Evidence Shows You Can, In Fact, 'Compete' With 'Free'

from the but-of-course dept

Fri, Sep 10th 2010 5:03pm — Mike Masnick

I've argued in the past that the claim you "can't compete with free," is entirely bogus, not just because people do it all the time, but because the very premise of the argument is wrong. Competition has always been about a lot more than price, and the "free" part is meaningless if a competitor can drive price to a lower cost then your marginal cost -- no matter what that price is. But, now there's actually some growing empirical evidence that the claim "you can't compete with free," is really, really untrue.

Modplan points us to a recent talk given by professor Michael D. Smith at Google. Smith is from Carnegie Mellon and is discussing some of his recent papers, such as one on whether or not "piracy" acts as promotion for movies and another one on how digital sales, when set up right, don't actually cannibalize other sales. That latter one debunks the silly claim from Jeff Zucker and many others that they're "trading analog dollars for digital pennies."

Some of the key points:

Contrary to the claim that free viewability of movies decreases demand, research shows that when a movie airs on TV for free, it increases demand for the movie both in DVD sales and via file sharing. And, on top of that, the greater demand for the content in file sharing does not appear to hurt the sales of DVDs.
One bit of research involved the natural experiment that happened when NBC Universal, due to a contract dispute with Apple, removed its TV shows from iTunes for almost a year before putting them back. So, what happened when the content got pulled? Well, first, piracy rates increased -- and not just in absolute numbers. The research compared piracy rates against the other major TV networks, and found that the rates tracked almost exactly prior to the content getting pulled from iTunes... but the second it got pulled, NBC piracy rates were noticeably higher than the other networks. In other words, not offering consumers a way to buy your content legitimately increase unauthorized access. No shock there, but nice to see the data to support that. Specifically, the data found that the "demand" for unauthorized versions increased by 11%.
Separately, the research showed a smaller, but still significant increase in demand for unauthorized content from those other networks. The theory here is that once NBC pulled its authorized content from iTunes, people who started getting it via BitTorrent suddenly realized they might as well do the same for non-NBC content. So, NBC's decision not to offer authorized content may have actually increased demand for file sharing on other networks as well
Here's where it gets interesting: what impact did this have on DVD sales on Amazon? Again comparing NBC data to other networks, there is no noticeable impact after the content is removed from iTunes as compared to other networks. In other words, while the action did increase "piracy," there's no indication that increased piracy decreased DVD demand.
Next experiment involved a move in the opposite direction. Looking at the "demand" for unauthorized BitTorrents of shows from ABC right before and after ABC added its shows to Hulu, again, as compared to the other networks. And here, there was a massive decrease in "demand" for the unauthorized works on BitTorrent.
Again, however, when the content went "free" on Hulu it did not harm DVD sales. Actually, DVD sales went slightly up (not enough to be statistically significant).
The final study looked at what happened to demand for movies that went on HBO, which created an interesting situation, because before HBO will air a movie, it requires the studios to remove that movie from video on demand or other digital distribution channels like iTunes. So, the content disappears from those other channels for a few weeks before it shows up on HBO. The research looked at where former iTunes and video on demand customers went for content in the window between the content being pulled from those channels and when it aired on HBO.
What the research showed was actually no statistically significant change in demand when the content got pulled from the digital distribution channels... but a big increase in demand after the movie aired on HBO.

It's an interesting talk with lots of great data. The key conclusions:

You absolutely can compete with free.
If you offer a convenient and reasonable offering, eve people who were getting content in an unauthorized manner, will often buy (i.e., it's possible to turn "pirates" into buyers). That is, it's not the "free" part that's the driving aspect of much of their behavior, but the convenience factor.

There's obviously a lot more that can be done here, and I do wonder if all of these findings hold up over time, but it's a nice look at some of the current research.

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Filed Under: competing, free, michael d. smith

23 Comments

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Norman, 10 Sep 2010 @ 5:28pm

Free is Good
This argument was decided over fifty years ago. Back in the early 1950's the Chicago Cubs and White Sox decided to televise every game they played, home and away. All the newpapers, broadcasters etc predicted that attendence would drop. It didn't, it rose. Turns out more people got interested in the games and the stands started to fill up. QED.
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milesmaker (profile), 10 Sep 2010 @ 5:47pm

Demand is perpetuated by supply
I wish the numbers and sources were here to have a look at but I'll take your word for it.

