by Chris Anderson
A couple weeks ago at my local bookstore, I happened across Chris Anderson’s (Editor of Wired) new book, “Free.” Anderson’s book is focused on the notion that due to abundance, digital content of all types tends to gravitate toward becoming ‘free,’ or, as inexpensive as to not be worth measuring. Case in point, when was the last time you worried about how many MB or GB of data you downloaded last month? He contrasts today’s digital economics (bits and bytes) with those of the atom-based world (physical stuff).
Rather than do a ‘review’ I want to look at my own experiences and how they compare to being ‘free.’
If you want a synopsis, take a look at the New Yorker’s review by Malcom Gladwell. A contrasting review is offered by Rob Pegoraro, at The Washington Post. As you read these, or other reviews (just Google ‘chris anderson free’), keep in mind the reviewer’s perspective. Reviewers’ perspectives may seem particularly biased based on which side of the | line they are on.
My experience may be somewhat unique, in that I have spent time on both sides of the line in the software industry. On one side, selling shrink-wrapped box product software (SWBP) and then moving to the other side as product manager for a SaaS/web-based business, in both cases selling into some of the same industries, such as automotive.
Selling software (digital, bit-based) has often faced some of the same challenges as the music industry. The cost to produce is all up-front. You bear the cost of buildings, utilities, tools, and staff in full, before the product even sees light of day. Unlike conventional industries such as automotive, or atom-based ‘stuff’ as Anderson puts it, the marginal cost of production (cost for each additional copy of a CD) is effectively zero. This leads to rampant piracy and theft of intellectual property.
For instance, students would get a ‘free’ copy of AutoCAD ($3995) and use it for their studies. The first product you ever use—tends to be—the one you want to continue using. So, students starting with a ‘free’ copy of AutoCAD (or Office, or take-you-pick) move into the workplace and ask their boss to buy it for their use there. Eventually, the student may become the person making the purchasing decision. Given the poor anti-piracy controls (especially in the early years), AutoCAD was readily available and in turn helped it become a dominant CAD package. Early adoption by students is one reason why companies push their software into the education arena.
One of the challenges in selling SWBP software is that pricing is based on scarcity. People are basically good in my view. Yet if software is readily abundant (e.g. can be copied easily), it tends to get copied, and the effective price then rapidly falls toward zero. In one example, a Fortune 100 company brow-beat us into providing them with ‘unlocked’ copies of software—making it easier to deploy. Three months later, during a conference call the customer openly admitted to copying the software because their purchasing process was taking too long. A couple weeks later, admitting to yet more copying, their manager complained to us, ‘…you need to give us a way to stop the software from being copied (Uh…).’
While scarcity was maintained, the customer paid for it. Once constraints on scarcity gave way to abundance (hey Bob, here’s the CD with the serial no. on it), the marginal price also fell to zero.
The challenge with selling SWBP software as discrete units is that it represents a one-time purchase by the customer. The customer may, or may not, return to buy future releases and services. I talk about this in a prior post, “When a Backward Customer’s No Longer a Customer.”
To help combat this, software vendors introduced ‘subscription’ services. Pay an annual fee, 10-15% of the purchase price, and you’re entitled to all the upgrades and updates made available during your subscription period. This tends to lead toward a more easily swallowed ‘maintenance’ price. Rather than make a major capital expense every few years to upgrade your software, you convert to an operational expense paid in smaller annual amounts. The downside to subscriptions is, If you fall off the bandwagon, you may have to pay past years’ subscription fees (bringing yourself up to date), and then pay the next year’s fee.
Software as a Service (SaaS)
SaaS offerings, purely web-based services, operate on a different footing. Here, everything is subscription-based in some form. If you’re a salesforce.com user, you (or your company) are paying a monthly fee based on usage (e.g. per user, per instance, etc.). If you stop paying, you lose access to the service, want to restart, just start paying again. From the provider’s perspective, administration becomes easier. Instead of COG (cost of goods, for CDs, boxes, etc.) you think in terms of operational overhead (e.g. servers, staff, bandwidth). And, service upgrades don’t necessitate creation of new physical media, tens of thousands of new tracking SKUs, nor distribution channel restocking.
In this model, the service provider has direct control over the abundance of their offering. They can more easily employ Freemium or other models. Anderson discusses freemium frequently. For example, 90-95% of a service’s users use a basic version of the service for free $0. 5-10% of the users pay for a Pro or full-service version and account for all the revenue—enough to pay for them, and the ‘free’ customers, and still make money.
The provider determines how they chose employ freemium, if at all. Many options exist including free 30-day trials or the Basic ($0) / Pro ($$) concept. The freemium model works because in the era of digital products, the marginal cost of new customers can be effectively zero. Consider, as part of your service, spread across multiple TB (terabytes) of storage, your storage cost is $0.0000005/KB/month. This presents you with some options.
As a service provider like salesforce.com can afford to give away storage space (they charge steeply for it, actually). Free storage now becomes a marketing feature, a loss leader effectively, for your core offering. If your primary business is as a web-based repository, you may elect to make a certain amount of online storage available to consumers for free, with premium versions offering access to redundant disaster recovery sites, regular backups, and other services.
Back to the Book
Pundits will enjoy pulling Free apart like pork for a pulled pork sandwich for some time. Chris’ presentation of economics in the digital realm, lightly contrasted with the atom-based ‘stuff’ world, is done in straight-forward manner. Even though he provides numerous real-world examples, past and present, the topic is controversial enough (today) to encourage lengthy debate.
For many, their position on Free will likely be driven by the source of their livelihood. Me? I have worked and sold into the physical world. My experiences also include all phases of the traditional software realm, and now the SaaS/web services realm. On a scale of Atoms-to-Bits, the farther you are to the right, the more likely you’ll agree completely with Anderson. My suggestion, keep your mind open as you read, and at the very minimum be conscious of how others are viewing the world. It just might let you communicate better with your teenagerJ!.