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Death to the free: Why recessions can be good

Posted in: Business Models, Content, Newspapers, Subscription Models, by: John Duncan

Jan 12, 2009
09:48 AM

There comes a time for most orthodoxies when they just plain run out of doxy. There comes a time when a “truth” is repeated so often that even very stupid people tell you it is obvious. At that point smart people abandon the poxy orthodoxy. That is now true for the belief that “the internet is about free” despite Jeff Jarvis’s insistence that punk’s not dead.

There are some very sensible orthodoxies out there - drive on the same side of the road as everyone else is a good rule - but the alleged overwhelming unstoppable power of “free” online is not one of them. In fact the biggest mistake newspapers made in the internet era was to devalue content by dishing it out for free. And the exhortations of every digital guru since to make everything free or be labeled a dinosaur have been loud and constant. And, as it is now turning out, dangerously wrong.

The point made to justify the argument was legitimate. If someone has an alternative free supply of something you can’t make them pay for your supply of it. But instead of recognising a boundary between what can and can’t be obtained conveniently elsewhere and establishing what the value of that information and convenience was, newspapers threw it all out there. Instead of fighting to establish smart exclusive content and finding the right price for it, they took the easy route, exclaimed that it was impossible to create that kind of content without it being imitated in five minutes for free and prayed for ad revenue.

I bring this up for three reasons two of them sparked by fellow Britons. Firstly the editor of AdAge, Jonah Bloom, argues in one of AdAge’s 3-minute videos that newspapers and magazines have to find revenue beyond advertising if they are to have a successful 2009.

Secondly there is Nick Denton’s battening down of the hatches at Gawker, selling marginal parts of the empire and closing down others amid a grim warning that the next year was going to involve a lot of sailing in lifeboats with limited passenger room.

The third is the David Carr article that upset Jarvis so much which was in fact a slightly peculiar piece about reading newspapers on iPods that I don’t really agree with.

Of course Jarvis is right to a degree. Free is a business model. But only if revenue comes from somewhere else. Free distribution without a realistic hope of other revenue was neither sustainable nor helpful. It crowded the market for interesting content and new approaches and created so much white noise that consumers were not really choosing the products they value most and thus natural selection wasn’t helping clear the battlefield.

VCs didn’t help. In the absence of any established stable revenue-model based on advertising, most venture capitalists were drawn like moths to any business that looks like another business that had an IPO, regardless of any idea of how to make money with them. (Venture capitalists are like sheep They find comfort in herds and can usually be outsmarted by a border collie.) Wasn’t the 2000 clearout supposed to cure us all of this kind of silliness?

Let’s say a fond goodbye to the model of the past few years with a brief fond memory. This is how it worked:
1. Have an idea.
2. Get enough cash together to execute the technology.
3. Get it out there for free so it can get quick traction.
4. Build an audience, and hope that enough people try it because it’s free.
5. Once you have an audience, find advertising.
6. As soon as you get enough advertising to appear successful, sell to a scared big old media company.
7. Live happily ever after.

For those who listened to the entirely self fulfilling “people won’t pay online” orthodoxy of the past 10 years and have been dishing out content without charge over the past few years it is probably not possible to put the genie back in the bottle. I feel sorry for the New York Times who had 227,000 online only subscribers to Times Select presumably paying $11.35million when they closed it down. I feel happy for Rupert Murdoch who resisted the attempt to copy the Times and remove WSJ’s subscriber walls. The WSJ’s percentage growth since then is almost identical to the Times’s.

The “free is king” way of developing online information businesses ought to have been very creative. It ought to have massively speeded up the creative destruction process by which things are built, tested in the market and succeed or fail, leaving behind the winners and allowing the losers to find another idea quickly and the capital invested to find another good idea. But it hasn’t. It’s created a world of imitation and fads in which entrepreneurs are encouraged by VCs to chase whatever is already being done somewhere else.

How did it create this world? Part of the reason is that it forced every entrepreneur to fish in the same pond. It focused an entire generation of innovation on the same revenue source: online advertising. And the fact that consumers were not asked to spend money, to make decisions on what to consume and what not to consume at a certain price, meant that it has actually hidden the winners and losers from view, allowing no clear demonstration of the value that consumers attach to a product via a price and a sales figure.

What we are learning now is that a user of a free product does not have remotely the same value as a customer of a paying one. The latter is a far better gauge of the likely ultimate success of a venture. The fact that we are likely to see more attention paid to this way of judging success is going to be painful for providers, irritating at first for consumers, but ultimately a better way to generate the new ideas and useful information tools that people will actually value in their lives.