May 062010

No such thing as a free lunch

The enticing title of this post refers to a phrase created to distinguish between two meanings of the word “free.” There is “free as in beer,” meaning free of charge, and sometimes referred to as “gratis” (from the Latin). This is contrasted with “free as in speech,” meaning free from restriction or censorship, and also referred to as “libre.” (As one who loves language, the conflation of two separate ideas into one word strikes me as an odd quirk and a fascinating bit of inefficiency in English, but I digress.)

Sadly, we’re not talking about beer today. What we’re talking about is the commonly-held idea that information on the Internet “should” be free — free as in beer. (Most of us reading this from outside the halls of the capitol at Pyongyang would agree that most information and news should be libre: free as in speech.) Visit any forum or online discussion about digital content (such as e-books, TV shows like Hulu, online newspapers, etc.), and dozens of people will tell you that information “wants” to be free, “needs” to be free, or “should” be free on the Internet. They will point out that hosting a website and transmitting data across the globe is a relatively trivial expense — and they’re right.

What many fail to realize is that producing quality content (whether it’s a well-written and well-edited novel or a well-researched news story) takes plenty of human labor, and that content is worth more than just the cost of the paper and ink to print it. Let’s look at newspapers for a moment. Newspapers everywhere are struggling. For about a decade now, most newspapers have spent a great deal of time, money, and effort developing slick websites to bring you all the news from their print versions — with additional perks like videos, more color pictures, and discussion forums — in order to enable their customers to stop paying for newspaper subscriptions. (Sure, you could argue this wasn’t the best business model, but hindsight is 20/20.) The idea was to make enough money on online advertising to recoup the lost subscription revenue plus pay for the additional web design and hosting costs they incur.

That idea has failed. Ad revenue is not enough to keep newspapers running right now. Internet advertising is just not very effective anymore, and advertisers are paying less and less per impression (how many of us totally ignore web banners and block pop-up windows?). Newspapers are taking big losses, laying off editors and reporters (which reduces the quality), and going out of business.

Of course, it’s a vicious cycle. Newspapers lose money, reduce the pay of journalists, lay off editors, stop sending reporters on fact-finding missions, and the quality of their writing goes down to the point that many are just regurgitating articles from the Associated Press — which we can get for free at dozens of places online, so why would I pay for access to The Miami Herald’s website? Now that newspapers have trained Internet users that information should be free (as in beer), it is proving very difficult to convince anyone to pay for online or digital content. Especially so long as other avenues keep giving it away for free. (Note that the continued chorus of Internet users in support of the “free” model is based on the fact that 95% of Internet users are content consumers and maybe 5% are content producers trying to pay rent. It’s kinda like having 9 wolves and a sheep vote on what’s for dinner.)

The problem is that quality, well-researched, neutral, accurate information is worth paying for. Good writing, good editing, investigative journalism, flying reporters to locations to uncover stories — that’s worth paying for. What some random blogger thinks about something he may or may not know anything about — that should be free. 🙂

On the other hand, the Wall Street Journal (to pick one example) seems to be making the same mistake LOTS of digital media (news, books, music, movies, etc.) producers are: overcharging. Customers know that it costs less to stream a TV show than create, package, and ship a DVD. It costs less to email an e-book than to print and ship a hardcover. And the WSJ’s costs go down if they can get rid of their printing presses and stop buying paper and ink by the ton.

Digital media producers are very slow in understanding that the marginal cost of selling 1 more digital download is close to zero. So it’s better to sell 5x as many (e-books, subscriptions, streaming movies) at 1/2 the cost. It’s a win-win. But, when I can get a DVD for $1 from Redbox, I’m not gonna pay $5 to stream it online. When the library is free and bargain books are a few bucks, I won’t pay over $10 for fiction e-books. When a print mag is $2 an issue, why am I paying $5 for a digital download? And why does a $3.99/week iPad WSJ subscription cost more than a $2.99/week print newspaper (that takes paper and ink and trucks and delivery people)? People aren’t stupid. I like my iPad, but I didn’t all of a sudden forget basic math.

