Is Free the Next Big Moneymaker?

As most traditional publishers are painfully aware, digitization has a tendency to commodify everything in its reach. Just think how much of the content we paid for a decade ago—from newspapers to premium video and audio content—is available now at no cost online. From news to business information, phone calls to software applications, the new model is giving away the store in the hopes of making a profit in some other way. Most text and video content relies on advertising to pay its way now, while service-based products, like web applications and digital calling, put some limitations on the free offering in order to upsell a richer version. Free is not an entirely accurate description of the model, since most of these schemes involve shifting monetizing from one place in the value chain to another.

And don’t expect the free-to-consumer model to abate any time soon. We are about to see an explosion of “creative” (perhaps daft) business models that will inevitably put a lot of pressure on all traditional fee-based approaches to content. In music, companies like SpiralFrog are already cutting deals to give away downloadable tracks in exchange for users coming back to the site every 30 days to be exposed to advertising. Virgin Mobile has attracted hundreds of thousands of young mobile customers to its Sugar Mama project, in which the company gives users a free minute of wireless time for every minute they watch a sponsor’s video ad. Likewise, San Francisco company AdPerk is trading ad viewing for free issues of magazines like Popular Science and Dwell. At the outer edges of this model there is something like a quid pro quo relationship brewing between consumers and publishers. Recognizing that their attention is worth something in the market, consumers and some content providers are willing to put a value on the time a consumer spends on a site and exchange it for free stuff.

The tendency for the internet to impose free models on almost anything it touches is not just a matter for the consumer content providers to contend with. Even on the business information side, the proliferation of free models has pressured fee-based competitors to rethink their models, sometimes radically. One of the most dramatic instances of bringing down a subscription wall is Elsevier’s new for physicians. For the price of registration, cancer specialists can access the most recent year of articles from scores of medical journals that libraries and hospitals are paying thousands to get. Elsevier is responding in part to the free ad-supported But the company is also after some lucrative pharmaceutical advertisers who are happy to pay handsomely to get their drugs in front of such a highly targeted audience of practicing prescription writers. However, in order to get those media buyers, even a medical journal needs the same thing as a major consumer pub in order to sell advertising: some scale.

There is no doubt that free grows an audience, and that is what so many of these models bank on. For a company like Elsevier, which has profitable businesses worldwide, it is a necessary experiment in a new model but a small piece of a much larger pie. But in the hands of some of the startups, the free model smells a bit like the dot-comedy of 1999. Remember when everyone burned venture capital cash like dry brush in an effort to “build brand” faster and bigger than competitors? The strategy was to bully your way to the top, buy up the withering also-rans, and only then start making money. There is a lot of Silicon Valley venture capital getting burned this second on a similar ploy to give away music, games, software, and even wireless service in order to get a big audience quickly. Then, the thinking goes, you either resell these eyeballs to advertisers or you make money on upselling just a fraction of them a “premium” service.

How well this model works for how many companies remains to be seen, but I suspect it will not end well for most of them. As I will explore in my next column, there are a lot of hidden costs to a no-fee model, for consumers, for producers, and even for advertisers. The laws of economics really have not been suspected by digital. There has never been and never will be a free lunch.