Archive for June, 2009

Why does online information “want” to be free?

June 30th, 2009

(via New Yorker)

This week, there has been an interesting debate going on between Malcolm Gladwell and Chris Anderson, both authors of bestsellers, surrounding Anderson’s new book, Free: The Future of a Radical Price, which tries to explain why online information has a tendency toward being offered for free and proposes some remedies for traditional publishers to cope with that trend.  (Gladwell is the author of Blink and The Tipping Point and Anderson The Long Tail.  Anderson is also Editor in Chief of Wired Magazine.)

Gladwell first posted a review on Free to New Yorker and basically argues that Anderson is fundamentally missing the point and that not all information “wants” to be free.  Or to be more exact, Gladwell’s idea is there is a proven willingness to pay for high quality content, online video and Wall Street Journal being his example.  In addition, Gladwell also pointed out Anderson’s proposal of a new business model involving paying for a manager to run a team of free writers is fundamentally flawed.  Gladwell wrote:

…it is not entirely clear what distinction is being marked between “paying people to get other people to write” and paying people to write. If you can afford to pay someone to get other people to write, why can’t you pay people to write?

Almost immediately, Anderson fired back with a post, titled Dear Malcolm: Why So Threatened, on Wired Magazine’s Epicenter blog.  However, Anderson’s counter argument only focused on providing his own experience with GeekDad as an example to back his new business model proposal without touching much on the key question surrounding “free or not free.”  (Interestingly, Anderson later shared on Twitter that the dispute is actually orchestrated by a PR firm. It’s an insider joke!)

To better answer Gladwell’s question, I feel we need to go back to Economics 101, which states prices in a free market are decided simply by supply and demand.  In other words, in today’s Web 2.0 world when there are countless blogs providing an abundance of news info (and let’s not forget Twitter on top of that), it is only natural that this over supply would eventually drive price down to near zero.  This trend can also be proven by another Economics rule — in a market with excess competition, the prices will be driven down to near or below cost, which is also close to zero in today’s cloud computing world.   Thus, it’s not incorrect for Anderson to say online information actually “wants” to be free.

That said, however, it also does not mean individual publishers cannot choose to charge for the content they produce.  Keep in mind that even though in an aggregated market, the final prices will be zero.  Economics also taught us every buyer has a different willingness to pay and suppliers can use ways to segment the market to capture that “consumer surplus,” which is the benefits buyers receive when paying at market price, which is less than their original willingness to pay.

Therefore, from the view of Economics, both parties are correct in describing the different phenomena that are happening in today’s news industry.  Personally, I think the future of journalism will be largely online.  Because with the help of ever improving technology, people will only consume more and more information digitally while online content providers will only get an increasing share of both consumer’s and marketer’s pockets.  Therefore, a future publisher’s online strategy should be consist of a mix between “freemium,” free to use but pay for premium content/features, and ad-supported models, of which Flickr is a good example.

Books mentioned in this post:

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Facebook Wants to Replace Google as Ad King. What are the challenges?

June 25th, 2009

Facebook's 4 steps to replace Google

Founded in 2004, Facebook in merely 5 years has made itself a formidable force on the Web.  Its currently rankings on major Website rating agencies can speak to just that: comScore: 8, 3, Quantcast: 5, Alexa: 4.  As the latest issue of Wired pointed out, Facebook has always set out to replace Google as the Ad King of Internet and never really cared much about competition from its own kind, i.e. Myspace, etc.

Wired also laid out Facebook’s four steps toward kingship as follows:

1. Build Critical Mass

It has done so with not just membership but also content base.

2. Redefine Search

Facebook’s goal is to encourage users to rely on information their friends post instead of what Google’s index engine finds.

3. Colonize the Web

With Facebook Connect and Open Stream, Facebook has built an ever growing network of sites that live off its user database.

4. Sell Targeted Ads, Everywhere

The end goal. Since targeted ads are said to be more effective than search ads. Thus, replacing Google as the most important ad platform.

As things currently stand, Facebook has done a pretty good job with the first three steps and is at the point where it needs to execute on the forth by turning the mass it acculumates into value.

Whether or not Zuckerberg’s company can successfully transform itelf into THE targeted ads platform, I think the following three things are key:

1. Unscalable Social/Targeted Ads:

Since these ads are targeted, they cannot be easily recycled and reused as people’s interests differ.  Even if two users like the same product, they might not be at the same point within a purchase cycle at the same time.  Therefore making reuse even less possible.  More importantly, there is issue with ad production costs.   Text-based ads, such as those shown alongside Google search results, are easier to manipulate and therefore making customization less costly.  However, to stand out within social media today, an ad has to be creative, interactive and viral and be in the form of a video clip or even a casual game, which all adds to the development costs.  That means targeted social ads have to perform tens or hundred times better than text ads in order for marketers to justify their costs.

2. Social Media User’s Lack of Purchase Intent

Most of the time, when social media users are browsing content their friends share online, they are not in the mood of buying something or looking for something to buy.  On the contrary, when users are doing a Google search, there is a certain percentage that is looking to purchase a product.  This will also hurt so called targeted ad’s performance.

3. Privacy Concerns

As Wired pointed out, from News Feed to Beacon, Facebook so far has angered its users every time when it tries to make their personal data more public.  However, a successful targeted ads platform inevitably will have to share these critical info among its partners.  Whether or not Facebook can find a way to do so both effectively and without annoying to its users is also a question mark.

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