Software Startups Realizing That Cookie-Cutter Freemium Doesn't Always Work Well

from the but-don't-miss-the-point dept

A few weeks ago, we ran a webinar about "using free as a part of your business." One of the speakers was Phil Libin, from Evernote, who gave a very detailed presentation (you can view the whole thing here) about how Evernote has turned "freemium" into a success story. I found his points fascinating, in part because I've actually never been a huge fan of the "freemium" model for software -- where you get some basic features for free and then to use more, you have to pay. I don't talk about "freemium" very often, because I'm not convinced it's a strategy that works in most cases. It can obviously work in some specific cases, as Evernote has discovered, but it can be tricky to apply elsewhere.

There are a few reasons for this. First of all, the basic concept of "freemium," involves some rather arbitrary choices. You provide "x amount" of storage/users/projects/features/etc. for free, and you hope that people will pay for increased storage/users/projects/features/etc. But where do you make the cut off? That's quite tricky to figure out, because there's no fundamental reason for the cutoff points. When we talk about using free in a business model, we generally focus on freeing infinite goods and selling the scarce goods, but "freemium" offerings for web services don't tend to make any such distinction. The "free" versions are basically given away as marketing in the hopes that people will upgrade.

But in many cases, that doesn't work for a few key reasons: first, you now have incentives to make the "free" offering worse. That's never a good thing. In the effort to get people to sign up for the premium version, you have bad incentives. You don't want to make the free version "too good" as then people won't feel the need to upgrade. I find that to be a bad incentive structure in many cases. On top of that, there's a part of this that's a "give it away and pray," type strategy. Yes, you're offering more features, but figuring out that right mix of what's free and what's paid is really incredibly tricky, and you simply have to learn to accept, as Libin has done, that the vast majority of people using your app are just there for the free version. For Evernote, one of the keys to making it work is that the app itself becomes more and more useful, the more you use it. That leads to greater conversions over time. That's honestly rare for most apps which have a more or less steady-state usefulness.

The problem is that while the "free" version is supposed to act as "marketing" for the paid version, it's often wildly mis-targeted. Many people use the free version solely because it's free, and have no interest in signing up for the paid version at all. So that's not the right target market. If you're going to charge for something, you need to give people a real reason to buy, which often is offering something entirely different that is enhanced by something free, rather than limiting something free.

Unfortunately, however, the whole concept of "freemium" (including the catchy term) has received so much attention that many startups now jump right in with a cookie-cutter "freemium" offering -- and now they're learning why that's a mistake. Ross Pruden alerts us to a really interesting article from an entrepreneur who went the cookie-cutter freemium route, and eventually backed away from it and saw his revenue shoot upwards. He then explores a few other companies that have gone through similar evolutions, and saw the exact same thing happen.

This isn't surprising, given the problems described above about "freemium." Unfortunately, however, the author of that blog post, Ruben Gamez, jumps to the wrong conclusion that "free plans don't work." That's taking it a bit far. Freemium type plans can work in some cases, and "free" by itself can work wonders, if done right. But that tends to involve using free to enhance the value of something else, rather than using it as a sampling.

18 Comments | Leave a Comment..

How Microsoft Missed The Disruptive Innovation In Paid Search

from the missing-the-details dept

We recently highlighted a part of one of Paul Graham's recent essays that told the story of how Yahoo missed the paid search opportunity, by fearing that it would cannibalize all the revenue coming in from its "portal" business. As we noted, it was a great example of why big companies so rarely notice disruptive innovation, even when it's handed to them. Ali Partovi picked up on the same part of Graham's essay, and wrote a similar story about why Microsoft also failed to see the opportunity in paid search, despite the fact that Partovi and others were pushing for it, both from the outside, and then inside (after Microsoft bought his company, LinkExchange):

From 1997 to 2000, we visited Yahoo more than a dozen times to pitch the Keywords idea: pay-for-placement, keyword-targeted text ads on the side of search results. Despite repeated rejection, we pitched every member of Yahoo's executive team multiple times, each time finding new ways to present the concept and new data to support how profitable and huge the opportunity might be, all in vain....

In late 1998, Microsoft bought LinkExchange for $265 million, telling us they liked the "Keywords" vision. As Microsoft employees, we continued pitching the Keywords deal not only to Yahoo, but also to the up-and-coming Google. I wasn't surprised to find that these companies were wary of partnering with Microsoft. My greater surprise was the seemingly insurmountable resistance we faced within Microsoft itself.

After almost two years of fighting bureaucratic obstacles, we finally got the green light to launch "Keywords" as an MSN Search feature in 2000. It started growing rapidly, and the MSN Ad Sales division feared (correctly) that it would cannibalize banner ad revenue. They therefore decided (incorrectly) to shut down Keywords after a few months. If Yahoo's demise stemmed in part from being ambivalent about technology, perhaps Microsoft's error stemmed in part from being ambivalent about ad sales: we couldn't get the senior execs interested enough to intervene.

Both cases highlight the same basic point: the claim that big companies will automatically recognize a disruptive innovation and "copy it" is wishful thinking in many cases. Time and time and time again we see stories more like the ones above, where truly disruptive innovation isn't just ignored, it's actively blocked at big legacy companies who fear it cannibalizing an existing business, rather than recognizing the opportunity.

In the end, both Microsoft and Yahoo failed to jump into keyword search in any serious way until long after Google established it as a giant business. At that point, both tried to play catch-up, with Yahoo buying Overture and Microsoft rebuilding its product -- and as we've also seen over and over again, by waiting that long, it was too late. The two companies still haven't come anywhere close to catching up in market share, even if the technology is considered to be about equal at this point.

So the fear of some big company coming out and just "copying" you is generally overblown. If your idea is really disruptive, they probably won't recognize it, and by the time they do, you'll have a big head start, and their attempts to copy what you did will prove a lot more difficult than they expected.

43 Comments | Leave a Comment..

Why Waiting Until A New Business Model Is Proven Doesn't Work

from the it's-why-you-need-to-start-early dept

One of the criticisms of our business model discussions here is something along the lines of "but how will this replace the $x billion already made." Or, alternatively "well, how can you expect anyone to switch until you show that it will replace what they already are doing?" The answer, of course, is that by the time you know that a new business model will work well enough, it's too late. It means one of two things have happened: either a competitor has figured it out and taken over the market or your existing business model is too decimated to have enough left to make the switch. This is the nature of so-called "Creative Destruction."

