introduction and history of free
DESCRIPTION
This is the first lecture in Stanford BUS 21 Monetizing Free: How to Make Money b y Giving Things AwayTRANSCRIPT
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Stanford BUS-21Martin Westhead
Mastering Marketing
Introduction
How to make money by giving things away
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Introduction
Free can really make money It is controversial
- Is free killing other industries and businesses?- Does Freemium work?
What do we mean by Free? A Brief History of Free
- Free Lunches- Jell-o, King Gillette- Free Radio
New Free- New kinds of Free and- Models for making money from them- What free products bring you
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Free Monty Python: Results – 3 months later
Monty Python DVDs - No. 2 on Amazon
230x (23,000%) increase in sales- Reminded people how
much they loved MP- …and they wanted more.
Cost to Monty Python:- $0- Plus a little curration
work
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Free businesses make money
$8B (10 yrs)
$60B (14 yrs)
$0.7B (8 yrs)
Revenues for 2013
$1.5B (11 yrs)
$0.65B (10 yrs)
$0.16B (11 yrs)
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FREE IS CONTROVERSIAL
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Federal Trade Commission Guidelines
Only guide written for the use of a word in commerce: “Free” (1971)
Explain free offers- Obligations a consumer has- Is there a catch?
http://www.alllaw.com/articles/legal/article11.asp http://www.gpo.gov/fdsys/pkg/CFR-2011-title16-vol1/pdf/CFR-2011-title16-vol1-part251.
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Is Freemium Dead?
Why the Freemium Model Doesn't Work – Mashable Freemium has run its course — Tech News and Analysis – Gigaom When Freemium
Fails - WSJ
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Technology hype curve(Freemium)
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Two sides to free
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Village Voice
1996 gave in and went free 2005 New York magazine
Considered “killed” by free
The Voice from Beyond the Grave: The legendary downtown paper has been a shell of its former self since it went free
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The Onion
Started in 1988 Free satirical broadsheet Expanded to
- 10 cities, - millions of web hits- TV production - Feature length movie
Free and continues to thrive
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So, does FREE mean low quality?
Free saved the Village Voice- Circulation had fallen to 130K from 160K- Now at 250K- Free saved it
But there is a perception of diminished quality- Feelings are relative not absolute- The Voice used to cost and it does no longer…- The Onion was always free- Free bagel is stale – Free ketchup is fine
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WHAT DO WE REALLY MEAN BY FREE?
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Definition
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The Two Meanings of “Free”
Gratis
- No Charge
- Free as in “Beer” (or Lunch)
- Primary focus of this class
Liber
- Freedom
- Free as in “Speech”
- Will mention in passing e.g. discussion of Open Source
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The Two Extremes of $0 Products
Cost built in“No such thing as..”
