Is a mix of free and premium content the way forward for the media industry?

Gideon Spanier
20 Mar 2009

Everyone from advertisers to economists has been seduced by the idea of going free in the past decade. Whether it's the rise of Google, the creation of the Freeview digital TV service, or newspapers such as Metro, the power of free has been compelling. It is the ultimate marketing tool.

Technology has been the driving force, bringing down the cost for users to virtually zero and increasing the size of audiences dramatically.

But there's no such thing as a free lunch. The business of free depends chiefly on advertising and the problem is that revenues have abruptly stalled because of the recession.

Commercial free-to-air TV in the UK has seen advertising dive by up to 20% in the first quarter of this year.

Dozens of small free newspapers, which don't have a cover price bringing in a secondary revenue stream, are being closed. Even online advertising growth has slowed markedly.

For those who experienced the first dot-com bubble bursting in 2000, there is a sense of déjà vu. It's "the end of the free lunch - again", says the new edition of The Economist today.

The magazine's business editor Tom Standage describes it as "the collective hallucination that advertising would pay for everything."

Plainly the solution involves generating revenue from outside advertising and the most obvious way to do this is to charge users for content.

American publishing giant Time Inc is among those which has said in recent weeks that it plans to introduce online charges.

"Good information costs money," said Ann Moore, chief executive of Time Inc. "Someone has to pay for the Baghdad bureau. I don't know what the business model is, but we are going to start pursuing it."

Finding a business model that works is the Holy Grail. Consumers will certainly pay for high-quality or niche services (say Sky TV or Home Box Office; the Financial Times or the Wall Street Journal).

But for mainstream media and entertainment brands, it remains hugely difficult. Erecting a pay wall means audiences stay away and, as Emily Bell, director of digital content at The Guardian notes, it's expensive to enforce, to manage customer relations, and so on.

The New York Times, the world's most popular newspaper website, is the prime example of a site that gave up on a pay wall to boost audiences.

Evangelists for free media such as Chris Anderson, author of The Long Tail and US editor of technology magazine Wired, are convinced that it is essential not to give up on free.

Instead he advocates "freemium" - a basic free offering, with premium paid-for services.

In an inspirational talk at Bafta in London recently he cited a string of examples where he felt the "freemium" model had worked. The owners of old Monty Python material put a slew of it online free - and, as a result of a mass audience getting to know the videos, sales of Monty Python DVDs soared.

Anderson also pointed to computer game firms which have had great success with offering their games for free on the web - and then charging for access to special extras or new levels.

The kids' online game Moshi Monsters, a current favourite in my household, operates on exactly this freemium principle.

"It's all about psychology," says Anderson. "If you get people to hand over a single penny, it is an act of engagement." This has a positive knock-on effect for advertisers too because the users are actively engaged. "Then you can charge more for advertising," he adds.

Persuading even a small number of users to pay for content is all that is realistic in most cases, he argues.

Anderson believes it is realistic to expect just 10%-15% of the customer base to pay. "It's the inversion of the free sample model."

But freemium still might not be economically viable for many businesses. A key issue is the cost base - the salaries overheads - that many firms have.

Old media companies such as record labels, broadcasters and newspapers are struggling to switch from a paid-for model to freemium. They have operating costs which remain too high for the digital age when consumers no longer like to pay and advertisers expect to pay less.

For new media firms, including some of the most successful such as Facebook and YouTube, there's a different issue with freemium.

Their users pay nothing and are extremely reluctant to change that. Worse, many advertisers are wary and aren't convinced these sites offer the right environment for their brands.

Standage of The Economist says some businesses will succeed in charging. But many more which are currently free will go bust.

Others will have to scale down their ambitions like Gawker (which has closed some of its collection of US gossip sites) or sell out to a bigger player.

The free model can still work - just as the old advertiser-funded model did for ITV for so many years - but with lower overheads.

The founders of weekly men's magazine Shortlist, launched 18 months ago, certainly hope so. They believe they have found a significant niche - just as men gave up on paying for expensive lads' glossies.

Freemium is just a concept, of course. If it means anything, it is that going free will drive up revenue from another source.

In the case of the music industry, the paradox has been that while few consumers now pay for music, they will spend on live concerts, festivals and merchandising.

That's a sort of freemium too. Because someone must always pay for lunch.