Who Pays for Our Online Lives? On the Internet, we expect things to be free. So who foots the bill for our activities online? Chris Anderson, editor-in-chief of Wired, Kevin Rose, founder of the social bookmarking site Digg, and Brad Feld, a venture capitalist, talk about the cost of offering online information to millions — free of charge.
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Who Pays for Our Online Lives?

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NEAL CONAN, host:

This is TALK OF THE NATION. I'm Neal Conan in Washington.

Online - just about anything you might want to get, you can get for free. Newspapers have abandoned the idea that they can charge subscriptions to see their news content, for the most part. Web-based e-mail and social network sites are free. And more and more, the only price you pay for music and TV shows is your time, however long it takes to deal with pop-up ads or watch mandatory commercials.

E-commerce - Amazon, for example - continues to do well. EBay makes money on commissions. You can still charge subscriptions for specialized content like Major League Baseball games. But if businesses offer all these other services and content online for free, how do they turn a profit?

Today, we'll talk with three insiders about what online business models work and what don't. Have you got an idea to make money on the Web? Did you try? Did it work? Give us a call. 800-989-8255. E-mail us: talk@npr.org. You can also join the conversation on our blog at npr.org/blogofthenation.

Later on in the hour, Moises Naim looks at China and India and wonders if the cost of lifting people into the middle class is too high.

But first: online business models. And we begin with Chris Anderson, the editor in chief of Wired magazine and, last month, the author of the article "Free! Why $0.00 Is the Future of Business." And he joins us from member station KQED in San Francisco. And Chris, nice to have you on the program again.

Mr. CHRIS ANDERSON (Editor in Chief, Wired Magazine): Nice to be here, Neal.

CONAN: And the thing, I guess, I don't understand is all these online social networking sites like MySpace and then Facebook, they attract a quadzillion visitors. I hate to use the technical term everyday. They don't make money?

Mr. ANDERSON: They do make money, or at least they can make money. It's, you know, the point is really that the underlying cause of running this business these days are so much cheaper than they've ever been before and getting cheaper everyday that a, you know, because of bandwidth and storage and processing costs falling, you know, which is - we've never had an economy before where the sort of underlying infrastructure costs were falling every year - that they can launch big businesses with very small revenue streams and still break even.

And then, as these businesses grow, they can potentially become incredibly profitable, because, again, it costs very little to run the thing day in and day out.

CONAN: So what's the business model that works?

Mr. ANDERSON: Well, you know, it's interesting. Free seems like one of these crazy things that just can't work. But we've seen it for 100 years. I mean, you know, the original free was King Gillette and the razor and blades, where you give away one thing to sell another.

CONAN: Mm-hmm.

Mr. ANDERSON: That's really just sort of shifting money from one pocket to another. Then, there's the business that I'm in, the media business, which has always been free. You know, radio is free to air. Television was traditionally free to air. You know, publications are subsidized to the point of almost being free.

And we make money with what we call third-party pay model, which is that a third party, which is advertisers, pay for the product to be free to the consumer. So, again, those are conventional models. What's interesting about the Web is that it has two forms of free. One is this sort of extension of the media model, which is advertisers pay for everything so it's free to consumers.

And that's what you're seeing with the MySpaces and Google, et cetera. And then, there's this rise of this kind of new forms of free that aren't advertising supported - and we can talk about it later - that are really based on the fact that the underlying services are so cheap to run that you can be extremely inventive in how you charge, who you charge, when you charge, and make it feel free to as many consumers as possible.

CONAN: And are some of these services that we're talking about for free, are they in the position of what, I guess, used to be in the old supermarket business called lost leaders. In other words, potato is very cheap maybe you can get some people into the store and they'll buy their milk too.

Mr. ANDERSON: Exactly, and that's a cross subsidy. And, you know, and since razor and blades, you bring - you saw the razors that they loss and make the money back on the blades. A cell phone - you get a cell phone for free and then you pay overtime for the minutes.

The old model of that was sort of the free sample. So you go - you'd get like, you know, you're trying to promote muffins. You give away 1 percent of your muffins, you know, for free, or 1 percent of your perfume you sprits in the, you know, department store counter for free on the hope that you will sell 99 percent as the result of the kind of, you know, word of mouth that you started that way.

