The Long Tail

My Two Cents on Charging for Content

Time, the New York Times and others with their back against the economic wall are now reconsidering that whole free thing.

Ann Moore, the CEO of Time Inc, told a British newspaper:

“Who started this rumour that all information should be free and why didn't we challenge this when it first came out? I say this in college classrooms and they start to throw their shoes at me.”

And so on…

My take: I actually don’t think it matters what Time or Newsweek does on the web: they both seem to be trending towards insignificance:

 

 

But some of the other Time Inc properties, such as People.com, are doing much better online. And the NYT is doing great. Should they charge?

I think they should—but not for everything and not for everyone. The old WSJ model got the Freemium model about right, I thought. For such premier titles, which can credibly claim to be papers of record and thought leaders, there is clearly a class of readers who will pay what it costs to get that content.

But what WSJ.com used to do was to offer a backdoor to free content for another class of consumer: the social media maven. Paying subscribers could make content free to others by clicking on an icon that created a URL for a free version of the story that they could use for blogging or to submit to sites such as Digg or Yahoo Buzz.

The deal was essentially this: these often influential word-of-mouth generators could trade reputational and attention credits for free content. The content would be part of the online conversation, not walled off behind a paywall, and presumably some fraction of those who followed the links to free content would recognize the value in the premium content around it and subscribe. A very nice Freemium model, in other words.

Sadly, the WSJ doesn’t seem to do that anymore. The social media links it creates just go to short excerpts of the stories, and you have to subscribe for the whole thing. I suspect that this has had the effect of discouraging people from using those links, since it’s going to result in disappointment for most of the people who follow them. I certainly don’t see the WSJ mentioned much on Digg or Reddit, and that may be why.

But as the NYT considers a Freemium strategy, I’d encourage it to revisit the model that the WSJ abandoned. The old Times Select paywall kept its columnists out of the public debate, which annoyed them and diminished the Times’ influence. A more social media-friendly alternative would avoid that dead end, while reintroducing a direct revenue stream. Free may be the best price, but it needn’t be the only one.

Now I can die happy

I have been dissed in a nerdcore rap song about SWSX, at which I am speaking.

…..

Fuck the panels, there ain't one girl ta talk to
I didn't fly here to see some Wired dude

You want The Long Tail? Well that's the wrong tail
Imma take these geek girls back to ma hotel

…..

Announcing The Free! Summit

Mike Masnick beats me to it:

“As regular readers of this site know, I'm pretty passionate about how businesses need to understand the economics of "free" in figuring out how to create business models that work. So, I'm excited to announce that I'll be hosting and emceeing the newly announced Free! Summit, to be held in Silicon Valley on May 11th.
Chris Anderson (whose book on "Free" will be coming out in just a few months) will be keynoting, and we're pulling together the rest of the participants as well.

The event is being produced by the fine folks from Tech Policy Central, and works as a nice lead-in to their Tech Policy Summit that will start immediately after the Free! Summit concludes. In fact, attending the Free! Summit gets you access to the opening session of the Tech Policy Summit as well. And, yes, registration to The Free! Summit is, in fact, free. But... there are a limited number of seats, so sign up now. Also, we're very much looking for individuals or organizations interested in presenting case studies on how they've used free as a part of their business model. We already have a few lined up, but feel free to suggest others of interest.

I hope that many of you can join us for what I'm sure will be a great series of discussions on "free" and what it means for business models, policy and the economy.”

The Rise and Fall of the Gaussian Copula Function

Felix Salmon has a terrific cover story in this month’s Wired on the all-too-seductive Gaussian Copula function, which made it easy to calculate risk on Wall Street. Take a big basket of financial instruments, each with their own risks, through them into the Copula function, and presto: you get the net risk. It was so beautiful and apparently bulletproof that investors began treating it like a black box. Then it all went wrong.

This story profiles David X. Li, the inventor of the formula (now living in China), and how its adoption led to the chronic mispricing of risk that toppled some of the largest banks.

It’s a hell of a story, for students of Wall Street and mathematics alike. Here’s the function, annotated (yes, we’re aware that it seems to be missing a parenthesis, but that’s in the original paper, too):

“Matter”: Marketing by sending people free stuff

Britain’s Royal Mail is trying something new with direct mail: sending people a box of free stuff. Called “Matter”, the first one went out in mid-December to 30,000 people who had signed up to receive it. The box contained books, DVDs, CDs, shower products, a candybar, a pre-paid SIM card and a few other goodies.

The idea is that you try them, maybe give some to your friends, tell people about the one you like and otherwise interact with products in a way that’s more interesting than traditional direct-mail advertising.

