I’m mulling over online business models and free content today, particularly the freemium model. Two thought-provoking posts about fundamental changes in 2008 sent me down this path.
Free to Freemium or Paid?
Chris Anderson’s The Economics of Free argues “Free may be the best price, but it can’t be the only one.” He makes cogent points relevant to those using “scale up and sell out” or ad-based business models:
1. Until last September, new web companies could raise money to introduce products for free, to reach the largest market. If the product idea proved itself, the entrepreneur got more money to expand. Eventually the company was bought out by a bigger firm. But since September 2008, he says, web startups must have a revenue model that “brings in real money while they are still young.”
2. Advertising is the default business model after “scale up and sell out.” But the price of online ads had dropped, as have click-through rates. Anderson states that Adsense ads barely cover hosting fees, even on popular blogs. (And witness today’s article in the Wall Street Journal, “Future Shock for Internet Ads” which confirms the drop in ad prices.)
3. One alternative is partial pay. In the “freemium” model, people use limited or simple versions of the web product or content for free, and they upgrade to paid versions when they like it. Anderson cites examples of Tapulous, the Wall Street Journal and Microsoft’s Biz Spark program.
Going forward, he argues, “Free is not enough. It ultimately has to be matched with Paid.”
Newspaper Business Models
While you’re cogitating on alternative business models, also consider the predicament of newspapers (and bloggers and other content websites.) Walter Isaacson’s How to Save Your Newspaper looks back and forward at traditional media’s changing business models.
1. Historically, newspapers have had three revenue sources: newsstand sales, subscriptions and advertising. But as of last year, more people got their news free than paid. Should this trend continue, the new “business model” will rely largely on online advertising. Isaacson claims this weakens the bonds with readers and makes publications more beholden to advertisers.
2. When newspapers put their content on the web for free, those who make the most money are search engines, portals, aggregators and internet service providers. How can this be a long-run solution for content providers?
3. Some publications, like the Wall Street Journal, use the freemium model, charging subscriptions for certain content. This has proven to be difficult in the past, and many have tried and failed with subscriptions. It remains to be seen if, given new economic realities, this business model will become viable. In addition, Isaacson sees easy micropayments (Spare Change, Bee-Tokens and Tipjoy, the latter now shut down) as an additional solution for content providers, both in traditional and new media.
Isaacson’s conclusion, which might apply to bloggers and other content providers as well as journalists, is:
“Charging for content forces discipline on journalists: they must produce things that people actually value. I suspect we will find that this necessity is actually liberating. The need to be valued by readers — serving them first and foremost rather than relying solely on advertising revenue — will allow the media once again to set their compass true to what journalism should always be about.”
What do you see in the crystal ball for online business models?
See also this page of related posts on social network business models.