The business model of free

The Long Tail author and Wired editor-in-chief Chris Anderson proposes that Internet-based distribution is driving consumer payments toward zero in all industries, including music.

Matt Rosoff
Matt Rosoff is an analyst with Directions on Microsoft, where he covers Microsoft's consumer products and corporate news. He's written about the technology industry since 1995, and reviewed the first Rio MP3 player for CNET.com in 1998. He is a member of the CNET Blog Network. Disclosure. You can follow Matt on Twitter @mattrosoff.
Matt Rosoff
2 min read

Wired Editor-in-Chief Chris Anderson has moved on from The Long Tail, in which the future of business was selling smaller quantities of many more goods. Now, he's proposing that the future of business is selling goods that consumers don't pay anything for. The organizations who provide those goods will receive their compensation in other ways, such as from advertisers, or other forms, such as a pleasant altruistic feeling (look at Wikipedia for an example).

It's a persuasive argument, particularly when he talks about music: "Between digital reproduction and peer-to-peer distribution, the real cost of distributing music has truly hit bottom. This is a case where the product has become free because of sheer economic gravity, with or without a business model." As I've pointed out many times, any new music-related business must accept the fact that it's competing against a huge store of readily available free music, and build that fact into its business model.

So what are those business models? Cross-subsidies could work: Anderson's article mentions vendors giving away burned CDs of a Brazilian band, Banda Calypso, in hopes they'll build a fanbase who will come to show. But there are other possible cross-subsidies as well. For instance, users could get music for free, but only if they're willing to pay for a device to play them on--the model being proposed by Omnifone and Nokia.

The music industry could also employ Anderson's "Freemium" model, in which a few users pay for a higher-level version of the product, subsidizing the 99% that want to get a lower-level version for free. Lossless downloads probably wouldn't work, as they're so easy for the first buyers to redistribute. But how about audiophile-quality vinyl LPs, DVDs with surround sound and video extras, or CDs with coupons redeemable for concert tickets by the act?

Advertising? It works for terrestrial radio, so why not for other forms of music distribution? It's true that radio's got somewhat of a captive audience--you can't switch the station when listening in the dentist's office--but if online sources don't make the ads too obtrusive, they might be able to convince users to accept them.

The point: there's still a value chain in recorded music, including songwriters, musicians, recording engineers, promoters, and live venue owners. Those people don't necessarily have to accept that their career is inevitably going to turn into a hobby. But they might have to think differently about what they're actually selling.