This point is highlighted in a recent NY Times article about how Netflix tries to avoid creative destruction by experimenting with new models well before they need to, and well before the old model has lost steam. The article compares Netflix to Blockbuster, which highlights this perfectly. Even though Blockbuster did see the success of Netflix and how the market was changing, it was very slow in embracing it, and never did so whole-heartedly. And even though it has a service quite similar to Netflix's, it has a lot fewer users and is struggling financially.

The article highlights this with Kodak as well:

Kodak saw digital photography coming. It even invented some of the earliest such technology, in 1975. Kodak just misjudged how fast consumers would give up on film and start snapping up digital cameras. And it misjudged its ability to outrun both trends.

Indeed. In 1997, I did work with a professor who was consulting for Kodak, and we did a detailed report on why Kodak needed to embrace digital now. The response? Kodak told us "yes, yes, digital is important, and we'll be ready to switch, but right now, chemical processing of photos is so much cheaper, there's no reason to change yet." And, they were right that it was a lot cheaper, but they were wrong about the time to start switching.

There are a few reasons for this:

1. Companies always misjudge the speed of trends, especially the rate of change. Things like digital revolutions start out slowly, and the quality seems bad. So companies in legacy businesses figure they have a long time to make the change. But the rate of change increases rapidly, especially once it "tips" and reaches a critical threshold. At that point, if you're not fully invested in the new business, you're, way, way, way behind.
2. It's difficult to really understand the new technology/market unless you're playing deeply in the space. This is the same thing we noted with people who claim that patents are necessary because once a good idea comes along others will just copy it. In many cases, that's not possible. That's because the truly innovative ideas require some real hands-on experience. Watching others do it is not the same thing.
3. It's very difficult, culturally, to build up businesses that cannibalize your existing cash cows. The skill sets may be different, and people begin to recognize that these "new" people may be working on projects that replace the "old" people. That leads to a lot of resentment and makes it really difficult to actually hire the good new people -- since they recognize they're going to face those kinds of institutional restrictions. For them, it's just easier to go to a "native" company that has bet entirely on the new offering.

All of this impacted Kodak:

Even when Kodak wanted to change, it couldn't, said Mr. Lucas, who has studied the company. "It was so large and had been so successful for so long that it was difficult to bring in people with a digital background."

Kodak has had to take draconian steps to survive. It closed labs and factories and laid off 60 percent of its staff of 60,000.

Indeed, Kodak is impressive in that it actually has been able to shift... even if it took a lot longer than necessary, and even now it's considered to remain behind other players in the space.

This is, of course, the typical Innovator's Dilemma, but it helps explain why so few companies are able to survive the innovator's dilemma. Even if they know about it, they think they can wait. They think that they shouldn't invest heavily in those new technologies and new markets until there's a clear path to profitability, or a clear plan for how it "replaces" what's already there. The problem is that by the time they have the answers to those questions, it's too late.

37 Comments | Leave a Comment..

Yes, People Can Comment On Content Business Models Without Having Produced Hit Content

from the appeal-to-false-authority dept

We've seen it over and over again in the comments on Techdirt. We'll talk about the impact of copyright or patents, and a lawyer will claim that unless we're an IP lawyer, we should not comment. Or we'll talk about content business models for the music or movie industry, and someone will claim that until we've had a hit song or movie, we should not comment. The argument always struck me as a curious one. After all, just because you don't have a law degree, doesn't mean you can't understand copyright law. In fact, since we're usually talking about the economic impact of copyright law, it seemed like the easy retort is that if those lawyers didn't have an economics degree, perhaps they shouldn't be talking about the impact of copyright law either. Of course, that's silly. The fact is, anyone who understands the basic issues has a right to give their opinion, and back it up with facts and discuss their positions. But saying that someone who doesn't have "x degree" or "y experience" is usually a response from someone who doesn't want to argue the actual details.

Filmmaker Ross Pruden just wrote a blog post discussing this, where he pointed out that you don't need first-hand experience to understand details and make a proper judgment call about how to run a business. When we talk about music or movie business models, I'm not suggesting I know how to make a hit song or movie. But I can look at the economics and suggest what makes sense from a business perspective given the market today. Just as Ross can look at the market and realize that how things are done today don't make as much sense, even if he hasn't (yet) made a "commercially successful film."

This whole appeal to a false authority is a bit annoying, because it's an easy way to dismiss the messenger without addressing the message. I doubt it will change, but it was nice of Ross to call out this point. Having created a hit song doesn't mean you know how to navigate a changing market. Knowing how to produce a blockbuster movie doesn't mean you know how to use the internet to your advantage. Knowing how to get a patent doesn't mean you know how patents impact innovation. Unfortunately, some people think that if they know one aspect of these things, only they are allowed to comment on the business models or economic implications. That's simply not true -- and those who go there tend to be in denial about the market challenges they face.

171 Comments | Leave a Comment..

Pay What You Want Works Much Better With A Charity Component

from the empirical-research dept

We've talked a lot about different types of business models with "pay what you want" being a popular one that comes up often. I still think there are some problems with it, but there's growing evidence that it can work very well. When Radiohead got a ton of attention for using it, the band made more from the digital "donations" than any of its previous albums' digital releases -- even though plenty of people still chose to pay nothing, and the average price was a lot lower than standard. But average price is kind of meaningless when judging the success of such a program. It's really the net that matters, and on that front, Radiohead did quite well.

We've seen the general model work elsewhere as well. A taxi driver had some success with it, as have many musicians who have used it with merchandise at shows. Even Panera Bread is testing it out. Earlier this year, there was a lot of attention paid to the really, really successful story of the Humble Indie Bundle that did pay what you want for a group of video games. That had an added component as well. Some portion of what you paid could be designated to go to specific charities (EFF and Child's Play).

It seems that the folks behind the Humble Indie Bundle are on to something.