No cost to me“truly Free Lunch”
Buy on get one freeFree ShippingFree gift insideFree phone with contract
Google SearchWikipediaFacebookYouTube
FlickrLinux
Dropbox
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BRIEF HISTORY OF “FREE’
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Free Lunch 1870–1920 – free lunch with purchase of a drink
- Saloons and bars in the US 1891 Rudyard Kippling
- Not just eating but “wolfing” on food- Overwhelming enthusiasm
A free lunch-counter is a great leveler of classes, and when a man takes up a position before one of them he must give up all hope of appearing either dignified or consequential. - 1875 The Times
The repast included "immense dishes of butter," large baskets of bread, "a monster silver boiler filled with a most excellent oyster soup," "a round of beef that must have weighed at least forty pounds,”
http://en.wikipedia.org/wiki/Free_lunch
Lunch was typically worth 6x the drink price but…- Patrons often stayed for more drinks- Came back at other times of day
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Jell-O
1854 Peter Cooper - Obtained patent for powdered gelatin
1895 Pearl Wait- Added flavors, color, brand- But still had trouble marketing it
1899 sold to Orator Woodward- Still struggled to sell it
1902 with marketing chief, William Humelbaugh- Free samples too expensive- Instead give away free information – recipe booklets
- Supported by a newspaper ad- Distributed by a travelling sales force
By 1906 hit $1m in annual sales
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King Gillette
Invented disposable razor- Anti-capitalist
Sold cheap razors to partners who bundled them free- Banks “save and shave”- Gum, Tea, Coffee, Marshmallows
Created a demand for blades- Recipes created demand for Jel-O
Same business model used today:- Printers – cheap printers, expensive
cartridges
Invent something that people use and then throw away – Advise from Gillette’s boss
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The Radio Business Model
1925 Dawn of the commercial radio industry- Distance fiends
No one knew how to pay for content Content paid for by radio manufacturers (e.g. RCA) Radio Broadcast magazine competition
- 800 people entered, ideas included- Listener contributions (NPR)- Government licensing (BBC)- Pay for listings- Advertizing suggested but not popular
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Radio Advertizing
1926 NBC’s Frank Arnold- Determined to give radio advertizing a try- “Fourth dimension” – print, flyers and billboards- “Guest in the listener’s home”
Problem with radio interference- Local station signal drown out distant station- Creation of the FCC- Not enough local advertizing
Solution came from AT&T- National radio network
Big audience critical for advertizing
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Multi-party business model
Network
AudienceAdvertiser
Content Producer
Content $
Content
Attention
$
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NEW FREE AND WHY ITS GOOD
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How is 21st century Free different?
Digital/Online Free is different- Key costs are falling rapidly
- Feasible to round down
- Technology supports mechanics… - E.g. subscription billing management- Consider customer lifetime value
- …and massive volume- Needed for advertizing, Freemium- Anything where network effects are important
…but giving things away is easy, how do you make money…
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Free Models
1. Direct cross subsidy- 20th century free- Buy 1 get one free / Free toy inside- (Not really free)
2. Platform- User get service for free- Someone else pays
- Access to users- Data of users
3. Freemium- Most users get free product- Some users pay for premium features
4. Donations / Pay-what-you want- Users decide how much the product is worth- Some get it for free
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Benefits of Free
Free can lead to rapid growth- Volume makes more business models work
Accelerate technology adoption- Quick way to cross the chasm
Mindshare markets of- Reputation- Attention
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Technology adoption
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Tumblr – lightweight blogging platform- 300M monthly uniques (according to Yahoo)- 100M Blogs- No revenue
Bought by Yahoo for $1.1B – Why?1. Value of “reach”
- Tumblr moved Yahoo from comscore #3 to #1
2. User data 3. Future monetization opportunities
- Yahoo is good at Monetizing content- E.g. Native ads,
Mindshare effects: Why did Yahoo buy Tumblr?
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Mindshare effects: Pricing a glossy magazine
3 prices1. Free online2. $4.95 at newsstand3. $10 for 1 year subscription
1 & 2 are purely economic Subscription price is a balance
- Cheap to increase subscriptions- Expensive to show commitment to advertisers- It’s a loss-leader, but can’t go to $0
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Free is like an Economic force of gravity
Near zero marginal cost of reproduction
Price of copies will fall to $0
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My Free Experiment
The Flower of Scotland Fantasy Sci-Fi story set in an
alternate Scotland- Terrorist fighting for Scottish
Separatism- Mari McLeod a barmaid on Skye
– only one who can save the world
Free PDF on Website Free books for class One condition
- If you like it – please post an Amazon or Goodreads review
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Summary
Free can really make money It is controversial
- Is free killing other industries and businesses?- Does Freemium work?
What do we mean by Free? A Brief History of Free
- Free Lunches- Jell-o, King Gillette- Free Radio
New Free- Models for making money from Free
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Next week
The Psychology of Free- Why Free works
Model: Direct cross subsidies Guest speaker:
Peter Fishman - Principal Analytics Manager, Yammer, Microsoft