Thinking freely: New business models for the digital economy

May 13, 2010 · by David Campbell · media economy, photography

Thinking Freely e1322648006785 Thinking freely: New business models for the digital economy

Everything costs something and no body wants to work for nothing. This statement of the obvious drives those disturbed by the impact of the Internet on business models for information industries. Individuals declare that they won’t give their work away, critics claim someone has to pay for content, and insiders (like the editor of Photo District News) repeat hoary old adages such as “no one will buy the cow if your giving the milk away for free.”

Free. If there’s one word that divides people and raises hackles it’s ‘free’. Things do cost and we do want to get paid so how can free make financial sense? Like all contentious concepts, free has lost much of its meaning in its transition from economic idea to bête noir of traditional business. It is time to go back to the beginning and appreciate what ‘free’ involves and for whom it makes sense. I will be using Christopher Anderson’s book Free: The Future of a Radical Price as a guide, which will take us to some unexpected places for those who think its argument is no more than its title.

***

The ability to charge directly for something depends on the relationship between scarcity and abundance. If you are producing something that is scarce you can price your product in a way that those operating in an abundant market cannot. If your company manufactures exclusive, unique sports cars you can demand a high price. But if, like most information businesses, you operate in competition with numerous content providers, you cannot charge scarcity prices (Free, p. 127). We might think that The Times offers something unique and can therefore price itself accordingly, but its news coverage is not sufficiently different from its numerous global competitors to justify its readers paying a markedly higher price.

For an information business in the digital economy, where information is formed through bits, and the cost of distributing bits is near zero, the ability to charge scarcity prices is further diminished. It is here the virtue of the web leads to an economic conundrum. The web has collapsed the costs of production and distribution for anything made up of digital files, thereby expanding the bounds of creativity, communication and collaboration. If maximizing the reach of information is the goal then the web is an indispensable and unavoidable tool. However, the digital capacity that so enhances circulation also undercuts the capacity of content providers to charge directly for their commodities. By largely removing the barriers to entry, the web has enabled the number of content creators to expand dramatically, thereby increasing competition and ending scarcity. At the same time, the end of those entry barriers makes paid content a difficult proposition. As Anderson argues, “if ‘price falls to the marginal cost’ is the law, then free is not just an option, it’s the inevitable endpoint” (Free, p. 173).

***

When we read that free is “the inevitable endpoint” it seems impossible to square the circle and reconcile this with of our starting point – that everything costs something and no body wants to work for nothing. But this is where we need to pay closer attention to the details of Anderson’s argument. Far from arguing that all things are given away and no one earns a penny, Anderson proposes that we stop fighting the disruptive powers of the Internet and find ways to harness its virtues so that creativity can be rewarded.

This means that free is not the business model. Aside from the fact that we are not searching for a single, universally applicable business model, Anderson makes clear that “the most interesting business models are in finding ways to make money around Free” (Free, p. 14). Throughout Anderson’s book he repeats the point that Free is not enough and cannot be pursued alone. Free always works in conjunction with Paid, has to be matched with Paid and should make Paid more profitable (Free, pp. 70, 153, 176, 240).

The close and necessary relationship between Free and Paid might surprise those who relied on reviews of Anderson’s book for their understanding of his argument. Perhaps the most prominent of Anderson’s critics – Malcolm Gladwell, writing in The New Yorker – argued that “Free is essentially an extended elaboration of Stewart Brand’s famous declaration that ‘information wants to be free.’” Here we have a misreading based on a misunderstanding.

Like many, Gladwell only quotes half of this now infamous mantra. What this selective understanding always leaves out is that Brand – who founded the Whole Earth Catalogue and The WELL and was a significant figure in the early days of the web – identified the tension between the ease of distribution and its impact on value. Speaking at a 1984 hacker conference, Brand declared:

On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.

Few recall the beginning of this quote, so there is a chapter in Free exploring Brand’s statement, which Anderson says has become “probably the most important – and misunderstood – sentence of the Internet economy” (Free, p. 96). In a later conversation Brand demonstrated for Anderson what he meant:

The physical world analogy, [Brand] said is a pub. It provides a place for community and conversation, but it doesn’t charge for that. It just charges for the beer that lubricates it. ‘You find that something else to charge for…you always wind up charging for something different from the information’ (Free, p. 100)

The business models that evolve around the relationship between Free and Paid will therefore use indirect means for reward. This means that although Free looks like something novel and untested it effectively draws upon the established approach we know as cross subsidy.

