Fred Wilson corrects the reference in my review of Chris Anderson’s Free to him dubbing the business model that Chris advocates prefers as “freemium”. He attributes it to Jarid Lukin.

Fred, whose early stage investing group Union Square Ventures, is an investor in Twitter, goes on to make some interesting points about free and paid-for services on the internet:

“I don’t believe everything will be free on the Internet. There will be plenty of paid business models. For example, if you want to watch Major League Baseball games live over the Internet, you’ll pay for that. If you want to use services like the FT and the WSJ frequently (more than 10x per month), you’ll pay for that. If you want to watch HBO over the Internet, you’ll pay for that. If you want a Twitter desktop or mobile client, you might pay for that too . . .

. . . the Internet allows an entrepreneur to enter a market with a free offering because the costs of doing so are not astronomical. And most entrepreneurs who take this approach will maintain an attractive free offering of their basic service forever. But that doesn’t mean that everything they offer will be free. That’s the whole point of freemium. Free gets you to a place where you can ask to get paid. But if you don’t start with free on the Internet, most companies will never get paid.”

This raises a point that I think is sometimes ignored in the free/freemium debate, which is that a company’s interests differ according to its position. In particular, charging nothing may well make sense to a start-up or a venture capitalist but not to an established business.

For social media services such as Twitter and Facebook, which are platforms for people to create their own content, free is a logical price. Because the cost of distribution is so low, and the cost of content is zero (people are donating it), any attempt to charge is likely to be undercut by a rival.

For a venture capitalist investing in internet businesses that are trying to grow as rapidly as possible, free is also a good bet. If nine out of 10 of those businesses fail because they burn through their capital but one grows enough to make money from advertising or freemium services, that is a good result.

Contrariwise, if does not make much less much sense for an established business with high fixed costs to start giving away content at below marginal cost because that way lies bankruptcy.

Of course, this is one reason why the internet is so disruptive. It provides a huge boost to the process of creative destruction by giving small businesses a platform to undermine big ones.

July 5, 2009 8:57pm in Business, Media, Technology | Comment