Anderson’s “Free” starts out by giving us a quick economics briefing, using that as backdrop to defend the notion of ‘free’.  He explains that, for instance, traditional, or old media has used a third-party advertising model to earn revenue while still providing a “free” product.  I may not pay for 30 Rock, but when I buy products advertised during commercial breaks on TV or in interstitials on Hulu, I am still giving my money to NBC.  It’s pretty basic and has worked for Google, a benevolent empire that has largely amassed their wealth through selling advertising and diversifying revenue streams.  Of course, the model isn’t absolutely identical – the web magnifies things by presenting opportunities to apply wisdom gleaned from specific metrics and target users with relevant advertising, as well as ways of satisfying niches with long tail services – but the principle is the same: subsidize one product (free content) with money made from another (paid ad space).  Multiply and diversify.

With the notion of one product funding the other in mind, I further illustrate the point by explaining how I helped inadvertently save ABC, Monday Night Football, and the Disney company in 2004.  Maybe.  Or not.  But keep reading!  I think you’ll enjoy the reasoning anyways!

The popularity of Monday Night Football, or MNF, a free over-the-air product until 2006, has apparently soured since moving from ABC to cable’s ESPN in 2006.  In fact, this year MNF has seen a decline in viewers week over week.  Meanwhile, competitor NBC’s Sunday Night Football, or SNF, has quickly become the NFL’s showcase; during that same transition period in ’06 SNF bested the last year of ABC’s MNF by comparison.  In general, it would appear that on average more fans are watching SNF than MNF (and SNF is on the rise – although, it should be noted that MNF has set cable viewing records, though still not as high as when it was over-the-air).  MNF just isn’t the same juggernaut it used to be, and that’s also in part because, for the viewer, cable TV generally comes at some price as compared to free over-the-air broadcasting).  Truthfully, ESPN doesn’t reach as many households as ABC did or NBC currently does, but, in using a cross-subsidies model – some Andersonian and basic economic thinking – I have found an interesting way of explaining how Disney, who owns ABC and ESPN, is going to come out winner.  In this situation, ABC will be our free product and the eventual beneficiary of the move.

In 2006, when MNF jumped from ABC to ESPN, NBC saw an opportunity to shift NFL eyeballs from Monday to Sunday.  On the other hand, Disney was looking at the move as an opportunity to bolster its ESPN brand as well as develop their free product – ABC’s Monday night – with other shows targeting other demographics.  However, this internal counter-programming was still probably not going to make up for all the prestige Disney would be losing in bumping MNF to a cable network.  Nevertheless, as their plans to switch MNF’s channel were taking shape, Disney still had Al Michaels in it’s deck, the lead play-by-play announcer and respected voice of MNF telecasts up to that point.  Certainly ESPN’s iteration of MNF would benefit from having Michaels, but Michaels would wind up with NBC’s SNF during the transition instead.  But this was no accident or failure on Disney’s part, for, ever the synergists, they must have spotted a different way to cross-subsidize and recoup expected losses with Michaels not around for ESPN MNF.  Michaels became expendable.  Let’s quickly investigate why.

First, back up to fall 2004, when ABC saw MNF get its lowest rating for a game ever.  Yes, their free ad-supported product was losing money.  Big deal?  Well, back up a few more months.  During the summer of 2004, Disney’s video game unit, Buena Vista Games, started a Think Tank of college interns to devise concepts for new video games.  I was one of those interns, a senior at USC.  One of the concepts we pitched, Epic Mickey, a recently announced game by Warren Spector and Junction Point that’s expected to reinvigorate the character Mickey Mouse and hopefully make him relevant to a whole new generation, was just coming together under the direction of game developer Chris Takami and others.  During our think-tanking we came across the character of Oswald, the Lucky Rabbit as we were looking for potential supporting characters to fit the story we concocted for the game. When we brought our ideas for Oswald to Chris Takami, he had some folks do some research and discover that Disney no longer held the rights to the character.  Oswald was Walt Disney’s first cartoon creation, but due to a financial dispute he wound up out of Disney’s hands and  in to the hands of Universal Pictures.  Of course, eventually Walt would craft Mickey Mouse and the rest is history, but this story doesn’t stop there.

Snap back to 2006, and The Walt Disney Company wants Oswald back from Universal in order to make Epic Mickey.  Why?  Disney CEO Bob Iger, perhaps betting that Epic Mickey will reap bounteous profits and reinvigorate a media franchise, subsequently subsidizing any long-term losses ABC and Disney might experience from MNF’s switch to ESPN, decides to trade Al Michaels to NBC Universal for Oswald the Lucky Rabbit.  Oswald was back home, and with the trade Disney has kickstarted a potentially lucrative video game venture, a mega franchise in the making (could there eventually be movies, books, and more based on Epic Mickey and Oswald? – as a progeny of George Lucas I sugggested as much for Epic Mickey when we pitched it, and Warren Spector has the same vision).  So, Disney cross-subsidizes ABC and synergistically creates new revenue with this trade, and in so doing they establish three revenue streams (new and free ABC Monday night primetime offerings, the Epic Mickey franchise, and the new ESPN MNF) where there was once only one, (free ABC MNF).  And it all starts with a bunch of interns, of which I was one.