What Free does do differently, however, is use the web’s ease of circulation and collaboration to create the probability that people might pay for something that is unique and considered relatively scarce. Although Free is not the business model, Anderson outlines some basic principles for any business model using Free as its starting point. These include:

  • Build a community around free advice, content or information
  • Collaborate with that community, getting feedback from them that enhances the free content or information being offered
  • Offer different or special versions of the free content or information provided and let those with money buy them
  • Build in a substantial profit margin to the limited products in order to pay for the production of both the abundant and scarce versions

This, then, is the much talked about “freemium” approach, where Free leads to payment for premium. It builds on the established idea of “versioning” whereby similar products in different versions are sold to different customers at different prices (Free, pp. 69, 165, 176). And it covers the full range of consumer psychology so that everyone from the person who wants something that is abundant for nothing, to the client prepared to pay for something similar but which is scarce, can be part of an information business’s constituency.

***

Does this approach work? The experience of the music industry says yes, and Anderson cites the oft-quoted Radiohead model in his book. For their album In Rainbows, Radiohead put it on-line prior to the standard CD release and gave fans the freedom to download then pay what they wanted. Zero was an option and some got it for free while others were prepared to hand over $20. In addition the band offered a deluxe box set at $80 each, and all of the 100,000 available sold quickly. The result was that Radiohead sold three million copies of the album across all formats (online, physical, deluxe), with the money made just from digital downloads prior to physical release exceeding the total from their previous album in all formats. Even more importantly, their subsequent concert tour was the biggest ever, and with the top bands now earning four times as much from events as from selling and licensing music, Radiohead reaped the rewards of extending their reach through free, on-line access to their music.

Mike Masnick at Techdirt has distilled the experience of Radiohead and other bands such as Nine Inch Nails into a “formula” for a business model that echoes Anderson’s principles:

Connect with Fans (CwF) + Reason to Buy (RtB) = The Business Model ($$$)

Masnick’s report offers a dozen detailed examples of musicians and companies that have embraced this approach and generated handsome revenues that reward them for their creativity even though they are not being paid directly for their content.

This embrace even extends to benefiting from the file sharers who are pilloried for the revenue they supposedly steal from content producers (something that motivated the controversial Digital Economy Bill in the UK). Masnick argues that the music industry needs to give up on the pursuit of new copyright laws, licensing schemes and DRM because of the way they inhibit connections with fans. A number of studies demonstrate that the “pirates” spend much more on legal music than regular consumers, and in his book Remix, copyright specialist Lawrence Lessig argues the downturn in physical album or single sales is not attributable to illegal copying. As such, prohibitions on sharing music are designed to defend the traditional recording industry with its business models based on the control of distribution, but get in the way of expanding the overall music industry, which is thriving like never before.

Can this approach work for industries other than music? Again, the answer is yes. Evidence from the book world shows that releasing free e-book versions of titles generally leads to increased sales of physical copies. Photography is also well placed to benefit. Cory Doctorow has argued that the more copies there are in the digital era the more valuable the non-reproducible becomes. This means that as digital copies of images proliferate – making both the image and the photographer better known and creating a community of interest in the process – the more a small but significant number of people will pay for “talismanic items” like signed, limited edition prints. This was borne out by a recent remark from Ben Burdett, director of the Atlas Gallery in London: “we sell to people who fall for individual images, especially well known images people recognise. They sell most easily because when people see them, they know and love them already.”

***

Getting to grips with how Free works requires strategic thinking freed from its established ways. Some of the hype around the arrival of the iPad has come from those who see it as a chance to correct “the mistakes” publishers made in the early days of the web (see the Photo District News editorial from February 2010). But imagining that there could have been world where every reader or viewer paid publishers directly for all their on-line content betrays a fundamental misunderstanding of what the Internet means for information industries. The web is an intrinsically open system, and new ventures would have emerged to provide quality information even if all the legacy companies had retreated behind pay walls from the outset.

