I’m mulling over online business models and free content today. Two thought-provoking posts about fundamental changes in 2008 sent me down this path.
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.”
While you’re cogitating on revenue 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) 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? Please leave a comment.
Related links:
What Are Business Models for Making Money Online?
Online Revenue Models That Work
{ 3 comments… read them below or add one }
The free-to-play microtransaction business model has been wildly successful in the Asian gaming market, and now proving a success in the US. Applying the mechanism to media for microtransaction purchases of content wouldn’t really be that far of a stretch, as the financials behind said transaction are much less complex than online games.
Dan, Thanks for your blog comment about Asian markets. Maybe online games are less fungible than news? If one newspaper starts charging, readers just go to others that are free. But gamers are not so easily satisfied with alternative games?
Gordon Crovitz wrote an opinion piece in Monday’s WSJ on ‘Information wants to be expensive’. The title is misleading, but the article makes a case for why news media should charge and what content they can charge for. Crovitz says the question is not whether we can charge but what differentiated content we can offer and can charge for.
One problem I find with Chris Anderson’s discussion is his argument that the marginal cost of digital goods is $0.00 and hence the price comes down to the same. Cost has nothing to do with price and only for undifferentiated commodities the price will spiral down to MC. The problem is most online services are undifferentiated or due to their sheer number become one.
I see no reason to give away for free any online service.
-rags
{ 1 trackback }