Column

The Hidden Costs of the Free Lunch

Everybody wants something for free. It’s human nature. And it’s rarely more prevalent than when it comes to technology. “It’s all just bits and bytes, why should it cost anything?” says one. “Information wants to be free” suggests another. 

Today’s generations have grown up in the age of Napster and Google and surveys indicate that there is almost an expectation that digital content, including music and movies, is free. Much to the chagrin of the entertainment industry who has been battling since the invention of the tape recorder and VCR to figure out how to keep making money off a product that is so easy to copy and trade.

Unfortunately while “bits and bytes” could be free, rent and food rarely are. So those people and companies that produce the content and services usually want to get paid. They have to eat too. That’s the digital battleground when it comes to monetizing products and services.

Attorneys and business-folk occupy plenty of ground in this landscape – with Google Docs and other “free” services all trying to entice us to their product. I think it’s important, however, when considering these services, to understand what their business model is. Because make no mistake, all of them ARE businesses and like all businesses they want to make money.

There are a few distinct business models online and some companies employ a hybrid approach that blends two or more of them. Let’s take a moment to talk about a couple of them.

Ad-Driven

One of the oldest business models is the advertising-driven business model. Since the first time a magazine or newspaper sold an ad most of our media and many of our Internet services have been driven by advertising. We’re used to the idea – though we sometimes forget it – that our television and radio programs, and to a large extent newspapers and magazines, are provided almost entirely by advertisers. 

That great new TV show? It was developed to get as many people as possible to watch. Not out of some egomaniacal desire to be “#1” (though certainly there is some of that) but rather because it allows the TV stations and networks to go to big companies and say “Look, 10 million people watch our show. Give us $200,000 and we’ll let those 10 million people watch your ad for 30 seconds.”

Radio is almost entirely the same situation and on the Internet a majority of the presented content exists to gain page views and clicks – all of which are carefully measured and packaged to entice advertising dollars.

Make no mistake – Facebook is not a social media company. They’re an advertising company. We users with our witty status updates, photos of the family BBQ and impressive FarmVille stats…we’re NOT their customers. The advertisers are their customers. As an insightful fellow recently posited “If you didn’t pay for the product, then you ARE the product.” We’re Facebook’s product and they package us up in nifty little profiles, get us to do most of the work, and then sell us to their advertisers. Brilliant.

Why are most of Google’s services free? Because they’re parsing your data for keywords so they can serve you targeted advertisements. Log into your Gmail account, open an e-mail message and cast an eye to the right side of the screen and you’ll see a convenient list of who is paying for your free e-mail.

It goes a lot deeper than American Idol and Facebook though…in the words of a prominent NASCAR driver “People think we’re a racing company. We’re not. We’re an ad agency that drives fast.”

One thing that is important to remember when dealing with ad-driven services is that they need access to you and your data. Google can command a premium for their ads because they can target their ads. They KNOW you’re interested in face cream or a new iPad because they’re (well, their computers are) reading your e-mail and looking for clues to who you are and what you want.

CBS would LOVE to know who your friends are and whether you own or rent. The move to online content is not entirely for your convenience – the interactivity of the medium makes it possible for them to gather more data about their viewers than they ever could with a simple TV broadcast.

Facebook needs you to tell them that you got engaged and that you like “Glee” so they can target ads to you. So they can go to their advertisers and boast that they have 2 million users who all enjoy bowling. If you think they’re not watching you, you’re wrong. They are watching you very intently for the next clue to what they can sell to a potential advertiser. That’s what they do. That’s why Zuckerberg and the Google guys are billionaires.

Freemium

Another model that has some traction in the Internet space is the “Freemium” model. In that model the service gives you some limited access for free, then tries to entice you to purchase the more robust version. Dropbox is an example of this model. You get 2GB for free, but if you want more you have to break out the credit card.

The Freemium model tends to be a bit more private – unless they also have an advertising component there isn’t much incentive for them to carefully scan your data or extract personal details from you. But it’s also a model that is always trying to get you to the next level. It does Dropbox no good if 100% of their users only use the free service. They need to entice you to upgrade and towards that end you need to keep a weather eye on the direction the service is taking. What was free yesterday could become pay tomorrow if they decide they need to realign their service plans and reduce what they give for free.

How’s That Free Lunch Tasting?

Before you entrust your data to a free service make sure you understand what data you’re giving them and what their business model is. If the data is your son’s soccer schedule or plans for the upcoming family reunion then it probably doesn’t matter that much whether somebody is parsing it for advertising revenue. If the data is a client’s draft patent application, financial or medical records then it’s a lot more important to understand who has eyes on that data and why.

Sometimes the safest course, even though it’s not as popular with the accounting department, is to just pay for a commercial service whose interests are more aligned with your own.

You get what you pay for.

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Comments

  1. David Collier-Brown

    Stewart Brand would agree with you: he is quoted as saying

    “Information wants to be free. Information also wants to be expensive. Information wants to be free because it has become so cheap to distribute, copy, and recombine – too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient. That tension will not go away. It leads to endless wrenching debate about price, copyright, ‘intellectual property’, the moral rightness of casual distribution, because each round of new devices makes the tension worse, not better.”

    Brand, Steward “The Media Lab: Inventing the Future at MIT”, New York, N.Y. (Viking, 1987) 1987, ISBN 0-670-81442-3

  2. As a journalist who has witnessed the death of paper publications, I watch this issue closely. You’re right, we’ve always been supported by ads in the past, and I don’t see any way to change that. Journalists who get paid (less and less) to produce articles have to compete in an online world where the basic info — the news — can’t help but be freely distributed.

    Even when the Wall Street Journal breaks a story and has an exclusive on it, that exclusive lasts for about 10 minutes. I read the summaries of the stories on WSJ.com, and if I want to read more I find the story elsewhere.

    So ads are it. What the publishing business has to figure out is how to target ads. Keywords won’t do it. What ad do you put next to an article about the political moves in Iran? We will have to know the readers’ interests by tracking them long-term.

    Anybody want to help me try it?