A fascinating new study has shown that "pay what you want" offerings seem to maximize the net take for those using it if they include charitable giving. The study was done at an amusement park, where people could buy a photo of themselves on a roller coaster, and four different situations were tested: (1) the standard "pay a fixed price" (2) a straight "pay what you want" (3) fixed price with part of the money going to charity and (4) pay what you want with part of it going to charity.

What's amazing is that the fourth one was the best one in terms of the net amount to the seller (yes, after giving the portion to charity). Sales were much higher and the net dollar amount to the seller was much higher than the straight "pay what you want."

Specifically, when people were asked to pay the flat price of $12.95, only 0.5% did. The $12.95 price, where half went to charity, barely increased the number of buyers. Then only 0.57% of people bought, and (obviously) after the charities cut was taken out, the net was way down. If it was pure "pay what you want," a lot more people bought: 8.4%, but the amount was much, much lower (average: $0.92). In terms of overall revenue, the gross is up, but the net definitely depends on the cost of the photos. If there's no marginal cost, then net revenue would go up as well (what Radiohead found). But in the final scenario, where it was pay what you want, but half went to charity, the overall reaction was the highest. 4.5% bought, and the average price was $5.33. Even when you take out the half going to charity, the revenue is much, much higher.

Now, there are a few caveats I can think of here. The $12.95 price appears to be pretty high. It's entirely possible that there could be another, lower, price that would do a better job maximizing profits. Perhaps at $5, the results would be somewhat different. So I'd definitely like to see more research done with different pricing points. Separate from that, I also find it... odd, that the yield rate when charity is added to pay what you want seems to be almost half of the pure pay what you want. Perhaps I'm missing something, but I can't see how that makes much sense. The "cost" to the user is the same, effectively, and clearly a lot of people value it a lot more. But nearly half don't value it at all? That seems... odd. Perhaps there are some more details that are missing from the summary of the study.

Overall, though, a fascinating experiment that shows how helping a charity can not just be good for the charity, but can also maximize your own efforts. Just don't tell that to the financial columnist who thinks charitable lemonade stands are destroying America.

16 Comments | Leave a Comment..

Google Tries To Make It Easy For Anyone To Create Android Apps

from the will-apple-do-that? dept

While Apple continues to want to act as a major gatekeeper for apps on the iPhone, Google continues to go in the other direction with Android. Its latest trick is to release a super simple GUI interface for designing personal apps for Android phones, with the idea of making it easy for anyone to create some software. This has been the holy grail of quite a few projects over the years: this concept of "situated" software. To date, most of the attempts to create such programming tools haven't gone very far (or, at the least, haven't been as widely adopted). Most of those tools have been for the desktop or the web, so it will be interesting to see if it's a different situation for smartphones. I would imagine one of the biggest barriers is mental, not technical, where people who just aren't programmers never even think of the idea of creating their own software. Still, it will be worth watching to see if anything useful comes from this offering. I like the fact that one student testing the program created a "LifeAlert-type" "Help, I've fallen!" app already, which uses the accelerometer on the phone to sense if someone is falling, and then automatically dials a number for help...

40 Comments | Leave a Comment..

Lack Of Food Copyright Helps Restaurant Innovation Thrive

from the yet-again dept

We've discussed over and over again how a lack of copyright protection in the fashion industry helps that industry thrive, because it helps disseminate fashion trends faster, helps better segment markets and (most importantly) gives designers more reasons to keep working on the next thing to stay ahead of the competition. It's a great example of a creative industry that is highly competitive and highly innovative without copyright. Other industries where we've seen similar things include the magic industry and stand up comedy. At times, we've also mentioned the restaurant business, but haven't looked at it in any great detail.

Reader Ephraim points us to a recent post at the Freakonomics blog that highlights how the restaurant business absolutely thrives creatively, despite a lack of copyright protection. The main example: the rise of Korean taco trucks in LA. As you may or may not know (and trust me, you're better off if you are familiar with this trend), a few years back, some enterprising folks set up a Korean taco truck in LA called Kogi. It quickly became a huge sensation, in part because the food is awesome and in part through smart marketing, including being one of the first food establishments to actively embrace Twitter.

But what happened next is quite interesting. Throughout LA (and now around the country) there's been an explosion of Korean taco trucks. And, it's not just limited to trucks. As the article notes, the large chain Baja Fresh is now offering Korean tacos as well. Believers in strong copyright have trouble explaining why this happens. According to them, without copyright as an "incentive to create" people won't innovate because they can't be rewarded, but that's not what's happening at all:

As readers of our past posts know, the conventional wisdom says that in a system like this no one should innovate. Copyright's raison d'etre is to promote creativity by protecting creators from pirates. But in the food world, pirates are everywhere. By this logic, we ought to be consigned to uninspired and traditional food choices. In short, the Korean taco should not exist.

But the real world does not follow this logic. In fact, we live in a golden age of cuisine. Thousands of new dishes are created every year in the nation's restaurants. The quality of American cuisine is very high. The so-called molecular gastronomy movement has innovated in myriad (and often bizarre) ways that have filtered down to more modest restaurants all over the world. Television shows such as Top Chef and Iron Chef challenge contestants to mix and match improbable combinations of ingredients with little warning or time. Our contemporary food culture, in short, not only offers creativity; it increasingly worships creativity--and many of us worship it right back.

So why isn't the "theory" matching up with reality? The author's come up with a few theories, but it seems to me that the biggest reason is the same one why the arguments that copyright is needed to get people paid is so wrong: they're not selling copyright. They're selling a product. And you can still sell your product whether or not someone can copy you. In fact, if someone can copy you, you have incentives to keep innovating and adding extra value that the buyer can only get from you -- such as prestige or ambiance or experience.

The authors also point out another reason (similar to the one we've noted about comedians), which is that there are social norms involved as well, focused on reputation. If you're seen as just copying the works of others, you are looked down upon, and reputation is quite important in these fields. And, of course, reputation and social norms function just fine without copyright.

The authors of the blog post conclude with a dead-on assessment:

The key point is that culinary creativity is flourishing, and it doesn't depend on copyright. Like fashion, food challenges our preconceptions about the economics of innovation--and perhaps should challenge our legal rules as well.

