Here is my latest reply to Chris Anderson in our debate about his book Free: The Future of a Radical Price. See my earlier post An interactive review of Free by Chris Anderson for details.

Dear Chris,

You are right: this debate has been far too civil, so let me get less friendly. I don’t believe you. Or, to be more exact, I hope you turn out to be right but I fear you are not.

I suspect you of advocating Freemium because Free turned out not to work. Not long ago, there were many calls for content owners - music and publishing companies in particular - to make all content free on the internet without any Freemium element such as premium subscriptions.

The idea then was that Google had uncovered a gusher of online advertising and that the lower yield of online ads would be balanced by the low cost of digital distribution. In other words, advertising would meet the entire costs of content delivery.

But, as we now know, that has not worked so well. I am sorry to use the example of newspapers since Malcolm Gladwell’s review prompted you to note (rightly, I think) that journalists find it hard to write about anything else in the context of web economics. It is, however, a good case.

Most general interest newspapers give away their content free online but have little hope of making up the yield gap between print and online advertising. So several newspaper groups in the US have gone into Chapter 11 bankruptcy.

Now, you arrive with an amended theory, which goes roughly: OK, advertising-supported content did not work out but here is something else for you to try.

Freemium may well be the best available option for a lot of companies, but how much hope does it really provide? Take your own figures on the Freemium economy in the US.

You quote a figure of about $1bn for spending on Web 2.0 premium services, which is not very much considering how much chatter there is about Twitter, Facebook etc.

You add to this $30bn for services relating to open source software - premium software, consultancy etc, and throw in a further $4bn for the casual games market.

My criticism is that a lot of open source services are provided by companies on the back of what you would call the “gift economy” - ie software developers working for free. So the enterprises that are offering Freemium-style services do not bear the full costs of production.

The economics are tougher for companies that that give away software and services they have built from scratch and then attempt to turn a profit with related premium services.

The true Freemium economy is extremely small and many companies are trying out business models without clear proof that they will work. If they fail, it will be hard or impossible for them to retreat to charging for their products and services.

So I fear that Freemium could turn into just as big a trap as Free.

What do you say?

John

Here is Chris Anderson’s latest contribution to our debate about his book Free: The Future of a Radical Price. See my earlier post An interactive review of Free by Chris Anderson for details.

Dear John,

You ask three good good questions (and sorry this is turning out to be such a civil dialogue; couldn’t you, for your traffic figures alone, have accused me of being anti-capitalist or just a bad writer?)

First, an aside. The book starts with a taxonomy of Free, which explains the difference between ad-supported free, freemium, cross-subsidies and the “gift economy”. All use the word “free”, but some are more free than others. Calling the book “Freemium” and just focusing on one, would have missed the opportunity to cast the broadest lens on this fascinating word. But when it comes time for the tactical advice in the book, as you’ve noted, Freemium is by far the most interesting.

On your questions:

1. Can Freemium can really spread far beyond the software and internet industries?

By and large, Freemium is a creature of the bits world, where the marginal costs of production and distribution are near zero. If something can be turned into bits, it can adopt a Freemium business model, but if it can’t, it’s hard to see how that same ratio of most-free, some-paid can be sustainable in any real way. (I won’t include trivial examples like how watching the Bellagio fountains in Las Vegas is free but gambling there is not!) That said, the number of things that can be turned into software is growing fast, including services (from travel agents to tax accountants) and it is not impossible to imagine that many of the health services you mention will someday be software. I can see a day when my doctor uses a Freemium model; free for routine consultation (artificial intelligence) and very expensive to see the lady in the white coat for more complicated stuff.

2. Is the point of Freemium marketing or advertising?

The point of Freemium is to use the free version as marketing for the paid version, but a form of marketing that is useful and trust-building, rather than just hyperbolic and annoying. The free form is useful, and if you like it the paid form is more useful yet.

3. Can Freemium make up for lost advertising revenue?

I do think for some in the media industry, Freemium can replace lost advertising. It’s exactly what the Wall Street Journal is doing: the most popular content is free, because it gets the kind of traffic that can generate big ad dollars, while the more niche content on specific industry domains is paid. Maybe a model for the FT?

Regards,

Chris

Here is my response to Chris Anderson’s post below about my review of his book Free: The Future of a Radical Price. See my earlier post An interactive review of Free by Chris Anderson for details of the review and this exchange of ideas.

Dear Chris,

Well, yes. Maybe I was a bit slow in not realising that Free was really about “freemium”. On the other hand, Free was the title of the book; if it had been called Freemium, I would not have complained.

But let us leave that on one side. What is unquestionably true is that you devote a lot of space in the book to examining the freemium model and that some innovative things are occurring under that label. I would even include the FT’s model for online access.

