Free For All, Profit For Some

Free for all on the Internet
The Associated Press and Rupert Murdoch's News Corporation both said this past week that they hope to rein in the internet free-for-all . . . and get more users to PAY for online information. With so much already available for free on the Internet, turning the clock back may not be so easy . . . or even wise, as Anthony Mason tells us in our Cover Story:

Whoever said "you don't get something for nothing" never used the Internet, where they seem to be giving away the store.

Free search engines. Free shipping. Free e-mail.

In the digital age, giving it away is becoming an essential business strategy.

In his book "Free: The Future of a Radical Price" (Hyperion), Wired Magazine editor Chris Anderson argues that businesses will profit by giving things away.

"Suddenly free becomes a new economic model and not just a marketing trick," Anderson said. "And that seems to be what's really different about the online form of free: Digital stuff costs so little to make and reproduce and distribute that it's possible for a few to subsidize the many."

Take Monty Python, Anderson said. The British comedy troupe's most popular skits were being pirated and posted on YouTube for anyone to watch.

"So they had two options," Anderson said. "They could either send YouTube a notice saying 'Take down our copyrighted content,' or they could do what they did which was say, 'Okay, if it's Monty Python you want and if it's 'free' you want, we'll give it to you.'"

So they created a Monty Python channel on YouTube and posted high-quality clips, encouraging those who wanted to see more to buy their DVDs.

"Monty Python DVDs became the number two DVD on Amazon," Anderson said. "Their sales went up 23,000 percent. And free worked perfectly."

"In effect, free is the advertising," Mason said.

"Free is the best form of advertising, because you're not telling somebody about a product, you're allowing them to try it," Anderson said.

Free is not new, of course. As far back as the early 1900s, Jello gave away handsome recipe books to get customers to buy gelatin. And Gillette razors were given away to promote the sale of disposable blades.

Over the years, that four-letter word has proved endearingly powerful.

Behavioral economist Dan Ariely, author of "Predictably Irrational" (HarperCollins), tested the power of free by conducting an experiment with chocolate. He offered his college students a choice. They could buy a Lindt Truffle for 15 cents, or an ordinary Hershey's Kiss for a penny.

"We said to people, 'You can only take one of the two. You can't take both,'" Ariely said.

Nearly 73 percent chose the truffle. But then Ariely lowered the price of each piece of chocolate by 1 cent. The Lindt Truffle was still 14 cents more expensive than that Hershey's Kiss.

"But now it's free," Mason said.

"Now one is free," Ariely said. "And now virtually everybody went to the Hershey's kiss. Now I have nothing against Hershey's, but the interesting thing is that when there were prices involved, people went for the quality. When something was called 'free,' people gave up the better chocolate."

"So we make an irrational decision?" Mason asked.

"That's right," Ariely said. "The moment something is defined as free, we don't think there's any cost associated with it, we get attracted to it."

On the Internet, we've come to expect it. Free information, free games, free videos. YouTube, which doesn't charge users for viewing videos, attracts about 85 million viewers per month.

Sarah Rothman Epps of Forrester Research says while YouTube itself may not make money, it does provide a huge archive of searchable videos to its parent company, Google, which made $4 billion in profits last year by offering free searches subsided by highly-targeted advertising. You search for plants, you get ads for landscaping.

"Google forces you to look really seriously at the free economy, because Google is the exception that either proves or breaks the rule, depending on how you look at it," Epps said.

No one has struggled more with the trend towards free content than the newspaper industry. The Wall Street Journal is a rare success story. It has been charging customers since it first went online.

"But what we started doing over the course of the last few years is putting some of it out there for free," said Executive Editor Alan Murray, "to say to the world, 'Hey, there's a lot of interesting stuff here, you know? Come sample it, get used to it, and maybe over time you'll become a subscriber, too.' And frankly that strategy worked."

Murray said Web readership has increased sharply, to more than 10 million a month.

"How many people who come to your Web site actually end up being subscribers?" Mason asked.

"Well, most of them don't," Murray said. "But that's all right. Some of them do. The decision to allow people to sample our content has helped grow our subscriber base."

The Journal now has more than 1 million online subscribers who pay $100 a year to access its core financial news, information many need for their work.

"It's not necessarily your most popular content you want to put behind the pay wall," Murray said. "In fact, that's the stuff you want to put out in the free world - it brings in new readers."

The New York Times learned that lesson the hard way. After offering a free Web site, the Times put its popular columnists like Maureen Dowd behind the so-called "pay wall." Readers wouldn't pay, and the Times was forced to make its site free again.

But its online edition is still struggling to make a profit, while its print edition continues to lose readers and bleed ad revenue.

Free, Epps says, is not working for everybody.

"Free is a very powerful tactic," Epps said. "And free can work for some components of some businesses. But free does not go far enough to power our whole economy, digital or otherwise."

Not every company can be Google, said Wired's Chris Anderson. Each business will have to find its own model.

"Unfortunately, there's no one answer," Anderson said.

And there is no going back.

For more info:
"Free: The Future of a Radical Price" by Chris Anderson (Hyperion Books)
"Predictably Irrational" by Dr. Dan Ariely (HarperCollins)
Forrester Research