Bad Business Advice: Always Look To Charge For Content

from the if-you-want-to-fail... dept

A few people have sent in the NY Times story supposedly about the “free vs. paid” debate that quotes some business school professors giving what appears to me to be awful advice:

Eric J. Johnson, a professor at Columbia Business School, said he had been amazed by media companies repeatedly adding free online services, like on-demand video. “Before you add something to your site, you should say that if consumers really want it, that should be part of a package that you could charge for.”

That’s looking only at one side of the equation and is doing so in a dangerously short-sighted way. Rather than saying “hey, if people want this, we should charge for it,” why not actually look at the larger ecosystem? Why not recognize the added value that can be added if it is free and how that can enable other business models? The problem is that professors like Johnson are basically pushing the idea that a media company is a “content company,” rather than a company that’s building a community. It focuses on the belief that the content is the final product. It’s not. It’s never been the final product. If you have open and available content, that allows users to make it more valuable by sharing it, spreading it, annotating it, commenting on it and building off of it. You can’t do that when you put it behind a paywall. Content behind a paywall is less valuable to most people. So why would people pay for content that is less valuable?

The problem is focusing so much on the product rather than on the real benefit. Having the content free enables so much else. And if you focus on charging, all it does is open up an opportunity for others to step in and provide that value, and sap away the “paying” users. Focusing just on the pay question and ignoring the value side of the equation is a recipe for trouble.

So, rather than the NY Times “debate,” perhaps check out what the site Hypebot did, which was note that the “debate” is already over. It’s not about whether or not there should be “free” content, but that the economics and the market are clear: it will be free. So, with that in mind, it put together a whole series of thoughts from different folks about ways to embrace “free” as a part of larger business models. There’s plenty of good stuff to read there.

Glenn Peoples, at Billboard, also picked up on the discussion, which is great, though I’d like to challenge one thing he wrote, complaining about Chris Anderson’s take on “free”:

Anderson did not draw enough distinction between marginal cost — which in the case of digital distribution is zero — and average cost. When Anderson writes that “the marginal cost of digital information comes closer to nothing,” what he means is the marginal cost of distributing that digital information. There are significant costs in recording music. The cost of creating a brand and inducing awareness, other considerations Anderson understates, are both unavoidable and considerable. An insignificant cost of creating and distributing one more digital file does not reflect the amount of investment to be recouped.

While I don’t want to speak for Chris, he and I have certainly talked about these things, and I believe that Peoples is misstating Chris’ point on all of this. As we’ve discussed here before, no one is ignoring the cost of creation or the cost of those other things. We’re simply stating the economic fact that none of those things matter in terms of final price. This isn’t how we want things to be. It’s how economics works. Price is influenced by marginal cost. That’s it. Price is not influenced by fixed costs (or average costs). That’s not because of what Chris says or what I say. It’s how a market works, no matter how anyone thinks things should be.

That doesn’t mean you ignore the fixed costs or the average costs. Obviously, you do need to pay attention to those for the sake of making sure there’s an ROI where you need it. But that’s where you look at your overall offering rather than focusing so narrowly on just the content. So if you can take the content (as you can) and make it free, and use that to drive up interest and value in other scarce products you can sell, then that’s where it matters. And, as for the question of “the costs in recording music,” we (here at Techdirt) have certainly addressed that at great length: the creation of content is in fact a scarce good. And you can charge for it — and many have. Jill Sobule is a perfect example of this, getting people to pay to create a new album. Other models work as well, including having brands help pay for the creation of music. There are lots of models that work — and they don’t conflict with or negate the fact (not opinion) that the content itself will have its price driven towards free.

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Comments on “Bad Business Advice: Always Look To Charge For Content”

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Bertrand Russell says:

Content as a trainwreck

I have a better idea. Let’s start charging production houses every time they make us watch bad content.

