When Free Isn’t Sustainable

April 6, 2010

There’s an interesting post on my friend Gini Dietrich’s blog, SPIN Sucks.  I found it and one of the comments both interesting and insightful.  It actually created a bit of a visceral response from me (you can read my comment here).

Writing about The New York Times’ plans to start charging for its digital subscriptions through Kindle (which it already does and plans on raising), and the iPad (which, apparently, it’s going to start to do); guest blogger, Nick Harrison, and a commenter put forth an idea that is commonly accepted, and inherently wrong.

The idea is that you cannot charge for information on the web.  Mr. Harrison, says, “My first reaction at the time was, if you are already losing subscriptions and advertising dollars, is actually charging for content the best strategy?”  My answer – Yes!

The commenter added: “This is an example of a company not understanding that they have to change with the times. The Internet has made nearly everything free, and people aren’t willing to go back from that.”  Outside of the fact that this isn’t true (The Wall Street Journal has been charging for content online since it started providing it), it doesn’t address the ability of a company to create a new experience worth charging for.

The reason I share this is because these thoughts are symptomatic of what is silently killing really good businesses – the idea that you cannot charge for what others are doing for free, or for less than you.

One of the first business lessons I learned (ironically from running a lemonade stand for a couple of days) was that if you charge less than it costs you to produce your products and services, you cannot make it up in volume.  If raising your prices means selling less volume, than so be it, because if you’re not making money – WHO CARES?!

The fundamental job of marketing is to create enough value so that people would be willing to pay more for something.  If all The New York Times does is charge for the same information and experience that other newspapers are giving away for free, then the author is right – it’s a bad strategy.

However, if you’ve had the opportunity to sample The New York Times’ iPad application (which I have) it will take you less than a second to realize that this is not the same experience as others.  Would I pay for it?  Yes I would.

Would everybody who reads The New York Times online pay for it?  Of course not, but who cares!  Would everybody pay for a phone that costs $600?  Hell no, but Apple made more than $1.5 billion doing it!

As I’ve been writing a lot lately, the newspaper or the information in the newspaper is the commodity.  The Internet has placed the value of that commodity (what I call the left side value) at zero. The Intelligence or Enterprise Value (what I call the right side value), however, is unlimited.

The New York Times was one of the first partners to jump in with Apple to develop meaningful applications for the new iPad, so much so that they were one of the few content providers highlighted in Steve Jobs’ announcement of the device.  I give The Times a tremendous amount of credit for their willingness to innovate and experiment.  I give them even more credit for asking people to pay for it.

Agree or disagree with The New York Times editorial slant, you cannot deny that they provide superior content and their new app provides a superior experience.  My only fear is that they won’t have the guts to stick with the plan.  Sure, maybe they’ll be smaller as a result, but I’d rather be smaller and profitable than larger and broke!

What’s the lesson for fast growth businesses?  Stop focusing on The Left Side (commodity) Value of your business and start building The Right Side Value.  If you don’t reinvent your business, some upstart in a garage will.

What do you think of The New York Times Strategy?

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Comments

7 Responses to “When Free Isn’t Sustainable”

  1. Paige Worthy says:

    Hi David. Happy to see I could elicit such a visceral response from you.
    I’ll let the “total misperception” thing slide. We don’t know each other; strangers say things sometimes.
    I’m glad to read your post here and find it to be no surprise that we arrive at such different conclusions coming from such different places.
    As a business model, this may be smart. I don’t have an iPad, and I don’t intend to get one because I was over it from day one. But I understand why people love it, and I’m sure there are a lot of viable business opportunities here.
    And the New York Times? Great publication.
    But I don’t really understand the ins and outs of the business world, how to turn a profit, etc. Which I realize may put me across as a total idiot here, but I’m leaving a comment anyway. I left another on Gini’s blog as well, which I’ll link to here: http://www.spinsucks.com/advertising/20-smackers-for-a-new-york-times-kindle-subscription/comment-page-1/#comment-7361
    Essentially: Basics for free, rich-content extras for fee. And maybe this whole thing is moot for me, because I’m not going to have an iPad in the near future and am not the audience for this big e-reader subscription model… But that’s my take, from a reader’s perspective. (A reader who also happens to be a journalist in perpetual peril of losing her job, as it were.)