The project was a collaboration with Tim Milne, who started the arts collective Artomatic. He says that the challenge so far has been getting advertisers to look past traditional direct mail. He told me:

“I've long believed that printed matter will gain new value in a digital world as everyone begins to crave the more physical / tactile / emotional nature of printed stuff.

Matter is revealing some interesting, unexpected behaviours. Matter is very social–people take the items (and sometimes the whole box) to work, to the pub and tell their friends and family about the cool things
they'd been sent. It fact, even though it's a physical medium, it behaves more like a digital channel.

The underlying concept–that if you give people nice things they'll better towards you is certainly true. What we're beginning to discover is how the simple act giving people something nice triggers a whole range of responses–using the objects, telling their friends and telling us what they think.”

The next box goes out in April.

From GeekDad Project to a Real Business

About two years ago, my then-9-year-old and I worked on a cool project to program Lego Mindstorms to fly a RC plane, which we cheekily called a Lego UAV. (And were then, even more cheekily, accused of "weaponizing Lego"--UAVs are export controlled as weapons!) It worked, amazingly, and was a lot of fun.

Then, as sometimes happens, I got obsessed, while he moved on to other things. In the past two years, I've made cellphone UAVs, Basic Stamp UAVs, autonomous blimps, and a true gyros+acellerometers+GPS autopilot version of the Lego Mindstorms UAV that's now in the Lego Museum in Billund, Denmark. We set up an amateur UAV community at DIYDrones.com, and get thousands of people each day exploring this new dimension of aerial robotics.

Now this project has gone pro. Our first commercial autopilot, the Arduino-compatible ArduPilot, has been released and our goal of taking an order or two of magnitude out of the cost of an autopilot has been achieved: it's $24.95!

Combined with a RC plane, this makes it easy to build a complete UAV for less than $500, which is really kind of amazing. As exciting as that it is, it's also sobering to know that a technology that was just a few years ago the sole domain of the military is now within the reach of amateurs, so we spend a lot of time educating our community on FAA regulations and safe and responsible flying (always under 400 feet, stay within line of sight, pilot always able to regain control).

As for my kids, well, the technology pretty quickly went over their head (in all senses of the word), but they're still involved a bit: video taking, pointing the ground-based telemetry antenna at the plane, laughing at Dad when his plane crashes and being bribed with ice cream if they'll tag along for yet another test flight. Someday, maybe one of them will want to get involved with some aspect of this again--programming, hardware design, even piloting. But until then, this counts as another project that started GeekDad and ended all Geek ;-)

eMusic data contradicts UK study

[From my inbox this morn, data contradicting the Will Page analysis]

“eMUSIC SALES DATA SUPPORTS "LONG TAIL² CONCEPT
Approximately 75% of Tracks Sold In 2008
Catalogue Crosses Five Million
NEW YORK and LONDON, Jan. 15, 2009 eMusic, the world's largest retailer of
independent music and the first to sell DRM-free MP3s in Europe, today
announced that approximately 75% of eMusic tracks sold at least once during
2008 based on a recent analysis of worldwide sales data.  This finding
supports the existence of retail's "Long Tail² and contradicts a November
2008 study released by British licensing body MCPS-PRS.  That study claimed
that of the 13 million songs on the internet, ten million did not sell a
single copy.
The theory that the internet enables businesses to sell a large selection of
goods in small quantities to a large population of customers at minimum cost
was popularised as the "Long Tail² by Chris Anderson in a Wired magazine
article in 2004.  eMusic, which does not sell music from the four major
record labels, is a successful example of the theory.
"eMusic IS the Long Tail,² said Madeleine Milne, eMusic Managing Director,
Europe.  "Our customers buy music beyond the mainstream top 40 because we
provide them with more context than any other major music retailer through
Web 2.0 features, insightful editorial content, a passionate subscriber
community and an easy-to-use and effective recommendation engine.  And, we
reinforce the music discovery experience with subscription pricing that
encourages experimentation.²
The company also announced that its catalogue has surpassed five million
tracks.  In the previous year, the company has added titles from Righteous
Babe, Independiente and Wall of Sound in Europe and in the U.S., Saddle
Creek, Barsuk, Domino and more. In November, eMusic announced the sale of
250 million downloads since establishing its current subscription model in
2003.
Madeleine Milne will speak at MIDEM in Cannes on Tuesday, January 20 on the
"Indies and the Digital Landscape² panel.”

A business model for open source hardware

The price of a typical gadget reflects two factors: the cost of making it and the price its inventor is charging for the intellectual property in it. Often the second can be many times the first (as in the case of an Intel processor chip, for example, which costs just a few dollars to make but can sell for hundreds of dollars).

