Economics of Digital Communication

Supporting COM 548 – Fall 2009

(Leading discussion/1)Leveraging free (other than ads) – reflection on Free

with 5 comments

Before I opened the book, “free”, I think free is a meaningless word because I was assuming that nothing in this world is really free. In other words, Free in most circumstance is a marketing gimmick and method, at best. So, I was wondering what creative perspectives on free the author can give us? Is it going to be another boring marketing book repeating facts most people already know?
I was wrong, mostly. The author, Chris Andersen, clearly has a unique understanding on the issue of free. To explain free thoroughly, Andersen gave multiple meanings to free that free was mainly a marketing gimmick, which was based on the economics of atoms, shifting money from one to another rather than the other business model before the 21st century; and free has a whole new definition in the 21st century that it represents a entirely new economic model based on the economics of bits.

In the first session, Andersen introduces origins of free, and what does free imply in both atoms and bits economics. Also, Andersen gives us four models of free which are common in our daily life.

In the second session, Andersen further explains why free is no longer a marketing gimmick in 21st century. One fundamental reason I found in this book is because of the Moore’s law that a unit of computer processing power halves in price every two years, the price of bandwidth and storage is dropping even faster. Also, Andersen explains how does free represent a new business model which gives corporations chanllenges as well as opportunities. Examples used in this book are Microsoft’s reactions on new entrant Corporation based on free business model and Google’s sucessful free strategies.

As I see, Andersen’s perspectives on free are overall, persuasive and credible. However, he should be more clear in terms of leveraging and quantifying free, other than selling ads which is at the cost of user experience. Leveraging and quantifying free are not easy at all, especially for small to medium scale corporation. I’ve seen many corporations or individuals sucessfully taking advantage of free but still failing to make direct money from it. Companies in the dot-com business, such as facebook and Myspace, they have been sucessfully developing a great cyber community with lots of features, applications and users. However, these great things do not turned out in revenues or cashes. So, they are giving away all the resources they have for reputation which will not directly transfer into cash. So, what should they do?
As I see, there is no business model served as panacea in this case. The best way to do this is to learn from peers. For instance, Tencent is a very sucessful media company in China, not only in terms of their great reputation but also their capability to turn reputation into cash.
The secret lies in micro-transactions. Tencent operates the largest instant-messaging network in China and is one of the largest overall community. Tencent, which includes the QQ IM service, QQ Show (an avatar social network modeled after Korea’s Cyworld), and QQ Pet (virtual pet)—is the No. 21 Web property in the world and the second largest in China after Baidu (the two keep switching the No. 1 and No . 2 spots).
A big reason for the difference in this profitability is that advertising makes up only 13 percent of its revenues. The rest are in micro-transactions for digital goods, online games, and other services that Web surfers gladly pay for, as well as mobile services. Here is how Tencent’s revenues break down:
Internet services (digital goods, games, micro-transactions): $344 million (66%)
Mobile services: $110 million (21%)
Online ads: $67 million (13%)
Total Revenues: $523 million

All in all, free is definitely a new business model, other than solely marketing method, in the 21st century. However, with all these free tools, we still need to figure out sucessful ways to turn all these free “stuff” into real cash because free doesn’t automatically do that for you.

Written by gzliuzw

20 October 2009 at 5:13 pm

Posted in Abstract

5 Responses

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  1. Really funny. When I was in China, I were busy figuring out what would be the other profit except advertising. Studying in Kathy’s class, however, points the answer to China, again.

    In China, people are discussing what we should do in this “free” world. Physical commercial products suppliers are complaining about the transparent price online; traditional media companies, such as newspaper and TV stations, are complaining about the instant updates online and decreasing advertising income caused by online ads; and new-born websites yell they can not find a efficient way to make profit in this “free” world.

    It seems that no one notices the ubiquitous but really profitable community tool–Tencent. Tencent provides free product–QQ or IM, but gain their profits from an auxiliary service. A large amount of Chinese don’t pay for its upgraded service often. However, it is true that almost every one who uses it pay for the service at least once.

    Since we depend a lot on that tool–almost all of our friends and relatives are included in it, its upgraded service become scarcity, if you want your virtual image to be ideal or you can win a lot in its virtual relaxing games. You don’t have to pay a lot, but you gain your satisfaction from this scarcity.

    But I think, this virtual profit models only exist in this scarcity resources.

    As for some information, such as news, software or music, which can be found easily online, this model can never work. Advertising seems to be their mainly income. Therefore, our attentions will become scarcity, since information is exploding.

    Li Li

    21 October 2009 at 11:31 am

  2. I am in complete agreement that there seems to be a lack of economic sustainability with a lot of the “free” going on today. For example, services such as YouTube are free and not making money. As you mentioned, MySpace is crumbling and losing money. And Twitter has yet to show a dime in revenue.

    However, the strategy of most of these sites may be to spend years building a user base out of free, and then slowly become financially positive. For example, Facebook is now profitable:

    And I may be proven wrong with YouTube, as Google is finding ways to report their broadband bill for YouTube as ZERO:


    22 October 2009 at 9:01 am

  3. I think the Tencent example is very valuable. In many ways Tencent is a pioneer and leader in the forefront of digital media.

    The Baidu model will more closely resemble that of Google, which many will argue is uniquely superior. Tencent, on the other hand, can not count on ad revenues alone. So it is more representive of a general business model.

    Tencent’s revenue breakdown is very interesting. The subject of micro-payment is counter-intuitive to Anderson’s concept that free is so much better than cheap. Note this is in China, where online payment is not nearly as mature and well-accepted. What makes so many users willing to open up their wallets (no matter how small an amount).

    Tencent’s example demonstrates that “free” is not the only model. We can speculate that in certain circumstances micropayment is a better model, as in the case of iTunes.

    I think the whole subject will need another book to analyze and discuss.


    26 October 2009 at 6:47 pm

  4. We can also see the similar business model of online games. Playing the game is free, but users need to pay for virtual items, like avatars. I think it’s similar to Anderson’s Freemmium. Users pay to enjoy some items others don’t have. This model relies on users’ loyalty to the service. Therefore, only a small percentage of people who have high loyalty will pay. It will be profitable if number of total members is huge enough.


    2 November 2009 at 12:09 pm

  5. Pretty website!


    6 June 2010 at 4:00 pm

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