Online, it's exactly the opposite. What you do is you give away 99.9 percent of your product for free and then sell just 1 percent. So, like, Flickr is a photo-sharing site - you know, most people have the basic Flickr service, which is free. But if you're a, you know, a very keen photographer who want the extra features, you can go for Flickr Pro and pay for that. And the reason they can give away 99.9 percent and sell .1 percent or something close to that is that it cost so little to serve those free - those base customers that they treat it as zero.

Muffins cost a lot of money, and you can't treat them as zero. Offering a, you know, a Web service to an individual who are kind of a casual user is so close to zero you can round it down.

CONAN: And so are these the so-called freemiums?

Mr. ANDERSON: That's freemium. It's free for most, premium for a few. The premium subscribers pay for the vast majority of free users.

CONAN: And you think this is going to be a model that goes on into the future? Is this going to be sustainable?

Mr. ANDERSON: I think it is because, you know, what's different about digital, what's different about the Internet is that we really do have a case where the underlying cost gets cheaper and cheaper every year. So, you know, whatever bandwidth, whatever it costs Google to stream a video today, it's going to cost half that much in 18 months, and so to for storage and for processing.

And so, not only does it get sustainable, but it gets better over time. Whatever business model works today based on digital service is going to work better tomorrow because the cost side of the equation goes down.

CONAN: Mm-hmm.

Well, joining us now is Brad Feld. He's a venture capitalist; a managing director at Foundry Group, an early-stage software and Internet investment firm, which is based in Colorado. And he joins us now from the studios of KZYR in Edwards, Colorado.

Nice to have you on the program today.

Mr. BRAD FELD (Venture Capitalist; Managing Director, Foundry Group): Thanks for having me.

CONAN: And when you consider which companies you want to invest in, how do you figure out whether or not they're going to be able to turn a profit online?

Mr. FELD: Well, I think Chris has described, very nicely, the dynamics around the freemium model, but it's really only one of many different ways that companies can make money online. And obviously, all of the advertising span that we've been seeing shift from traditional media to online media as a massive trend that companies like Google are on keyboard advertising, or display advertising with companies like DoubleClick or Yahoo have really driven.

What's insightful about the dynamics that Chris talked about is if you think about 0.1 percent being the pay part of it, if you're going to actually figure out a way to move that 0.1 percent to 0.6 percent or 1 percent or 3 percent - so it's not 99.9 percent that you're giving away for free, but you're providing in a value where people are actually willing to, over time, increasingly pay incrementally more or an incrementally more number of people would be willing to pay, it becomes very powerful.

And one of the real opportunities when you start to see huge amounts of traffic, or huge amounts of traffic isn't measured in, you know, thousands of unique visitors a month or hundreds of thousands of page views, but - not millions of page views, but tens of millions or hundreds of millions or billions of page views a month. All of a sudden, you have a lot of other different opportunities to make money, again, off of that very small percentage that's willing to pay.

So, for example, we've seen great success with virtual goods in certain countries and in certain applications. And if you get enough volume, the virtual goods market is quite interesting.

CONAN: Can you give us an example?

Mr. FELD: So, you know, there are a handful of social networks where you actually can pay real money for virtual stuff, and this is virtual stuff that you might use to increase your skills or grow your characters if you're playing some sort of online game.

CONAN: "Second Life," for example.

Mr. FELD: Bingo. Another approach would be a lead theme model, where, really, what you're doing is you're matching up consumers' supply and demand. So - where the consumer service is free, there's a whole bunch of people in the world who want access to those consumers and they're willing to pay for access to those consumers in a highly qualified way. And those consumers might be willing, on the other hand, to provide their lead information because they're looking for something specific.

So we had great success with a company that's now owned by InterActiveCorp called ServiceMagic that, essentially, pioneered the lead fee model between people that were homeowners that were looking for renovations for their homes and contractors, which is, you know, a very local market, one that has significant scale and one that's very inefficient and really valuable. If you can provide additional content to that homeowner for free, they'll take all that content all day long. And when they're ready to do some renovation for their house, they'll happily say, hook us up with a couple of leads, where those leads are willing to pay 20, 30, or $40 per lead.

CONAN: We're talking with venture capitalist Brad Feld and with Chris Anderson of Wired magazine about business models that may or may not work on the Web. If you'd like to join us: 800-989-8255. E-mail: talk@npr.org. And let's begin with Paul(ph), Paul calling us from Long Island in New York.

