Free! The changing countenance of monetisation in a digital world

Chris Anderson, the editor of Wired magazine, has just published a new book, entitled Free!, which attempts to shed light on the changing countenance of monetization in the digital world. I have not read the book yet but, based on an interview with Anderson that was broadcast as a Bloomberg podcast last week, it appears that the book is devoted to the issue that, in the digital world, contents are available at little or no cost to the user. Anderson then goes on to explore the implications of this observation.

As I understood from the podcast, because the marginal cost of each item of content is zero, or nearly so, Anderson suggests that the appropriate marketing approach in such circumstances is what he calls “freemium”. In the bricks and mortar world, a company would promote its product by distributing for free a small percentage of its products (say 10%) in order to develop sufficient customer buzz and then to recoup the investment by (it hopes) increased sales. The basis for the model is that the marginal cost of each such unit is material, such that the person will have to rely on sales of the remaining 90% in order to achieve a profit.

In the digital world, however, the circumstances are reversed. Because the marginal cost of production and distribution is so low, the appropriate strategy is to distribute a large quantity of the product for free, and then ideally to recoup by sales of relatively small number of units, where the after-cost-of-sales-of-goods profit for each unit sold is large. It appears that the book is available for free in a limited fashion for online reading (it was in fact blocked in my geographic area), and there is a form of variable pricing for hardback and soft back versions.

What particularly grabbed my attention, however, was Anderson’s observation about the possibility that what is particularly attractive for him is the possibility of making substantial sums from ancillary activities, such as speaking engagements and the like. Here, the profits from such ancillary activities will presumably go straight to the author only. That is the rub for me. What happens if the “freemium” model does not prove economically successful for the publisher, but the ancillary activities prove lucrative for the author?

If so, the day may not be too distant where the publisher for the three-dimensional copy will become increasingly irrelevant to the book business. Once promotion and distribution of book titles on the internet are perfected, the publisher’s role is severely diminished. Revenues are garnered by differential pricing for on-line reading, Kindle-like downloads, and permission to make a single copy from the on-line text. For the really successful books, the author and his ancillary activities may become the prime source of revenue. The publisher is irrelevant.

In such a case, we will have a reversal of the balance of interests in book publishing from the model that prevailed in the 16^th-17^th century, in the run-up to the Statute of Anne. In that period, publishing was largely about regulation and censorship by the Crown, and profits for the guild-protected publisher. The author, to the extent that author-based contents were published, was largely irrelevant. By contrast, in the Free! World of Anderson, the public’s interest is directed supported by the author only, who acts both as content creator and distributor (not to mention personal celebrity, if the book enjoys success). Like the author in the pre-Statute of Anne days, the publisher of the not-to-distant future becomes largely irrelevant.

With such an eventuality lurking, I am compelled to express a word of caution. Being a hopeless romantic about books and publishing, I still believe that a three-way relationship between the public, the author and the publisher is in the best interests of all three. If so, and if the ancillary book-related activities of the author become a material part of the book’s revenues, I would suggest that the better arrangement is to provide for a sharing of these revenues between the author and publisher with respect to revenues received by the author in connection with the author’s book-related ancillary activities. In this way, the publisher will have a greater incentive to carry out its distribution and sale function, while taking into account that the on-line world will likely materially alter the nature of the publishing business and the sources of publishing profits.

For a review of the book Free!, see here