If you think about it, as Anderson points out in ‘Free’, this is what Google does so well – they give away one free product (search) and sell another product (AdWords) to subsidize the free one while still earning a profit from other revenue streams, too (such as the freemium-based Google Apps).  ABC is free, but Disney collects revenue and then some to keep it going from other streams (selling on-air commercial time, selling games like Epic Mickey, charging cable systems to carry ESPN, and so forth).  Sure, it’s not the same as offering many high-quality free products at the same time the way Google does with free Gmail, free Google Search, and free Google Maps, all robust standalone products, but it does prove that if you diversify you can offer several very popular products for free or nearly free and still recoup and profit through other means.  Don’t believe me?  Just wait and watch how much attention they pour into promoting Epic Mickey, a game that will make oodles a pop (at whatever the typical Wii game going price will be when it’s released next year).  So, there you have it: Disney, like Google, diversifying and synergizing through new models.  You should do the same, because you must realize, as my friend Brook Elllingwood put it, that all companies are now media companies.  Step in to the 21st century and play by the same rules as the Googles, Facebooks, and Twitters of the world.

As an epilogue, I don’t actually know what went on in the room when Iger traded for Oswald (as a long-gone former intern by that point), and I’m sure there are eight gazillion other ways Disney prepared to handle the MNF move and ABC Monday losses – plus I’m not dense enough to not recognize that Disney makes plenty of money in other ways (theme parks, toys, etc).  But, they could have just bought Oswald back or found some other way of acquiring him.  Why Al Michaels?  Because Epic Mickey is going to be huge and fund rest of Disney’s free products, as well as help keep MNF on cable TV.

“Free,” the latest book by Chris Anderson, author of “The Long Tail” and editor-in-chief of Wired magazine, illustrates how the 21st century’s digital economy of ones and zeros is increasingly moving towards a pricing model where everything is (or should be), essentially, free (Anderson, 2009).  Another way of putting it is thus: whereas the marginal cost of reproducing intangible digital goods made of bits instead of atoms is practically zero, whereas Moore’s law and other concepts dictate that the cost of processors, bandwidth, and storage are marching towards nil, and whereas less typical motives for doing business like gaining reputation and raising social capital are on the rise, the very notion that one should pay for digital goods and services is pretty much dead at the door.  Anecdotally, for a US economy that is for all intents and purposes steeped in never-ending debt, built on the foundations of imaginary money no less, the irony is not lost upon myself that we really ought not to be paying for anything anyways!  Nonetheless, money is scarce, but the resource of intellectual property is endless.  “Free” addresses what to do about this, and how real money can be made by giving everything away.

But wait…

In the interest of confessing that I whole-heartedly believe in this gospel of Free, I will offer the counterpoint before moving on.  Indeed, not everyone agrees with Anderson.  Like who?  Malcolm Gladwell for one, who interestingly enough in a February 2004 TED talk illustrated an idea that fits perfectly with Anderson’s previous long tail concept (the skinny end of the distribution graph where companies like Amazon make a collective killing selling small amounts of less popular items; see The Long Tail at Wikipedia for more (The Long Tail, 2009)), discussing in this TED talk how businesses have learned that providing choice, variability, and specialization invariably will lead to greater profit, succeeding in a novel concept: giving consumers what they really want (Gladwell, 2004).  Why would Gladwell disagree with Anderson when it comes to “Free”, then?  In his review of the book in The New Yorker, Gladwell concedes that Anderson offers a lot of reassuring answers to intellectual content producers who are seeing the digital age destroy their profits through things like piracy and shifting mediums, but contends that Anderson’s solutions hold little weight.  These solutions, the gist of which I will get in to later, Gladwell asserts, seem unnecessary or redundant.  For example, why pay for the special service of finding someone to write when you can simply pay someone to write (Gladwell, 2009)?

There’s more!

Gladwell may be wise to question Anderson’s solutions, but time will ultimately have to determine who is right.  Businesses need new economic models now.  It is fascinating that the fears surrounding economic change seen in the digital age appear to echo fears being trumpeted in other areas, such as those witnessed in debates currently raging in politics and the social world.  For instance, the right tends to question the need for change, such as they have in watching the potential implementation of a new health care system unfold, and so they are doing everything they can to fight it.  Likewise, incumbent industries, or “old media”, like the recording industry or newspaper industry, have done or are doing the same – putting up a fight against changes in the way their content is consumed by the masses.  Even a software publishing giant like Microsoft, as Anderson points out in “Free”, has attempted to fight change in the midst of disruptive innovations like open source software (Anderson, 2009).  Change is inevitable, but adaptation is unavoidable.

