My Letter to the Economist

To the Editor,

As a former Economist technology writer, I understand the attractions of “simplify, then exaggerate”. But in the case of your article on freeconomics (“The end of free lunch—again”, March 19th), you have done a bit too much of both.

First, where is your evidence that online advertising is a failing model?  To be sure, the crisis has dramatically slowed its growth (like that of every other industry) but unlike most others, it’s still positive. The worst forecasts for the year that I’ve seen predict that it may drop by a few percent from last year’s record figure. That’s a lot better than the offline advertising market and hardly supports your hyperbolic claim that “the demise of a popular but unsustainable business model now seems inevitable.”

Second, there is more to free business models online than advertising. The big shift since the crisis has been the rise of “freemium” (free+premium) models, where products and services are offered in free basic and paid premium versions. Think Flickr and Flicker Pro (more storage), virtually all online games and even your own site (some free and some paid content).

Finally, your scorn blinds you to the fact that this crazy idea of giving away content for free and supporting it by advertising is nearly a hundred years old. It is the basis of the standard radio and television broadcast model (“free to air” content) and countless other companies, from the free daily and weekly newspapers to the vast majority of media websites, including all of our own at Conde Nast. It works great—The Economist should try it!

Regards,

Chris Anderson

Editor in Chief, Wired Magazine and author of the forthcoming “Free: The Future of a Radical Price”

Comments

[Andy Gibson (@gandy)]

Hey Chris, just saw you tweet this. I said I'd blog a follow up to our SXSW conversation but I guess it might make more sense just to add it to the debate here, if only because people here hopefully know more than I do!

I didn't really clarify this before, but I completely support your argument that giving things away for free can make us money. As you say, it isn't new, it's an old technique with updated margins: instead of giving away 5% to monetise 95%, it's turning the other way around, and we can afford to give away much more and monetise a smaller slice of a bigger pie. I've just followed exactly this model myself, writing a free web 2.0 handbook for non-profits and govt here in the UK because I know I'll make my costs back in consultancy and other services.

The bit I'm struggling with is what happens outside the system you describe. Greater efficiency of production drives down costs, and therefore prices, but it does also practically reduce the quantity of work available in the production process (printers being the example we discussed last week). Greater audience reach certainly enables us as authors to reach and monetise a greater number of people, but it still feels like we're competing globally for a slice of a smaller pie: we can reach more of the audience ourselves, but is the audience getting larger, or richer?

How does the 'free' economy create jobs and wealth? The printers and their kin are some of the people who buy premium accounts, printed books, new houses and the latest mascara, so if you "follow the money", they're the people who we actually monetise with our advertising and freemium models. The size of that market is the important thing, surely? Beyond increased efficiency and how to monteise it, what opportunities can you see for new wealth creation and new marketable services can you see? The printers need to adapt to a changing economic reality, for sure, but where do you see the new opportunities being for them and their like?

I don't think that any of this undermines your 'free' argument, but I'm definitely left wondering what the impact of this evolution in economic activity will be on the mainstream economy, and how interdependent the two spheres actually are. What are the externalities we need to consider here? Or, to frame it more positively, are we creating a different kind of economy alongside the monetary economy that relies on free time, generosity and social capital, and what might that look like?

[Chris Anderson]

Andy,

The answer is pretty simple: people move upstream to higher-value jobs. Steam rendered muscle power free, so workers became skilled. Automation rendered telephone operating free, so operators moved into accounting. Etc...

Clayton Christensen calls this the "law of conservation of attractive profits", but it is basically the story of economics since the industrial revolution. As one resource becomes "free" people are able to create something else that is expensive. As a society, we get richer each time.

[alittlebitoftime.com]

Hi Chris,

Hoped you were going to see this, thought about emailing you to let you know, but then i figured you would spot it being ex-Economist.

Really dig your work,

Ben
Edinburgh

[Thomas M. Schmitz]

I do have a question about Internet advertising as a business model. Where is the topple-point? How large of an organization can online advertising sustain?

Except for Google and a select few companies, it appears that Internet advertising dollars are spread broadly and not too deeply. Lots of people or businesses make a little money. Few make enough to operate a large multi-employee organization like the Seattle Post Intelligencer, which had to reduce most staff to become an online only publication.

The IAB video you shared exemplifies this. Online advertising possesses a very long tail indeed. How many "killer apps" for large scale, big money advertising can the Internet support? What's the capacity and what is the plottable trend?

As someone who depends on ecommerce, these are the questions I want answers to.

