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The Limits to FreeConomics Alan Patrick Web 2.0 Expo Berlin
Today  Discussion ,[object Object],[object Object],[object Object]
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 ,[object Object],[object Object],[object Object],[object Object]
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 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],eMarketer, Jefferies & Co, Broadsight Analysis 2009 2008
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
T&C TLC  When you post User Content to the Site, you authorize and direct us to make such copies thereof as we deem necessary in order to facilitate the posting and storage of the User Content on the Site.  By posting User Content to any part of the Site,  you automatically grant,  and you represent and warrant that you have the right to grant, to the Company  an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) to use, copy, publicly perform, publicly display, reformat, translate, excerpt (in whole or in part) and distribute such User Content  for any purpose on or in connection with the Site or the promotion thereof, to prepare derivative works of, or incorporate into other works, such User Content, and to grant and authorize sublicenses of the foregoing.
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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Web 2.0 Expo Berlin 2008 - Limiits to FreeConomics

  • 1. The Limits to FreeConomics Alan Patrick Web 2.0 Expo Berlin
  • 2.
  • 3. Today What is true – Metcalfe’s / Reed’s Law Aggregation Distribution Creation Customer Environment Archive Material Data Availability Bandwidth People
  • 4. 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
  • 5.
  • 6. 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!
  • 7. Today The Hope…… Seedcamp 2008 Business Models via Wordle.net (Courtesy Guardian)
  • 8.
  • 9. Today Paddle, sir ? Credit: Funnypix
  • 10. Today The game theory of “Free” Price Demand P £ D £
  • 11. Today The game theory of “Free” Zero Price Infinite Demand P £ P f D £ D f
  • 12. Today But if everyone else dives to the bottom too ? Thanks to http://threeriversfishing.blogspot.com/2007/05/everybodys-doing-it.html
  • 13. Today The liferaft game Price Demand P £ P f D £ D f Your Increased Share Everyone else’s little increased shares
  • 14. 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
  • 15. Today Deja View media.ebaumsworld.com/.../ShitCreek.png
  • 16. 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
  • 17. Aggregator Today A bit of theory – standard supply chain Buyer Goods Pay Creation Goods Pay
  • 18. Aggregator Today A two sided market Buyer Goods Pay Supplier Goods Pay Pay
  • 19. Aggregator Today Free Content Forever – a UGC market End User Goods Content Creator Goods Fund No Pay
  • 20. Today “ Digital Sharecropping” ?
  • 21. Aggregator Today A multi sided market Buyer Goods Supplier Goods Fund Advertise Pay No Pay
  • 22. Today An example Video Video Pay Ads Create
  • 23. Today An example - Act 2 Video Video Pay 4 % Sue Sue Goods
  • 24. Aggregator Today “ Offset” Economics User Goods Supplier Goods Fund? ? Pay No Pay
  • 25. T&C TLC When you post User Content to the Site, you authorize and direct us to make such copies thereof as we deem necessary in order to facilitate the posting and storage of the User Content on the Site. By posting User Content to any part of the Site, you automatically grant, and you represent and warrant that you have the right to grant, to the Company an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) to use, copy, publicly perform, publicly display, reformat, translate, excerpt (in whole or in part) and distribute such User Content for any purpose on or in connection with the Site or the promotion thereof, to prepare derivative works of, or incorporate into other works, such User Content, and to grant and authorize sublicenses of the foregoing.
  • 26. Today What is your Net Present Value? Cumulative Income Money Time NPV of Cumulative Income
  • 27. Data may be free, but its everywhere in chains
  • 28. Today Those who pay the pipers choose the tune
  • 29. Today Bandwidth too cheap to meter? Volumes Payment £ >> 0 Capacity 1 D £ D free Time Demand Capacity 2
  • 30. 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
  • 31. 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
  • 33. 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
  • 34. 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
  • 35. Today Companies under risk (3) – no added value Entertain Dead Sheep Inform Enterprise Productivity Quality Quality Costs Reliability Costs
  • 37. Today Safe Harbour
  • 38. Today “ Near Freeconomic” models (1) Razr & Blade
  • 39. Today “ Near Freeconomic” models (2) - Freemium
  • 40. Today Pay per Poke
  • 41. Today Make it easy to advertise…. ABC Today Don’t Worry, Be Happy TV Lessons Predictability CPM / CPC Quality Content Good Metrics
  • 42. 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)