Reports of the death of the free content model are exaggerated
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Fred Destin, partner, technology team, Atlas
Can you sense the change in sentiment? As the economic crisis tightens its grip, the industry’s pronouncement is clear: free is dead, just another pipe dream fuelled by visionary entrepreneurs and opportunity-starved venture capitalists. Everyone’s singing a different tune: Newscorp’s Murdoch and Time’s Moore decree that solace lies with subscriptions; CSFB analysts goofily estimate that YouTube is costing Google $470m a year; Twitter is ridiculed for not (appearing to) consider how it might make money; even The Economist hails the ‘end of the free lunch & again’.
Don’t believe the (new) hype; predictions such as these reflect current fears but really say nothing about the future. We come from a world where delivery was costly and, as a result, media brands held huge sway. But we’re clearly living through the second revolution of ‘movable type’: welcome to the world of highly fragmented audiences.
Free can’t sustain newspapers or broadcast networks with their high fixed-cost bases migrating online. If most of your costs are related to delivery and delivery is essentially becoming free, then you have a problem. The fact that free delivers much smaller absolute revenue numbers is also true. Skype created a few billion dollars’ worth of value, but how much telecoms market cap did it destroy? $50bn?
Free shrinks industries, but the model is sustainable. Start-ups disrupt at every level in the way they generate, aggregate and distribute content, and in the way they engage with users. I hear you say, “Facebook doesn’t monetise well.” So what? It’s a social network designed to let people interact and, unsurprisingly, they don’t click on ads. But the cost of delivery is close to zero. These guys don’t need to make much money per user and have all the time in the world. If activity stream is the future of human interaction, they’re sitting on a goldmine.
Is YouTube Google’s biggest mistake? It’s the most astonishing story of adoption of a new medium ever. It probably only needs to achieve around $1.50 or $2 effective cost per thousand to break even and can monetise in many ways, in-stream being only one. What’s the world’s biggest broadcaster and (possibly) media company worth to you?
Some start-ups will fail, clearly, but there’s no denying the huge impact free has already had on all our markets. Let’s point to Skype in telephony, DailyMotion in video, GameForge in gaming, or Last.fm or Spotify in music. The point is simple: the credible free businesses out there are designed to be resilient and incredibly hard to compete against. To paraphrase Clay Shirky, we would be lying if we told you that this revolution is going to happen on a timeline that will respect the old models and allow them to evolve. It won’t.