hyperlative.com | signal vs. noise in distributed media

A review of Free: The Future Of A Radical Price by Chris Anderson.

Chris Anderson is Editor-in-Chief of the US edition of Wired magazine, a post he has held since 2001, and is also author of 2006 best-seller The Long Tail: How Endless Choice Is Creating Unlimited Demand.

His latest foray into the lucrative non-fiction business book market relies on the same trusted formula as his first: entertain the reader with engaging, loosely-connected historical anecdotes wrapped in confident, well-turned prose to present a modish and more or less plausible concept sure to set the twittering classes a-chatter. Then cash in with a series of speaking gigs at upscale digerati gatherings to guarantee media mindshare for your new idea.

However, second time around the zeitgeist has been shaken by financial dissolution and reality has reasserted itself in place of neoliberal abundance economics. The claims The Long Tail made about distributed markets have been largely discredited and people are rightly remembering that there is no such thing as a free lunch after all.

Nevertheless, Anderson’s thesis is of interest, especially in the new media markets which are his native environment and are currently in a turmoil apparently caused by the collapse of business models based on charging for content.

He makes two main proposals, both of which have indisputable premises. The first is that inexorably falling digital processing, storage and bandwidth costs have steadily brought the production and distribution costs of digital goods and services closer to zero. No-one could deny that, nor the key point that the internet powerfully combines all three.

However, tending towards zero and reaching it are not the same thing. And someone still has to pay the remaining marginal costs, which can be considerable at scale. A recent report by Credit Suisse estimates that YouTube will cost Google half a billion dollars this year in bandwidth and content licensing fees.

The second is that there is a significant psychological difference between low price and no price: research shows that the “mental transaction costs” involved in thinking about a purchasing decision inhibit participation even in otherwise attractive propositions. Sweep away charges and the lure of free creates extraordinary demand, not to mention unprecedented competitive advantage.

However, as Anderson says, “advertisers will pay as much as five times more” for readers who are committed enough to subscribe “than they’ll pay for a free magazine that may be treated as junk mail”. So reducing mental transaction costs to zero by giving your product or service away will mean you are neither able to demonstrate commitment to advertisers nor bring in money by charging. Who would invest in a business like that?

In fact, Anderson is apparently quite happy to propose an idea only to refute it himself a few lines later. His introductory claim that we are looking at “an entirely new economic model” which is not just a variation on well-worn strategies is soon contradicted by his admission that “all forms of free boil down to variations of the same thing: shifting money around from product to product, person to person, between now and later, or into nonmonetary markets and back out again”. All of which he identifies as tried and tested marketing methods.

But there are the beginnings of an interesting discussion in this book, a more thorough exploration of which might have made a welcome contribution to the ongoing Great Paywall of News debate. The freemium (free plus premium) approach, giving away a basic version or limited sample of a product or service, offers to combine the benefits of lower barriers to participation without undermining the commitment of paying customers who are also attractive to advertisers.

There’s nothing new about this business model, but it is a key strategy for content producers challenged by the web. It certainly works for The Economist, three-quarters of whose 1.3 million readers are subscribers. And both The Wall Street Journal, with a million subscribers, and the Financial Times, which has been charging for access to its website since 2002, are succeeding behind the paywalls that many pundits said would signal their demise.

Some would protest that these publications are unrepresentative as they offer specialist information which conveys commercial advantage, are aimed at high earners and are often paid for on company accounts. But quality, scarcity and value remain relevant whatever the context and delivery platform. Although cost has become less connected to price on the web, businesses are still not so much built at a price point but according to the value they deliver and the cost of delivering it.

Developing this angle might have encouraged Anderson to admit that some income remains necessary to meet lower but still real production and distribution costs. He might also have attempted a more nuanced assessment of the perceived value involved in paying for a product whose quality, authority or reliability is implied and may even be guaranteed by the cover price.

However, none of this amounts to anything approaching the new market law that Anderson is aspiring to spell out. Many business and marketing models exist, some of which will fade and some grow, but free is not the single determining concept in any of them.