Pretty much everywhere we look, when we find industries or fields where copyright doesn't exist or isn't relied upon, we see the same thing: much higher levels of competition, more and faster innovation and an overall thriving industry. This is the kind of actual evidence that never seems to be discussed in debates over strengthening copyright laws, but should be. It also explains the supposedly "counterintuitive" research that has shown as there has been less respect for copyright in movies, music and books... the rate of production for each of those has increased as well (again, contrary to what copyright system defenders will tell you).

At what point can we put the "without copyright no one would create new content" statement into the mythbin of history?

213 Comments | Leave a Comment..

Is It Better To *Require* Or *Request* Something In Return For Free Content?

from the the-debate-goes-on dept

Over at Music Think Tank there's a blog post provocatively titled: Why Music Should Never Be Given Away For "Free", which brings up a point I've heard multiple times from various music industry marketers (many of whom I generally agree with). They say it is okay to give away music without a monetary transaction taking place, but instead you should demand something else in return. In this post, he suggests requiring an email address, a retweet or a Facebook share in order to get free music.

I definitely understand the general rationale for this line of thinking, but I'm afraid that people are going too far with it, and it's actually harming the value of free music in some cases. Obviously, it's great if you can get something (monetarily or not) in exchange for the music, but putting up a barrier can also be harmful. First of all, if it's truly a brand new fan who hasn't heard your work, they might not be willing to commit to you in that way. Especially when it comes to Tweeting or Facebooking an artist. If I don't know the artist, there's no way I'm mentioning them to all of the people who follow me on various social networks. On the flip side, when I do see friends who make those kinds of Tweets, they feel like spam. They're not at all convincing and they don't feel authentic. They feel forced. Honestly, when I see people post social networking messages in exchange for free tracks, it actually makes me less interested in the musical act, because I feel like they need to beg for attention, rather than letting the fans organically give them attention.

Finally, part of the reason the whole "free music" world exploded the way it did was because of the massive simplicity and lack of friction in music sharing, which made music discovery and promotion much more seamless and easy. Putting required friction back into the process seems like a mistake, and will likely just drive fans (or potential fans) either to other artists or back to the same file sharing systems that remove that friction. That doesn't help anyone.

So rather than requiring an explicit exchange, it always seems a hell of a lot more effective to offer the content for free, but ask for the exchange as a voluntary setup: "If you like these songs, tell your friends or sign up for our mailing list" or something like that. This way it's not forced. It's not inauthentic. It's not friction. It's about trusting the listeners, rather than trying to force them to act in a certain way.

55 Comments | Leave a Comment..

Newspapers Doing Well With Membership Clubs Instead Of Paywalls

from the join-the-club dept

One of our biggest complaints with news publications that insist "a paywall is the answer" is the fact that they never seem to actually add any more value to their publication that makes it worth paying. They're so focused on getting people to "pay for content," they miss the fact that there's plenty of competing content, and the real focus should be on providing value that builds a community. Thankfully, not all newspapers are making that mistake. Bill Mitchell, at Poynter, has a post about a new study looking at newspaper business models that both highlights that straight paywalls need to be about more than just paying for content, but also which highlights the success some publications are having with membership clubs, which specifically provide additional value behind the content for those who are willing to subscribe:

Take, for example, the street-level bookshop at Politiken, the leading newspaper in Denmark. I stopped in there one drizzly Saturday morning last Fall after teaching in Poynter's Scandinavian Summer School. I picked up a couple of travel guides and an English language version of a popular Danish novel. But I paid my bill and left the shop oblivious to the range of products and services available to Politiken subscribers via its Politiken Plus loyalty program.

"We can say 70 percent of (our subscribers) use Politiken Plus during the year," the paper's sales and marketing director, Poul Skott, told the authors of the WAN report. "The more products we have the better ... the harder it is to say good-bye to the newspaper. It's going to hurt a bit, because you can only get a Plus card as a newspaper subscriber."

This Google translate page will give you a sense of what the program offers, including special offers on travel, restaurants and theater, and how the activities and deals of Politiken Plus are integrated into the newspaper.

This actually fits in well with some of the suggestions that people came up with back at the Techdirt Saves* Journalism event last month, highlighting how publications can focus on building up services for the community which keep them loyal to the publication and the community itself.

It sounds like the early results from such programs suggest they work well (or, at the very least, better than comparable newspapers that don't use them). Still, reading through the analysis, it still feels like most publications are looking at these programs as ways to "retain subscribers," not as a central reason to buy. That is, they're still focused on "selling the newspaper" with this is a bonus add-on, rather than trying to sell this bundle, which is made more valuable by getting the news as well.

10 Comments | Leave a Comment..

The Lack Of A 'Golden Ticket' Business Model Doesn't Mean You Give Up And Go Home

from the how-do-these-people-keep-their-jobs? dept

This one is a bit surprising. Following the recent nutty statements from Prince, Kara Swisher has decided to take the contrarian position to explain why Prince might not be so crazy after all. Her reasoning is that she's spent several days down in LA talking to entertainment industry execs (her first mistake), and they seem to agree with Prince that the internet is a darned problem. Of course, to some extent, that's like asking the leading buggy whip makers their feelings on automobiles. Just because they haven't figured out a way to thrive doesn't mean that the automobile revolution is "over."

After spending several days here in Los Angeles this week, talking to execs, talent and others who toil in the entertainment industry--I can't say what I am hearing is that much different in terms of the continuing frustration with the lack of decent business models to replace the ones that have worked for so long and been so lucrative for the entertainment and media industry.

This is how disruptive business models work. The disrupted whine and complain about how the disruptors haven't shown them how to continue making the same monopoly rents they made in the past. But that, of course, ignores the nature of disruption. Disruption doesn't work by having someone come along and show the legacy players how to exactly replicate their old profits. It's the exact opposite of that. Disruption is when others figure out how to break down the barriers to do something more efficiently, and undercut the old business model. But that doesn't mean that there's anything wrong for the underlying benefit that people get.

More entertainment content -- movies, music, books -- are being made today than ever before. Anyone bitching and complaining about how the internet is "destroying" the industry isn't paying attention. What they should be focused on are all of the massive new opportunities created by this sudden glut of content, combined with massively more efficient (and often free) methods for content creation, distribution and promotion.

From music to movies to television, the biggest minds here still sound perplexed as to what will finally be the golden ticket to carry them through to the inevitable next era of digital distribution.

