The Long Tail is Wagging Freeconomics

In 2006, Chris Anderson, editor-in-chief of Wired Magazine, came up with an article with a fascinating theory (later published in a book called The Long Tail: Why the Future of Business Is Selling Less of More) that made some serious waves. Anderson argues that “economy is increasingly shifting away from a focus on a relatively small number of “hits” (mainstream products and markets) at the head of the demand curve and toward a huge number of niches in the tail. As the costs of production and distribution fall, especially online, there is now less need to lump products and consumers into one-size-fits-all containers.” Translation: if, for example, you own a music store, a shoe emporium, book market or spice stall,  you will only be able to carry limited stock – you will therefore tend to carry only best-sellers, that is, items that have a better than average chance of selling.Online stores, on the other hand, have no such worries (as proven by, and other online retailers.) Anderson discovered that the demand curve (for example, the number of music tracks downloaded from a music site) “started like any other demand curve, ranked by popularity. A few hits were downloaded a huge number of times at the head of the curve, and then it fell off steeply with less popular tracks. But the interesting thing was that it never fell to zero.” (PDF)  Anderson named his theory “The Long Tail“. The theory clearly applies to merchandise in its wider sense: services, content repositories, knowledge bases and anything that can be offered for sale. 

Anderson’s new book is sure to pile even more misery on offline sellers. In Free: The Past and Future of a Radical Price he declares that, far from being a short term promotional gimmick, free merchandise is a solid business strategy. In fact – he says – it is probably the only way some businesses could survive. The book will only be out in July 2017, but Anderson wrote an article on the subject for Wired. Future business models, says Anderson, should have zero-cost. The new model “is based not on cross-subsidies – the shifting of costs from one product to another – but on the fact that the cost of products themselves is falling fast.” Anderson believes that the success of various industries that offered products for free (music, print newspapers, elements in the gaming industry and – of course – online services like Google); prove that ‘freeconomics‘ is a good business strategy. Income, he says, will be derived from the differentiation between items that are offered free of charge and special – paid for – items. These items will be available as ‘Long Tail’ – niche – products – and they – hopefully – will provide sellers with ongoing income. You will need to pull out your wallet if you are looking for Bette Midler’s masterful rendition of Kurt Weill’s Surabaya Johnny, recorded live in Cleveland in 1977, a DVD of  Providence, Alain Resnais’s 1977 masterpiece on aging and death, or a copy of Itzik Manger’s hysterical “Book of paradise“.   

Anderson lists 6 categories of ‘free’:

  1. Freemium – you get part of the service for free, but pay for additional, specialised, features – as and when you need them.
  2. Advertising – someone pays for the service but you get it for free.
  3. Cross-subsidies – you get stuff for free as a way of enticing you to buy some target product/s. This was once known as ‘the SodaStream principle’ because SodaStream offered the soda making machine for close to nothing, making its money through selling various juices in syrup form, as well as the gas canisters required to create bubbly juices.
  4. Zero marginal cost – as the cost of production is reduced to zero, items can be distributed for free (for example – the potential dissemination of music online.)
  5. Labour exchange – here customers do some work in exchange for free services or items. Examples include voting for an answer on Yahoo Answers, or using Google’s 411 Services. It’s a mutually valued exchange of service for benefits.
  6. Gift economy -“From Freecycle (free secondhand goods for anyone who will take them away) to Wikipedia, we are discovering that money isn’t the only motivator” says Anderson. “Altruism has always existed, but the Web gives it a platform where the actions of individuals can have global impact.” 

Not everyone agrees with Anderson. There appears to be a parallel counter-movement arguing that the culture of free internet content needs to be changed, Eric J. Johnson, a professor at Columbia Business School, quoted in Techdirt, believes that people should pay for what they want: “[b]efore you add something to your site, you should say that if consumers really want it, that should be part of a package that you could charge for.An article in the New York Times simply asks “They Pay for Cable, Music and Extra Bags. How About News?” and quotes Chairman and CEO of News Corp Robert Murdoch, who says: “People reading news for free on the Web, that’s got to change.” This may sound just like what Murdoch’s shareholders would like to hear, but the sentiment may end up in heartache for the media mogul. The NYT article reminds us that the Financial Times online had more than 1,000,000 subscribers before it started to charge for access to a large section of its archive, offering only part of it for free. A year later, they had 50,000 subscribers and now, eight years later, they have 109,000 subscribers. Murdoch may argue – reasonably – that 100,000 paying customers are a distinct financial improvement on 1,000,000 freeloaders. Interactive Media legend Robin Parker argued once that he’d rather have 250 subscribers who are member of a wine club and, therefore, spend R1000 per month on wine, than 10,000 subscribers who buy nothing.

 The question remains – could the Financial Times online have found better ways to ‘monetise’ on a million users?  Anderson’s theory of Freeconomics seems to support that view. “Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today”, he says.

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