers:

Free dailies are surging ahead, growing circulation 20% last year, mostly in Asia and their native Europe. Free dailies now make up 7% of worldwide print circulation (EU 23%, US 8%).

That's from a PaidContent report, ironically enough. Hey, Rafat--when are you going to change your great site's name?  ;-)

[UPDATE: Piet Bakker notes that the WAN's data collection methods appear to be pretty sloppy. Take these numbers with a grain of salt--probably directionally accurate, but no more than that.]

The real meaning of "there's ain't no such thing as a free lunch"

Econ geeks like me know George Mason University economist Russ Roberts as one of the best commentators on the dismal science, not only for his Chicago-school clarity but also his ability to communicate economics to a broad audience through everything from novels to a popular podcast. So I was delighted when he asked me to be the guest for today's audio installment, which you can find here.

The highlight for me was his explanation of what "There's ain't no such thing as a free lunch" (TANSTAAFL) means, and how it squares with my own suggestion that, at least from a consumer's perspective, lunch really can be free.

From Robert's summary of this part of the podcast:

What do economists really mean by this phrase? Common interpretation: If you think it's free it's only because you are not counting the externalities and repercussions. Suppose you go up to a sort of friend and say "I'm going to take you to lunch, a fancy restaurant." Friend demurs. Maybe feels he might feel pressured to reciprocate. Or that he might be asked for something down the road. Is if free to you if you never intend to reciprocate or do anything even if asked? It may be free to you, but it costs someone else or costs you in opportunity cost.

Everything has an opportunity cost--something else could be done with those resources. Walking down the street, someone presses into your hand that you recognize as a coupon for a meal at a great restaurant. No out of pocket costs, don't even have to deal with Russ's conversation, better than even daydreaming through Russ's conversation. It's free in the out of pocket sense, free in the sense of everyday language; but in fact it still costs you your time--the time you spend eating at the restaurant is time you're not doing something else. That's what economists mean by Tanstaafl ("There ain't no such thing as a free lunch"). Reading Wikipedia takes your time as a reader. Tiny cost, eyeball cost, zero compared to the alternative of looking up the information somewhere else--which would also have the eyeball cost. Milton Friedman meant the opportunity cost.

So there you have it. In the purely monetary economy, there are plenty of free lunches. But include such non-monetary factors as time, attention and the value of the other things that you might have done with your time and attention, and eventually you'll pay, one way or another. Fair enough--free in the monetary economy is close enough for me.

We had a lot of fun on the podcast and Russ is always a treat to learn from. Check out the rest of his summary of the wide-ranging conversation here, along with reading sources and furious comments from Russ' listeners  (or better yet, download it to your iPod and listen to it as God intended in the car)

Follow-Up on a Free Book Experiment

Late last month, Random House's Crown imprint launched its first free book experiment, which quickly became more controversial than the publisher expected.

Crown released Scott Sigler's new book, Infected, online as a free (no DRM) pdf on March 27th, five days before it would be available in stores. The hitch was that this was limited-time deal: on March 31st, the day before the book went on sale in stores, they would take down the file.

This elicited the following rant from Boing Boing's Cory Doctorow:

Publishers are schizophrenic and often end up acting really dumb in the service of trying to do something smart. Crown is putting Scott's book online for free as a PDF, but they're taking it down after only four days -- presumably just in time to kill whatever momentum the downloads are generating. If you happen upon this blog-post next week when it shows up on Digg, you're out of luck -- no download to use to figure out if you want to buy the book.

Worse still: Crown is only making the download available before the book goes on sale! This is an act of massive goofiness. Here's what this means: the book's promotional download period ends before you can buy the book. If you download this book and love it, you can't walk down to the bookstore and pick up a copy. Sure, you can pre-order it on Amazon, but I know from watching my affiliate link payments here on Boing Boing that ten times as many of you buy books that are on sale when I blog them than buy books that have to be pre-ordered. The Internet exists in an eternal NOW, and expecting someone who downloads a book to hold onto the impulse to buy it for four days is so unrealistic, it makes me suspect that this strategy was conceived of by someone who doesn't actually use the Internet.

