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Dorian Benkoil Dorian Benkoil
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Bob Cauthorn Bob Cauthorn
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Ben Compaine Ben Compaine
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Dorian Benkoil senior consultant at Teeming Media. An award-winning journalist and editor, he was a foreign correspondent for AP and Newsweek, and international and managing editor for ABCNews.com. At ABC News he moved to the business side, handling sales integration and business development, before joining Fairchild Publications as General Manager for their Internet division, becoming editorial director for mediabistro.com, then a consultant for Teeming Media in New York. He graduates this year with an MBA from Baruch's Zicklin school of business. Learn more about him at Benkoil.com or his blog - MediaFlect.com.

Robert Cauthorn is a journalist, former vice president of digital media at the San Francisco Chronicle, and was the third recipient of the Newspaper Association of America's prestigious Digital Pioneer Award. He launched one of the first five newspapers web sites in the world and is generally considered to have delivered the first profitable newspaper web site in 1995. Cauthorn has been in the middle of the transition from old media to new and is recognized as frank-talking critic when he believes newspapers stray for their mission. In mid-2004 he became the president of CityTools, LLC a new media startup based in San Francisco.

Ben Compaine has divided his career between the academic world and private business. He was a journalist when manual typewriters were considered state of the art, but also led the conversion of his college newspaper to cold type. He has started and managed weekly newspapers. His dissertation at Temple University in 1977 was about the changing technologies that were going to unsettle the landscape of the staid and low profit newspaper industry. Since then he has focused his research and consulting on examining the forces and trends at work in the information industries. Among his most well-known works (and the name of his blog) is "Who Owns the Media?".

Vin Crosbie has been called "the Practical Futurist" by Folio, the trade journal of the American magazine industry. Editor & Publisher magazine, the trade journal of the American newspaper industry, devoted the Overview chapter of executive research report Digital Delivery of News: A How-to Guide for Publishers to his work. His speech to the National Association of Broadcasters annual conference was one of 24 orations selected by a team of speech professors for publication in the reference book Representative American Speeches 2004-2005. He has keynoted the Seybold Publishing Strategies conference in 2000; co-chaired and co-moderated last year's annual Beyond the Printed Word the digital publishing conference in Vienna; and regularly speaks at most major online news media conferences. He is currently in residence as adjunct professor of visual and interactive communications and senior consultant on executive education in new media at Syracuse University's S.I. Newhouse School of Public Communications, and meanwhile is managing partner of the media consulting firm of Digital Deliverance LLC in Greenwich, Connecticut.
About this blog
Two forces have shattered the news media. Technology is the first. Although media technology is undergoing its greatest change since the day in 1440 when Johannes Gutenberg first inked type, for more than ten years now the news industry has mistaken new technologies merely as electronic ways to distribute otherwise printed or analog products. Estrangement is the second. The news media has lost touch with people's needs and interests during the past 30 years, as demonstrated by rapidly declining readerships of newspapers and audiences of broadcast news. How we rebuild news media appropriate to the 21st Century from the growing rubble of this industry is the subject of this group weblog.
In the Pipeline: Don't miss Derek Lowe's excellent commentary on drug discovery and the pharma industry in general at In the Pipeline

Rebuilding Media

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March 20, 2008

The Freemium Business Model: Anything There for the Media?

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Posted by Ben Compaine

Have you heard about the “Freemium” business model? It’s a label offered by James Governor Jared Lukin in a “name-that-model” contest proposed almost exactly two years ago in a post at A VC by Fred Wilson, a partner in a New York venture capital firm.

Wilson looked at many of the more successful Web ventures and observed that what they had in common was a basic service that they offered for free and a step-up premium service that they charged for.

The basic voice over IP service Skype, for example, lets users call anyone anywhere for no cost, so long as both the caller and callee are at broadband-connected computers. However, if you really want to be able to call anyone anywhere—that is, to a land line or cell phone -- there are per minute charges. Want voice mail? Upgrade to Skype Pro.

A wonderful service I use called LogMeIn employs a similar approach. It gives me access to my desktop computer from any other computer, anywhere. A free version lets me see all my directories and files and transfer them to my remote laptop. The upgraded version actually displays the screen of my desktop, with access to any program or file, as though it was on my remote computer.

There are many other examples.

But for the Freemium model to work, Wilson observed there are other characteristics that demarcated the more successful implementations and the others:

• Ideally, they don’t require any downloads or plug ins to start. Lots of exceptions here, but it is a helpful goal.
• Support every browser with any material market share. There is no excuse these days to be FireFox or Safari challenged
• Make sure the service works on various flavors of Windows, OSX, and Linux.

In short, he says, eliminate all barriers to the initial customer acquisition.

But unlike 30 day free trials before having to pay, a true Freemium experience ensures that whatever the customer gets day one for free they are always going to get for free. Nothing is more irritating to a potential customer than a “bait and switch.”

If Freemium is such a great approach, why wasn’t The New York Times’ foray into this model more successful? It gave away a basic service and, with Times Select, offered a premium upgrade.

