I remember reading Wired Magazine in its edgy infancy, when it was a much thicker publication than it is today. Wired has retained much of its edge, and today I enjoy reading what is rocking their world via RSS feed. Free. Today, Wired’s Editor-In-Chief, Chris Anderson, opened Wired’s Dispruptive by Design conference with a discussion of the disruptive power of a zero price: free. Not coincidentally, Anderson distributed a pre-release copy of his book, Free: The Future of a Radical Price, to attendees. Free.
Anderson argues that prices, particularly for digital content, will naturally drive toward their marginal cost. The historical and economic principles involved make sense. Driving prices down expands markets, expanded markets create economies of scale, scaled distribution becomes profitable. In his presentation, Anderson refers specifically to “music, video and video games… news, books and email”, where the marginal cost is effectively zero.
The implications for digital signage are interesting. Certainly music, video and news are important elements of many digital signage network presentations. Today, their cost can hardly be described as free. However, as the battle for a rapidly expanding market ensues, prices for each are nearly certain to become commoditized. “Free” content is out there already, but most network operators still opt for paid content. Anderson refers to this behavior as risk avoidance, as there is some promise of quality when something is paid for. There is also a halo effect. One can glean news, weather and business information from many sources that are low or no-cost. But when the desired information is branded with the imprimaturs of Reuters, AccuWeather and The Wall Street Journal, the credibility and quality associated with those brands is conveyed to the network. It will reliably be partly cloudy and 95 degrees in Florida tomorrow, but somehow it feels more reliable when a trusted source like AccuWeather says so.
It is fair to assume that in the future, many networks will reduce their costs with commoditized content, if they are not already doing so. This would enable them to expand their networks with lower operating costs. If the same principle applies to advertising, then their CPM rates will also fall to the marginal (and lower) cost. Food for thought, but my guess is that advertisers will always pay up for measured audience, impressions and dwell time on digital signage networks. Low-cost content operators will have to prove that they can keep the eyeballs on the screens. This will be interesting to watch.
Dave Haynes extends Anderson’s concepts to the software end of the business. Indeed, we have already seen “free” digital signage products pop up, but their business models do not contemplate being free forever, as Dave aptly explains. My father always used to say, “you get what you pay for”, and he never knew much about software. In his presentation, Anderson related the story of how Bill Gates explained why software couldn’t be free. He said that if people wanted features to expand, if they wanted technical support, if they wanted some assurance that their provider would be around in three years, then paying for software was a no-brainer decision and in their own best interest. Things worked out pretty well for Mr. Gates.
The marginal cost for software is arguably near zero. Once an application is developed, providing that code again and again is merely a case of transporting bits and bytes. But given the fact that software products are never finished, that argument does not hold water. Enhancements, bug fixes, new features, and user interfaces must continually evolve in order to meet customer requirements. For applications upon which customers are betting their business, the marginal cost must include the investment required to support what exists already and to develop what isn’t yet there. It is much more than transporting bits and bytes, it involves real people listening, coding, testing and training.
“Free” is a compelling and attention-getting word. And in the grand scheme of things, there is a place for free. After all, we make use of Linux and open source code for certain elements of our infrastructure. Software engineers like to remind us user types, “Linux is free, if you value your time at zero”. To create software applications that are differentiated and compelling, even “free” elements must be extended (and of course contributed back to the open source library), and surrounded with original software design and code.
A commenter on Wired’s site, from Outlandos Music, put things very well: “When we create music, products, services, and experiences that make consumers feel so good that they want to tell the world about them, people will pay for them…” Indeed, you can hear passion in great music, read it in great books, see it in great movies, feel it when you get great service, and sense it when you use great products and software. It creates buzz, it creates fans. Free goods and services in a marketplace drive innovation and a passion to justify market prices. So free is good… and Dad was right.