‘Long Tail’ Author Anderson: Free Doesn’t Work As A Standalone Business Model

imageLong Tail author and Wired EIC Chris Anderson explains why the “zero sum” model doesn’t work alone in this economy — and teases his next book Free — in Saturday’s Wall Street Journal. The argument: “free” wasn’t enough before for all but a few and it’s not going to work now without a pay component, whether it’s “freemium” — “free as a form of marketing to put the product in the hands of the maximum number of people, converting just a small fraction to paying customers” or flat out charging for the bulk of goods and services. (The essay itself exemplifies “freemium” — free for anyone who wanders by WSJ.com, not just to those of us who pay to subscribe to the site’s full content.) It works for the consumer, or as Anderson puts it, “It’s a consumer’s paradise: The Web has become the biggest store in history and everything is 100% off.” Of course, that’s until the products they use disappear because the money isn’t there. A couple of excerpts:

— “What about those companies trying to build a business on the Web? In the old days (that would be until September of last year) the model was pretty simple. 1. Have a great idea. 2. Raise money to bring it to market, ideally free to reach the largest possible market. 3. If it proves popular, raise more money to scale it up. 4. Repeat until you’re bought by a bigger company. Now steps 2 through 4 are no longer available. So Web startups are having to do the unthinkable: come up with a business model that brings in real money while they’re still young. … What about the oldest trick in the book: actually charging people for your goods and services? This is where the real innovation will flourish in a down economy. It’s now time for entrepreneurs to innovate, not just with new products, but new business models.” Anderson admires Tapulous, which is gives away its general iPhone app Tap Tap Revenge, but charges for band-specific versions with add-on songs.

— Working through the list of major usual suspects (Twitter, Digg, YouTube, Facebook) that haven’t yet figured out how to turn massive amounts of users or traffic into equally major money, Anderson follows: ‘A year ago, that hardly mattered: The business model was ‘build to a lucrative exit, preferably in cash.’ But now the exit doors are closed and cash flow is king. Does this mean that Free will retreat in a down economy? Probably not. The psychological and economic case for it remains as good as ever — the marginal cost of anything digital falls by 50 percent every year, making pricing a race to the bottom, and ‘Free’ has as much power over the consumer psyche as ever. But it does mean that Free is not enough. It also has to be matched with Paid.”

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