The free mentality of the Internet, and a hybrid alternative

Software developer Jesse Grosjean wanted to try an experiment with one of his most recent creations - an applications for the iPhone called WriteRoom.

He posted his software in Apple's App Store at the price of $4.99. He sold nine copies. The next day, he dropped the price to free and over the next three days his application was downloaded 16,347 times, according to stats he posted on his blog. He toyed with the price for several days, but even at his lowest price, $.99, he peaked out at 446 downloads in a day.

Grosjean's mini-experiment is indicative of a part of Internet culture that is wrecking financial models for businesses of all kinds - an expectation that content should be free. "Content may be king, but, ironically, its perceived value today is being driven towards zero," writes entertainment lawyer Jonathan Handel. "In the eyes of consumers, content is becoming a commodity - more a commoner than a king." (see his six reasons why here)

As Chris Anderson, editor of Wired magazine, points out in his book Free: The Future of a Radical Price, most Internet users take advantage of free services on a daily basis, many of which are profitable business ventures. That includes search engines Google and Yahoo, social networking sites such as Facebook or MySpace, Wikipedia, Amazon, Craigslist, and dozens of others. In fact, the 20 busiest sites in the U.S., as identified by measurement firm Alexa, are free sites.

But that model isn't working for everyone, especially in mass communication. What, then, is supposed to fill the void left by that lost revenue for businesses as they transition to the Internet? Companies are trying all kinds of things online from advertising-supported (Hulu, an online distribution platform for network TV) to subscription-supported (the Wall Street Journal) to micropayments (iTunes).

But the latest trend online, "freemium", may be the one that holds the most potential if advertising sales continue to fall. In May, the New York Times called the freemium model "the most popular among Web start-ups."

To understand freemium, start with Anderson's explanation of how online business models have evolved. First, sites used the super-cheap distribution costs of the Internet to get huge audiences and sold general interest ads against those huge audiences. That's not all that different than the traditional mass media approach. Then, sites began finding more effective, targeted advertisements by targeting users based on their habits or interests, squeezing the most money possible out of display advertising. Facebook does this based on information users supply in their profiles; Gmail does it with the content of your messages.

Ad rates online are much lower than on TV or in print, though. "Advertising in traditional media, whether newspapers, magazines, or TV, is all about selling a scarce resource - space," Scott Karp, founder of Publish 2, says in Free. "The problem is that on the web, there's a nearly infinite amount of space. So when traditional media companies try to sell space online the same way they sell space offline, they find they only have a fraction of the pricing power."

So what happens when advertising support alone isn't enough to sustain a business? That's where freemium comes in. Freemium is based on giving away a product to the masses then "upselling" the most dedicated, intense users to a premium product and using those fees to support the free content being given away to the rest of the user base. Anderson argues that the low (and rapidly decreasing) distribution costs online facilitate that large-scale distribution of free content, at little cost to publishers.

Some examples of Freemium:

• YouTube gives away all of its content for free now, but is looking at renting certain premium videos in the future
• Microsoft will soon release a free online version of Office, while still selling a more feature-rich desktop version; Adobe does the same with Photoshop.com
• The New York Times is toying with the idea of a membership program that would give members access to behind-the-scenes tours and videos; the Pittsburgh Post-Gazette already has one.

So what are the implications for the mass media? Industries will be challenged to determine what is free and what is premium. Some have already tried this. Both newspapers and the music industry have long benefitted from "bundling" - selling the hit singles and the lower-performing songs on the same album, for example or the top news stories with low-cost content from wire services.

For many in mass media, there's already a freemium model in place. Anderson points to Wired's three tiers: free online vs. $.88/copy by subscription vs. $4.95 on the rack. However, now he says those in the mass media must ask: "What's the $19.95 version?"

This is a cross-post from Explorations in New Media, an ongoing project at the Schieffer School of Journalism at TCU.