Another Example Of The Difference Between Value And Price: Free Mosquito Nets Are More Valued

from the economics-at-its-finest dept

We've pointed out time and time again how price and value are not the same thing. They may be related, but value tends to explain the demand curve, whereas price is determined by the intersection of supply and demand. To think about it logically, we buy stuff all the time because we value what we buy more than the money we're paying for it (the price). That's why the economic transaction happens. Or, to put it another way, you'll pay the price for something if it's lower than what you value it at, but that doesn't automatically change the value of it to the price. Now, there are some reports that suggest that the price, acting as a signal, can impact perceived value, but that appears to be limited only to a few specific situations.

We saw another example of the difference between price and value in a recent episode of Planet Money, which involved a discussion with the authors of the book Poor Economics, about their very data driven look at various economic questions. An early part of the discussion looked at the question of whether or not people in poor countries don't value mosquito nets when they get them for free. Apparently some economists have argued that you have to make poor people pay for their mosquito nets or they won't "value" them. Tragically, it seems that even some economists don't recognize the difference between price and value.

Thankfully, the folks who wrote this book went out and did real research, and the data shows that people in poor countries actually seem to value the free mosquito nets even more than when they have to pay for them. That is, people who received free mosquito nets seemed even more likely to use them than those that were paid for. I'm a sucker for data driven economics, so it's always nice to see stories like this one.

Filed Under: free, mosquito nets, price, value

Interviewing Paulo Coelho About Books, Social Media And 'Free'

from the have-any-questions? dept

I've written a bunch of times about Paulo Coelho and how he's completely embraced social media, new business models and the economics of digital and infinite goods to increase his already considerable level of success. So, I'm thrilled to announce that I'll have the pleasure of interviewing Paulo at BookExpo America in NYC on May 25th at 2pm, where we'll be discussing his various experiments, how he's using social media, and how others can take advantage of social media and use "free" to their advantage, rather than fear it. We'll also even have some time to discuss his latest work (honestly, what good is interviewing someone like Paulo Coelho if we don't also talk about some of his writing!). In the meantime, though, I'm interested in any suggestions folks have for questions for Coelho in this particular forum.

Filed Under: copyright, free, infringement, paulo coelho, pirates, social media, writing

Rick Reilly's Advice To Journalism Students: Please Don't Compete With Me And Undercut My Salary

from the that's-not-advice,-that's-fear... dept

Simon Bodger points us to a story about how ESPN's Rick Reilly -- who has been described as the highest-paid writer in the country gave the commencement speech for journalism students at the University of Colorado, and told them never, ever to write for free:

When you get out there, all I ask is that you: DON’T WRITE FOR FREE! Nobody asks strippers to strip for free, doctors to doctor for free or professors to profess for free. Have some pride! What you know how to do now is a skill that 99.9 percent of the people don’t have. If you do it for free, they won’t respect you in the morning. Or the next day. Or the day after that. You sink everybody’s boat in the harbor, not just yours. So just DON’T!

Thankfully, folks like Craig Calcaterra are pointing out that this is absolutely "horrible, horrible advice."

Writers need to write. A lot. Indeed, the only way anyone gets better as a writer is to just … do it. Your credential as a J-school grad is nice, but it is insignificant compared to experience. And, as the media world progresses further and further into the digital age, it becomes increasingly insignificant in an absolute sense.

Furthermore, Calcaterra points out what Reilly is really saying here, which is "don't undercut me, so I can keep my super high salary":

What Reilly is really doing here is not giving advice to graduates. He’s giving them a warning: “Don’t take my job! Don’t take my friends’ jobs! They make a good living writing, and if you come in and undercut them with your blog or your contributed piece, you may screw with the system, so cut it out, will ya?”

Also, I think Reilly is wrong. Plenty of people ask doctors to doctor for free and professors to profess for free -- just not all the time. I assume that people also ask strippers to strip for free as well, and my limited knowledge of stripper employment suggests that they make most of their money from tips, rather than salary, anyway... But the point -- which seems to go right over Reilly's head -- is that doing something for free is not the same thing as not earning money. No one is saying "write everything for free." What people are saying is that writing some things for free can have serious benefits, in terms of exposure, or recognition, or the ability to improve your writing. And, for many, it becomes a way to make money. I wrote Techdirt for free for many years, and now it makes me a good living. If I had followed Reilly's advice, I never would have started Techdirt in the first place.

"Free" isn't the enemy.