Content creation has to be paid for, but in the digital world of information abundance that revenue is no longer going to come principally from direct payment. Free is part of a larger business strategy that leverages the web’s virtues for circulation and collaboration in pursuit of greater rewards, while recognising that we cannot (and should not) fight the impact of the Internet on distribution systems. Free does not mean giving everything away for nothing; it means creatively pursuing indirect mechanisms and cross subsidy to reap the benefits of the new media economy


Photo credit: TheAlieness GiselaGiardino²³/ Flickr

This was written as a guest post for Fast Media Magazine, and appeared there on 12 May 2010.

22 Responses to “Thinking freely: New business models for the digital economy”

  1. You conclude by saying, “revenue is no longer going to come principally from direct payment”. But was it ever true that revenue came principally from direct payment? It seems to me that the new model so eloquently described in your paper is actually old: the cover price was never sufficient to cover the cost of content production, which in truth was always paid for by cross subsidy, namely the subsidy from advertisers as the third party in the relationship between print media and readers. Radical as it might seem, we are still only shuffling the deck. “Plus ca change, plus c’est la meme chose” (attributed to Jean-Baptiste Alphonse Karr 1808-1890).
    Thanks for another insightful and helpful commentary on the changes in our industry.

  2. Thanks for the comment Stephen. You are right – thinking about where we are now involves a clear view of the past, which is often very different from claims about the past. Cross-subsidy has been the order of the day for a very long time, especially in the print media. What I was trying to convey with the conclusion was that direct payment (musicians relying only the sale of music, photographers relying solely on the sale of photographs) is not the way forward.

  3. For an excellent statement on what ‘free’ means in terms of digital rights, see Cory Doctorow’s Guardian column of 18 May at http://www.guardian.co.uk/technology/2010/may/18/information-wants-to-be-free

  4. Critics of today’s copyright laws often contend that instead of trying to control the use of their works through copyright, “old industries” must adopt “new business models” that would address the public’s desire to have unlimited access to content and impracticality of copyright enforcement in the context of the Internet. Usually adoption of such new business models is offered as a remedy for the growing number of copyright infringements.

    In my new article, Failed Business Models of the Past, Eh?, at http://mincov.com/articles/index.php/fullarticle/business_models/ (http://bit.ly/b2TceK), I explain why adoption of new business models has nothing to do with abandonment of the underlying principle that the owner of copyright should be allowed to decide how its content is used. If a business decides to use their property in an inefficient manner, it is perfectly OK to let such a business fail. We should not “save” this business by stealing from it the property that we think it uses inefficiently.

  5. iamnotasuperstarphotographer October 21, 2010 at 10:26 am

    “What I was trying to convey with the conclusion was that direct payment (musicians relying only the sale of music, photographers relying solely on the sale of photographs) is not the way forward.”

    It was never the way to succeed in the first place. This happened when photographers took control of the business.

    Look at Magnum, a big co-operative with a CEO from Private Equity sitting in an office in New York. I would love to know who drives decisions in that business and from what basis. The Art collective based in Paris or the businessman in New York?

    Look at the massive shift in story telling of the photographer’s compared to the attitude of one of its it founding father’s HCB. He was always behind the story and not in front. The context led the product but now the context is all about the photographers. He famously hated to be photographed but now everyone wants their voice front and face all over a multimedia piece.

    Having a declining business run by photographers structured to service aspiring photographers means that their personalities will be at the centre of their stories. Their ego’s will push themselves to the front because they will believe that the economic value is specifically derived from their personal genius. “I shot this, I shot that, I believe this is important because… it is my own personal vision that is unique”. I have heard this so many times – it is the photojournalist’s unique personal vision that is the key sales differentiator. It might be in interpersonal relationships that dictate who gets the funds to do the work but this is a business built from the sheer force of personality.

    Why? Because the photojournalist has became too big for their boots? NO. They are wonderfully passionate people who believe in their subjects in the main. Their ego’s over a period of time are boosted because they present to the same people – want to be photographers and a captive audience. They go to talks and people who want to be in their position say to them “you are amazing”. In many cases I agree.

    This is where it goes wrong. They feed that back to their business people, collect stats from the online propositions that say “want-to-be-photojournalists search for work by existing photojournalists as examples of how to be as great” and wonder why they do not make any real income from it.

    It is simple, your audiences are the ever declining pool of want to be photojournalists with declining sources of revenues!

