Freeconomics — Why free content is bad
Would you pay $4 for a Frappuccino at Starbuck? No problem. Would you pay $8 dollars for a good stout at a local brewery? Of course. Would you pay $1 to read a well crafted article on medium.com? Probably not. A reddit post surfaced a couple of months ago with the following headline: “I pay $5 for a coffee but not $0.99 for an app” [link]. The post got a lot of attention and most replies seemed to acknowledge the silliness of the phenomenon:
“This actually got me buying more apps when I thought about it. I could either have this one beer, that isn’t going to make me feel anything unless I have more, or I could buy a decent music app that I’ll get hundred of hours of use out of.” — bluesnack
The reason I’m bringing this to attention is that I believe something is fundamentally wrong with the way we value web content. Why can’t we spend money on web-content and online services like we can with regular e-commerce product? The ingenious innovation that is the web has enabled us to share and consume content in ways that previously was unimaginable. It’s a wonderful thing, I’m not denying that, however, there are side effect. The goal of this essay is to shed light on the issue in hopes of changing your attitude in regards to valuation of web-content.
As I see it, this problem can be divided into two challenges. The first is the mindset of the consumer and the second is bad business models.
PS: Bear in mind that I will regularly switch between examples from the software and the media industry, but hopefully it will not get too confusing.
Challenge 1: The mindset of the consumer
The typical answer to why people have such a hard time paying for software is that we can get similar software for free. And, remember that once something is free, it’s going to be extremely difficult to get anyone to pay for it later. I believe that some of these problems have deep roots in the Open Source community. These wonderful people make great content without monetizing it. This is of course amazing, but there is a catch. When you make something great and offer it for free, it establishes a psychological baseline in the mind of consumers (Kahneman, 2011). Now people take it for granted that the type of software you made is supposed to be free. What people fail to realize is that the amazing aspect of Open Source development is not that it’s usually free of charge to the consumer, but rather that the source code is open and available for everyone to see. You can contribute to the project or even just “steal” the code for own purposes and this is completely fine. This is most certainly great for society as it enable you to learn and innovate by building on other people’s ideas. So if you build something that you think is great, feel free to leave the source open, but don’t be ashamed to charge money for the product!
The “problem” with free is not something we see with physical products since most people can deduct that a physical thing must be made out of materials and materials cost money. Software on the other hand is a different story as behavioral economist Dan Ariely states:
“The barrier is that it’s very hard to figure out how much something is worth”
It’s basically cost-free to copy and therefore it could just as well be free. So the problem is not Open Source itself, but rather people’s valuation of software and web content. Furthermore, Ariely argues that once the valuation goes to zero, we have an even bigger problem because of the psychological effects of “free”. People are much more likely to choose a free product versus a product that is close to free even if the latter offers a much better cost-benefit (Ariely, 2006). This is one of the reasons why it is so hard to get people to pay $5 for a desktop application that is clearly better than the free alternative.
I also feel that it’s necessary to bring up the quality aspect when talking about this subject. Free web-content is more often than not inferior in quality to alternatives we can pay for. Have you ever read an article so good that you keep thinking about it for days? Have you ever seen a youtube video so well crafted that you get this urge to show it to everyone? The reason why you enjoyed this particular piece of content is likely because someone put in an immense amount of hours to make it. Unfortunately, very few people is able to produce such content week in and week out without getting paid for it. Just imagine all the great minds out there that are stuck with their boring 9–5 job because they don’t know how they could financially justify working with their passion. Just imagine all the great content that could have been.
Another argument concerning quality applies to websites and customer service. As Mike McDerment states in his article from 2013:
“Free services just can’t provide great customer service.” [link]
In most cases, free providers simply don’t have enough resources to offer a product with great customer service, which is often something you get with paid services.
Challenge 2: Business models
The second fundamental problem lies with the current online business models. They are simply out of date. Many content providers in the media business is struggling today, but is this really just due to a lack of willingness to pay by the consumers?
Just to get some context, let’s begin by looking at the traditional media model. A publisher provides a product free to consumers, and advertisers pay to ride along. Radio is “free to air,” and so is much of television. Likewise, newspaper and magazine publishers don’t charge readers anything close to the actual cost of creating, printing, and distributing their products. They’re not selling papers and magazines to readers, they’re selling readers to advertisers. When the internet first was introduced it didn’t take long before banner ads and such became very popular. This media model have since been the cornerstone of online business models.
