Thursday, July 9, 2009

Free is not enough

There's been a great deal of debate lately around the Freemium business model that Fred Wilson helped describe (and a commenter helped name). Many take it as an inevitability, others as a bogus and destructive force. I'm a believer, personally, but I also think it's horribly misunderstood as a model and, frankly, not very new.

The first thing to understand is that free isn't a business model, it's a piece of a business model. No company, band, or person will ever make money on free. Free = $0 income. Duh.

The second thing to understand, then, is that there's always been a piece of a business model that was value "wasted" -- generating no directly measurable return. For ages, big companies have thrown empty money at marketing departments, asking them to provide the consumer with entertainment so that they might build brand equity -- radio or tv was the medium, and ads were designed to pique the audience's interest. Advertising is entertainment for an attention-wealthy consumer base.

The problem for those companies is that the attention-wealthy consumer base is dwindling as the internet (among other things) helps put a wealth of options at the consumer's fingertips. Andy Sernovitz has one of my favorite marketing quotes of all time is "Advertising is the cost of being boring." In an attention-scarce world, advertising is a last resort.

So what replaces advertising in the marketing department? Higher quality, more targeted content. In the music world, this means digital files or streams distributed to fans and potential fans via their chosen method online. As with any other industry, you pay for quality and convenience -- you pay for cable to get more and better shows, but still get commercials; you could bypass those commercials by spending even more money on a DVR and spending the value of being among the first to watch by waiting for the program to record; you could spend more time and money to reduce commercials to a screen wipe by buying the DVDs; or you could spend more time and effort searching online and downloading the videos. All above factors being equal, experience wins: companies (read: Hulu) win when they find the right balance of quality, convenience, and monetization.

In the music industry, people began demanding the convenience of MP3s, and no content owners wanted to make them convenient or at the right price (that right price being whatever the fan thinks is fair). The content was going to get free eventually, with no cost of packaging or distribution, but "piracy" reigned as a result of the resistance of the content rights holders to provide that content conveniently and at a rate the rights holders and fans could agree upon. They didn't realize the inverse relationship between attention and necessity for convenience, nor the shift of media for their advertising dollars from endcaps and radio promo to studio and production costs, so the fans figured it out for them. Apple has won the market to this point solely on convenience -- if it weren't for the success of the iPod, there's no way iTunes would be the leading retailer after having clung to DRM and proprietary formats for so long.

It's not free that's killing businesses, it's that free is not enough. It's the inefficient use of free and the inability to find alternative methods of monetization.

Chester French gained tens of thousands of email addresses by giving away an entire album's worth of content for free on their website. People were willing to exchange their contact info for the value of the mixtape, because the band made it easier than searching around on P2P networks. Most of those people went on to buy a record and/or ticket to a show, again, because they made it easy (he emailed them all a link to a page on his website) and at an appropriate price ($7.99 for digital download, $13.99 for vinyl or cd, $19.99 for vinyl or cd + tshirt + poster). They gave the fans options to self-select their level of support for his brand, and the vast majority went with one of the higher-priced options.

The only worry on an album "leaking" at this point (if anyone cares about you, it's almost inevitable) is that you don't make it more convenient for fans to get at a reasonable price. That price can be free (though I'd advise that if you're making it more convenient than other sources you should at least get some contact info) or whatever the "reasonable" price you and your fans agree upon by them transacting -- keep in mind many folks like to shop for deals, so convenience is only a relatively small markup. I've worked with a number of artists whose albums I've had on my iPod even before knowing I was going to be helping "put out" the record, and all have made significant revenues off whatever delivery channels they made convenient for the fans.

Need more evidence that free is not enough? I have spent over $1500 on music in the last year, according to Mint.com (which is a severe underestimate as it doesn't account for cash purchases nor many other music-related purchases). I have almost exactly 1500 songs in my iTunes library that have zero plays, another 1415 with one play, and 5000 total (would take 14 days to play, 35.16 gb of music) with 5 or fewer plays. I can point to maybe 5 of those bands that I've ever spent money on. You can give me your music, but you can't make me listen to it.

The next stage of music, when the triviality of "free" content has passed, is getting in peoples' ears. I've said before that I think a great deal of that will be through tastemakers, and that other artists (or their brands) are likely to be the most profitable tastemakers. Tastemakers add context and relevance to convenience, and should have the ability to offer content at a fair and reasonable price, and should benefit as a result of their addition of context and relevance. Currently, blogs are compensated almost solely through ad sales (and some through promotions and concerts) as a payoff for their ability to bring in eyes and ears, and precious few are even remotely profitable that way. Sites like HypeMachine and iMeem add another level of convenience (you can find almost any track you want merely by searching), and pick up affiliate fees if the user clicks through to purchase a track on iTunes or Amazon (the biggest bottom-line difference between the two being that iMeem hosts the content and thus has to pay streaming bandwidth fees and royalties, and spend their efforts on negotiations and legal battles whereas HypeMachine can innovate great, engaging, context-adding features like Twitter charts).

