from the Garage Ventures event at Microsoft campus in Silicon Valley. Chris Anderson is the keynote.
Generation has grown up expecting things to be free. Young people think it's obvious that stuff is free online.
Older generation thinks it's wrong, economically illiterate.
Half says no way, half says duh. Free is the most misunderstood word in english language.
Word has two meanings: 1) freedom, free speech; 2) no price
Free as in liberty is good. Free as in price might be a trick, possibly good. By combining the two meanings, there is ambiguity.
There is semantic confusion, and historic confusion.
Jell-O gave away Jell-O recipe books door to door. Would then stock local merchants.
Give away something cool, but that has no value without buying something else. Gillette is another example.
Free is not a new economical model - in all these cases, you still have to pay at some point.
What's happened is that we've switched from an economy of atoms, to an economy of bits.
Bits have near 0 costs of production and distribution.
The other thing is that's changed is that it's an deflationary system. Cost declines are huge. Bandwidth and storage coming down, as is processing. Whatever you are doing now, will cost you half as much a year ago. We've never seen deflation hit as fast and as long as this. Muscle power to steam power brought things down fast, but then started going back up. Assembly line, same thing. These are step changes.
Digital Goods are the first good that are able to keep this deflation up. These seem like decade long trends.
Razors to digital swords.
Virtual goods want to be free. Like water wants to flow down hill. Closer to a force of physics, than a hippie mantra. It's not philosophy, not moral - it just is. An effect of processing, storage, distribution going down.
The kids are not wrong, are not spoiled. They have just internalized digital economics.
Default marginal cost is zero. But there must be an economic model to explain this right? No, we don't. This is new.
In the 1800s some new concepts were discussed and defined. Competition. It's obvious now, but then, every product was different (without mass production). With the rise of the industrial age, you started to see the same stuff being built, and hence competing.
Two economists had different takes. First economist believed that producers would conspire to limit capacity to preserve price. Bertrand said no, manufacturers will compete on price, until they got to the marginal cost of production. Competition will drive prices down. This was the end of the discussion.
The Internet has brought all this back - it's the most competitive marketplace the world has ever seen. It's easy to compete. Near zero cost of production is the norm.
The Internet is largely driven by the underlying cost of production. If you don't make your stuff free, someone will do it for you. Music. We didn't make it free because we are bad, but because we could. Free tends to win.
Transistors. RCA sold ahead of the price. Lost money at first, made gobs at end. Lose money from everyone, but make it up on volume.
YouTube is not making money today, but it will make money tomorrow. Odds are it will become profitable. So will Twitter and Facebook. You can lose money today, and make it tomorrow because the costs are coming down.
Argument: you can't compete with Free. This is wrong. Microsoft competes brilliantly with free. In the 1970s Bill Gates convinced people to pay for software, not just hardware. He created a market. He wrote an open letter to hobbyists.
In the 1980s, MS' competitors started bundling software with computers, with an upgrade plan. MS releated Microsoft Works.
In the 1990s, MS had to compete with piracy, Pirates are the animal forces of economics. MS is against piracy.... but, they didn't crush them. Bill Gates: China is a developing economy. We want them to pirate our stuff. When they are ready to pay,perhaps they'll buy ours. Lose money now, make it later.
Netscape released a free browser, which MS crushed by bundling IE with operating system.
2000s - MS competed with OpenSource. You are not selling software - you are selling risk reduction. You would get an SLA, a phone number. A promise that somebody would make sure the software worked. In open source, the RedHat's were doing the same thing. Selling service and security, contractual support.
Now, they are giving their enterprise software for free to startups. BizSpark. It's the chinese pirates all over again. Lose money now, make it later when the startups start making money. Free as a form of marketing.
The bane of the Free discussion is the newspaper industry. It's not free vs. paid, but ad driven versus freeemium.
- The best model is a mix of paid and free
- YOu can't charge for exclusives that will just show up later
- Don't charge for the most popular content
- Content behind a pay wall should appeal to niches
- The narrower the niche, the better
(alan murray, WSJ)
Freemium is the inversion of the free muffin. Give away the majority, and charge the niches.
Churn rates are much lower for freemium models than those that charge up front.
Give away the head, sell the tail.
Two most interesting markets to look at Freemium: Video Games and iPhone Apps
Games are going from silver discs to online. Games - free to play, but you better if you pay:
- People will pay to save time. (buy teleportation tool! save time!)
- People will pay to lower risk
- People will pay for things they love
- People will pay for status (club pengin pets)
- People will pay if you make them (and they are hooked) (times up! time to pay)
Microsoft tells you that Open Source is "free like a puppy."
Q: where do you stand on micropyaments?
A: it's failed and failed and failed for two reasons. One reason is going away (transaction costs). Second reason is psychological barrier, penny gap. Harder to make these go away. I doubt we will see microcents like was originally prophesied, where everything will cost tiny amounts.
Q: What about quality?
A: Quality is funky word. THe old way is that quality meant production quality. Quality is now about relevance, it's in the eye of the beholder.
Q: Freemium works for EverNote. We agree. Optimistic about the future of the model. (editor's note: this is not a question).
A: This is not a question, but here's an observation. First wave of Internet: big build audiences and slap the old model (ads) on top. Second stage, be smarter with ads: adsense. WIth Freemium, you need to build two products: 1) free, and 2) ideally, many paid.
Q: Where's the lockin for expert content?
A: Now it's DRM, but that will die. With movies, we don't know the answer yet. Going to near zero cost of production, to near zero cost of consumption. Netflix you can watch as many as you want for $14.95. Has to be a volume business.
Q: how will Newspapers use micropayments?
A: I don't think they will. We know subscriptions well.
Q: Price falls to marginal cost of production. Health insurance pricing is more competitive now, because of abundance of information. How do you last through the free zone to get to the profits?
A: great question. You need to find the gaps. Don't tackle Gmail and Yahoo Mail head on. MS literally tried paying people to search. Less than free. Startups can't do that.
Q: in a content model, you said 30 day free is not ideal. WHat's the suggestion?
A: problem is you are giving people a real easy reason to get out. You give enough free so that they get utility, and then upsell them. ONce they are engaged it's not spam.
Q: With Wired, you can get stuff for free or pay for it. Why pay for it?
A: Everything is free, but you get a superior format if you pay. Print. The packaging is important. Online is not as good. Pictures are thumbnails. Our model is we convert some fraction of the online to print, because offline is superior. Problem is not enough know that the print experience is so superior. How do hint how superior the print side.
Q. Perception of free. Webkinz - the subscription is bundled into the animal.
A. Also neopets, toy companies. Game is free to pay, but characters are unlocked by buying code. Marketing to children is fascinating.
Q. With tiered service, what are your thoughts on number of tiers? Before it gets confusing?
A. The upside of 30 day free trial is you can sample and try it. The bad news is the level of commitment is minimal. Every product is different - I think two paid tiers is a good level, and one free.
