Bad Business Advice: Always Look To Charge For Content

Say That Again

from the if-you-want-to-fail... dept

A few people have sent in the NY Times story supposedly about the “free vs. paid” debate that quotes some business school professors giving what appears to me to be awful advice:

Eric J. Johnson, a professor at Columbia Business School, said he had been amazed by media companies repeatedly adding free online services, like on-demand video. “Before you add something to your site, you should say that if consumers really want it, that should be part of a package that you could charge for.”

That’s looking only at one side of the equation and is doing so in a dangerously short-sighted way. Rather than saying “hey, if people want this, we should charge for it,” why not actually look at the larger ecosystem? Why not recognize the added value that can be added if it is free and how that can enable other business models? The problem is that professors like Johnson are basically pushing the idea that a media company is a “content company,” rather than a company that’s building a community. It focuses on the belief that the content is the final product. It’s not. It’s never been the final product. If you have open and available content, that allows users to make it more valuable by sharing it, spreading it, annotating it, commenting on it and building off of it. You can’t do that when you put it behind a paywall. Content behind a paywall is less valuable to most people. So why would people pay for content that is less valuable?

The problem is focusing so much on the product rather than on the real benefit. Having the content free enables so much else. And if you focus on charging, all it does is open up an opportunity for others to step in and provide that value, and sap away the “paying” users. Focusing just on the pay question and ignoring the value side of the equation is a recipe for trouble.

So, rather than the NY Times “debate,” perhaps check out what the site Hypebot did, which was note that the “debate” is already over. It’s not about whether or not there should be “free” content, but that the economics and the market are clear: it will be free. So, with that in mind, it put together a whole series of thoughts from different folks about ways to embrace “free” as a part of larger business models. There’s plenty of good stuff to read there.

Glenn Peoples, at Billboard, also picked up on the discussion, which is great, though I’d like to challenge one thing he wrote, complaining about Chris Anderson’s take on “free”:

Anderson did not draw enough distinction between marginal cost — which in the case of digital distribution is zero — and average cost. When Anderson writes that “the marginal cost of digital information comes closer to nothing,” what he means is the marginal cost of distributing that digital information. There are significant costs in recording music. The cost of creating a brand and inducing awareness, other considerations Anderson understates, are both unavoidable and considerable. An insignificant cost of creating and distributing one more digital file does not reflect the amount of investment to be recouped.

While I don’t want to speak for Chris, he and I have certainly talked about these things, and I believe that Peoples is misstating Chris’ point on all of this. As we’ve discussed here before, no one is ignoring the cost of creation or the cost of those other things. We’re simply stating the economic fact that none of those things matter in terms of final price. This isn’t how we want things to be. It’s how economics works. Price is influenced by marginal cost. That’s it. Price is not influenced by fixed costs (or average costs). That’s not because of what Chris says or what I say. It’s how a market works, no matter how anyone thinks things should be.

That doesn’t mean you ignore the fixed costs or the average costs. Obviously, you do need to pay attention to those for the sake of making sure there’s an ROI where you need it. But that’s where you look at your overall offering rather than focusing so narrowly on just the content. So if you can take the content (as you can) and make it free, and use that to drive up interest and value in other scarce products you can sell, then that’s where it matters. And, as for the question of “the costs in recording music,” we (here at Techdirt) have certainly addressed that at great length: the creation of content is in fact a scarce good. And you can charge for it — and many have. Jill Sobule is a perfect example of this, getting people to pay to create a new album. Other models work as well, including having brands help pay for the creation of music. There are lots of models that work — and they don’t conflict with or negate the fact (not opinion) that the content itself will have its price driven towards free.

Filed Under: business, business models, charging, content, economics, free