I like the way that you phrase the distinction between freemium and the old practice of free offers in your response:

Rather than giving out few percent of your product away for free as marketing, hoping to sell the rest, you give away most of your product for free as marketing, hoping to sell to a minority.

That is an intriguing notion, if more a matter of quantity than an entirely new phenomenon. As you say, the software and internet world is now rife with freemium-type attempts to make money.

One thing I like about your focus on freemium is that it moves the debate beyond an argument over whether everything should be paid for online or everything should be given away. The latter implies that the entire media industry can become advertising-supported, which I doubt.

Still, as I say in my review, there is a lot of experimentation going on with freemium pricing models and, in many cases, it has not been proven conclusively to work - one exception being the open source software industry. So I would be interested in your thoughts on these questions:

First, can freemium can really spread far beyond the software and internet industries? It clearly faces a lot of barriers in manufacturing or services that involve human interaction, such as health and hospitality, which are unable to send out free samples.

Second, is the point of freemium marketing or advertising? In other words, do companies need to get a big audience by distributing free content in order to attract advertisers or to market their premium services to larger audiences?

Third, how large do you think revenues from freemium-type models can be in the media industry, and can they replace the loss of traditional forms of advertising?

All guidance gratefully received.

John

Here is Chris’s first salvo to my review of his book Free: The Future of a Radical Price. See my earlier post An interactive review of Free by Chris Anderson for details of the review and this exchange of ideas.

Dear John,

You write in your review of my book Free: The Future of a Radical Price:

“The most plausible contender for an ‘entirely new economic model’ made possible by the internet is what Fred Wilson, the New York venture capitalist, has dubbed ‘freemium’. This refers to companies that allow anyone to use their products free but offer a premium version for which a few users are persuaded to pay.

Many internet companies employ freemium, from Skype, which charges customers to make computer-to-phone calls, to companies that charge for more versatile versions of software. Many of them, however, are still experimenting to see what, if anything, works.”

I agree, and this is actually the core of the book. When I refer to a “new economic model”, I’m not referring to slapping advertising against stuff, which dates back centuries. Instead, I’m talking about the underlying economics that allow Freemium to work. Freemium is the inversion of the traditional free sample. Rather than giving out few percent of your product away for free as marketing, hoping to sell the rest, you give away most of your product for free as marketing, hoping to sell to a minority. This is only possible in the online realm, where the marginal costs of production and distribution are close enough to zero to “round down.”

Freemium is now the main business model of the booming “software as a service” industry online, the online games industry and the fast-growing iPhone applications market. I think that creating business models around Freemium - what to charge for and what not to, a question determined as much by psychology as economics - will be the most interesting, and lucrative, efforts of this online era. And the book, both in its chapters and its tactical advice at the back, is intended to help guide that.

In short, I agree with you that Freemium is the big new story in the Free economy. I’m just surprised that you didn’t see the book as essentially telling that story. The history of Free is in the book for context, but “the future of a radical price” is what it’s actually about.

Chris

We are about to try something a bit different on this blog. I have reviewed the book Free: The Future of a Radical Price by Chris Anderson for Thursday’s FT and you can read the start of the review below. But, instead of leaving it at that, we are using the review as the stepping-off point for a debate.

Chris has agreed to respond to my review, and his first salvo will be published tomorrow morning here, at the same time as readers of the paper in Europe get a chance to read my review. I don’t know of any other cases (although there may be some) where an author has responded to a review simultaneously.

I plan to continue the debate with my thoughts on Chris’s response tomorrow and hopefully we will carry on with the exchange until the weekend, or we get tired of it, whichever comes sooner.

To start things off, here are the first few paragraphs of my review:

Chris Anderson has built a career out of making bold pronouncements that the economics of Silicon Valley – the way in which software and digital technology are built and distributed – are likely to spread to, and ultimately conquer, the rest of the economy.

His first claim, in The Long Tail: Why the Future of Business is Selling More of Less, was that consumption patterns were being fundamentally altered by the plentiful and cheap shelf space provided by digital technology. Instead of most dollars being spent on hits, consumption would instead skew towards thousands of niche products.

Now Mr Anderson, editor-in-chief of the US edition of Wired magazine, has followed that up with Free: The Future of a Radical Price, a manifesto for giving away products to consumers rather than charging for them. He writes: “There really is a free lunch. Sometimes you get more than you pay for.”

The obvious criticism of Mr Anderson’s work is that, as Mandy Rice-Davies said of Lord Astor’s denial of an affair with her: “Well, he would say that, wouldn’t he?”

Wired is a West Coast magazine, grounded in Silicon Valley’s software culture, where companies such as Apple profit from the free availability of “content” that runs on their far-from-free hardware.

