There’s Always a Price Tag

In recent weeks, media mogul Barry Diller made a news splash when he proclaimed that hundreds of millions of people are in for a rude shock: They who expect virtually everything on the Internet to be free, but within 5 years, they will actually have to pay for content.

Virtually simultaneously, Chris Anderson, the editor-in-chief of Wired magazine (and author of The Long Tail), set forth a dramatically different viewpoint. In his book, Free: The Future of a Radical Price, he argued that businesses must learn to compete with “free.” Anderson doesn’t really believe the provocative title of his book; he argues that in an Internet-focused world, every business must be willing to give away something valuable for free in order to gain paying customers for other – presumably more expensive – products and services. Anderson himself is reportedly giving away copies of his book for free (at least to some people); his payoff will be invitations by companies and associations to give paid talks, which can be a very lucrative business.

Anderson’s viewpoint is not novel, though it is being treated as such. A decade ago, I read a book entitled Information Rules: A Strategic Guide to the Network Economy. The authors, two well known economists (Carl Shapiro and Hal Varian) argued that the “new rules of business,” a very common phrase during the early days of the commercialized Internet, were not new at all. Indeed, classical economic theory had within its doctrine all of the rules needed to run Internet-based businesses successfully. One, which is relevant here, was that buyers could not assess the true value of an “experience good” without consuming it at least once.

The experience good idea suggests that Anderson overstates his case, while Dillard will have to pay at least some attention to the idea of “free.” For example, business people can assume that the online Wall Street Journal – perhaps the best example of the Barry Dillard argument – will be worth paying for since they have consumed the paper version and know that there are at best, only a handful of media outlets which can provide comparable information. In contrast, the online version of the average daily newspaper has to give away all its content for free simply because experience has taught potential consumers that most newspapers carry pretty much the same news – at least regarding most of the important issues of the day. So, if a particular newspaper charges for its online edition, the average consumer can find similar coverage by some other which does not.

Media companies will not succeed unless they pay much greater attention to the first of nine questions I ask when formulating strategy: Who needs us? Why? If no one “needs us” we can’t charge for the value we think we deliver. If people do need us, we can.

Of course, one might present a counter-argument by pointing to the relationship young people have with music: They “need” it but they want it free. Here I’ll say that we must differentiate between theft and fair use. I have yet to meet a young person who considers ripping off music as his or her right; they are almost always apologetic and defensive, pointing out they have little money and “everyone is doing it.” If it weren’t for this attitude, I doubt if iTunes would have been the money maker it is: why buy it on iTunes if you can get it for free? Yet Apple is making money … perhaps even minting it.

The Internet is as close as we can come to the economists’ assumption of a perfect market – one in which no one makes “supernormal profits” because there are too many buyers and too many sellers of the same (or very similar) stuff. The only way a company can make money is by making this perfect market “imperfect,” and draw a greater number of buyers than any competitor. And there are only three ways of doing this: building a great brand, creating defensible intellectual property or creating a hard to replicate delivery system. The WSJ is in the catbird seat because it has done the first two very well; the typical newspaper lacks “defensible intellectual property” and is distributed in exactly the same way as every other. Moreover, only a handful have true “brand name” status. Hence, they cannot get out of the perfect market.

I will be interested in learning how Mr. Dillard will deal with this issue. If he can, he will be able to turn the Internet into paid media. If he cannot, he won’t – unless of course, all of the content providers collude and in Ayn Rand’s John Galt style, go on strike (or equivalently, coordinate the raising of barriers).

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