That single sentence basically describes the problem. These guys are sitting back and waiting for someone to hand them a golden ticket that replicates the old ways of doing things. That's not how it works. No one gave the buggy whip makers a golden ticket that let them keep their old lines of business going.

But the lack of a golden ticket most certainly does not mean there are no business models. Those who are embracing new business models are finding plenty of opportunity to do amazingly well (in fact, better than they did before). But, for the most part, it involves hard work and multiple streams of revenue. It's not the old "sit back and let the cash roll in" model that the industry is used to. But, some of us think that's a good thing.

"Why is the consumer always right?" said one exec to me this week in a typical statement. "You can't have a business if there is no business model."

It's a good thing the exec who said that did so anonymously, because otherwise his or her board of directors should be calling for him to be fired. The consumer is always right in a competitive marketplace because if you don't serve them, your competitors will. That there are still entertainment industry execs who don't get this is scary. And, saying there are "no business models" is so wrong that it again seems troubling that this exec still has a job in the industry. We spend a lot of time pointing to all sorts of working business models every day. They may not be the "golden ticket" that this exec wants where he gets to sit back and relax and see the cash flow in, but they can actually bring in a lot more money by leveraging a more efficient system, connecting better with fans, and giving them a real (scarce) reason to buy, rather than trying to bully them into paying through artificial scarcities.

From there, Swisher reverts back to Prince's statements:

If you remove the sillier parts of his quote that preceded it, such a statement is not unreasonable from an artist who wants to be paid for his creative efforts.

Thus, instead of mocking that sentiment, perhaps it is time for tech leaders to figure out a way to keep talent from being dragged into the future without so much kicking and screaming.

The role of the disruptor is not to make life easy for the disrupted. Swisher and these execs seem to be confusing the role of certain folks in the legacy industry with the overall entertainment industry itself. As noted, the entertainment industry is thriving. More movies, music and books are being created. More money is being spent. It's just that it's going to different players. There's no reason to "figure out a way to keep talent from being dragged into the future." The opportunities and wide open path are there. The problem isn't that tech leaders haven't made it easy for them. They have. It's that these guys are so myopically focused on the way they used to make money they don't realize that the new opportunities are already there and have been embraced widely by others.

39 Comments | Leave a Comment..

UK Hairdresser Fined For Playing Music Even Though He Tried To Be Legal

from the the-system-is-designed-to-trip-you-up dept

We've pointed out many times just how ridiculously complex various licensing collection agencies are in the music space, especially when multiple collection societies cover the same music. The whole system seems designed to make it nearly impossible for anyone to actually play music legally. Take, for example, this situation in the UK, pointed out by reader mike allen, involving a hairdresser who had paid for a license from PRS For Music just to be allowed to turn on a radio in his shop... only to discover that he failed to pay the other UK collection society, PPL (home of the infamous CEO who insists that "for free" is a bogus concept). So even though this guy thought he was legit, he still ended up with a fine for £1,569.

In his defense, he claimed that he'd never even heard of PPL, and since he had a PRS license, he assumed (quite reasonably) that he was in the clear. Now, I'm sure that defenders of the system will quickly step up and say that it was his responsibility to find out what music licensing groups you have to hand over a tithe to each year, but all this guy wants to do is turn on his radio. For most people, it's just common sense that you shouldn't have to pay a fee just to turn on a radio in your barber shop. And then, once you're informed that this totally nonsensical situation is, in fact, true, it seems quite reasonable to then assume that one license will let you turn on the radio. Finding out that you need two (or more) separate licenses just to turn on the radio (even though the radio already pays its fees and the music acts a promotion) just seems ridiculous for everyone who isn't a recording industry exec or a long term copyright lawyer.

Copyright is not supposed to work this way.

599 Comments | Leave a Comment..

High Quality Fan Flick Leads To $8 Million Hybrid Fan/Investor Funded Pro Film

from the these-things-evolve dept

Four years ago, we wrote about the amazing quality of Star Wreck, a fan-created Star Trek spoof that was created on effectively no budget, for fun, but which had stunningly good special effects (especially for no budget). We pointed this out not to say the future of film was such fan labors of love, but to note that the claims that professional movies needed $200 million budgets to create amazing special effects was a myth. However, we've had a few Hollywood insiders use this particular story time and time again to falsely suggest that we claimed that Star Wreck represented the future of the movie business.

But, what's interesting is what's happened since Star Wreck. As we noted last year the filmmakers behind Star Wreck have been busy at work on their latest project, called Iron Sky, and they were experimenting with a sort of hybrid funding model that included a fair amount of fan support, whereby fans could buy "War Bonds" to crowdfund a portion of the movie.

Wired is now reporting that the film has raised 90% of its $8.5 million budget, and they're close enough that plans are moving forward to get the movie production underway. Again, this particular effort was a hybrid. Part of the money is fan funded and part of it involves traditional movie investors.

But what's most interesting to me is how this story progressed. It went from some fans messing around and creating a rather impressive film visually speaking, to a new $8.5 million production. $8.5M is still a small amount from a movie-making perspective, but it's not nothing. Plenty of excellent indie films have been made for a lot less. And, of course, you never know what happens next, after this film is made as well. And that was really the point. It was never that the model that created Star Wreck was the answer, but that the overall ecosystem is evolving, and its evolving to a world where the fans and the community really area a part of things, rather than looked at as evil people who just want stuff for free. Embracing your community leads to wonderful possibilities.

6 Comments | Leave a Comment..

Ideas vs. Execution Shows Why Competition Is A Good Thing

from the it's-a-sign-of-a-market dept

I was recently talking with a group of folks who were discussing an idea for a new product, which I thought was pretty compelling. However, one of the concerns raised by someone in the group was the fact that there seemed to be a few other companies already in that space, and while they weren't doing the exact same thing, there was concern that this product wouldn't be considered "new." This is an issue that comes up a lot, and one that we recently talked about in suggesting that companies need to get over the wasteful and inefficient view that everything they do has to be wholly invented from scratch. Along those lines Chris Dixon has an excellent post, which he titles: "competition is overrated," but I think he really means that fear of competition is overrated. He notes that competition in a market often means you're on the right track:

Almost every good idea has already been built. Sometimes new ideas are just ahead of their time. There were probably 50 companies that tried to do viral video sharing before YouTube. Before 2005, when YouTube was founded, relatively few users had broadband and video cameras. YouTube also took advantage of the latest version of Flash that could play videos seamlessly.

