The Limits to FreeConomics Alan Patrick Web 2.0 Expo Berlin

Today Discussion Reducing costs on the web 2.0 value chain, and the rise of FreeConomics Limits to FreeConomics Post Crunch Business Models

Reducing costs on the web 2.0 value chain, and the rise of FreeConomics

Limits to FreeConomics

Post Crunch Business Models

Today What is true – Metcalfe’s / Reed’s Law Aggregation Distribution Creation Customer Environment Archive Material Data Availability Bandwidth People

Today What is true – Moore’s Law / Learning Curves Aggregation Distribution Creation Customer Environment Creation Costs Archive Material Data Availability Bandwidth People Search & Aggregation Cost Hosting & Distribution Cost Equipment Costs

Today What is not true: Lower cost = Free ! Volume of Business P f C f Time At First…… Cost of Start 10x Lower Transaction Costs are non-zero - Losses are affordable via capital funding

At First……

Cost of Start 10x Lower

Transaction Costs are non-zero

- Losses are affordable via capital funding

Today Free fails due to transaction costs Volume of Business P f Time - Every new node has transaction costs, and they also follow Metcalfe’s law - Transaction Cost losses are eventually unaffordable via capital funding - Requires income..…usually fast FAIL!

Today The Hope…… Seedcamp 2008 Business Models via Wordle.net (Courtesy Guardian)

Today The Reality.… Total Online Ad Spend 2009 $50bn Google 27% Next 3 30% Next 20 ~ 25% Long Tail Post It Note Analysis: If everyone wants to be a $100m company… … .and there is about $ 10bn tops to share easily…. … it means, on average, there is enough for c 100 companies… ..Globally ! Chances are, it won’t be you eMarketer, Jefferies & Co, Broadsight Analysis 2009 2008

Post It Note Analysis:

If everyone wants to be a $100m company…

… .and there is about $ 10bn tops to share easily….

… it means, on average, there is enough for c 100 companies…

..Globally !

Chances are, it won’t be you

Today Paddle, sir ? Credit: Funnypix

Today The game theory of “Free” Price Demand P £ D £

Today The game theory of “Free” Zero Price Infinite Demand P £ P f D £ D f

Today But if everyone else dives to the bottom too ? Thanks to http://threeriversfishing.blogspot.com/2007/05/everybodys-doing-it.html

Today The liferaft game Price Demand P £ P f D £ D f Your Increased Share Everyone else’s little increased shares

Today Spending a fortune for users who pay nothing Zero Price Finite Demand P £ P f D £ D f Your spend to keep Your Share Everyone else’s spend to keep Their Shares

Today Deja View media.ebaumsworld.com/.../ShitCreek.png

Today The 4 FreeConomic Myths Aggregation Distribution Creation Customer Environment UnmeteredHosting & Distribution Open, Free Services SustainableFree content Others will give you stuff for free - forever

Aggregator Today A bit of theory – standard supply chain Buyer Goods Pay Creation Goods Pay

Aggregator Today A two sided market Buyer Goods Pay Supplier Goods Pay Pay

Aggregator Today Free Content Forever – a UGC market End User Goods Content Creator Goods Fund No Pay

Today “ Digital Sharecropping” ?

Aggregator Today A multi sided market Buyer Goods Supplier Goods Fund Advertise Pay No Pay

Today An example Video Video Pay Ads Create

Today An example - Act 2 Video Video Pay 4 % Sue Sue Goods

Aggregator Today “ Offset” Economics User Goods Supplier Goods Fund? ? Pay No Pay

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Today What is your Net Present Value? Cumulative Income Money Time NPV of Cumulative Income

Data may be free, but its everywhere in chains

Today Those who pay the pipers choose the tune

Today Bandwidth too cheap to meter? Volumes Payment £ >> 0 Capacity 1 D £ D free Time Demand Capacity 2

Today Or The End for Aggregators on a Cheap Ride? All utilities become metered at some point, typically when capital replacement costs become an issue

Today The User Shall Not Pay ? Cost of Media Production favours Cr*p in Free market Poor Quality drives out Good Quality from Market Quality customers - then advertisers - exit market 500 Channelz… … .an nuffinz on Cr*p Quality

Today Gamechange ?

Today Companies under risk (1) – acquisition costs Many Players, Sticky Unique, Sticky Many Players, Not Compelling Unique, Not Compelling Churn / Lifecycle of customers Competition for customers Marketing Cost Community Care costs

Today Companies under risk (2) – distribution costs Video, 1 to 1 Text, 1 to 1 Video, Social Net Text, Social Net Complexity Bandwidth & Hosting Transport Costs Community Care costs

Today Companies under risk (3) – no added value Entertain Dead Sheep Inform Enterprise Productivity Quality Quality Costs Reliability Costs

Today FTW?

Today Safe Harbour

Today “ Near Freeconomic” models (1) Razr & Blade

Today “ Near Freeconomic” models (2) - Freemium

Today Pay per Poke

Today Make it easy to advertise…. ABC Today Don’t Worry, Be Happy TV Lessons Predictability CPM / CPC Quality Content Good Metrics

Today … .pay to have Ads removed ? A recent IBM study found that the TiVo generation is officially online, with 11% of respondents happy to pay ' a little' to remove all advertising from videos. Consider the numbers: Google-owned YouTube pulls in something like 50m unique users a month; let's assume it can charge 'a little', a couple of dollars a month maybe - let's round it up to $24.99 a year for a 'premium user' service. Now let's assume that 11% of users sign up. That's a revenue stream worth $137m annually... Source: eMarketer (http://www.e-consultancy.com/news-blog/364572/one-in-10-will-pay-to-remove-youtube-ads.html)

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