Silicon Valley, and particularly Google, has a brutal variation of King Gillette’s razors-and-blades business model. According to this theory, the razor is sold cheaply in order to get consumers hooked and then be inclined to buy pricey disposable blades. And in the case of the biggest company of the internet age, it gets newspapers, music, television and film companies to take the losses while it accumulates the gains.

You can read the rest of the review here. Please follow the debate between Chris and I, and offer your own thoughts in the comments below.

My column this week in the FT is on the New York fraudster:

There was a moment during Bernard Madoff’s sentencing hearing in Manhattan on Monday when it became obvious that the 71-year-old fraudster was going down for a very, very long time indeed.

It was when Judge Denny Chin cited the case of a woman who went to see Mr Madoff after her husband’s death to be reassured that his legacy was safe. The avuncular titan put his arm around her shoulder and assured her that all would be well; she could trust him.

Fraud is often a difficult crime to prosecute, and for which to obtain punitive sentences. It is complex and hard for juries to understand and the harm it causes – the losses to investors in the companies involved – are intangible compared with violent and physical crimes.

If someone is mugged and robbed in the street, both the damage and the way in which it was caused are obvious for all to see. In cases where a chief executive fiddles the accounts to cover losses, how it was done and the way that it hurts mutual fund investors are harder to grasp.

So Bernard Madoff was a prosecutor’s dream – the Hollywood incarnation of a white-collar criminal. He dealt face-to-face with many of his victims and looked them straight in the eye; he did not merely taint the value of the investments but squandered the cash they entrusted to him.

I sat through the hearing surrounded by victims of Mr Madoff (I left behind my media credentials and was dispatched by the security guards to sit with the other folk). It amplified the emotional impact of the heart-rending – and they were heart-rending – stories of people losing all they had.

Ira Sorkin, Mr Madoff’s lawyer, is unhappy about the 150-year sentence and thinks the judge went off-piste in applying the federal sentencing guidelines. He thinks it is “absurd” to send an elderly man to jail for many times his life expectancy to satisfy demands for “vengeance”.

For what it is worth, I thought Mr Sorkin mumbled his way through a poor attempt to defend Mr Madoff in his closing argument. It was neither here nor there, however: Mr Madoff’s conduct was ultimately indefensible and he deserved what he got.

The question is whether Mr Madoff’s spectacular sentence should become the benchmark for future cases of corporate fraud, as Douglas Berman, an Ohio State law professor and blogger on sentencing policy has suggested that it will.

I think not. The Madoff case was exceptional and should remain an outlier. Neither deterrence of future crimes nor retribution demand that every white collar fraudster with a yacht and a share in a private jet gets a spectacular punishment – a harsh one is sufficient.

You can read the rest of the column here and comment below.

We now have a new Hollywood villain to blame for the financial crisis - not a financial arbitrageur with slicked back hair, as in the original Wall Street film, but a hedge fund manager who has the effrontery to short stocks. To add to his crimes, he does it globally!

According to Nikki Finke’s blog Deadline Hollywood Daily, Javier Bardem is being enticed to play this repulsive character in Wall Street 2, Oliver Stone’s reprise of his 1987 film about the infamies of the Street. What could be more egregious than a short-selling hedgie with a Spanish accent?

It is redundant, I suppose, to point out that short-sellers such as John Paulson, who made billions by shorting mortgage securities, play a valuable role in financial markets. Not only are the regulators on to them, but now the film industry is bringing up the rear

I am already looking forward to February next year, when the film is due to be released.

I went to Bernie Madoff’s sentencing today and wrote this FT piece:

It was, taken literally, an absurd jail sentence: one of more than life, one reaching well into the grave. Yet Judge Denny Chin on Monday ignored the plea of Bernard Madoff’s lawyer to give him a shorter term on the grounds that, at 71, his life expectancy is about a dozen years and instead threw the sentencing book at him.

The handing down of the 150-year sentence was a moment of breathtaking legal theatre at the end of a hearing that was both mournful and moving, as nine victims of Mr Madoff’s Ponzi scheme stood to testify to the suffering he had caused. Their lamentations were accompanied by the sound of others crying softly in their seats.

Ira Sorkin, Mr Madoff’s lawyer, did his best during the 90-minute hearing to argue that Mr Madoff was sorry for his crimes, had co-operated with the authorities and should not suffer “vengeance”. Yet, after the victims had spoken, his argument that his client should be treated gently sounded hollow.

Mr Madoff put on a more effective display of remorse than at the hearing in March when he had woodenly pleaded guilty to fraud and other charges. This time, he turned deliberately to face his victims lining the seats at the back of the Manhattan courtroom to say: “I am sorry. I know it does not help you.”

You can read the rest of the article here and add your comments below.