Similarly, just because there are so many companies in a market, it doesn't mean any of them are really executing well:

Other times existing companies simply didn't execute well. Google and Facebook launched long after their competitors, but executed incredibly well and focused on the right things. When Google launched, other search engines like Yahoo, Excite, and Lycos were focused on becoming multipurpose "portals" and had de-prioritized search (Yahoo even outsourced their search technology).

In fact, this succinctly reiterates a whole bunch of the points that we've discussed repeatedly over time. First, there's a big difference between ideas and execution. Just because others are in the market (and even well established), it doesn't mean you can't do a better job. It also highlights the difference between invention and innovation, where invention is just coming up with something new, but innovation is really bringing it to market successfully. Facebook and Google are both great examples of innovative companies who didn't really "invent" their initial markets.

And Dixon then brings it back to the value of imitating, on which there's now an excellent book out (which I'm still only partially through) called Copycats. Dixon points out that in being a "follower" initially, you can build off of their work:

The fact that other entrepreneurs thought the idea was good enough to build can be a positive signal. They probably went through some kind of vetting process like talking to target users and doing some market research. By launching later, you can piggyback off the work they've already done.

On top of that, I would argue that you can also avoid some of the mistakes that they make.

In the end, he points out that worrying about competitors is really usually the least of your issues as a startup:

Startups are primarly competing against indifference, lack of awareness, and lack of understanding -- not other startups. For web startups this means you should worry about users simply not coming to your site, or when they do come, hitting the BACK button.

Consider that the startup equivalent of the messages told to tons of content creators these days: that obscurity is a much bigger threat than "piracy." In the same way that "piracy" is really just "competition," those too focused on that sort of competition will often miss the more important fact that you need to find actual, real users and customers who are going to stick around.

One other point on all of this: when you limit a market to just one player (via monopolies like patents), you can actually lose out. You don't get those other players in the market that you yourself can piggyback off of as well, and there's less incentive to get the formula right. Competition is a good thing in how it drives a market, but if you're working in a startup, you shouldn't necessarily be so worried about it directly.

6 Comments | Leave a Comment..

Kickstarter Conundrum: Money Changes Everything... But What If It Doesn't Let You Change Enough?

from the things-to-think-about dept

Let me start out by saying that I'm a huge fan of what Kickstarter has put in place. They've more or less built up a simple and easy to use platform to allow all kinds of creative folks a way to "fan fund" a variety of projects (music, books, software, performance art, movies, etc...) by using a "tiered" support model. If you're not familiar with the site, it lets people setup a project with a funding "goal" and a deadline. Then, they can set up a series of tiers for how people can fund the project, with promises to get back certain things in response to those tiers. This is the model we've spoken about a few times in the past -- such as what Jill Sobule did a couple years ago to fund her album.

While I definitely believe this sort of model can make a lot of sense in certain areas, I don't think it's right for everyone, and it certainly can create some potential problems -- especially if the content creator doesn't live up to expectations. Kickstarter got a lot of publicity back in May when one of its projects, called Diaspora, for a "distributed" social network got covered in the NY Times at the same time as there was a lot of fuss about privacy concerns on Facebook. That resulted in the project -- which had only been seeking $10,000 to let four college kids work on this project over the summer -- raising over $100,000.

Now, many have looked at this as showing off the power of Kickstarter (though, others might argue it really showed off the power of the NY Times). However, Clay Shirky pointed us to a critique of the Diaspora/Kickstarter "success" that points out that it could actually end up being bad for both Kickstarter and Diaspora:

It is kinda alarming as this pressure to deliver something by the end of the summer something so complex is not necessarily going to help them. The open source community have been trying to develop peer to peer web solutions for ages. There are many reasons why we have not seen a strong distributed social web yet. Some of these reasons are technical, other are social, it's not impossible, but also not trivial.

It is not unlikely that Diaspora would fail to deliver on it's promised milestone by the end of the summer. This should not be a big deal for an Open Source project with developers scratching their own itch. But in this case, the Facebook users frustration, Diaspora's media attention and the actual $$$,$$$ make this an itch shared by many many more users and only 4 students are given the scratcher.

To some extent, I also wonder if the research Daniel Pink talks about in Drive can also come into play. By adding more money to the mix, it may actually make it more difficult for the developers to build something as good as they might have otherwise. Now they have so many more expectations and so much more attention that it makes it that much more difficult to live up to expectations, even if they actually can achieve what they initially set out to achieve.

The other thing that might make this tricky is the same point I've made a bunch of times about the difference between ideas and execution. One of the things you quickly learn at a startup is that the initial idea is meaningless. Once you get to work on executing, that idea will change daily (if not more often). You may have a general idea, but reality gets in the way, and you adjust and adjust and adjust. Often, what comes out in the end is entirely different than what you set out to do, but that might not be a problem. It's quite rare for a project to set out towards a specific point and end up at that point.

For most startups, there's flexibility there. As the execution happens, they can shift course along the way. But in a situation like this, where thousands of people have donated with specific expectations, changing course is difficult, if not impossible, even if it turns out to be the most important thing for the project itself. If they do change course along the way, for the good of the project, suddenly people may get upset about a sort of "bait-and-switch." This doesn't mean that I don't like the Kickstarter model in general. But I can see where it could cause trouble in certain situations. For things like an album, where the deliverables are clear and understandable, it can work fine. But for a software development project, it could be a lot more complex, and there can be some serious pitfalls. Combine that with having a project massively overfunded, and it could lead to trouble.

11 Comments | Leave a Comment..

Copying Is Often Efficient And Smart

from the it's-not-so-bad dept

A couple months ago, we mentioned the book Copycats, which highlights how copying others is often a good overall business strategy, not just for companies, but for innovation as a whole (and, from that, society at large). I've since gotten a copy of the book, though haven't had a chance to read it (getting to it... eventually...). But it's interesting to see others picking up on the same idea, outside of the book (or did they just copy it?). Peter Friedman points us to a Business Week column by Scott Berkun, who has done lots of writing on this topic, highlighting how wasteful it is to have everyone trying to "reinvent" stuff that's already been invented (often reinventing it in a "worse" way). His argument, like the one in the Copycats book, is that we need to get over this stigma that copying is somehow "bad."

