This is the first lecture in Stanford BUS 21 Monetizing Free: How to Make Money b y Giving Things Away

1. Stanford BUS-21
Martin Westhead
Mastering Marketing
Introduction
How to make money
by giving things away

2. Introduction
 Free can really make money
 It is controversial
- Is free killing other industries and businesses?
- Does Freemium work?
 What do we mean by Free?
 A Brief History of Free
- Free Lunches
- Jell-o, King Gillette
- Free Radio
 New Free
- New kinds of Free and
- Models for making money from them
- What free products bring you

3. Free Monty Python
November 2008

4. Free Monty Python:
Results – 3 months later
 Monty Python DVDs -
No. 2 on Amazon
 230x (23,000%)
increase in sales
- Reminded people how
much they loved MP
- …and they wanted more.
 Cost to Monty Python:
- $0
- Plus a little curration
work

5. Free businesses make
money
$8B (10 yrs)
$60B (14 yrs)
$0.7B (8 yrs)
Revenues for 2013
$1.5B (11 yrs)
$0.65B
(10 yrs)
$0.16B
(11 yrs)

6. FREE IS CONTROVERSIAL

7. Federal Trade
Commission Guidelines
 Only guide written for the use of a
word in commerce: “Free” (1971)
 Explain free offers
- Obligations a consumer has
- Is there a catch?
http://www.alllaw.com/articles/legal/article11.asp
http://www.gpo.gov/fdsys/pkg/CFR-2011-title16-
vol1/pdf/CFR-2011-title16-vol1-part251.pdf

8. Is Freemium Dead?
Why the Freemium Model
Doesn't Work – Mashable
Freemium has run its course
— Tech News and Analysis
– Gigaom
When Freemium Fails - WSJ

9. Technology hype curve
(Freemium)

10. Two sides to free

11. Village Voice
 1996 gave in and went free
 2005 New York magazine
 Considered “killed” by free
The Voice from Beyond the Grave: The legendary downtown paper has been a shell of
its former self since it went free

12. The Onion
 Started in 1988
 Free satirical broadsheet
 Expanded to
- 10 cities,
- millions of web hits
- TV production
- Feature length movie
 Free and continues to thrive

13. So, does FREE mean low
quality?
 Free saved the Village Voice
- Circulation had fallen to 130K from 160K
- Now at 250K
- Free saved it
 But there is a perception of diminished quality
- Feelings are relative not absolute
- The Voice used to cost and it does no longer…
- The Onion was always free
- Free bagel is stale – Free ketchup is fine

14. WHAT DO WE REALLY MEAN BY
FREE?

15. Definition

16. The Two Meanings of
“Free”
 Gratis
- No Charge
- Free as in “Beer” (or Lunch)
- Primary focus of this class
 Liber
- Freedom
- Free as in “Speech”
- Will mention in passing e.g. discussion of Open Source

17. The Two Extremes
of $0 Products
Cost built in
“No such thing as..”
No cost to me
“truly Free Lunch”
Buy on get one free
Free Shipping
Free gift inside
Free phone with contract
Google Search
Wikipedia
Facebook
YouTube
Flickr
Linux
Dropbox

18. BRIEF HISTORY OF “FREE’

19. Free Lunch
 1870–1920 – free lunch with purchase of a drink
- Saloons and bars in the US
 1891 Rudyard Kippling
- Not just eating but “wolfing” on food
- Overwhelming enthusiasm
A free lunch-counter is a great leveler of classes, and when a man takes up a position
before one of them he must give up all hope of appearing either dignified or
consequential. - 1875 The Times
The repast included "immense dishes of butter," large baskets of bread, "a monster
silver boiler filled with a most excellent oyster soup," "a round of beef that must have
weighed at least forty pounds,”
http://en.wikipedia.org/wiki/Free_lunch
 Lunch was typically worth 6x the drink price but…
- Patrons often stayed for more drinks
- Came back at other times of day

20. Jell-O
 1854 Peter Cooper
- Obtained patent for powdered gelatin
 1895 Pearl Wait
- Added flavors, color, brand
- But still had trouble marketing it
 1899 sold to Orator Woodward
- Still struggled to sell it
 1902 with marketing chief, William Humelbaugh
- Free samples too expensive
- Instead give away free information – recipe booklets
- Supported by a newspaper ad
- Distributed by a travelling sales force
 By 1906 hit $1m in annual sales