So, what is so harmful about it you might ask. The simple answer is that this three-way market model hurts innovation. A good example of this is how the complexity of the three-way market model have implications for online magazines. When the value of a piece of content is measured in terms of number of clicks and not the content itself, the incentives to make great content disappears. Content is made for the consumers, but it’s the advertisers that indirectly dictates the format of the content. It’s clickable, short and inconclusive articles that sells and so the model inherently encourages mediocrity because it makes money on quantity, not quality. Another side effect of this is that we become less critically of things when it doesn’t cost us anything. If for instance it had cost 5 cents to read an article online, wouldn’t it be safe to say that people in general would pay more attention to what they choose to consume? More conscious consumer choices means that content providers must also think more in terms of quality since this is what consumers want and not the advertisers. Remember that when you are paying for something you are indirectly saying “Yes, I want more of this!” and this way you are giving feedback to the provider so they can make even better content in the future.
“You need a lot of financial depth to be able to handle the growth of a free business, which is outside the reach of most people. Then you need to have first-mover advantage.” — Vinny Lingham [link]
So advertisers want traffic, loads of traffic. Just think about it, even though you offer an incredible valuable service to a couple of hundred people, you can not begin to think about earning even a dollar before you reach a critical mass where advertisers starts showing interest in you. This makes it hard for niche web-content to be profitable. This model is in my mind an unforgivable compromise. We have to create value for readers and advertisers at the same time which is really hard. Thus, I feel that it’s long due to move away from the current advertising model.
In recent times an alternative model called the freemium model have become very popular. The freemium model which works by offering a free version of the product but at the same time charging money for a premium product which typically have more features and benefits. Spotify is a good example of this.
This is a great model that usually gets rid of the advertisers, but here we run into the problem discussed above by setting a baseline at $0. Yes, it can be a great way to grow a fast user base, but it is really hard to get users to pay for it later. Because of this, companies have found a solution which involves just making their product shittier by incorporating annoying advertising in their freemium version. Now we are back to the problems discussed before.
Netflix on the other hand is doing something I find more sensible. It is essentially using the “Spotify model” but only with the premium product and a free trial. There is no way to get it for free. They offer quality content to the consumer and the consumer pays for it with no middle man. Just as it should be! Just think about it, if Netflix had offered their service with a freemium model they would probably never have be able to fund all the brilliant show they produce today.
To be fair with the media industry, they have in fact tried to replicate this model, but unfortunately not with very much success. I believe that the failure thus far can in part be attributed to bad pricing strategy. In Norway where I live, some newspapers suddenly put up a paywall with a monthly fee of 20$. I think it shows that some media outlets have weak understanding of their customers. Netflix can get away with charging a constant fee of 10$ a month because we already have established an approximate price in our head of what a movie is worth. I think most of us can agree that a good movie is worth at least 10$ to watch. So if I just watch one good movie every month, Netflix would still be worth it for me. On the contrary, even though you’re getting hundreds of articles a month from a magazine, in retrospective, how many of those would you have payed to read? Probably not close to $20 worth of articles. While Netflix can be your sole source for movies, the same can not be said of many media outlets. People like to read articles all over the place. Because of this I think the best solution here would be a revenue model where you pay a small sum per article you read. This way you can browse many different news outlets without worrying about monthly subscriptions from each. You pay for what you read. This model is not very widespread yet and a big reason is that from a technical point of view it has long been difficult to do microtransactions cheaply, but this will without doubt change in the near future. Bitcoin companies like Blockcypher (no affiliation) is already lining up for this revolution.
The times are changing
Luckily, I believe we are starting to move in the right direction. Spotify and Netflix has shown that people are willing to pay for content and software online as long as the product is reliable and easy to use. The media is lagging behind, but I believe that with new microtransaction technology we will soon see business models that is beneficial to both consumers and providers. Additionally, It also makes me genuinely happy to see services like Patreon be successful. It tells you that we collectively want to support creative creators, even if they make content that only exists in the virtual world. The beauty of Patreon is that it enables small niche creators to make a living of their passion. You can for instance live of a youtube channel with only 1000 subscribers as long as a substantial group of those viewers is dedicated enough to pledge you some dollars per video you make. This is a really powerful change and all that was needed was just a new infrastructure that enabled consumers to pay for the content. It really shows that great business models can lead the way and change people’s mindsets for the better.
Thank you for reading and remember to support the creators you care about!