But if you don’t charge for intellectual property, gadgets can get a lot cheaper, and potentially reach a much larger market. That’s the philosophy behind “open source hardware”, and it’s something I’m practicing in one of my side projects, an aerial robotics community/company called DIY Drones that does autopilots and autonomous blimps (one of our blimp controller board shown above). We give away all the intellectual property (schematics, PCB files, firmware, software, assembly instructions, etc) but sell the completed units, charging only a set markup on the cost of the hardware itself, which we disclose.

But what’s the right markup that leads to the lowest cost for consumers and still makes money for us? That’s what we set out to find out. With the help of some open source hardware experts (Lenore Edman, Limor Fried and Phillip Torrone, plus this good overview), here’s the business model we settled on:

The Forty Percent Model 

This model is based on a simple rule: transparency about costs and a choice between paying us to make the product or doing it yourself.

The basic process is that we list all the components and other costs of our product (an autonomous blimp in this case) and links to where you can buy them yourself, along with instructions on how to put them together. If you want to do it yourself, or perhaps already have some of the parts and don’t need ours, go for it!

But if you want us to make it for you (guaranteed to work), because it’s easier, safer, quicker, etc, we would charge you a 66% markup, which give us 40% profit.

(Aside: People often confuse markup and margin. Think of it this way: if a product costs $1 and you mark it up to $1.66, you have a 40% profit margin. $0.66 is 40% of $1.66.) 

Let's say you want to make your own company and compete with us, charging a lower markup to undercut us in price. Excellent—consumers win! All of our source code and PCB/schematic files are open source and licensed to allow commercial use, and if someone else is making the products, it costs us nothing. If you can make it cheaper or better than us, that’s great—the market will grow and we’ll have more people using our stuff. The only requirement of the license is that you credit us for the design and link back to us.

The Third-Party Catch

Okay, the above is a great model when you’re just selling from your own website. But what if you want your product sold through third-party retailers, who can collectively have far greater reach than any one company? Then the economics get a little more complicated because you need two 40% profit margins, one for you and one for the retailer.

So the markups now go like this: $1 –>$1.66 –>$2.76. Furthermore, you must avoid “channel conflict” by undercutting your retail partners, so you need to charge pretty much the same price everywhere, including your own site. So your $1.66 product must now be priced at $2.76, which is a 64% profit margin for direct sales.

We thought that was too high and would feel like a ripoff when we disclosed all the costs to our customers. What to do?

The answer came in limiting our pricing transparency—we wouldn’t disclose our volume discounts. Because we buy in bulk, our costs are actually much lower than the single-unit costs that we post and would be available to a DIYer. So it’s not total transparency, only as much transparency as we can practically offer given the fact that those discounts change from order to order and suppliers don’t want the exact size of those discounts made public.

So we’ll post single-unit prices available to all, even though we actually pay less for most items. We can’t disclose how much less, but it should average about to 30-40%.

The final model: Semi-Transparent Pricing

This is what we settled on:

1. Disclose the prices for components in single-unit quantities and link to sources people can buy from, but do not list our volume discount prices.
2. Set our direct sales price as the sum of the single-unit prices (call that “apparent cost”) plus 66%. However, our actual costs are lower due to our volume discounts, so our actual margin is higher. The point, however, remains: we will only charge 66% more than it would cost you to DIY.
3. Our wholesale price is the apparent cost, allowing retailers to add the 66% markup for themselves. Our own profit comes from the difference between the apparent cost and whatever our real cost is with volume discounts. The harder we push on those discounts, the more money we make.

And from my own mag yet!

From the issue of Wired that will be coming out in a week or so, this is one of those “Statgeist” funny infographics in the Start section. Think about it. It actually works incredibly well on all levels (the insult to the editor-in-chief notwithstanding):

The best selling MP3 album of the year was free

Cool news: The best-selling MP3 album at Amazon in 2008 was Nine Inch Nails’ Ghosts I-IV, which was released free under a Creative Commons license.

The album made more than  $1.6 million in revenue for NIN in its first week, and hitting #1 on Billboard’s Electronic charts, Last.fm has the album ranked as the 4th-most-listened to album of the year, with over 5,222,525 scrobbles.

The Creative Commons blog notes:

NIN fans could have gone to any file sharing network to download the entire CC-BY-NC-SA album legally. Many did, and thousands will continue to do so. So why would fans bother buying files that were identical to the ones on the file sharing networks? One explanation is the convenience and ease of use of NIN and Amazon’s MP3 stores. But another is that fans understood that purchasing MP3s would directly support the music and career of a musician they liked.

The next time someone tries to convince you that releasing music under CC will cannibalize digital sales, remember that Ghosts I-IV broke that rule, and point them here.

[Hat tip to Phllip Torrone]