  2. Paige, thank you for the comment – and my apologies if my vigor got ahead of my text. Upon a second reading of my comment I realize that it could be easily misunderstood.

    The visceral part of my response (and again thanks for eliciting it) comes from a lot of intense focus the last few weeks trying to get companies to understand that if they focus on creating value and viewing the world through their customer’s eyes, customers will look beyond price (what’s it cost) to value (what’s it worth). I didn’t mean to single your comment (or Nick’s post) as being out of the norm – quite the opposite. The idea that if you compete against free you can’t earn premium margins is hurting a lot of businesses.

    I read your comment (actually just as I was getting pinged with your comment here) and I completely agree with you. If all they do is give the basics and say “now you gotta pay” it has no chance of working. And I agree that there needs to be basic content available for free. As the enrich the experience, through the iPad or otherwise, I believe they (and other companies in a variety of industries) can begin to monetize their intelligence. It’s a shift in thinking, and it’s possible.

    I hope this isn’t the last time we engage – and I promise to be more careful in my word selection. :)

  3. This was fun to watch! Professional discourse as its best.

    I didn’t write the post on my blog, but my position on this entitlement we all have is that we don’t deserve to have everything for free, but it’s been given to us that way for so long, which has created the problem. Do I think all media should charge for their content? Yes. Do I think if they didn’t start off charging for online media from the beginning that they can charge now? No.

    To Paige’s point, if they continue to give away what I already get for free and then charge for better, more useful, and more valuable content, I’ll pay for it.

    http://twitter.com/ginidietrich

  4. Gini, I agree – and when you experience the fidelity and potential of the iPad application you quickly realize it’s way different (and better) than merely online.

    I hope my bigger point isn’t lost though. Businesses need to price to be profitable – regardless of the market. I probably talk with 20-30 businesses every month about sales related issues. Many to most are literally pricing themselves to death. In the name of “being competitive” or “keeping to machines running” they are making it impossible to ever be profitable. If raising your prices means being smaller then so be it – but businesses have got to price for profit (even if their competitors are being stupid). All one need do is look at the airline industry to see what happens when you let your competition set price.

  5. Joe Heidler says:

    I agree with you Doug. I learned long ago that being small and profitable beats the hell out of being large and broke. It has cured me of my quest for world domination, but not from being the best and most profitable in my area.

  6. Benjy says:

    I think one of the problems with the selling of content on the web is that there seems to be a major disconnect with the price vs. the old model. The media want to charge pretty much what they did for the old, tangible version whether a newspaper, book, CD, etc. but the customer sees that there is no longer the need for printing presses, CD blanks and cases, paper, trucks, delivery drivers, warehousing, retail space rent for sq. footage taken up by CD/Book display shelves, etc. and thinks that the costs should be significantly lower.

    Here in Chicago, I can subscribe to the Tribune via commonly available specials for under $3/week… so say $150 a year. I’ll assume the NYT is available in New York for a similar cost. So why should the electronic version on a Kindle or iPad cost MORE than that? And yet the Kindle NYT is going up to $20/month. I know the papers lose money on the printing & delivery of physical papers vs. revenue from subscriptions, and make it up on the ads. So if they can remove that huge cost why not pass most of it on to the customer? I’d pay some for digital content but not the same or more than for the tangible product.

  7. Joe, best and most profitable sound like worth goals to me (and who knows, maybe you’ll dominate the world anyway :) ).

    Benjy, I think it comes down to a choice that every seller has to make – do you want to have a “what’s it cost” conversation or a “what’s it worth” conversation.

    I do not have a personal opinion as yet about an NYT subscription fee, as they are not yet asking for one and the iPad app, while very nice is still in a sort of beta phase, so I don’t know what it will be when it’s done (though from the looks of what is there now it will be quite good). I would not pay (and haven’t paid) for the Kindle version because I think the online free version is better.

    That said, the main point I wanted to make is that sellers need to focus on having “what’s it worth” conversations. This type of transformation will take time as customers have been trained in the “what’s it cost” mindset. Additionally, only a percentage of customers will be willing to pay what something is worth – and my point is that this is alright. The internal purpose of a business is to create wealth and earn profits – not be big for the sake of being big.

    Thanks for the comments.

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