Monday, February 25, 2008

What Are You Worth in a Free Economy?

What Are You Worth in a Free Economy?
Chris Anderson Explains How 'Freeconomics' Will Change the Media World
By Nat Ives

Chris Anderson's book "The Long Tail" described the rising potential in niche media -- enabled by plummeting digital-storage costs -- and predicted a declining reliance on blockbuster media. In his first (as yet untitled) book since then, Mr. Anderson, the editor in chief of Wired magazine, plans to crystallize the implications of doing business when the cost of products, services and storage is falling rapidly toward zero.
Wired's new issue is free .. sort of. You still have to pay for the mag.

"'Free' shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today," he writes in a forthcoming Wired cover story previewing the topic.
That's not to say Wired's growing print circulation is about to become free for readers, or that Wired didn't happily pocket every new penny of revenue when ad pages edged up 5.6% last year, according to its estimates.

It does suggest, however, that media companies and their advertising clients might rethink their strategies amid growing competition from the sector called "free." In an interview ahead of that cover story and Hyperion's planned book release early next year, Mr. Anderson told Ad Age what's coming now. We edited lightly for space, which still has a cost attached to it for Ad Age.

Advertising Age: Give us the broad strokes on "freeconomics." What's free, for whom and why?

Chris Anderson: When you think about it, there really are three kinds of free. There's the free we've known forever, which is the King Gillette razor-and-blade model, which is a form of cross-subsidy. A spin-off of that model is the media model, where the product is free because it's subsidized by the advertiser. That's called a three-party market -- the publisher, the advertiser and the consumer who gets everything for free.

The second kind of free is this weird kind of the free that's never existed before, simply because cost goes to nothing. Moore's Law said processing would get cheaper every year, but there are corollaries for bandwidth and storage. As the price gets closer and closer to zero, you can eventually just treat it as free.

Hotmail started with a tiny amount of storage for free and then you had to pay for the rest. By 2000 to 2002, you were getting more. Then Gmail said, "We're going to give away one gigabyte for free," and revolutionized the market. Yahoo said, "We'll give them infinite storage. We'll use that to reinforce people's connection with Yahoo and make the money somewhere else, maybe banner ads on Yahoo News, maybe just the information you get from people's user behavior that allows you to charge more for ads."

The third model of free is the gift economy. This is what used to be called freaky, Berkeley, hippy-commune stuff and now is the basis for Wikipedia, the blogosphere, Craigslist. There is a real economy out there that is motivated by nonmonentary consideration such as reputation, attention, expression -- all the social incentives that are turning out to be incredibly effective in getting people to do things for free. Before we didn't have a platform on which they could work.

Ad Age: If everything is getting closer to free, why did the cover price on all my celebrity-gossip magazines just go up?

Mr. Anderson: Magazines are in the essentially free business. At Wired, we charge $10 a year for a subscription when the actual cost to us is more than 10 times that much. So why do we charge anything? We charge a nominal fee simply as a psychological fee that shows that you want it -- which allows us to charge advertisers more. A single penny does it. We charge $10 because we don't want to devalue the product, because that would be sending the wrong message. But from our perspective it's essentially free.

Ad Age: Which media companies or marketers win with free, and which lose?

Mr. Anderson: Obviously you don't want to compete with free. If your economic model doesn't let you get to free but your competitor's does, you're fighting a very powerful proposition. If you are selling software and some other company decides to make that software a free service, Microsoft Office is going to be more and more competing with online word processors. That's a wake-up call for Microsoft.

Music labels are the best example of an industry threatened by free. They're in the selling-discs business, the selling-songs business. Obviously the newspapers are dealing with Craigslist. Newspapers charge for classifieds; Craiglist runs them for free. We know how that story ends.

Advertising is a very interesting question. Right now the agencies are competing with cheap. Google can serve very small advertisers who can't pay for big agencies. There's going to be more and more advertising forms that are free to somebody. Advertising isn't the victim of the free economy; it's the engine of the free economy.