Supplies are limited!

Perhaps some insight for fearful incumbents can be gained from Anderson’s discussion of the way society tends to ignore abundance and focus on scarcity as changes occur over time.  In a brief economic history laid out early in the book, Anderson spells out how people tend to fear the loss of certain resources and expect that as they become scarce prices and demand for these commodities will increase.  However, what Anderson illustrates is that once a resource becomes limited, people shift their focus towards alternative resources and the prices and demand for the depleted resources actually drop (Anderson, 2004).  Consider how oil prices have dropped in recent years as people have begun shifting towards alternative energy sources.  Mapping this framework on to the commodities of intellectual industries, incumbents need to understand that the demand has shifted to where the abundance of their resource can be acquired, which is through marginal reproduction of assets in the digital space.  Incumbents are ignoring the reservoir of abundance and are not looking for ways to make money in this new landscape, focusing on the depleted interest in older resources, a classic societal trend, or so it would appear.

*Shipping and handling not included.

What are these new models, the ones Gladwell might not like very well?  In general, Anderson looks to Gladwell’s specialization and variability concept and his own long tail for answers.  The, as Anderson calls it, “superabundance” of easily reproduced resources has created a wealth of information.  And, like Anderson points out, described already by Herbert Simon, a wealth of information creates a poverty of attention (Anderson, 2009).  One size does not fit all, as Anderson says, which further complicates the matter – choice is seemingly endless.  Anderson also states that as people get older they tend to have less time and more money.  What this all spells out, according to Anderson, is that people will continue to expect free content because it costs nothing to reproduce, but people will, in the interest of convenience, pay for specialized service and ancillary product which will make consumption almost as easy a choice as taking a free product, too.  Freemium models, where a minority of users pay for specialized product and everyone else still gets the normal good while profit from the minority covers them all, are most indicative of this.  So, yes, there is a catch, but it is not a very bad one because freemium customers fund the masses while receiving added value for so doing.  Everyone wins.

Call now!

Free is inevitable.  I embrace it already and look forward to more of it.  However, even I know it is not truly free in that the abundance of some provides for the advancement of many.  This is a model already seen in representative democracies which function on taxation to operate, as Anderson notes in his book.  Like those right-wing politicos that are fearful of losing resources to social change, if they understood that they only need to shift their attention to new resources they would have nothing to fear.  Anderson’s “Free” succinctly illustrates how incumbent players moving (or being thrust) in to the digital space can learn from successful companies like Google and Yahoo!, both of which have made their millions by giving away their products while using alternative methods of cashing in on the value created by so doing (e.g., targeted advertising, to name Google’s primary model as one such method).  Those industries that are succumbing to network effects need to look for new ways of doing business right now, starting with giving away their primary products for free.  If they don’t, someone else will.

References

Anderson, C. (2009). Free, the future of a radical price. New York: Hyperion.

Gladwell, M. (2009, July 6). Priced to sell: Is free the future?. The New Yorker. 80.

Gladwell, M. (2004, February). Malcolm Gladwell on spaghetti sauce [Video File]. On TED: Talks. Video posted September 2006. Retrieved 25 October 2009, from http://www.ted.com/talks/malcolm_gladwell_on_spaghetti_sauce.html

The Long Tail. (2009, October 24). In Wikipedia, The Free Encyclopedia. Retrieved 25 October 2009, from http://en.wikipedia.org/wiki/The_Long_Tail

This isn’t at all to say I know absolutely nothing about technology and business, if not specifically economics.  I know plenty about innovation, incumbents, disruptors, and so forth.  But, now I need to learn about the Information Economy. And, gladly, our instructor has been going over the basics of economics already, so I feel I won’t be utterly lost in this course.

So, my key goals for this quarter are to learn the following:

1. How does supply and demand apply to information?
2. How do you place a dollar sign on something that is not a scarce resource?
3. How on Earth, other than supplying knowledge to enact change, do you develop an Information Economy in places still fixated on scarcity, like the developing world?  I mean, isn’t a cell-phone or OLPC (“One Laptop Per Child“) pointless if you’ve got nothing to eat?

Kathy Gill, a brilliant woman who I’ve had the pleasure of taking a course from before, is our instructor.  I think I will learn a lot because my indifference to the subject of economics will probably mean I’ve got a massive untouched portion of my brain to awaken to these pretty new ideas (to me, that is).  I look forward to it!