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.

Somehow it was bound to happen. The “Twittergate” scandal involving German members of parliament who leaked the result of the president’s re-election is symptomatic of the current craze for Twitter among the world’s politicians, business people and media types.

As the FT reports this morning:

Julia Klöckner, of chancellor Angela Merkel’s CDU, told her Twitter “followers” that afternoon: “People, you can watch the football in peace. The vote was a success.” Ulrich Kelber, of the SPD party, was even more specific, prematurely uploading the result of the vote-count to his micro-blog: “The count is confirmed: 613 votes. [Horst] Köhler is elected.”

Ms Klöckner later apologised for the “somewhat premature timing” of a message. She has stepped down from her party role in Germany’s parliament.

That comes after various New York Times journalists Twittered about an internal meeting at the paper, which covered topics such as digital business models, irritating Bill Keller, its executive editor.

Lots of organisations are trying to draw up new rules to deal with Twitter, which is not only a real-time tool but crosses the divide between professional and personal use.

I cannot help thinking, that this horse has left the stable. The notions of embargoes, and of confidentiality itself, are inevitably strained by everyone being able to broadcast their thoughts instantly to all those who care to listen.

The text-messaging phenomenon among teenagers has just transferred to the business and professional world, with unruly results.

For some reason, the headline “Why journalists deserve low pay” caught my attention (via Roy Greenslade) and I have read the essay on the topic by Robert Picard.

I think his analysis that the economic value of general news content has diminished because local papers no longer have a distribution monopoly is correct. However, I am not sure about his solution - that such papers should reconfigure themselves as digital providers of specialist information.

The Boston Globe, for example, could become the national leader in education and health reporting because of the multitude of higher education and medical institutions in its coverage area. Not only would it make the paper more valuable to readers, but it could sell that coverage to other publications. Similarly, The Dallas Morning News could provide specialized coverage of oil and energy, The Des Moines Register could become the leader in agricultural news; and the Chicago Tribune in airline and aircraft coverage.

It is a nice idea, given that non-distinguishable national and political coverage has very limited economic value on the internet. But turning local, general news sources into global, specialised ones strikes me as quite a stretch, in terms of both branding and execution capacity.

I cannot see why the Hartford Courant, for example, is more likely to become a compelling brand in insurance coverage online than, for example, Lloyd’s List, which now Twitters. On the whole, I agree with the thoughts of Jeff Jarvis - that local news providers should stick to their knitting (and knit harder).

My FT column this week is on the New York Times:

Over the years, the Ochs-Sulzberger family has made a habit of buying high and selling low.

Under its control, the New York Times Company squandered $2bn by buying back its shares at high prices, saddling itself with debt it is struggling to service. It sold its former headquarters in Times Square cheaply and moved to a shiny new one worth $500m that it has had to put in hock to raise $225m (€165m, £148m).

Meanwhile, it is trying to shed its stake in the Boston Red Sox baseball team while battling to save The Boston Globe, a prize possession that is expected to lose $85m this year. If it were as bad at journalism as balancing its books, it would not win many Pulitzer Prizes.

The man who gets most of the blame is Arthur Sulzberger Junior, the daffy fourth-generation family member who is publisher of the paper and chairs the company. But there is no evidence that another Sulzberger, Ochs (or Cohen, Dryfoos or Golden) would outperform him.

Now, two astute wheeler-dealers – Carlos Slim, the Mexican media mogul and David Geffen, founder of Asylum Records and Hollywood big shot – have their eyes on The New York Times. They sense that the world’s leading general interest newspaper could soon be on the block.

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

Another day, another Kindle press conference. Here I am again at a New York launch event for a new Amazon device, only three months after the arrival of the Kindle 2.

This time, Jeff Bezos of Amazon has just enthused about the Kindle DX, which sounds like a small car but is in fact a large screen version of the Kindle electronic paper reading device.

I am not sure whether it is really an improvement.

One good thing is that it has a 9.7 inch display, which makes it easier to read complex documents with photos and graphics embedded - particularly PDFs. PDFs (but not Word documents) can be loaded on directly through a port, rather than having to be e-mailed through Amazon.

That makes it better suited for textbooks and Mr Bezos announced a partnership with three big educational publishers, including Pearson, which owns the Financial Times. The device is going to be tested out by a group of US universities, including Princeton, this autumn.

In theory, it also makes it better for displaying newspapers and magazines. Arthur Sulzberger, chairman of the New York Times Company, was on hand to announce a partnership with Amazon.

But all of this comes at a cost, both financially and physically.

The device is going to retail at $489 when it arrives this summer, which strikes me as pretty expensive for the average college student, even if it would save lugging around textbooks.

It is also heavier than the smaller Kindle 2, at 19 ounces in weight compared with 10 ounces. That takes a toll if you are holding it for prolonged periods.

One market I could see it appealing to is investors and analysts, as a medium for reading complex financial reports. It was notable that the first slide Mr Bezos displayed on stage was of a Merrill Lynch research report on technology.

As to newspaper readers adopting it in droves, I am less sure. Newspaper owners are keen on large-screen electronic paper devices because they more closely mimic the physical version of the paper. But I wonder whether the Kindle DX will deliver what they want.