One of the biggest issues is it's not all about advertising. Advertising pays for a lot and will pay for more, but there are many other models such as premium, cross-subsidies that are not based on ads.

Ad Age: You discuss the effects of abundance in your article. What happens when we get to play with bandwidth and storage that's free or nearly so?

Mr. Anderson: The best example of this today is YouTube. We focus on the viral hits and phenomenons and the most popular videos. As a Long Tail guy, what's really interesting about YouTube is the extent to which we waste the bandwidth and storage for passing around videos that are of interest to, like, three of us. It's YouTube, not Viral Tube or Lonelygirl15 Tube. It's not about quality; it's about relevance and focus. It's about being incredibly targeted on narrow interests.

Ad Age: So how does a "freeconomic" media model affect or interact with the Long Tail?

Mr. Anderson: The Long Tail is all about infinite choice. If you can give people infinite choice, you can discover the latent demand for products of niche appeal. Infinite free shelf space was essentially the enabling factor. It was simply by being able to be indiscriminately, profligately wasteful that we are able to discover the demand for niche content.

Chris Anderson, editor in chief of Wired magazine

What we're discovering about the world of the narrow, of the specific, of the niche is that's where people's engagement is the highest. That's where they care about stuff. We have relatively superficial engagement with mass products and relatively deep engagement with niche products. As you go down the tail of popularity, people will pay more to reach narrow audiences than they will to reach broad audiences. You can sell things for big money; you can charge more for advertising.

The world we live in -- a mass-market, commodity, cost-per-thousand market -- is very interesting to compare with the hyper-local. There's a site on Seattle-geek parenting -- you would say that's pretty narrow. We asked what their CPMs are. They said: 'We don't calculate that; we have local merchants who will pay us a few hundred dollars.' If you work it out in CPMs, they're paying $100 per thousand.

A site on Seattle-geek parenting is only possible because the cost of production is zero and most of the labor is donated.

Ad Age: Does free empower consumers, whose attention and respect are becoming the media companies' chief asset, or dis-empower them by eliminating the vote-with-your-wallets influence of circulation revenue, subscriber fees and so on?

Mr. Anderson: I'd like to think that getting more for less is empowering. As we shift from the currency being money to attention and reputation, in a sense, the field becomes a relatively level one. We all have attention and respect we can offer. That's a far more democratic access to the marketplace. We all have attention that has some value. As more and more becomes free, we're able to deploy that wherever for whatever. Basically everything is available to everybody -- not necessarily at all tiers and all features, but the walls to entry to products and services are falling faster than ever before.

Ad Age: What's going on at The Wall Street Journal online, which Rupert Murdoch had strongly hinted would go free once he took over but now is slated to retain a walled garden at its core with possibly even higher prices?

Mr. Anderson: Murdoch has to be culturally sensitive to the company that he bought and deftly change it. Ripping out the pay side overnight would have probably been too traumatic. I'm not sure we've seen the end of that story.

It reminds us that the original Stewart Brand quote is "Information wants to be free." The actual quote also says some information wants to be expensive. What he meant was that commodity information wants to be free and noncommodity information wants to be expensive. I could give away my book and sell you speeches, which are targeted. A band does exactly the same thing: commoditize the album and then monetize the performance. What Murdoch is exploring is the difference between a commodity and a noncommodity.

Ad Age: What's your take on micropayments? Edward Wasserman recently asked in the Miami Herald whether journalism could live without ads, imagining instead "a vast menu of news and commentary offered to you ad-free for pennies per item, the charges micro-billed, added up and presented like a utility bill at month's end."

Mr. Anderson: At this point, my opinion is that micropayments have always failed and will always fail. They violate the fundamental law of free. Free is psychologically powerful. Charging one penny ruins the psychology. Asking people to just think for one second, "Is this worth it?" or "How much is it worth?''is often too much.

Ad Age: Will your book be free?

Mr. Anderson: Obviously we're going to walk the talk. The issue is going to be free. Send us your snail-mail address, and we'll send you an issue free