    All you are left is to take income from the NGO world – which is not journalism – or ever smaller pools of cash from magazines. Online magazines? Good luck with that because look at the product. What are you really selling? An informed passionate opinion (narrowly focused) or objective journalism (informational and open)?. What is the economic value of an opinion to the mass audience?

    It is the failure of ideology that has produced this inward looking un-virtuous circle of declining income streams. Academics will want evidence – Look at those who build substantial proportion of their income from workshops and even worse, portfolio reviews. Look at the people drawn from the gallery world running the business of photojournalism.

    When an inward looking ideology is left with only the weakest/poorest part of their demographic to profit from then all you are going to get is smaller and smaller. Why? The barriers of entry get too high and the protectionist measures taken from the down right unpleasantness of ANY inwardly facing congested industry will only benefit those who are personally forceful (more women, less war photographers in high places please!). This discredits the industry as a whole as most reasonable people turn away and get on with bring up their families and working hard.

    Look at the recent scandals from a far. Morel vs AFP vs LF Leroy. A pulitzer prize given to someone allegedly digging up the bodies of children to prove a point photographically. The representations of the disenfranchised of the less fortunate parts of the world being used for the consumption of people within this industry (mistakenly perceived as “audiences/the public” as opposed to “their current audience/the industry”). All of this backed up by the cult of personality.

    Going to an opening must be like reading the society pages of Tatler or Vogue and saying “look at what she is wearing” or “who is dating who” when it is announced so-and-so is shooting for “X” or “Y” has used medium format for that project. All with the same level of social elitism.

    “Free does not mean giving everything away for nothing; it means creatively pursuing indirect mechanisms and cross subsidy to reap the benefits of the new media economy”.

    A good healthy business has this built into its structure already. Print presses was new media in China thousands of years ago. Inventing paper was new media thousands of years ago. Good businesses looks, finds and creates the environment to innovate because to have the humility to stay where they are is to be overtaken by everyone else. I agree with Mr Mayes – this is nothing new at all and as an outsider, I can say that it is going to a brave person who thinks that the solutions are going to come from people trapped inside this cycle of dis-investment.

    This industry does not need a new business model. It needs good old fashioned business disciplines and the freedom to be run by creative business people able to find a bunch of photojournalists who want to accept their decisions. It seems to me from the outside, it is the business people who are accountable to the photojournalists. That is economic madness.

    Maybe this is why the dependency culture of discretionary aid has hit the industry so badly. Why the structures created to benefit from aid so badly affects its ability to attract external capital. It is because it is unsustainable. Mr Campbell – I would argue that these ideas are nothing new in business, they are very, very, very old indeed.

    Most of all, I hope I have got this all wrong and everything is fine in this great industry.Why? look at the subjects you shoot, the nobility of intention and the people you try to give a voice to. I hope I am wrong about what I see sitting from the outside looking in.

    • @iamnotasuperstarphotographer: I’ve offered a brief response to your wide-ranging comments here and elsewhere after the first lengthy comment you left on the post of 11 October 2010.

  6. Awesome post.Thanks Again. Awesome.

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  6. […] not mean that everything is given away for nothing. Despite claims to the contrary – for details see my review of his book – Anderson is very clear that (a) free is not a business model and (b) that it is always linked […]

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  11. […] that data paints a picture at odds with the oft-heard claims about a rampant and destructive “culture of free” on the web – symbolised in the graphic at the top of this post. # In both the US and […]

  12. […] and that data paints a picture at odds with the oft-heard claims about a rampant and destructive “culture of free” on the web – symbolised in the graphic at the top of this […]

  13. […] around those words and/or pictures. Above all else, we have to forgo the easy moral outrage and develop a more sophisticated understanding of the role ‘free’ plays in relation to paid …. Creative experimentation is the order of the day. I know personally how hard this is, but it is […]

  14. […] David Campbell sites: “Cory Doctorow has argued that the more copies there are in the digital era the more valuable the non-reproducible becomes. This means that as digital copies of images proliferate – making both the image and the photographer better known and creating a community of interest in the process – the more a small but significant number of people will pay for “talismanic items” like signed, limited edition prints.” […]

  15. […] Campbell, D. (2010) Thinking Freely. Available Online:http://www.david-campbell.org/2010/05/13/thinking-freely/. Last Accessed January 2014 […]

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