As new business models emerge in the music industry (all incorporating a free component as marketing), I have little doubt that more business models will emerge for tastemakers. Major labels missed their chance at retaining their status as tastemakers, and now have to earn it all over again. As they rebuild their own reputations (and I have faith they can get there), they'll begin to start letting artists pay them to leverage their connections with the real tastemakers (as we saw today with UMG's deal with Tunecore). Someday soon, though, those tastemakers will also have methods of monetizing their connections -- and yes, free will be part of their business models too. Whomever can get people to listen has the opportunity to make money, and those who can get listeners to take actions have the greatest opportunity. Same thing goes for any business in any industry, and that's nothing new.

The interesting piece of the puzzle is not the changes in business models, but how companies and industries adjust to the changing landscape. The underlying business principles remain the same: those who can provide the highest quality content conveniently have potential for revenue, and those who select the right business model and provide the right context for the content will wind up profiting.

7 comments:

garywan said...

Once again nicely done sir.

I would add this: "attention trust" is the key factor.

Regardless of trends or tastes... I will only give you my extended attention if I feel good about YOU. Attention trust is more significant than quality, fan management or taste making.

The discussion of free (Anderson, Gladwell, White et al) has captured our attention... but we all know this is evolving. I don't think we know exactly where its going just yet.

Meantime aren't we are all still really trying to figure out how to keep art and culture a 'product' that sustains its creators and perpetuates its own continued creation? What is the relationship between the attention of the observer and the value of an experience that is created by another? What is the value (to the beholder) of making the connection with a state of wonder (which is what true art really is... the rest being didactics or pornography, loosely defined).

My intuition tells me that the great creators will continue to create because for them its a necessity. This is why I will likely trust them.

The art of sustenance will be developed by creative minds because they enjoy winning the game.

Jed said...

Much as I dislike it, don't eschew advertising!

I fully agree with your point that the internet "helps put a wealth of options at the consumer's fingertips". It has helped everyone better define his/her tastes and preferences, and then better identify products that meet his/her particular tastes and preferences.

But advertising is no less powerful now than it ever has been, it is just that the audience is more widely distributed.

Why do you think Budweiser and Miller still dominate the beer business? It isn't because they have the best product. It is only partially because they are large enough to influence policy to their advantage. It is mostly because they have dominated people's idea of "what beer is" because of their advertising.

Advertising and the free business model are not "value wasted" with no measurable return. They are the cost of doing business and are essential to building and maintaining market share. "Advertising" worked in the prior age of concentrated media/communication. "Free" works in the current age of distributed media/communication.

Technology changes; human nature does not. The media landscape changes based on technology, the need to attract consumer attention in order to sell goods or ideas does not. We're just seeing a shift in the method of doing so, one that better matches the technology of the day.

Ty White said...

Gary - Absolutely. Attention trust is crucial, which is where the context comes in. Some people are ok with having mass media as their tastemakers, others are not. It's on the content creators to seek out the most appropriate tastemakers and gain their attention trust, either with quality or cash.

Jed - Exactly. Not trying to eschew advertising, just saying it's only one way of reaching an audience, and only some audiences are receptive to it in its traditional form. In the realm of music, we've seen some very interesting (albeit expected) differences between the fans of mass-marketed artists and fans of smaller artists -- as you might expect, folks who listen to major acts are more likely to interact with advertising than fans of, say, the artist that is blowing up on the local bar scene. The fans of smaller artists tend to dig more for their music and be tied more personally to their sources of discovery -- music recommendations coming from outside those sources have an uphill battle to make it into their ears. You have to find a different method of marketing to those folks, and their tastemakers don't accept cash -- the investment has to be in viral marketing, which is reliant on quality and originality.

musictechweb said...

Good read. I know I never discover bands from advertisements

kcortez said...

Another take on free from BandCamp

http://blog.bandcamp.com/2009/07/13/trent-reznor-and-another-way-of-thinking-about-pay-what-you-want/

Our guess is that whereas a set price does nothing to engage a fan, pay-what-you-want-with-a-non-zero-minimum invites fans to ask themselves a question. And that question goes something like “OK, given what he put into it, Trent has decided that this is worth at least $8, but is it worth even more than that to me?” On paper, you might think this would turn some off, but for plenty of people, the answer to the question turns out to be a resounding “Yes.”

trmw said...

Nice post Ty. The only part that confused me was this:

"As they rebuild their own reputations (and I have faith they can get there), they'll begin to start letting artists pay them to leverage their connections with the real tastemakers (as we saw today with UMG's deal with Tunecore)."

Can you explain what you meant in regards to UMG and Tunecore? Are you saying Tunecore is the tastemaker there? Or that Tunecore has connections to tastemakers?

Agreed that tastemakers are increasingly important. That's one reason trusted indie labels like Sub Pop, etc, can still really boost a band.

Ty White said...

k. cortez - definitely an interesting take, using price as an engagement tactic. to me, i think the goal should be to avoid making the fan think about price altogether -- if you provide great value at appropriate price levels, fans shouldn't have to think twice about their level of participation/purchase.

trmw - i was referring to the recent deal UMG and tunecore signed to offer UMG marketing services to tunecore clients. in other words, indie bands are buying access to the channels the major labels dominate, including relationships with major tastemakers (radio, tv, blogs, newspapers, etc).