Right now, in meetings at corporations around the world, the wise are suffering. They are trapped in rooms where debate rages over how to solve a problem. The rub is that the problem has already been solved, just not by someone in the room--and solutions from outside are ignored. This is the disease known as "NIH," or "Not Invented Here" syndrome, and it's alive and well in 2010. Despite our many technological advancements in communication, none have eliminated this perennial waste of time. Why is this problem so hard to shake? Will we always be confronted with people who insist on reinventing wheels?

It's good to see more people discussing this basic topic, as the cultural stigma against building off of what others have done is really quite disturbing, and underlies many of the arguments in favor of bad copyright and patent laws. Getting people to realize that building on the works of others has produced wonderful things, while also being much more efficient, is a key to rethinking how we view concepts like "intellectual property."

40 Comments | Leave a Comment..

Forget The Early Adopters: Gadget Companies Should Target The Late Leapfroggers

from the skip-a-generation-or-two dept

Clive Thompson shows, once again, why his articles and columns tend to be fascinating must-reads. He's written up some details of some research suggesting gadget makers rethink their marketing strategy of going after early adopters, and instead, consider targeting late adopters. Now that might sound counterintuitive at first. Getting early adopters helps build buzz and then word of mouth passes down the chain to everyone else under the curve, right? Not quite. What the research shows is that "late adopters" are often so late that they never adopt certain generations of a technology. But, when they do "upgrade" they'll upgrade to the latest. So they basically "leapfrog."

[Jacob] Goldenberg offers the following thought experiment. Imagine that John is a laggard who buys a Walkman and listens to it while he jogs every day. Eventually, the Discman comes along, but John doesn't upgrade because he doesn't see anything wrong with his Walkman and doesn't want to re-buy his music on CD. Then MiniDisc players come along, but John still holds on to his Walkman. Then, 16 years after he bought his portable tape deck, MP3 players become the hot new thing.

By now, though, John is finally starting to feel self-conscious about his huge, bulky Walkman, and maybe it's starting to break down. He's finally ready to buy a new music player, so he becomes--ironically--one of the first people to get an iPod.

The research shows that this is often the case. The folks normally considered "late adopters" skip multiple generations, but when they upgrade, they upgrade to the latest and greatest, and are often among the first buyers of those devices, often planning to hang onto them for another few generations. Amusingly, as I thought about this, I realized that this actually describes me! For example, I tend to keep mobile phones for four or five years before upgrading, but when I do upgrade, I get something pretty new and snazzy and then use it until I'm almost embarrassed to show it ("wait, you write for a tech blog with that phone?" has been said to me more than once). Same with other gadgets as well. I have an ancient mp3 player and no intention of upgrading. I had the same super bulky and not very good digital camera for seven years before I recently bought a brand new one that puts the old one to shame.

The research then suggests that targeting those "late leapfroggers" rather than the early adopters can actually do quite a bit for the bottom line:

Goldenberg argues that the economic impact of leapfrogging laggards is huge. By his calculations, if only 10 percent of laggards leapfrog, their purchases can drive profits from a new gadget 89 percent higher than they would be without leapfrogging. "And that can be the difference between succeeding and not succeeding," he says.

If Goldenberg is right, marketers have made a colossal error by snubbing laggards. Instead, they ought to be frantically figuring out how to market to them. After all, early adopters don't need much convincing. But if you can figure out how to tip just 1 percent of laggards into the "buy" category, the upside is huge. What's more, Goldenberg thinks word-of-mouth recommendations from laggards are supremely persuasive: If John can handle that new gizmo, anyone can, right?

Thompson then wonders if some of this is driving the early sales success of the iPads. Sure, early adopters are buying it, but for some "laggards" who never bought a smartphone or a laptop, perhaps it's a reasonable buy? I'm not completely convinced that's the case, but it's an interesting theory. Would love to see some actual data on how many iPad buyers didn't already have a smartphone or a laptop.

That said, this story got me thinking about a concept that I've been pondering lately, which often explains why people have so much trouble understanding certain aspects of trends: it's because people have difficultly conceptualizing dynamic markets as an ongoing connected process, but instead, automatically think of them as an encapsulated unit. If you look at any product totally in isolation, the normal "adoption curve" that Geoffrey Moore built his career on makes sense.

It assumes an orderly progression from beginning to end, with your typical bell curve. But that assumes that each product is a market unto itself, without impact from additional innovations and newer products. That's not the case at all. Many of the "late adopters" never actually get around to adopting, and when they adopt, they may have jumped up onto another, higher curve, rather than coming down the back end of the adoption bell curve. Recognizing such dynamic market forces isn't always easy to do, and it's a huge reason why people sometimes have such difficulty predicting market trends.

19 Comments | Leave a Comment..

People Pay For Access, Not Content... But Most People Don't Understand The Difference

from the partly-right dept

A bunch of folks have been sending over this short video by Forrester Analyst James McQuivey about the idea that people pay for access to content, not for content itself, and that this has always been the case:

As he notes, in the past, content and access were often bundled together, so people confused the two. But, today, they've become somewhat separated, which is why many of the content industries are struggling. McQuivey's suggestion to people is to build business models that focus on charging for access and that's how you "get people to pay for content."

He's absolutely right that people have paid for access (a scarce good) and that getting people to pay for access is a business model that works (though, hardly the only content-based business model). However, the problem is that I think he underplays the difference between access and content, such that many people will hear his talk and assume that "paying for access" really means "putting up an artificial paywall that forces people to pay." The mistake there is in not realizing where the real separation is between access and content.

People pay for their broadband connections. That's access. People pay for their mobile phone data plans. That's access. Those are scarcities. Putting up a paywall or a micropayment system is not paying for access. It's trying to set an arbitrary limit on content. Unfortunately, McQuivey's "example" of paying for access is a bit misleading. He talks about Netflix's streaming offering. But he ignores that most of those subscribers were originally paying for DVDs, and the streaming is a throw-in. Where the real "access" that Netflix has tapped into lies in its ability to easily and conveniently get movies onto your TV. That's what people are paying for. It used to be DVDs (and still is for many Netflix customers), and more recently it includes integrated streaming. But that could come under pressure from other forms of easy and convenient access to the same content, so Netflix will need to continue upping its game.

