19 March 08 | Chad W. Post

I’m sure a number of other people have already discussed this, but I just got my hands on the new issue of Wired, which has an article by Chris Anderson called Free! Why $0.00 is the Future of Business.

Aside from being editor-in-chief of Wired, Anderson is the author of The Long Tail: Why the Future of Business is Selling Less of More. (Just to get this straight, the “future of business” is giving away less of more?) The Long Tail was considered to be rather revolutionary, since is posited a business model for things like books that flies in the face of the conventional model. In contrast to selling umpteen-million copies of the 5 or 6 mega-best-sellers out at any point in time (which is the object of most B&N and Borders stores), Anderson argued that the real money is made by selling 1 or 2 copies of an infinite amount of titles, a la Amazon. (Obviously infinity times 1 is greater than 100,000 times 5.)

For a while, this book/concept was all the rage, with people applying it to publishing (everything as print on demand! sell two copies of all deep backlist and you’ll stabilize your sales!) among other industries. The big problem with this idea—in my opinion—is that for most publishers, the “long tail” ain’t all that long. This may make sense for a Random House with thousands of backlist titles, but for a press with a few hundred the economics don’t work out nearly so well. Also, there’s still a huge disconnect between the capabilities of p.o.d. technology and being able to market these titles to bookstores and readers. And a house that can take advantage of the long tail theory, usually isn’t set up for making sure their deep backlist is selling 2-3 copies a year—they’re set up to promote the hell out of the mega-books.

Regardless, Anderson is one of the most interesting theorists of new economic models in this new media age. This new article—and forthcoming book—is no exception. It’s not like he’s rewriting the rules of economics either—everything in this piece places by the standard model that you learn in Econ 101. What is unique is that he takes concepts to the extreme and can understand (and lucidly explain) what happens when placed in our new cultural context. And in this article, he explains the relationship between a digital culture and giving things away.

At the core of his argument is the idea that thanks to the internet, marginal cost for a whole slew of objects is virtually $0.00. (Marginal cost is the variable cost associated with producing one more copy of a particular item. So, printing 1,001 copies of a book versus 1,000.) There are still fixed, up-front costs, but once an object is digitalized, there’s no limit to the number of copies that can be “produced” or “distributed.”

Which in traditional firm economics is like the fricking golden fleece—if you can take over a huge market share, you can become a price-setter and make millions. But the transparency (and file sharing) of the internet has screwed that all up.

Anderson instead details six current models in which a company giving products away for free can still make a profit. Here’s a quick rundown of the six:

  • “Freemium” — get the basic version of something for free, pay for the premium version;
  • Advertising — subsidize giveaway via ads;
  • Cross-subsidies — get the razor for almost nothing, but pay a ton for the blades;
  • Zero Marginal Cost — cost of distributing music is now absolutely zero—make money in concert tickets or merchandising;
  • Labor Exchange — get something for free if what you use it for creates something of value (use Google’s 411 service for free, and by doing so you help Google create a better product which will eventually be ad-based);
  • Gift Economy — essentially an altruistic enterprise in which “zero-cost distribution has turned sharing into an industry. See Wikipedia.

All of us experience these things on a daily basis, but not many small business or non-profits seem to be putting much thought into how this could revolutionize their particular industry. Anderson’s final point (in this article at least) is that distribution may be reaching a zero point, but there’s a “limited supply of reputation and attention in the world at any point in time.”

As a business, you still need a way to get enough money to keep the lights on, but the point has shifted from selling product for maximum profit to making your position in the market extremely valuable and using free distribution methods to make this possible.

How does this apply to publishing? I have no clear idea. Maybe by charging $500 for the Kindle, but only $0.01 for a book. (Authors would love that.) Receiving enough donated income to give away digital books for free (while still paying authors). Or by giving away books, but selling tickets to readings. Or giving away digital versions and making expensive collectors editions of books. Or using the Wowio model of subsidizing electronic versions via ad sales. I’m really not sure. But in a field still hung up on DRM and resistant to change, we may be left behind as things like Hulu.com start popping up for other parts of the “entertainment” industry. It’s something worth thinking about and whoever figures it out will dramatically change this industry—hopefully for the better.

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