With this in mind, I’m convinced I found the the worst show on all the Fox properties. It’s called “Sexy Cam” and on Fox Reality Network. But don’t let the cute name fool you into thinking it’s of interest. It’s trickery. Reminds me of a time an old friend talked me into meeting them at a hamburger joint called “Hamburger Marys”- the one with the breasty woman batting a big wink. I drove past it every day, and thought well, why not, I don’t mind meeting a friend for a burger. But, something just didn’t seem right.

So I’m fully convinced that Glenn Beck goes home every evening to produce “Sexy Cam” in his basement, it’s really that bad.

With that in mind, I would like to receive money for any really bad content that is broadcast over public airwaves. My time is valuable, and Fox, you need to reimburse me.

Thank you.

Anonymous Coward says:

The flip side of the question is how much does providing free content benefit the provider?

“The cost of creating a brand and inducing awareness, other considerations Anderson understates, are both unavoidable and considerable.” How much would it cost for a band to gain recognition through paid advertising? The amount would be huge. However, putting your music out on you-tube has almost zero cost and it potentially has the same benefit of gaining recognition for free. Do the “Must Charge for Content” crowd think that getting a free benefit is a bad thing? Here is another example. I put out a blank web page (no real content) but I put an adsense advertisement on it. I would not get many page views or click-thru. However, put some nice free content on it, and I have more views, more click-thru, and more income.

When content is put out for free there is the opportunity cost of loosing what people might have been willing to pay to obtain the content. Many paid content business models have failed because businesses almost always overvalue their content and then discover people won’t pay as much as they had projected. The other failing is that they try to get a big piece of a small pie, when getting a tiny piece of a much larger pie would be more profitable. A newspaper might be able to get a few people to view their site at ten cents per article. However, they might be much better off if they could get a lot of people to come from an aggregator site and get one cent per view.

Weird Harold (user link) says:

First, I have to say that this whole discussion is just another circular way back to supporting Chris Anderson, the god of “FREE!”, who remarkably will be the feature speaker at Mike’s FREE! Summit. Don’t think of it directly as relevant information so much as being a thinly disguised ad.

But if you can get past that, there is much more meat here to work with, and not all of it Mike will enjoy.

One thing you will notice is that true valid examples are small. We get a short list around here, NIN, Radiohead, Corey Smith, and now add in Jill Sobule as the poster children. But really, there aren’t that many great examples out there.

More importantly, music is much cheaper to produce than say a news website or a weekly TV program. if the music people can’t barely make it work out (and few of them appear to be making it work out) then how the heck are the more expensive information and entertainment products we consume every day going to do it?

What is the upsell from a movie? If the movie is “infinite” and given away for free (and in the case of wolverine given away before it is even available), where will the money be made in the long run? If the news site has no income because every user is access the content through a third party open source reader, or is blocking every ad space with an ad blocker, who will pay? What are they going to upsell you to? Would you pay more money for happier news?

I have always felt that when too many products become free and only ad supported, there will not be anyone left to buy the ads. Heck, even Mr Anderson finds his job may be on the line, as Wired as gone from a fat and profitable monthly book to a thin magazine with fewer and fewer ads and significantly less content. Perhaps he would like to discuss how the “FREE!” revolution may fail if the ad dollars don’t show up?

zcat says:

Ignoring Weird Harold as a hypocrite

It seems that I can read his opinions both here and on his own website completely for free. There doesn’t seem to be any content at all on his website that you have to pay to access. Clearly he doesn’t stand behind a word he spouts, otherwise he’s be putting his obviously valuable opinion on a subscriber-funded website and charging for it.

jeremy daw says:

distinction without a difference

I’ve been reading these posts about the “creation” of content is what is interesting, not the “content” itself…what does that mean?

Apply economic theory to music is not even an interesting misapplication.

I’m not interested in the creation at all, I’ve been in lots of bands, it’s not pretty. I’m only interested in the content.

This is just a smoke screen for ripping off content.

I keep my nytimes sunday subscription although I rarely read it because I value what they produce. As opposed to ripoff aggregators like huffpost.

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