Filed Under: free, journalism, rick reilly, work

Once Again, Freemium Often Isn't A Good Model, But That Doesn't Mean 'Free' Doesn't Work

from the thinking-through-business-models dept

Since we talk a lot about the use of "free" in business models, it's common for people to assume that we love any and all business models that use "free." In particular, one assumption is that we think all "freemium" business models are great. However, that's simply not the case. What we're talking about here is how and when to use free in a business model. The important thing to recognize there is that when we're talking about free, it's in trying to figure out where it makes sense in the business model -- not to say that "everything should be free" or that "any business model that uses free is great." Yet, often, people seem to assume that we think any business model that has "free" is wonderful. The unfortunate result of this is that any time someone uses free as a part of a business model and it's not effective, people think they've "debunked" what we have to say.

For example, last year, we wrote up a post explaining why so-called "freemium" business models probably are not a good idea for many software startups. There are some it can work for (and work really well, as Evernote continues to show), but it really doesn't make much sense for a lot of others. That focused on a link from a software startup founder who found that freemium didn't work for him. There's now a similar post from the creator of the popular Instapaper app, talking about why he's pulled the free mobile version of Instapaper, hitting on many of the same points that we raised with the initial post about why Freemium just isn't right for certain businesses (especially software). The only reason I saw this was because Dave Harper pointed us to it, suggesting that it might debunk some of our positions -- though Dave was very cool about realizing the difference once I pointed him to our earlier post.

However, I really think it's important to highlight this particular issue, because it's one that comes up a lot: when talking about the importance of free as a part of a business model, that does not mean that all "free"-based business models work, or are even good ideas at all. What's important is to recognize when and where free makes sense and where it doesn't. "Freemium" business models for software can be tough, though it very much depends on the specific software and service being offered. It's very difficult to figure out what should be free and what should be premium, and quite frequently people underestimate just how few of the free users will ever switch over.

But none of that means that all free business models (or even all freemium) business models don't make sense. We've always tried to drive home the idea that there are no cookie cutter business models in the digital world, and it's important to understand the underlying economics to better understand where free might fit as a smart piece of your business model.

I think the worst thing about the focus on things like "freemium," or even the intense focus on the word "free" itself, is that it often leads to cases where people can't get past the "free" part, and when the larger business model fails, they blame the "free" part, rather than recognize that perhaps it was the way "free" was used as a part of the business model that was the problem.

Filed Under: business models, free, freemium, software

When Will People Stop Exploiting Google?

from the time-to-pay-up dept

I assume you've been hearing all about how sites like the Huffington Post are exploiting workers like a slave master by having them work for free. It's all, as Nick Carr has noted, digital sharecropping, as "free" is really all about exploiting others. And, of course, what it comes down to -- as Billy Bragg pointed out a few years ago -- is about who profits from all of that "free" stuff. According to Jonathan Tasini, that's "unjust enrichment."

Since we've established all of that, I have to ask the big question that really represents the elephant in the internet room: When will people stop exploiting Google?
You see, I recently read on Kevin Kelly's site about how Google provides about $500 worth of value to the average searcher. And we got it all for free. But, but, but... you say: we're paying for that in the advertising we see. Oh, how naive. Why, that's just like saying that Tasini got paid in exposure (how do you measure that?!?) or that Bragg got paid in getting a free platform to promote his music. Others will point out that Google made the choice to offer its service for free -- but, again, that applies to the people screaming about being "exploited" by Arianna Huffington as well. Then, of course, some will say that those situations are different because they involved companies cashing out. Yet, according to the Kevin Kelly piece, there's approximately $65 billion in consumer surplus from Google that the company is not capturing. $65 Billion. How can the company possibly go on knowing that the public has made so much money off of its hard work?

So, all of you using Google without paying your $500 directly to Google, when will you stop exploiting that poor company?

---

Okay, got that out of the system. A bit more seriously, you really should read the Kevin Kelly article which combines a few different studies to determine how much Google is worth to users. The really key point in all of this is the pure economic growth created by this. It's not in Google's bottom line (though, that's part of it), but in the massive consumer surplus created by tools like Google that allow people to do things they simply couldn't do before and do other things much more efficiently. If you understand how economic growth works, this is a perfect example. What are sometimes called "spillover effects" or "consumer surplus" is really economic growth in action. It's when the sum is greater than the parts, and that value can be more widely distributed. This is a good thing, and it would be nice if people stopped getting confused by "free" and thinking that it means an economic disaster, rather than an economic multiplier, as it often is...

In terms of the specifics, this also really does a nice job of demonstrating the difference between price and value. The technical "price" of using Google is free, but we value it a lot more than that. Google offering up search for free doesn't "devalue" search, as some suggest. It does the opposite. It creates more value. Kelly asks what would happen if Google decided to try to "capture" that excess value by charging. I'm sure a ton of people would pay. But, really, the question is would that be sustainable? The second Google did something like that, you could bet that Microsoft would suddenly jump to being the number one search engine, and it would open up all sorts of opportunities for new upstarts trying to enter the market. And, really, that's the key point we keep making. Certain things can't really succeed at a long-term price over zero, because the competition will just eat them alive. But, a la Google, it doesn't mean there isn't a ton of money to be made. You just have to figure out what to charge for. There's no exploitation going on here. Just economics.