I've been waiting for a study like this to rear its beautiful head; to analyze and understand the inherent nature of content piracy and what its motivation stems from. After all, every pirate isn't prone to break the law at every turn. There's a compelling message being conveyed to the market saying, "Well, what did you expect me to do? You didn't offer me access to it, so..."
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- Brian (profile), 10 Sep 2010 @ 7:06pm
  
  Re: Demand is perpetuated by supply
  Yup, give reasonable access to content and at a reasonable price and don't treat your customers like dirt. Show them that they are awesome, give them something to come back for. Stop worrying about "piracy" and focus on making good music/movies/etc.
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kyle clements (profile), 10 Sep 2010 @ 7:07pm

compete with free
I disagree.
No one would ever pay for something they can get for free.
Now please excuse me while I run out and purchase some more bottled water.
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- Bob Ming, 12 Sep 2010 @ 3:49pm
  
  Re: compete with free
  Some people will (theoretically) go out and buy stuff that they can get for free because they want to "support the artist". Again, this is just a theory, it makes absolutely sense to me...free = win
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Greevar (profile), 10 Sep 2010 @ 7:43pm

This isn't about competing with free.
"We can't compete with free" is just an excuse that grossly outlines how unaware they are not in the business of selling plastic discs. It's foolish to even try to sell copies with the expectation that it will be treated like the physical media it's stored on.

If they want to make a living from creating art, they need to stop looking at it from the mindset of a manufacturer and see it from the perspective of a contractor, mason, or landscaper. They don't cry that they're not getting paid every time someone sees the work they did, they were paid for the job already.

When I came to this realization about the truth of earning a living as an artist, I started to see the content world in a very different light. I went to a Best Buy the other day just to browse and when I got to the DVD/Music/Games area of the store (usually the central and largest section), I started to see the items on the shelves very differently. I didn't see products to buy, I saw the same job replicated over and over. I thought to myself, "Why would I want to buy this stuff? Why would I want to pay someone that did nothing to produce this stuff when the people that actually do the real work already got paid?"

It's one huge lie that sharing content hurts artists. The artists that create the games, movies, and music we enjoy already were paid. It's the publishers, the leeching middlemen, that are the ones supposedly hurt by "piracy". Think about it. Would the studios make content that the publishers sell to us if the publishers didn't pay them? No! Would the publishers make it themselves? Maybe, but I doubt it. So then, the fact remains that if the art is worth creating, there are enough people out there that think it's worth paying someone to make it.

Paul Ellis has figured this out. ZeroPoint Software has figured this out too. The era of treating copies like physical products is coming to an end, but I fear there will be blood before it is over.
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- AFAB (profile), 11 Sep 2010 @ 10:00am
  
  Re: This isn't about competing with free.
  Well put! I've been a "content" creator for 25 years as an independent contract software developer, I've always been paid for my work, and although I've created some awesome stuff over the years, I've never held the copyright on any of my code. I, like most old school developers have always depended on freeware/shareware code, and I have contributed to some open source projects. I make a fine living doing what I do, but expanding my operation to a recruiting firm has never appealed to me. I would rather work with code than manage people. This has limited my income to the number of billable hours I can put in and the best rate I can negotiate. By no means am I a "starving artist", but I'm never going to be a millionaire without a golden lottery ticket. The software I create (and granted I'm usually part of a larger team) is typically "worth" millions, but I don't complain about residuals or any of that nonsense. I am starting to realize that there may be business models opened up by the internet that would allow me to be more fairly compensated for the actual value of my work. I would love to hear some ideas about how CTF-RTB can be applied to mainstream business software development and consulting/contracting.
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  - AFAB (profile), 11 Sep 2010 @ 10:27am
    
    Re: Re: This isn't about competing with free.
    OOPS, I meant CWF-RTB (too many acronyms in my profession)
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  - Anonymous Coward, 12 Sep 2010 @ 11:42am
    
    Re: Re: This isn't about competing with free.
    the model is to form a revenue share group "partnership" where a portion of the actual entity that owns the software or product is split among the actual contractors or people who created the end product. However, stock should also be set aside for future players such as unforeseen marketing, sales, and investors.
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Barry Solow (profile), 10 Sep 2010 @ 7:44pm

Re: Demand is perpetuated by supply
Miles:

I believe you can download the original published study here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1381827

It contains tables, figures, and two pages of references.
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Anonymous Coward, 10 Sep 2010 @ 9:13pm

They think it is competition, I think those 2 things are complementary(free and commercial).

Markets form around free, look at the internet people were wild copying each other HTML code, pasting all sort of things and it grew to a point where people can make money and multi-billion dollar companies sprung from it.

Free is what creates and sustain markets but it seems when they start to fade away some people get upset and try to force others to pay, it ain't happening but they will try.
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Anonymous Coward, 10 Sep 2010 @ 11:10pm

i.e., it's possible to turn some "pirates" into buyers

Fixed.
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- vivaelamor (profile), 11 Sep 2010 @ 9:44am
  
  Re:
  " i.e., it's possible to turn some "pirates" into buyers
  
  Fixed."
  