21. King Gillette
 Invented disposable razor
- Anti-capitalist
 Sold cheap razors to partners who
bundled them free
- Banks “save and shave”
- Gum, Tea, Coffee, Marshmallows
 Created a demand for blades
- Recipes created demand for Jel-O
 Same business model used today:
- Printers – cheap printers, expensive
cartridges
Invent something that people
use and then throw away –
Advise from Gillette’s boss

22. The Radio Business
Model
 1925 Dawn of the commercial radio industry
- Distance fiends
 No one knew how to pay for content
 Content paid for by radio manufacturers (e.g. RCA)
 Radio Broadcast magazine competition
- 800 people entered, ideas included
- Listener contributions (NPR)
- Government licensing (BBC)
- Pay for listings
- Advertizing suggested but not popular

23. Radio Advertizing
 1926 NBC’s Frank Arnold
- Determined to give radio advertizing a try
- “Fourth dimension” – print, flyers and billboards
- “Guest in the listener’s home”
 Problem with radio interference
- Local station signal drown out distant station
- Creation of the FCC
- Not enough local advertizing
 Solution came from AT&T
- National radio network
 Big audience critical for advertizing

24. Multi-party business
model
Network
Audience
Advertiser
Content
Producer
Content $
Content
Attention
$

25. NEW FREE AND WHY ITS GOOD

26. How is 21st century Free
different?
 Digital/Online Free is different
- Key costs are falling rapidly
- Feasible to round down
- Technologysupports mechanics…
- E.g. subscription billing management
- Consider customer lifetime value
- …and massive volume
- Needed for advertizing, Freemium
- Anything where network effects are important
 …but giving things away is easy, how do you make
money…

27. Free Models
1. Direct cross subsidy
- 20th century free
- Buy 1 get one free / Free toy inside
- (Not really free)
2. Platform
- User get service for free
- Someone else pays
- Access to users
- Data of users
3. Freemium
- Most users get free product
- Some users pay for premium features
4. Donations / Pay-what-you want
- Users decide how much the product is worth
- Some get it for free

28. Benefits of Free
 Free can lead to rapid growth
- Volume makes more business models work
 Accelerate technology adoption
- Quick way to cross the chasm
 Mindshare markets of
- Reputation
- Attention

29. Technology adoption

30.  Tumblr – lightweight blogging platform
- 300M monthly uniques (according to Yahoo)
- 100M Blogs
- No revenue
 Bought by Yahoo for $1.1B – Why?
1. Value of “reach”
- Tumblr moved Yahoo from comscore #3 to #1
2. User data
3. Future monetization opportunities
- Yahoo is good at Monetizing content
- E.g. Native ads,
Mindshare effects:
Why did Yahoo buy Tumblr?

31. Mindshare effects:
Pricing a glossy magazine
 3 prices
1. Free online
2. $4.95 at newsstand
3. $10 for 1 year subscription
 1 & 2 are purely economic
 Subscription price is a balance
- Cheap to increase subscriptions
- Expensive to show commitment to advertisers
- It’s a loss-leader, but can’t go to $0

32. Free is like an
Economic force of gravity
Near zero marginal cost of
reproduction
Price of copies will fall to $0

33. My Free Experiment
The Flower of Scotland
 Fantasy Sci-Fi story set in an
alternate Scotland
- Terrorist fighting for Scottish
Separatism
- Mari McLeod a barmaid on
Skye – only one who can save
the world
 Free PDF on Website
 Free books for class
 One condition
- If you like it – please post an
Amazon or Goodreads review

34. Summary
 Free can really make money
 It is controversial
- Is free killing other industries and businesses?
- Does Freemium work?
 What do we mean by Free?
 A Brief History of Free
- Free Lunches
- Jell-o, King Gillette
- Free Radio
 New Free
- Models for making money from Free

35. Next week
 The Psychology of Free
- Why Free works
 Model: Direct cross subsidies
 Guest speaker:
Peter Fishman - Principal Analytics
Manager, Yammer, Microsoft