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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.

Related posts:

Making documentary possible: How the Internet leads to new funding opportunities The ongoing revolution in the media economy Leveraging the web: how people are willing to pay for content Copy culture: What people actually think about file sharing