Filed Under: business models, economic growth, exploitation, free

Record Labels Pressure Spotify Into Being Worse; Driving Users Back To Piracy

from the golden-geese... dept

I've spent a lot of time in Europe, over the past few years, at various music industry events, and one thing has become clear: all sorts of folks tell me that they stopped file sharing once they started using Spotify. It's uncanny. It shows, once again, that if you actually offer a good service, you absolutely can compete with file sharing. But there's no golden goose that the record labels can't kill, and they've been grumbling about Spotify for a while now... despite the fact that Spotify is making them more money than iTunes, in countries where it's available.

However, as we've seen, the entertainment industry has a special talent for screwing up a good thing, and their latest target is Spotify. Spotify still hasn't been released in the US, in part because some of the record labels (*cough* Warner Music *cough*) are demanding ridiculous restrictions on users, limiting any "free" parts to make the service a lot less appealing. Now it appears that the labels have also pressured Spotify into seriously cutting back on their free offer in Europe.

This will, undoubtedly, drive many of the users, who were making the industry money, back to unauthorized file sharing. In fact, many of the comments on Spotify's blog post about this say exactly that. For an industry that keeps claiming stamping out piracy is the number one goal, you would think it would know better than to take away the best tool they've had to compete with file sharing in a while. Spotify certainly isn't perfect, but it's amazing how quickly the recording industry seeks to destroy anything that starts making them money. They tried to do it with iTunes as well, but Steve Jobs fought back. Spotify apparently doesn't have the same clout just yet.

Really, this is symptomatic of the mentality of many of the bosses in the recording industry. They do absolutely nothing themselves to innovate. Instead, they resist and/or sue any innovation that comes along. Then, when an innovation finally breaks through and works, just as it's starting to really take off, the record label bosses get jealous and start complaining that these innovative services that are making them money are getting too much of the credit (and money) and demand a larger cut, making claims about how the service isn't the thing that's important, it's the music. Of course, if it were just the music that was important, these innovative services wouldn't be catching on. The service is important too, and each time the record label bosses overvalue their own music and undervalue the service, they end up killing off innovative offerings and driving users back to file sharing...

Filed Under: business models, free, record labels, spotify
Companies: spotify

Saying That The NY Times Paywall Is Dumb Does Not Mean That We Don't Want The NY Times To Make Money

from the this-is-real? dept

Someone passed along Simon Dumenco's AdAge report in which he purports to debunk the bloggers who are criticizing the NY Times' paywall. Frankly, it may be the dumbest argument I've seen in a long time, in that it makes absolutely no sense. First Dumenco mocks BoingBoing (where Cory Doctorow is not a fan of the NYT paywall) because it didn't have employees kidnapped in Libya like the NY Times did. And... somehow, this is proof that a paywall makes sense. I'm not kidding.

Dumenco's demented argument appears to be "the NY Times does real journalism, the people complaining do not, and thus mocking a paywall is bad." But that completely and totally ignores the very point that people are making about the paywall. We're not mocking the paywall because we don't like news organizations doing real journalism, or we think they don't deserve to make money. We're mocking the paywall because it won't help the NY Times actually make that much money. It's a bad idea not because it'll help the NY Times continue to do serious reporting, but because it won't actually help them do that. That's the point that many of us -- including Doctorow -- were making. But instead of responding to that, Dumenco made up a complete straw man that somehow people against the paywall are against the NY Times doing reporting at all.

Even worse, he compounds the ridiculousness of the argument by then mocking Doctorow's support of business models that include "free" as a part of the business model by noting that Doctorow sells physical books, even as he gives away digital copies of all of his books. It's as if Dumenco's brain can't comprehend rather simple concepts. When people talk about the use of free as a part of a business model, it doesn't mean that everything must be free. For example, I read Dumenco's ridiculously stupid article online for free. Does this mean that Dumenco also doesn't believe that the NY Times should make money? That seems to be the logical conclusion of his illogical argument.

We see this kind of brain-dead logic all too frequently in discussions of business models in the digital age. I tend to think of it as the mental divide-by-zero error, wherein otherwise intelligent people simply stop thinking, the second someone mentions "free" as a part of a business model. Suddenly, they think that this means "absolutely everything must be free and no one should make any money at all." And yet, no one argues that. They're arguing about what things should be free, and what it doesn't make sense to charge for if you actually want to make money. For example, charging for a paywall online is probably not a very good business strategy to make money. Saying that doesn't mean I don't want the NY Times to make money. It means that I think they could make more money by putting in place an alternative business model -- such as by getting people to pay for added scarce value, rather than abundant content.