Part of the answer (there is sometimes but not usually a silver bullet) may be that the model is most likely to succeed when the customer implicitly understands why the paid service has to cost money. Free e-mail accounts that offer greater storage for a fee. Termination cost on other carriers networks in the Skype model is explicit justification. In the case of TimesSelect, it would be obvious to most readers that arbitrary withholding of access to some portions of content was not related to significant costs. It may have made some sense as a “value” play, yet it clearly did not work. “But if your free service is loved and you do a good job articulating the value that comes with the paid service, you can convert to paying users with good results,” concludes Wilson.

penny_gap.JPG
The Freemium model was augmented one year later by another venture capitalist, Josh Kopelman. He has labeled his observation “The Penny Gap.” I recall meeting Kopelman when I was teaching at Temple University in Philadelphia. He had started Infonautics Corporation, the predecessor of today's High Beam Research, in the early Internet days. I assume from that he learned some lessons about offering a subscription service that gave users access to a wide range of magazines, journals, reference and newspaper material. (And that he was more successful with a subsequent venture, Half.com, acquired by eBay).

The Penny Gap says in essence that getting a user to go from free to any sort of payment, even a penny, is harder that getting a paying subscriber to pay more. Going from free to $1.00 is a much higher hurdle than from $1 to $2, even though the difference is the same. The Penny Gap is a disconnect with classical economic theory, which would hold that demand increases as the price decreases. As Kopelman illustrated in the accompany figure, getting users to make any financial commitment is the greater hurdle than the amount itself.

What does this say about the content-heavy online ventures of the legacy media business? In large measure it helps explain why they settled for the most part (well, except for The Wall Street Journal) on an advertiser supported Web model. From USA Today to Slate to The New York Times media sites have tried and failed to make a user pay model stick, despite offering some high grade content.

But by dissecting the successful non-media sites that have achieved a substantial user-pay component, could media firms find areas where they can truly find value added to justify a premium? I’m not optimistic. Two years ago I might have offered that a comprehensive ad-free video service could be sold at a premium. Recall CNN tried that with its Pipeline service, providing real time video streams and an archive of telecasts. It met many Freemium characteristics, including a presumption of additional cost for all the storage and bandwidth. Apparently Time Warner determined that more advertising revenue outweighed the subscription dollars. Hulu, the new NBC Universal-News Corporation joint venture, is all free, all the time. It has not made noises about offering paid-for premium content.

The bottom line is that as a generalization the media business may not get over the Penny Gap chasm. For those firms that have been on the electronic side, where advertiser supported has long been the total revenue stream, maintaining that model may be easiest to accept. For that segment of the print media that has been used to drawing at least some of its revenue from consumers, resigning itself to only advertising may be tougher. And perhaps a bit of a blow to its self-esteem.

Comments (8) + TrackBacks (0) | Category: Internet | Online | Revenue models | media industry


COMMENTS

1. Raby Saltmon on March 20, 2008 9:44 PM writes...

Your article on Freemium, really begs the question, if the economy moving towards in that direction, I have been following some few other companies like:

http://showmypc.com
http://skype.com
http://google.com/goog411
and other google service
http://thefreesite.com

I am sure there are many more but they all have something common, that is a free modal, with business targeted options.

The winner is the end is the consumer.

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2. Anonymous on March 21, 2008 8:16 AM writes...

Interesting article, but looks like you got the source wrong:
http://avc.blogs.com/a_vc/2006/03/the_freemium_bu.html

Permalink to Comment

3. Ben Compaine on March 21, 2008 9:35 AM writes...

Yes, according to Wilson in the follow up post in the link provided by Anonymous (a very prolific writer who seems to comment at countless disparate blogs) Jared Lukin came up with the Freemium label. Governor's post was just before Lukin's and I read the wrong name for Lukin's post. Thanks.

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4. Paul Bradshaw on March 25, 2008 5:14 AM writes...

Disney call this model the 'velvet rope', i.e. you pay to cross the velvet rope into the 'VIP' area with added benefits. I wrote more about this in my 21st century newsroom part 5: http://onlinejournalismblog.com/2008/01/28/making-money-from-journalism-new-media-business-models-a-model-for-the-21st-century-newsroom-pt5/

Permalink to Comment

5. dorian on May 12, 2008 8:02 PM writes...

Fremium, is really a mixed model. Mixed models work well for niche media -- and most news sites are niche either geographically or by interest. The Times got it wrong, but perhaps with the type of content, not the concept. They put opinion behind the wall because they couldn't make money off it with high-cpm ads, not because of any user orientation.

I keep thinking of the old Wisconsin paper that had a paid Green Bay Packers website that made a decent chunk of change for extra stats and so on. What stats, hyper local content, access can any paper sell? What leads can it generate and sell?

Alternately, how many ways can it serve its content and get ads attached?

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6. Keith Johnson on July 17, 2008 12:02 PM writes...

The Freemium Business Model, especially for web-based businesses, is excellent, I believe, and a real solution to the penny gap economics of the web in particular. Yes, everyone wants everything free, but for a company to survive as a business entity, there has to be cash flow to at least pay its business expenses. The freemium model, at this point of the game, is the way to keep customers happy and also to ensure the survival of businesses providing needed services.

Permalink to Comment

7. Alex Roberts on May 30, 2011 9:43 AM writes...

Interesting, but this kind of model is 100% founded on the current state of technology. The reason for the 'penny gap' issue is simply because the payment providers haven't yet worked out how to (profitably) take micro-payments - eg. one penny - from us. When they do, and I'm certain they will, the whole gameplan will change, and all you Harvard professors will be one step behind the curve (again). My point is this: be very wary of building a prospective business based on a model that could go out of the window tomorrow morning.

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8. iiiii on March 16, 2012 12:47 AM writes...

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