Either Crown believes that free downloads sell books or they don't. There's no coherent explanation for a ticking-bomb download like this one; it's like the hesitation marks on the wrists of a half-ass suicide.

So which is it? Does Crown believe that free downloads sell books, or don't they?

I talked to Shawn Nicholls, Crown's Online Marketing Manager, to find out.

The short answer is that Crown does indeed believe that free pdfs will sell more physical books. "We definitely subscribe to the believe that offering something online isn't going to take away from sales," says Nicholls. "The one thing I tried to do when we started this was to make a distinction between free music and free books. A MP3 can be a substitute for a CD, but we're not at the place where a pdf is a substitute for a hard book."

But Crown also believes in the concept of artificial scarcity: "Our goal was to create some buzz. Four days of availability gives a sense of urgency and makes it more of an event," he says. And although Crown did take the book down from its official site, Nicholls said that they wouldn't stop people from mirroring it elsewhere for as long as they want.

Here are the initial results of the experiment:

• The book was downloaded 45,000 times over that four days, compared to just 15,000 times for a previous experiment in free ebooks, The Beautiful Children, which was published by Random House in January. (That pdf was posted after the book was on sale.)
• Over the four days, Infected went to #1 on Amazon's Horror List, and #150 overall in book sales (from being in the two thousands before). It's too early to know what the bookstore sales are like, but on the online sales alone, the experiment looks like a success so far.
• The Infected microsite became Crown's top site.

Nicholls suspects that fewer people were inconvenienced by not being able to buy the books in stores over the free pdf window than Doctorow predicts. "The online audience we were hoping to reach is more prone to buying from web retailers, so for them pre-ordering on Amazon four days before publication isn't that frustrating. It shows up just a few days later than it would have if it were purchased after its on-sale date." 

"The way we looked at is that we straddled the line a bit. Giving away the full content of the book at all is a service to the consumer. Cutting it off short was simply us looking at all our long term goals--balancing the marketing buzz of a limited-time event against the virtues of longer availability. However, I can see the logic in Cory's point. It was an experiment, but if we see it as successful, we'd only want to go further, not go back. What we did this time was a calculated trade-off. Next time the conversation might be entirely different."

My take: the important thing is that Crown believes that free digital books can sell more hard copies. Exactly how to do it is a work in progress, but the philosophical hurdle has now been crossed. Now we can expect more and better experiments and less hand-wringing about FREE. Which is quite an advance, any way you look at it.

Wired cover story on FREE now live

And so it begins. Just as I started The Long Tail with a feature in my own magazine in 2004, today FREE begins in magazine form: a 6,000 word preview of the book in the current issue of Wired.

The big differences this time. First, we finally figured out how to package my abstract thinking into something that would work as a cover (The Long Tail wasn't on the cover back in '04 because in cover testing nobody seemed to "get it"!). And second, we've got our website back this time, so we've put a lot more work in the presenting it better online, including a video, a way to get the print magazine free this month and a wiki on free business models.

The feedback I get on this piece and on the exploration of other FREE themes on this blog over the next year will be invaluable in making a better book, just as it was with The Long Tail. This is the start of my explorations of the world of FREE, not the end.

Oprah + FREE = Blockbuster

Reader Duncan Rawlinson writes in with a cool example of free books (AP story excerpted here):

"Free business book is Web sensation

The Oprah touch doesn't just work for traditional books. More than 1 million copies of Suze Orman's "Women & Money" were downloaded after the announcement last week on Winfrey's television show that the e-book edition would be available for free on her Web site, for a period of 33 hours....

"The download offer "has built excitement for Suze's book across all formats," Julie Grau, the book's publisher, said in a statement.

According to Saturday's statement from Winfrey, more than 1.1 million copies of Orman's financial advice book were downloaded in English, and another 19,000 in Spanish. The demand compares to such free online sensations as "The 9-11 Commission Report," which the federal government made available for downloads, and Stephen King's e-novella, "Riding the Bullet."

