New economy is a term that became popular during the years of the Internet bubble. Although the term is now less used, there has never been before a better understanding of the disruptive forces transforming our economies and some industries.
Chris Anderson and his book The Long Tail provide excellent insight in how the economy of abundance and near-zero cost electronic distribution, is bringing to the surface a long tail of niches that is becoming as relevant as the mainstream.
The music industry is a clear example of the shift from a blockbuster/hit based model, enforced by the limited physical distribution and its scarcity of shelf space, to the almost infinite availability of content and creators in the long tail empowered by the decreasing costs of producing and distributing content through Internet.
Chris Anderson, editor in chief of Wired, has just published another interesting article: Free! Why $0.00 Is the Future of Business. See below some excerpts from his article:
“Once a marketing gimmick, free has emerged as a full-fledged economy. Offering free music proved successful for Radiohead, Trent Reznor of Nine Inch Nails, and a swarm of other bands on MySpace that grasped the audience-building merits of zero. The fastest-growing parts of the gaming industry are ad-supported casual games online and free-to-try massively multiplayer online games. Virtually everything Google does is free to consumers, from Gmail to Picasa to GOOG-411.
The rise of “freeconomics” is being driven by the underlying technologies that power the Web. Just as Moore’s law…”
“…two trends driving the spread of free business models across the economy. The first is the extension of (…) cross-subsidy to more and more industries”. “The second trend is simply that anything that touches digital networks quickly feels the effect of falling costs. (…) When Google turned advertising into a software application, a classic services business formerly based on human economics (things get more expensive each year) switched to software economics (things get cheaper). So, too, for everything from banking to gambling. The moment a company’s primary expenses become things based in silicon, free becomes not just an option but the inevitable destination”
“From the consumer’s perspective, though, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely different business, one of clawing and scratching for every customer. The psychology of “free” is powerful indeed, as any marketer will tell you.”
“The most common of the economies built around free is the three-party system. (…) In the traditional media model, a publisher provides a product free (or nearly free) to consumers, and advertisers pay to ride along. (…) In a sense, what the Web represents is the extension of the media business model to industries of all sorts.”
“The attention economy and reputation economy are too fuzzy to merit an academic department, but there’s something real at the heart of both. Thanks to Google, we now have a handy way to convert from reputation (PageRank) to attention (traffic) to money (ads). ”
In the article, Chris Anderson explains six broad categories of free:
- Freemium. 1% of users support all the rest. It is the “Pro” or “premium” paid versions of software or services that pays for all free users.
- Advertising. “Free offerings build audiences with distinct interests (…) that advertisers will pay to reach”
- Cross-subsidies.”Give away the cell phone, sell the monthly plan; make the videogame console cheap and sell expensive games”; give away the razor, sell the blades
- Zero marginal cost. In the online music, “Some artists give away their music online as a way of marketing concerts, merchandise, licensing, and other paid fare.”
- Labor exchange. “…the act of using the service creates something of value, either improving the service itself or creating information that can be useful somewhere else.”
- Gift economy. e.g. Wikipedia. “zero-cost distribution has turned sharing into an industry”
As in the traditional media industry, free for the end-user does not necessarily mean that no-one is making money out of it. Digital technologies are bringing the cost to produce and distribute content down to zero, and that is unleashing a tsunami of talent ready for global reach. Content has never been so open to all kind of creators and never as available to all kind of audiences.
As the author concludes:
“… a generation raised on the free Web is coming of age, and they will find entirely new ways to embrace waste, transforming the world in the process. Because free is what you want — and free, increasingly, is what you’re going to get.”