There is a middle ground: free is an unsustainable model if you want quality content, and overcharging will kill the model just as quickly. Higher volume at lower prices is the great opportunity of digital content.

Now, if only things worked the same way for beer ….

Apr 122010

We are seeing more and more digital content, including:

  • E-Books
  • Downloadable & streaming movies and TV shows
  • Apps and games
  • Magazines
  • Newspapers

This digital content costs less to produce and distribute than the non-digital version. It eliminates printing costs, fabrication of DVDs and DVD cases, and shipping costs, just to name a few. So why isn’t this stuff getting less expensive?

The problem is that the content providers are generally overcharging. Why can I rent a DVD from RedBox for $1, or unlimited movies for a month from Netflix for $9, but on the iTunes Store I’d have to pay $5 just to stream a movie one time, or $15 to download it? Why are you charging $3 for a single TV episode I could watch for free? Why are many e-books $9.99 and up, even when they have a paperback version out for several dollars less? Do they really expect me to pay $5 for a single issue of Time magazine, or $20 a month for the Wall Street Journal? Don’t they give it away for free on their website?

And, one thing I quickly noticed on my wife’s new iPad: all those $0.99 and $1.99 and $2.99 iPhone apps have iPad versions that tack “HD” onto the title and sell for $4.99, $9.99, and $14.99. A tad greedy, methinks.

What these content providers don’t seem to realize is that the great benefit of digital content is that there is no marginal cost. Once the content itself is created, you can sell an unlimited number of digital copies for essentially no cost. Yet, many of these providers are still stuck in the tangible retail model, where they need to make a certain profit margin on each book, or CD, or magazine that they print or produce. What they fail to realize is that they could cut prices in half and probably sell 3, 5, maybe even 10 times as much content, doubling or tripling their revenue and profits. (Also, to the extent that magazines and newspapers make a lot of money on advertising, even selling only twice the content at half the cost is a huge win for them.)

I grappled with pricing issues with my e-books. I first priced them at $4.77 each. I figured that was a “fair” price for an e-book, about half the cost of a paperback, so the readers were getting a good deal. But then a funny thing happened. I tried selling them for just 99 cents each. A little voice in my head cried out that I was “devaluing” all my hard work (those books took over a year each to produce) and that they were “worth” more than that. But when I sold 7, then 20, then 35 times more copies at $0.99 than I did at $4.77, it didn’t take long for me to silence that tiny voice. But what I don’t understand is that, if I can figure that out, why can’t the movie studios, large publishers, and newspapers?

Think about it. I’m not gonna pay $5 to digitally rent a movie I can get for $1 elsewhere. But if that movie was $1 or $2, I’d probably digitally rent at least a few a month for the added convenience. So, the movie studio can make $0 off of me, or $6 a month. Remember, it costs them almost nothing to actually stream the video to me. So who’s winning with these high prices?

That doesn’t even consider the fact that higher prices increase piracy. I don’t think overcharging makes piracy okay (you’re still illegally downloading something you didn’t pay for), but it helps people justify it in their own minds when they can say, “Screw these greedy movie studios. I’d never pay $15 for that movie anyway, so they’re not really losing anything by me pirating it.” When an e-book is just 99 cents, for example, the vast majority of people would rather just pay what they consider a fair price than resort to piracy. Apple figured that out with 99 cent music downloads … and the greedy music studios forced them to raise prices to $1.29 … and (prepare to be shocked) digital music sales declined for the first time ever.

On the other end of the spectrum is the “everything should be free on the Internet” model, which people are slowly realizing doesn’t work (even newspapers are finally figuring it out as they lay off reporters and editors). The problem with everything being free is that the people who create quality content need to get paid, so you can get insightful commentary, professional journalists who can travel to report on stories, quality television and movies, and well-written novels. If even the people who are very good at creating content can’t make a living at it, they will take their talents somewhere else that pays the bills, and we’ll all be poorer for it.

So, my belief is that people are willing to pay reasonable prices for digital content (read: less than the old cost of physical content), and that lower prices (that are still above free) will result in more sales and more revenue, and will allow more people to enjoy more content. That’s a win-win in my book.

© 2010 David Derrico