First off, let me preface this whole deal with a little background. I have had a web account of one form or another since long before the browser era, doing telnet connections, using archie and veronica, pine or similar for mail… what some today might consider web 0.1 beta. So while I don’t have a doctorate in business or anything, I have gotten a pretty harsh education on the world of the web. I have seen money making schemes come and go, scammers in and out, and so on. So with all the Web 2.0 hype and the shifting business model, I have a few things I want to throw out. Stay with me here, this might take a while.
The most obvious manifestations to the public of web 2.0 (call it W20 for short) has been in the entertainment world. The radical shift from pay / broadcast / retail markets to what is nicely referred to as “non traditional distribution methods”, thinks like Itunes, Napster, Youtube, Flickr, torrents… There are many ways that media is now getting to the general public. The music business as a whole has suffered the most, as they were the first target coming in the door (music files are relatively small, and were easily traded even when people were on slower connections). Music is probably the most often stolen thing in the world now.
With increased bandwidth to the end users, the video, movie, and television worlds are starting to suffer the same fate, it is now pretty much a simple process to find almost any movie (including many still in theatres) and download it within a reasonable amount of time (less than 24 hours) so you can burn your own DVD copy to enjoy. While the theatre business isn’t suffering too much at this point, the secondary markets of DVD sales of movies after they leave the theatres is showing some decline.
Welcome to W20, where basically there is a bizarre sense of entitlement that exists amongst the general population that anything can be put online and it is free, legal, and happy.
What has only recently come to light is the idea of W20 as a business model. The idea is to give something away that is desirable (such as a song) hoping that the end user will also do something that will create income. Example would be Radiohead giving away their newest album online (using a donate what you want process, which allowed people to donate anything from nothing to 100 dollars, I think it was). While I have seen various reports, the end number was a couple of dollars average for an entire album, which suggests that a large majority of end users paid nothing. Radiohead’s apparent motivation was to stick it to the record companies, but in the end they signed a distibution deal and the record is available all over the world. The real reason is concert ticket sales, which is where most bands make their true fortunes. Giving away the album to generate more fans to generate more ticket sales is sly spin business model, potentially gaining them tens of millions of dollars for giving up a couple of million of record company payouts.
The concept (as will be discussed in an upcoming book called (remarkably) FREE! by Wired editor Chris Anderson (author of the very popular and seemingly misleading “The Long Tail”) will attempt to explain how to make money on free, how it all works, and how it is a great business model, and how companies are making millions off of giving apparently valuable stuff away for free.
Mr Anderson often makes me chuckle because his books are often presumptuous, taking narrow snapshots of reality and attempting to paint the rest of reality to match. The Long Tail was based on a narrow point in time where a strong supply of back catalog TV shows and movies on DVD allowed the nostalgic public to buy huge amounts of older material at a good price. Anderson mistakenly took this as a long term trend, forgetting that at some point, (a) the nostalgic people will have binge bought enough old stuff and will stop, (b) that the material will become more widely available online (free!), and (c) that the wave of older material is all but exhausted already, nobody is waiting impatiently for the DVD box sets of “Hello Larry” or “Check It Out”.
In the FREE! universe Mr Anderson appears to ignore the domino theory of free. The concept of free is offer something good for free, hoping or intending that a very small percentage of the people who take free will also do something profitable, and will cover all the costs of the free distribution and leave a profit. But Anderson forgets to consider “What if someone else offers the next step for free as well?”
Free is the easiest selling point, it is the selling point where you don’t discuss the merits of the product, the merits of ownership, the true value of the product, but rather just take it, it is free. Music is ending up with the same value as that piece of paper flying the guy on the street handed you to get a 2 for 1 coffee at Joes Java shop. Free in the end devalues things until there is no value, and then no more enticement. So someone has to step it up and put something of value on the line again.
Consider this: Bands give away their music hoping to get people to come to their concerts, buying tickets and making money. But after a while a status quo balancing point comes in and it gets harder for new bands to break in. So some of them start giving away concert tickets hoping to make their money selling T-shirts and beer at the shows. Then someone gives away the T-shirts and Beer and tries to make it up selling laundry detergent (to clean those t-shirts) and Taxi rides (to get the drunk people home). It goes so on and so on. So today’s upsell value added profit center is tomorrow’s freebie, and so on.
Mr Anderson also touts the “advertising supported” model, where ads are forcibly pushed onto visitors. That isn’t just the banner ads and text ads you see on many sites, but by either forcing people through an ad page to get to the content (interstitial advertising) or by blending the advertising into the end product (logos on videos, “brought to you by” messages before music, or bundled downloads / software installs to pay for the downloads). What Mr Anderson again fails to consider is the idea that advertising exists only to promote products with a true income creating business model. If everything is free, why would anyone be buying advertising? Bands giving away their music for free aren’t going to take out huge ads online to promote their productions unless they are sure they are getting money back. Record companies are getting cut out of the game, so they aren’t going to spend. The further up the food chain this conversion of value product to teaser freebie goes, the less and less money is actually available to promote anything. Thus the advertising supported buzz generating websites (like say a Perez Hilton or whatever) cannot exist if they cannot generate income through advertising.
Simple example? Record / CD stories are disappearing faster than President Bush’s popularity. Not just individual stores, but entire chains are getting blown out (Tower Records, anyone?). The shift to the super cheap delivery systems (itunes), breaking of the album concept (individual songs sold), and the torrents / file traders have pretty much eliminated the physical distribution of music CDs. It was the weakest business model, but it is very likely the first dead canary in the coal mine.
Mr Anderson fails at the very basic thing that is in almost every marketing book out there: Free (or even cheapest product around) fails to create value for the end user. All upsells and marketing are dependant on value, and the loss of value for the music product (does anyone even buy CDs anymore?) has all but killed off huge parts of the music industry. Sales continue to drop rapidly of physical product, and online sales (while high in transaction numbers) are not bringing in the same sales income that physical product sales did in the past. At some point, it becomes more and more difficult for the music companies to stay in business, and their business is to get new artists from nothing to stardom, through huge investments of money and time. Remove the profit motive, and suddently new bands aren’t getting the wide distribution and exposure needed to push them over the top. Short term the FREE! concept may work, just like The Long Tail appeared to work, because you have a backlog of material and demand. But as that demand is satisfied and a lack of new high value content diminishes demand in the future, then the model fails.
The W20 business model, the FREE! universe isn’t any different from the Private Equity companies that have taken public companies private by basically getting those companies to bury themselves in debt. In the short term, money way made. But the business are gutted, often unable to stay afloat, and the true value of the companies is lost to a few robber baron types that run off with the money to gut other companies for their debt values. The W20 model has already gutted a large part of the music business, is starting to gut out the TV and movie world, and has set dangerous precedents in the mind of a new generation of consumers that feel that everything should be free. Pretty much anyone under 25 has no true understanding of paying for music, except what they buy from Itunes from time to time. I know plenty of people with tens of thousands of songs downloaded, hundreds of movies downloaded… with no concern for value because they don’t see any in it.
Free has a price, and hopefully more people will realize that the W20 business model is nothing more than gutting out value in an attempt for short term profits.