Free For All? Profits Can Be Elusive Online

Even with viral Web hits — like this one for a music video — YouTube is not profitable. i i

What Price Popularity? Even with a string of viral Web hits — like this one for a music video — YouTube has yet to turn a profit. YouTube hide caption

itoggle caption YouTube
Even with viral Web hits — like this one for a music video — YouTube is not profitable.

What Price Popularity? Even with a string of viral Web hits — like this one for a music video — YouTube has yet to turn a profit.

YouTube

One of the biggest buzzwords in business these days is "free." It's not just the title of a best-selling book; it's a trend in marketing and pricing — and something customers have come to expect, especially in the digital world.

At the offices of TeachStreet — an online marketplace for teachers and students — the casual atmosphere can remind a visitor of a dot-com-era startup. But the business model is decidedly 2009.

What The Customer Wants ...

TeachStreet founder and CEO Dave Schappell says that free is part of its marketing strategy.

"So if you teach piano, you can come to TeachStreet, add your profile and a listing that says you teach piano," Schappell says. "That's free; it's likely always going to be free."

Some of TeachStreet's services have a price tag, but Schappell believes that to get people to use his site, it must be free, at least initially.

Deborah Mitchell of the University of Wisconsin's business school says that human beings instinctively try to minimize risk, though we might not even know it's happening. And she says that in many instances — especially in the digital world — we've come to expect a price of zero.

"You know, the so-called 'Google generation,' or people under the age of 30, certainly under the age of 20, have grown up just having all kinds of access to things online that didn't cost anything," Mitchell says. "So they expect music, other kinds of content, news — you know, even in the industry of pornography, they feel like the content should be free."

The Web: Fated To Be Free?

In his new book, Free: The Future of a Radical Price, Chris Anderson explains the logic behind the basic assertion that some information wants to be free.

"Digital stuff — that is, bits — have unique characteristics," Anderson says. "They can be copied at almost no price, they can be distributed at almost no price. And these unique properties of bits carried with them economic implications. And one of them is that they could be made free — and, therefore, because they could be made free, that there was a sort of gravitational force for them to tend to become free."

Not everyone agrees with this thesis. But it's fair to say that when most people think about getting things for free on the Web, what they really mean is that they don't pay any money. The actual cost is often shifted from users to advertisers.

The Business Of Free

The first in a three-part series of reports on how the concept of "free" is changing how companies do business.

Google makes a bundle with this model, but many other companies do not. For example, so far neither Facebook nor YouTube has turned a profit.

But, Anderson says, YouTube will soon be in the black.

"This is the thing about new companies — they tend not to make money in the early years," Anderson says. "What you build is, you build nonmonetary assets; you build audiences; you build attention; you build content; you build data; you build something of value, and then you figure out what the business model is."

Balancing Free Vs. A Fee

But once something's been offered for free, it's hard to get people to pay. Just ask newspapers struggling to find ways to make money from online content that is now available for nothing.

In fact, some marketing experts suggest that the move to make things free has been too fast and too dramatic.

Chris Anderson On NPR

"It's created this impression that we must go in the direction of free," says Peter Fader of the Wharton School. "And that could be harmful. It could become a very dangerous self-fulfilling prophecy.

"There are still many areas of digital content where people are quite willing to pay, and don't need any notion of 'free' at all."

Anderson views things a bit differently. He says that in many instances, companies can find a way to make more profit from giving products away than from charging for them.

Just about every Web site lets visitors try a free sample. Some companies hope that what they offer is so valuable that people will begin to pay for it.

Other firms are turning to what is being called a "freemium" model. The idea is to give most things away — but charge some people for a premium product.

In theory, at least, those who pay will subsidize everyone else.

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