I get asked this all the time these days, so before I crash after a speaking tour of Latin America (eight cities in four days!), here are my thoughts on what a recession will mean for free-based business models.
First, let's confine this to online, which is where the most interesting free models are. There are three main forms of "real" free: Ad-supported, "Freemium", and the Gift Economy. Here how I think each will be affected:
- Ad-supported: In the offline world, advertising is going to go down. Online, where it's easier to make the case for clear ROIs, I suspect advertising growth will continue to be positive, but will slow considerably. That means that many of the companies that were counting on a rising tide lifting their boats will be disappointed, and more than usual will go bust. Result: Negative
- Freemium: This should become the favored model, since it's connected to direct revenues. But companies that have only worked out the free part but not the premium part are going to have to figure out what they can add to their products to make them compelling enough to pay for. If they don't, they will find their investors' patience with them is very limited, and many will fold. Those that get the freemium balance right should be fine: free is a good price to have when people don't want to spend, and freemium models can work well when just 5% of users convert to premium, thanks to the near-zero marginal costs of serving the other 95%. Result: Modest positive
- Gift economy: This is driven primarily by people's "spare cycles" (AKA cognitive surplus) and rising unemployment means more spare cycles, sadly. Obviously people still need to pay the rent, so many of these shared contributions are really just advertisements for the contributor's skills. But other contributions will be idle hands finding work while they look for their next job. As a result I think you'll see a boom in creativity and sharing online as people take matters into their own hands. Today, if you're in-between jobs you can still be productive, and the reputational currency you earn may pay dividends in the form of a better job when the economy recovers. Result: Positive
Agree? Disagree? The comments are open.
Welcome back from the tour. That's brutal.
I agree with your premise. I think the gift economy will benefit, and that people who can do a little something more for people will be more motivated to do that kind of work to get a leg up on the less clueful competition.
I wonder if the Advertising won't diminish as much as it will shift harder into CPA versus CPM. If I'm an affiliate marketer, I can get far better play from an ad that drives a lead or sale versus someone just getting more pageviews and dubious sales value.
Freemium? I agree again. I think that companies who've started at free pretty much can't just start asking for money. Jott.com did, and I stopped using the service. Haven't looked back. I imagine there will be more.
Get some rest, and enjoy the family.
Posted by: Chris Brogan... | October 09, 2008 at 08:51 PM
You're still refusing to consider en masse purchase or commission (the keenest section of the audience pays as a collective - for a work that is then freely copyable to the rest of the world).
Perhaps this is still over your horizon or possibly even underneath your radar?
Posted by: Crosbie Fitch | October 10, 2008 at 01:22 AM
I don`t know if there is really a positive effect on the Gift Economy. People who are under stress or even have fear of losing one's livelihood , are not the people who are spending days to edit Wikipedia stuff, or helping society or develope a new facebook app just for fun...
And only a small percentage of people in certain industries... like media, software developer, design ... are able to use these "reputational currency"...
So I think to see a positive effect is highly speculative...
Just a thought...
Posted by: Thomas | October 10, 2008 at 03:51 AM
@Crosbie. I'm afraid I'm not following. What you describe sounds either not free or covered by one or more of the other models. Could you give an example?
Posted by: Chris Anderson | October 10, 2008 at 06:11 AM
I think what Crosbie is suggesting is a model where a consumer (legally) purchases something and distributes it (illegally) to people not willing to pay the original cost. An obvious example of this would be illegal music file-sharing.
Not sure I'm right. Also, not sure if there would be a legal version of this model.
Posted by: Ryan | October 10, 2008 at 07:32 AM
Thomas ~
There will be a positive result found within the gift economy as mentioned, although it will be limited to those who have the initiative to take "spare time" and make it "their time". The unknown is how many people will take advantage of the resources around them to enhance their abilities between jobs. If you do not know, learn. There are an abundance of people willing to teach because they are(or should be)excited to share what they know in search of information that is new to them.
I go to my auto mechanic based on his reputation, why does reputational currency have to be limited to computer technology?
Posted by: bksmyth | October 10, 2008 at 09:35 AM
Slightly off topic, but in the realm of 'free' models. Where do point systems fit in the 'free' world? Systems like traditional airline miles programs or hotel rewards? Many companies who offer these programs construct them to make a positive return on their own (not counting repeat business from the program). Part of the reason is frequent fliers or hotel users are highly qualified customers for other services and perceive themselves to have 'currency' (points) to spend.