[MIGHTYBIGMEDIA]

While I don't always agree with Chris, and have said so in these comments, I'm with him 100% on this one.
The new model for media creation, distribution and monetization moving forward is simply not going to look the same, or offer the same opportunities. The automobile displaced the carriage, much to the dismay of buggy whip manufacturers. They downsized, changed businesses or gave up. Unfortunately, lots of printers aren't going to make it this time around.
Advertising won't totally fill the revenue gap that's being created. We're entering a world where there will be fewer revenue pools so businesses will need to look for additional streams... and maybe even start drilling down into the revenue aquifers to survive.

[neotoy]

I think your last point actually works against your overall argument. You say "giving away content for free and supporting it by advertising is nearly a hundred years old". Which is exactly why this repurposed model is on its way out.

Advertising only works within the context of a traditional economy. But both the world and human psychology are changing; forcibly waking up the the realization that none of this fundamentally cannibalistic industry-centric behavior is economically sustainable.

[Chris Anderson]

Neotoy, are you saying you think advertising in all forms is on the way out? Does that include Google's form of advertising? If so, I'd love to hear why.

[Aud-ny]

This cracks me up--especially the reference to Conde Nast's success. Chris, have you looked at the numbers recently? Sure online advertising is not hit nearly as hard as offline, and I admit more money is shifting to online so we will still see growth, but is it sustainable? I see many titles where the offline and online are inextricably linked--they draw from the same resources. Will online advertising be able to keep the whole ship afloat as it is? In many cases we've already seen the answer is no. Especially considering a few things: (1) as another reader notes "Internet advertising dollars are spread broadly and not too deeply." (2) another is the downward pressure on CPMs and the reduction in some of the (bigger campaign) brand advertising.

Freemium is the future, but it will only work where titles can offer a unique service to their readers. I have a feeling a lot of titles will not have what it takes to make it there.

[Tim]

It is interesting to see how dinosaurs don't see the end of the world because their cosy climate leads them to believe the current environment is tickety-boo.
However maybe the Economist isn't really prehistoric after all - see the report here on The Economist SMS activity in India.
http://www.campaignindia.in/feature/a_strategy_that_s_a_no_brainer
Courtesy of Communities Dominate Brands Blog

[OurSpace]

I like the analogy of the dinosaurs, but I agree the Economist isn't really prehistoric. And What is 'Communities dominate Brands Blog' This is the coolest Economics blog I have ever seen. A lot of info here, Good Job
OurSpace-The coolest Social Network on the Planet!

[Gary Teh]

I am very curious how the new model for online advertising will look like. If there will be one coming up some, in which direction might it becoming from. Will it be coming from the direction of Google then or some hit hitherto unknown black swan?

[Landon W.]

The term free has become the most powerful tool in an online marketers arsenal, but "free" has a much different connotation than it once did. Unfortunately, the term "Free" is now synonymous with heavy advertisements or very basic services.

[pakseowebpromotion]

I have many years experience over internet. I fear there is very little money earning opportunities over internet. Although Google has great importance as a business promoter yet it has absolutely no market in front of Live TV, TV cable advertisements and newspapers advertisements in Pakistan. However search engines has better importance for international brands.

[infoteme]

I agree with Chris on this one..

[John]

Hi Chris I have just finished your Free book and i loved it. Gonna listen to it again and try and make notes. One question I had the example of the gym. Where is this gym and have you the name of it? I like this model and would be keen to see how its progressing.

Thanks

[lisa]

The free lunch era is ending, but not the way you describe. I've read an article about dotcoms (downloaded from rapidshare search engine http://rapid4me.com ) and found out that consumers provide $300 billion worth of time, attention, loyalty, word of mouth and personal information to the advertising industry for free. Advertisers spend that money seeking consumer loyalty and all the spoils that comes with it. Media companies receive all the ad revenue that consumers have earned and most of the consumer loyalty that advertisers have bought because of their ability to aggregate an audience.

[lisa]

http://rapid4me.com

[دليل مواقع]

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[cerita dewasa]

The free lunch era is ending, but not the way you describe. I've read an article about dotcoms (downloaded from rapidshare search engine http://rapid4me.com ) and found out that consumers provide $300 billion worth of time, attention, loyalty, word of mouth and personal information to the advertising industry for free.

[iron]

It is hard to believe that they believe they can get away with these letters and no-one will figure out they aren't economists.

[foto cewek bugil]

Hey Chris, just saw you tweet this. I said I'd blog a follow up to our SXSW conversation but I guess it might make more sense just to add it to the debate here, if only because people here hopefully know more than I do!

[Alana Baker]

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[wii zubehör]

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[2im]

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