Filed Under: business models, cory doctorow, free, paywalls, simon demenco
Companies: ny times

Android, Economic Moats, And How Zero Marginal Cost Defenses Can Also Be Great Offenses

from the ain't-just-defensive dept

Venture capitalist Bill Gurley has another excellent economic analysis of how powerful Android is and what it really means for Google. I have one (somewhat serious) quibble with it, in that I actually think Gurley misses the key economic point that would have made his argument even more convincing, but I'll get to that later on. The key points he makes are dead on, and should be recognizable to regular readers of this blog on our economic analysis of zero marginal cost products.

He kicks it off with a general business observation from Warren Buffet:

One of Warren Buffet's most famous quotes is that "In business, I look for economic castles protected by unbreachable 'moats'." An "economic castle" is a great business, and the "unbreachable moat" is the strategy or market dynamic that heightens the barriers-to-entry and makes it difficult or ideally impossible to compete with, or gain access to, the economic castle....

For Google, the economic castle is clearly the search business, augmented by its amazing AdWords monetization framework. Because of its clear network effect, and amazing price optimization (though the customer bidding process), this machine is a monster. Also, because of its far-reaching usage both on and off of Google, AdWords has a volume advantage as well. Perhaps the most telling map with regards to the location of the castle can be found in Jonathan Rosenberg's "Meaning of Open" blog post. In this open manifesto, Jonathan opines over and over again that open systems unquestionably result in the very best solutions for end customers. That is with one exception. "In many cases, most notably our search and ads products, opening up the code would not contribute to these goals and would actually hurt users." As Rodney Dangerfield said in Caddyshack, "It looks good on you, though."

From there, Gurley points out that pretty much all of Google's other products are effectively that "moat." They're the things that keep bringing you back to Google's search and ad products. And that's where Android fits in:

So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not "products" in the classic business sense. They have no plan to become their own "economic castles." Rather they are very expensive and very aggressive "moats," funded by the height and magnitude of Google's castle. Google's aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.

From there, he points out, that this makes it difficult for anyone else "trying to extract economic rent for a competitive product in the same market." Indeed. And while that may raise some antitrust alarm bells, Gurley later points out why it should not:

One might yearn to suggest that there is a market unjust here that should be investigated by some government entity, but let us not forget that the consumer is not harmed here -- in fact far from it. The consumer is getting great software at the cheapest price possible. Free. The consumer might be harmed if this activity were prevented. And as we just suggested above, the market is finally driving towards software pricing that represents "perfect competition."

I actually think there's a decent retort to this, which is that someone could say that this moat situation means that others cannot get into the market at all, and thus consumers could be hurt in the decrease of competition, which could mean that certain innovations don't make the market and/or that Google begins to stagnate on innovation as it faces no serious competition in those areas. To date, however, I don't believe there's much evidence that this is happening with Google (though, it is an area worth watching carefully).

But, really, what Gurley is describing is the same stuff that we've been talking about for over a decade: it's the natural economics of digital goods. Over time, someone will figure out a way to price those goods at the marginal cost of zero, and use that to support some other business. So, if you're sitting around hoping to charge for those goods, you're going to be left out in the cold. We know that argument and live that argument, though it's always nice to see it being validated yet again in real life.

But here's the key point that I think Gurley is missing, and which would have made his argument even stronger. Above, I bolded the line in his writeup that said that "Google's aim is defensive not offensive," with these products. I think he's actually underestimating Google here. These moves are both defensive and offensive (the best offense is a good defense, right?), though not in the traditional way of trying to directly monetize those offerings. It's that those "free" or abundant goods don't just act as a defensive shield, but they can also make the scarce "castle" good much more valuable. If we're sticking with the moat analogy, it's a situation where the moat not only acts as a defense, but it also serves to float the castle to even higher levels.

We've described this in other fields many times. For example, in a simplistic example, with music, freeing up the music makes it easier to spread the music, build a bigger fan base, and then increase the value of the scarcities around the musician (so they can make more on tour or through merch or more creative business models).

And I think that's certainly true with Android as well. It doesn't just build a "moat" around Google search/AdWords that protects that business, but it actually enhances those businesses and makes them more valuable directly. It does those things by extending the availability and usage of such businesses (I do searches on the go from my phone all the time these days), but also opens up those businesses to scenarios where they never would have been useful before at all.

So I agree with Gurley's basic premise, that making use of such zero marginal cost infinitely available goods by embracing their free nature acts as a very powerful moat, but I think he underestimates how much of an offensive play it is in not just protecting the castle, but vastly enhancing the castle's offensive power as well.

Filed Under: android, competition, economics, free, marginal cost
Companies: google