The publishing community has endlessly debated the effects of making text available online, with some saying that free downloading is a valuable promotional tool and others worrying that sales for paper editions would be harmed. The Authors Guild and the Association of American Publishers each have sued Google for its plans to scan and index books for the Internet.

The offer for "Women & Money," originally released a year ago by Spiegel & Grau, a division of Random House, Inc., has not kept people from buying the traditional version. As of Saturday, the book ranked No. 6 on Amazon.com [Note: As of Sunday, it was No 2]. The paper edition of "The 9-11 Commission Report," published in 2004 by W.W. Norton and Co., was a best seller for months.

"I can tell you that with respect to the `9-11 Report,' the free download did not seem to hurt sales at all," Norton publisher Drake McFeely told The Associated Press on Saturday. 'There were people who wanted it quickly, in a less convenient form, and that was clearly a different market from the people who wanted the traditional book.'..."

For fun, I plotted the sales of the book on Amazon for the past month, which includes more than three weeks before it was available for free and a bit less than one week since it was given away for a day and half on Oprah's website. Here's the data, thanks to TitleZ:

Certainly looks like free books didn't hurt her sales ;-)

Latest free news

This is a good sign: it's getting really hard to keep on top of the flood of "free" news. I'm on the road (in Atlanta, talking to radio folks), but here, in telegraphic form, are the latest ones of note from the past few days:

[First, a news flash! My book will be previewed as the cover story in Wired this month. Out in about ten days. Link then. I think you'll like it ;-)]

• Kevin Kelly has been on tear of great writing/thinking about free, including this delightful rhapsody on eight new scarcities created by free (remember: every abundance creates a new scarcity), and this, on how technology "wants to be free".
• Another great thinker/writer about free is Techdirt's Mike Masnick. If you haven't subscribed to his feed, you should. Start here.
• Tim O'Reilly's TOC conference, now underway, has spurred the book industry to announce some modest experiments in free, such as limited versions of free online books and selling books by the chapter. Harper Collins is taking the lead, including free books by Paulo Coelho and Neil Gaiman. The idea is that these are "samplers" that will drive sales of older books. This is all good, but it's just a start...
• Q: Does Microsoft's bid for Yahoo stem from the company's fear that Office is competing with free? (A: No. But I appreciate the suggestion that free productivity software in now a mainstream idea anyway...)
• Whoops! Glenn Fleishman reminds me that the biggest free news of the day is actually Starbucks switching to free WiFi for people who use the Starbucks cards. [My excuse for the miss: I'm an Verizon Evdo junkie, even though it's anything but free, and I don't use WiFi in public spaces anymore]

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?

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)

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.

Kevin Kelly's Free Book Experiment

Every year or so my friend Kevin Kelly releases an updated version of his book-length True Films guide to the best documentaries. He's done it in print (through Lulu and Amazon) and he's done it as a cheap ebook download from the True Films site.

This year he's doing something new. He's released the book as a special pdf that, when read with Adobe Acrobat 8, shows ads on the side. He explains:

These ads are inserted into the PDF by Adobe (using the Yahoo ad network) when you open the file. Like Google Adsense ads, they are contextual. That is, Adobe/Yahoo tries to match the content of the ads with the content of text on the the pages, in my case, text about documentaries. The ads I see at this moment of writing are mostly about apartment rentals, but they change each time one opens the book. The way Adobe/Yahoo "knows" about the content of the PDF is not by crawling the web, but by the author (me in this case) submitting the PDF to their machine the first time, which then stamps it with a registration code, so it can remember what's in it when someone far away opens it on their machine.

Like Google, no money flows unless someone clicks on them. If a reader of the True Films PDF books clicks on an ad, the advertiser pays Yahoo, who in turns gives me some small percent, around 5 cents (I think).

But because the PDF file must reach out from your computer to the Adobe server to get the ads, an action that some readers may not approve, seeing the ads is an opt-in default. You have to agree to see the ads before any will show up. You will also need the latest version of Acrobat Reader (8) to see them. If you use an older version no ads will show up, and you'll see only the free book. Since the ads are adjacent to the book, whether you see ads or not will not affect the design