  Unless it originally said all pirates then I don't see what was broken.
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Jim, 11 Sep 2010 @ 5:07am

People are emotion-driven
On our site sells movie downloads, we also stream some content for free. One of our content partners signed up for free (ad-supported) streaming. Apparently, he didn't know or he didn't bother to read the agreement he signed. So, when he saw his content on-line for free, he freaked. He blamed a recently drop in his sales on it. But he was comparing the drop in sales he had months BEFORE we put his tiles up for free streaming. In fact, his download sales (that's actually purchases) went up 53% AFTER we started streaming his titles for free.

Two Points:

1. Ad-supported free streaming tends to increase sales because it drives traffic (in other words, attention) to the page offering a title for sale. You've got to get people's attention before you can get people to buy.

2. After I showed the content provider described above that free streaming actually increased his sales, he still asked me to remove his titles from ad-supported streaming. He just couldn't get his head around the notion that more attention = more sales. Most content providers are like him. It's very, very difficult to convince them. Even if you do, they imagine that their content is being devalued by it, which must be hurting them in some way.
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Anonymous Coward, 11 Sep 2010 @ 7:19am

Call me old, old school, but when a program / movie is broadcast over the public airwaves (ABC, CBS, NBC) it becomes public information and so what if then I make a copy. Hello anybody out there!! I did say public broadcast which can be picked up with an antenna. Hey they can keep cable because I get enough paid commercial shows on regular TV. If I miss a show or movie I want to see then I consider it convenient to be able to download it and watch it.
So if I'm wrong then besides being a criminal all of my life for smoking evil weed (alcohol makes me sick and I like a buzz like everyone else), I am also a criminal for buying and using a VCR, DVD Burner, TIVO and DVR. Wow better lock my ass up because I'm not changing a thing.
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ArcticChill (profile), 11 Sep 2010 @ 10:44am

Where do...
..."they" find the statistics on piracy? The movie/music industry says they have stats, the fellow talked about in the article has stats. Just curious is all.
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Bob, 11 Sep 2010 @ 12:12pm

What do you know, Google paid for the research. Of course he's going to tell Google what Google wants to hear.
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- Anonymous Coward, 11 Sep 2010 @ 10:22pm
  
  Re:
  Yeah! Darn those facts! They make people like Bob and Frances look stupid.
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Daniel, 11 Sep 2010 @ 6:38pm

To anyone that insists that you can't compete with free I have one simple word.

Dasani.
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Hephaestus (profile), 11 Sep 2010 @ 8:37pm

Mike please don't post articles like this any more. The record labels and studios might actually stop their lemming like run towards the abyss.

Never mind ... I just remembered ... RIAA and MPAA are run by lawyers, not business men.
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Anonymous Coward, 11 Sep 2010 @ 9:20pm

If you are a big record label of course you can't compete with free, you don't have the knowledge to do so even though radio showed that free could be good.

Now if you are Google free is part of the package and people are scrambling to catch up, in the mean time the are a billion dollar company, how is that possible if free doesn't pay?
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Griff (profile), 12 Sep 2010 @ 9:44am

Simple example from personal experience this week.
I have a LoveFilm (formerly Amazon) DVD by post subscription.

Recently they told me that in addition to my "n" DVD's by post I get 4 hrs of free movies on demand per month. So I choose a 90 minute movie, watch it as many times as I like for 48 hrs, and it counts as 90 mins of my 4 hrs. Found a movie the kids loved and they watched it few times over the weekend.
Not a penny spent, but a new service discovered.

Then come this Friday, kids want a movie & pizza evening. My 4 hrs has been used up. But there are 1000's of movies to choose from and they are something like £2.50 pay on demand. And that 2.50 will get me 48 hrs of viewing (kids love to rewatch a movies they really like).
I have by now found out (for free) that the technology works, the interface is OK,and the quality adequate. And now I can have pretty much any movie at 5 seconds notice. No trip to the video store. No wishing I'd had it posted 4 days ago. Just choose movie and pay. Sorted.

They'll probably get plenty of my money in exchange for the sheer convenience. But it all started with the free "nothing to lose" tryout that came first.
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Jay (profile), 12 Sep 2010 @ 5:46pm

The strawberry argument
I once heard a great talk by a guy on competing with free.

He asked who had every bought strawberries before, everyone raised their hands. He then said that was proof price was not the determining factor in your ability to sell something.

Point is anyone of us could have gone out and acquired some seeds (need not to even have bought them, simply grow from clipping or get from friend) and gone and grown our own strawberries, essentially getting an unlimited supply for free.

But we didn't. Why not? Because the growers, the distributors and shop offered us something we wanted. Something we values more than the price we paid for the strawberries.

Seems to me the same generic argument applies here too.
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