It strikes me that is you have a free (or 'freemium') web service you could in some way re-monetize time-spent on the service by allowing users to build up 'currency' (points) for use. The more points you earn, the better discounts you can get on a range of associated goods/services that third parties pay you for the privilege of selling directly to your highly qualified customers.
Sort of like a rewards program for web services.
A system like this would have to have some kind of protection from getting gamed (using the service to amass points at no cost). But I have to think some business models might find it useful.
Forgive me if it's old ground.
Posted by: Paul | October 10, 2008 at 03:19 PM
in my country brazil, models are same
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Posted by: imobiliarias santa maria | October 11, 2008 at 09:48 AM
See Kevin Kelly's 1000 true fans (http://www.kk.org/thetechnium/archives/2008/03/1000_true_fans.php).
For example, a thousand users of a GPL software package want a certain feature added, so they all chip-in with a pledge of $50 each (also see http://micropledge.com/about ). When the package is released the developer gets $50,000, and the users get their software. The software being GPL, can then be legally copied for free (without royalty).
It can work for music too. A musician's 1,000 best fans pledge $1 for the next single (see http://quidmusic.com) and they get $1,000 when they release it. The fans get the song - but then it's also free to anyone else.
Posted by: Crosbie Fitch | October 13, 2008 at 03:20 AM
I agree with bkysmyth, while you might think the gift economy would be a positive, the reality is, most people will not have the intitiative to make it happen on their own, and will use the poor economy as an excuse for not taking action.
As always, this means even more opportunities for those who don't wait but take action now. Also, let's not forget all the opportunity that is now available wit the stock market, as many companies are undervalued.
As always, there is opportunity for the small minority willing to take advantage of it.
Posted by: Josh Neumann | October 14, 2008 at 04:32 PM
I mostly agree and disagree, here are some minor modifications:
Ad-Supported: Online advertising growth will not slow considerably. I agree that offline is in trouble but even this spend will take years to be reduced and/or migrate to online. Humans just don’t move that fast and they are not comfortable with massive change. Playing with ad dollars is like cutting your oxygen intake, people get very scared and thinking they can’t live without it.
Result: Positive – for Online for the foreseeable future but Negative- for Offline
Freemium: The issue with the premium part is there’s always another competitor/startup who is willing to include those feature into their free offering to gain market share. This model is what I call a “pipe dream.” You are always thinking that you are going to convert but it rarely happens in the scale needed to succeed. Has anyone ever purchased Winzip Pro? I do like the notion of free offerings to drive brand awareness and mind share but the main business model should be solid and independent. Result: UNCH
Gift economy: I love the “spare cycles” concept and I believe in the power of 2.0, but I question whether or not it holds up during extremely high levels of unemployment ( I’m in NYC) It’s easy to spend you spare cycles during work or play when times are good and you’re being paid / you’re bored because your productivity is beyond your workload. But to spend your time “gifting” when you’re trying to make ends meet is like thinking a castaway will be conducting outdoor hobbies while attempting to survive on a desert island. The stress of unemployment could change the gift economy. Result: Modest Positive
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Posted by: Eric Mauriello | October 14, 2008 at 06:42 PM
I read an interview of yours in the Portuguese newspaper "Público" and I love it, the Freemium concept must give the Economy Nobel Prize and as they say you must live during the next 25 years, and I hope so.
Your idea gives me the inspiration to a new business...
I will visit your blog again and again to learn more.
Best Regards,
Pedro Nunes
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Posted by: ffxi gil | March 11, 2009 at 08:46 AM
Losing one's livelihood , are not the people who are spending days to edit Wikipedia stuff, or helping society or develope a new facebook app just for fun...
And only a small percentage of people in certain bedroom furnitureindustries... like media, software developer, design ... are able to use these "reputational currency."
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Result: UNCH
Gift economy: I love the “spare cycles” concept and I believe in the power of 2.0, but I question whether or not it holds up during extremely high levels of unemployment ( I’m in NYC) It’s easy to spend you spare cycles during work or play when times are good and you’re being paid / you’re bored because your
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