So while I agree with McQuivey, and have said similar things in the past, I think he underplays how difficult it is to be in a position where you really can charge for "access." There really aren't that many players who can do so legitimately. I worry that many people will view this video and jump to the wrong conclusion, and try to artificially block access in order to get people to pay.

108 Comments | Leave a Comment..

Writer David Gerrold Highlights Why Any Industry That Thinks File Sharing Is Bad Is Ignoring Customers

from the indeed dept

Jeff Rife was the first of a few of you to send in author David Gerrold's opinion piece on why industry's fighting against unauthorized file sharing aren't properly servicing customers. He kicks off the piece by making it abundantly clear that he does not, in any way, support the idea of unauthorized file sharing, but then points out the basic tenets of "marketing myopia," where legacy industries focus on the product they're offering, rather than the benefit they're providing consumers:

After World War II, the government shifted many of its mail contracts from the railroad industry to the burgeoning airline industry. This was millions of dollars of revenue lost to the railroads. Because air travel was faster than trains, more and more people began to travel by air. As more people bought cars, and as the Interstate Highway System expanded, the railroads lost even more customers. The railroads still carry freight, but with the exception of a few high-density corridors, passenger rail travel in this country remains an intolerable mess.

This is because the railroad industry thought it was in the railroad business--they're not. They're in the transportation business. But they thought they were in competition and forgot about the possibility of partnership.

If the railroad industry had thought about providing genuine service to the customers, they would have partnered with the airlines. A train station can exist in a city center, an airport can't. They could have established transportation hubs, with trains delivering passengers from city centers directly to nearby airports. By making it more convenient to use trains to connect to planes, both leaving and arriving, they would have simplified travel.

This is, of course, a point that we've raised for years. Gerrold then applies it to the RIAA (again, something we've tried to do a few times as well):

This is the same mistake that the RIAA and the SMPTP are making today. They think they're in the business of selling discs. They're not. They're in the business of delivering entertainment. And they've forgotten that. At least, their lawyers seem to have forgotten it.

This isn't the first time the entertainment industry has made this mistake. Almost forty years ago, Sony started selling Betamax videotape recorders for home use. Universal and Disney promptly sued, claiming that home video recording would create the opportunity for copyright infringement and they would lose billions of dollars. The Supreme Court ruled against them. Under the fair use provisions of the copyright law, it's legal to record media at home for personal use. Even if some people might use videotape machines for illegal purposes, that was not sufficient justification for denying fair use to everyone else.

After losing that lawsuit, Disney and Universal (and all the other studios as well) began selling their movies on Betamax and VHS tapes, and later on DVD. Videotape sales became an enormous market for the studios and eventually DVD sales accounted for at least half, often more, of a film's total gross income.

From there, he highlights another point that we've mentioned multiple times: if there's "piracy" going on for your products, it generally means that you -- as a content producer -- are failing to provide what your fans want. Not serving your customers needs, because it goes again the product you sell is a recipe for failure. Going one step further and suing your fans for working hard to access the content they want is even worse. As Gerrold notes:

The only people who can benefit from that are the lawyers.

If your business model is more focused on benefiting the lawyers than your fans and customers, you're doing it wrong.

51 Comments | Leave a Comment..

Zappos Admits Pricing Mistake Cost It $1.6 Million; But Is Upfront About Taking The Hit Itself

from the such-is-life dept

For many years we've seen stories of companies making pricing mistakes at e-commerce stores. The news of those mistakes tends to spread very quickly, with lots of people piling on to order something for way less than it cost. Inevitably, the company realizes the mistake, and usually contacts everyone who ordered to let them know the order won't be fulfilled because it was a mistake. I actually have no problem with this, though some people think it's horribly evil. Either way, what seems to almost always happen is that the negative publicity that follows leads the company to change its mind and honor the original price. Sometimes, it actually takes a lawsuit to make that happen.

However, this weekend, it looks like Zappos had a pretty massive pricing glitch on its sister site 6pm.com. It lasted a few hours. But what's different this time is that once Zappos fixed things, it immediately decided that it would still honor the wrong prices, even though the mistakes would end up costing the company (now owned by Amazon) $1.6 million. Now, between Amazon and Zappos, the two companies have a ton of money, and continue making a lot of money every day. But, no matter what, a $1.6 million pricing error is still a big deal. Big enough that you would think that the company could potentially withstand any sort of PR hit to trying to not honor those prices (perhaps offering up some sort of gift certificate or benefit to those impacted, instead). However, for a company that bases its entire reputation on bending over backwards to make customers happy, it appears they quickly decided that it was best for their overall reputation to just eat the $1.6 million, and keep (or even boost) that customer service reputation.

31 Comments | Leave a Comment..

Some Final Stats On The Humble Indie Bundle

from the slice-the-humble-pie dept

BigKeithO writes in with some more followup, including some more results numbers from the Humble Indie Bundle experiment that we've written about a few times, involving some indie developers bundling up a bunch of PC games in a "pay what you want" pricing scheme. The program went on for two weeks, bringing in a grand total of $1,273,588. $833,630.69 went to the developers (or $166,726.14 to each), while the EFF got $183,601.47 and Child's Play got $188,578.04. I'm sure some will knock these numbers, suggesting that they're significantly lower than what some big name EA game would get, but you have to remember that these games were a bit older and weren't likely to get that many new purchases. On top of that, in two weeks, that's a pretty good sum of money for some indie developers on older games.

The other interesting tidbit, as many noted, is that despite suggestions from some that the "open source" world are folks who "just want stuff for free," the average amount paid by Linux users ($14.52) was significantly higher than those paid by Mac ($10.18) or Windows ($8.05) users. Obviously, averages are only so useful, given that they can be skewed by outliers (anyone got the medians? standard deviations?) but it's still information worth pointing out. All in all, a very interesting experiment, with some great results for those who participated.

34 Comments | Leave a Comment..