Fighting against free is like fighting against gravity

Matthew Warneford
22
October
2011

Digital content will be free. Tv will be free, games will be free, books will be free, music will be free. All digital entertainment will be free. Fighting against free is like fighting against gravity. Why? Because digital distribution is free.

The internet is the most efficient distribution network ever invented. If something can be digitized if can be distributed for almost zero cost. It sounds obvious, but the impact is profound.

In the past businesses relied on distribution to protect their prices:

  • Writing the news is easy. Creating a network of printing presses and distribution centres to get the news across the country in the same day is hard.
  • Creating music is easy. Recording an album, burning a CD, and setting up a network of shops to sell the music is hard.

When you buy a newspaper or a CD only a small part of the price goes towards the cost of creating the content. You’re really paying for the distribution.

Today anyone can write their own blog or create their own music. But it’s not the citizen journalists that are threatening the newspapers. The real threat are the millions of ordinary people who email news stories to their friends!

Perfect Market

In economic theory, we’d say that each person who emails a news article to a friend is in fact a “competitor” with the original producer – the person who emails the news article is “creating” and distributing that content for free.

The same is true of digital music. I can copy and distribute an MP3 for free.

In economics this is known as a “perfect market”: the cost of coping digital content is zero and the cost of distributing the digital content is zero, therefore there is perfect competition and zero barriers to entry.

The bad news for content creators is that in a perfect market, economic theory dictates that the price of the product, like its marginal cost, must also fall to zero as more competitors enter the market.

Unfortunately (or not) every consumer consumer of digital content has the potential be a competitor with the original creators! That’s a scary thought. Making high quality digital content is hard work, and does cost money. But copying and sharing is free. The creators have all the cost, and too much “competition” from their customers to charge for the content.

Thing about this – every customer is a competitor! It sounds absurd, yet this is exactly what happened to the music industry and the newspapers. Trying to fight against it is like trying to fight gravity. Gravity always wins.

That’s why I believe all digital content will be free. And those business that rely on distribution for protecting their prices need to act fast.

Who’s next?

For a while slow internet connections made sharing music difficult. That’s why the newspapers were the first to see their business models disrupted by the internet. But every year internet connection speeds increase by 50% (Nielsen’s Law of Internet Bandwidth) so it wasn’t long before the average connection speeds improved enough to share music freely and the Recording Industry was hit square in the jaw by the very same perfect market forces.

Note. While perfect market forces predict the price of music should become zero. In practice, I don’t think this will happen in the near term. Services like BitTorrent are not perfect: there’s a chance of downloading a virus, not all tracks are good quality, and there’s even the small risk of RIAA law suite. Services like iTunes can continue to charge something for quality of service and to avoid hassles. But the reality is clear – music is much cheaper now than 10 years ago.

Fast forward, and today, home broadband has become fast enough to download video content and now we see the very same perfect market forces colliding with the TV and film industries. It is becoming increasingly hard for professional content creators to make money. At Dubit, we experience this every day in conversations with children’s TV producers – there’s little TV advertising revenue, falling DVD sales, and less funding.

So what’s the answer? Embrace free by adopting participative pricing.

Participative pricing

We’ve all grown up with the idea that everyone who goes into a store pays the same price, the price on the sticker. Participative pricing is turns this idea on it’s head.

Participative pricing is the idea that customers can pay whatever they want for your content – each customer could pay a different price.

Where fixed pricing finds the equilibrium between volume and margin – the point at which increasing the price actually results in less profit because there are fewer customers – participative pricing unlocks the demand curve.

Lets look at the hypothetical demand curve for a game. If the game is being sold in retail for $40 there people to the left of the curve who will gladly pay $40 because they would have been prepared to spend much much more. And there are even more people to the right who wont pay $40 because, for them, the game just isn’t worth it.

Participative pricing lets people pay what they consider good value. For some people this means paying $100, for others $5, and for a huge number of people this means paying nothing! And thats fine when content is distributed online – because there is no marginal cost.

Letting them have the game for free isn’t just being nice. Those people who spend zero dollars are valuable, because all those people are potential marketers for your product. People who might just convince someone else, someone who is prepared to pay for your content, to give it a go.

Thats the key. For those consumers who are prepared to pay for your content, be it $1 or $1000, you have to give them lots of ways to give you that money! For those who only want to spend a few dollars, let them, and those on the left of the demand curve who love your product and want to spend hundreds of dollars, find a way to let them spend too.

How?

I’m going to drawn an example from “my world” – games (my company creates games for entertainment companies, like our Dorothy of Oz virtual world).

So lets look at Zynga, a company who have wholly embraced free. Not only can anyone play Zynga’s games for free, there’s no pay wall at which point players have to pay – the whole game can be consumed for free. As a result, every day Zynga give away man YEARS of free entertainment! Every day.

The catch: Zynga games will only let you play for a short period of time per day.

Built into the game are “rate limiters” – these might be a supply of energy that runs out, or the need to wait for crops to grow. Zynga’s business model hangs off these “rate limiters”. Simply, if you’re enjoying the game, and want to keep playing, then you can pay money to play for longer. Or if you decide the game just isn’t worth $1 for another 20 minutes then you can come back the next day and play for free.

This is participative pricing in action. Players can decide exactly how much they enjoy the game by deciding how much money to spend to keep playing. Of course they’re not actually spending money to buy time, they’re buying energy or some other abstract concept that unlocks the “rate limiter” built into the game.

By recognizing how “perfect market” economics are changing the entertainment landscape, Zynga have become the most valuable games company in the world – reportedly worth $15B – $20B. Not bad for embracing free and adopting participative pricing.

But there is a downside.

In an effort to maximise short term gain, some games will use physiological “tricks” that lead some players to become addicted to the game. These are the same types of “tricks” used by casinos.

When players become addicted they do spend a lot of money, far more money than they would otherwise spend. But when that player breaks the cycle they’re sure to feel cheated – they perceive that they’ve spent more money than entertainment was worth to them. The result is a dissatisfied customer.

The cycle of addiction is the biggest risk facing free to play casual games. When customers feel they’ve spend more money than the entertainment was worth to them they wont spend money again.

Brands embracing free and adopting participative pricing, must create fans, not addicts – fans spend money because they love your product, not because they’re addicted. These are the children who want the Transformers bedsheets, the pencil tin, and the rucksack. Or the soccer fan who buys the jersey and goes to all the games. While addicts are the people who spend money for a while and later bad mouth your product!

In my next post I’m going to talk explore how to create fans, not addicts, in free to play games.

Matthew Warneford, over and out.

P.S. Let me know what you think in the comments. Am I right? Or just a fool!

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