PAUL (Caller): Yeah. Hi, Neal. Thanks for taking the call.

CONAN: Sure.

PAUL: We have an online service right now which is free to all users, and we take it a step further. We don't require any login or registration. And it's called FreeGabMail.com. It's F-R-E-E-G-A-B-M-A-I-L, dot-com, where users can go on to the site, they can record a video message with their web cam, or if they have a camcorder hooked up to their computer, they can contemporaneously record a message and immediately send it off to their friends using their standard e-mail client.

CONAN: And when you're hoping to make money on this, how does that work?

PAUL: Well, right now, we're doing everything with Google AdSense. And we haven't generated a tremendous amount of money yet, but we are getting hits on our ads, click-throughs on our ads. That's just a small banner at the top of our page.

CONAN: And is that the kind of system where every time somebody clicks on it, you get a small amount?

PAUL: Right. Every time the ad is viewed, we get an amount. And if someone clicks through, we get a larger amount.

CONAN: And how big do you think you're going to have to get before this -before you buy an estate in the Hamptons?

PAUL: Well, right now, you know, we're probably having thousands of users a month. So, really, to make any significant money, I think we need hundreds of thousands of users a month to make something like this really worthwhile.

CONAN: Brad Feld, briefly, do you think Paul's analysis is right?

Mr. FELD: I think Paul's probably off by an order of magnitude. You know, it's probably order of millions versus hundreds of thousands and, you know, Paul my guess is you're making a couple of bucks a day on AdSense, is that right?

PAUL: Yeah well, we're only making a few dollars a day and - but, in keeping with what you said earlier, our costs are very, very low on this and so really at this point, those two bucks are two bucks in the pocket.

CONAN: Okay. Paul, good luck to you. Appreciate it.

PAUL: Thank you very much, Neal. Take care.

CONAN: We're talking about the way to make money on the web. Coming up, we'll talk with the founder of the social media site Digg and ask him about how he plans to turn a profit. We'll also take more of your calls: 800-989-8255. E-mail us: talk@npr.org.

Stay with us. I'm Neal Conan. It's the TALK OF THE NATION from NPR News.

(Soundbite of music)

CONAN: This is TALK OF THE NATION. I'm Neal Conan in Washington.

So, your e-mail, your music, your news, your blogs - check out npr.org/blogofthenation - they are all free. So how on Earth does anyone turn a profit reconciling desire for free data, information and services with capitalism, has become the billion-dollar question that a lot of startups and venture capitalists were struggling with and that we are talking about today with Chris Anderson, editor in chief of Wired magazine and with venture capitalist Brad Feld, the managing director at Foundry Group.

If you've got an Internet idea, you think you can make money out off it, give us a call: 800-989-8255. E-mail us: talk@npr.org, You can also check out our blog at npr.org/blogofthenation.

And Chris Anderson, I wanted to ask you about something, the targeted advertising that we are talking about, this is the ability - of course, one of the things the Internet could do is not just send us ads. It can send us ads tailored to our desires, and of course we are giving up a lot of privacy to do that, these companies look at what we are looking at and say, oh, if you're on the side looking, for example, for home repair, we'll send you the ad from Lowe's or from Home Depot.

Mr. ANDERSON: You know, it's interesting, there's two things about that. First is that, you know, the notions of privacy and what we want and what we don't want are changing and, you know, the generation — the Facebook generation obviously has a different sense of personal space and privacy than perhaps we did.

The second is that a lot of those ads, those targeted ads, actually don't require any invasion of privacy. They're targeted to the content, not to the user. So when you - AdSense was mentioned earlier. This is Google's program to put ads on other sites. So, I, for example, have a robotics site, really narrow robotics site, and we run Google AdSense. Those ads are so targeted to our aerial robotics content that they almost feel like content themselves.

CONAN: Hmm.

It does not require any knowledge about the users. It just has to understand what are, you know, what the, you know, the marketplace of opinion, which is all these incoming links on the Web, thinks our content is about and then matching that with advertisers who have exactly the right ad for that.

CONAN: So on a robotic site, like the one you run, there might be ads for, what, the holographic projectors or something like that? Not yet, maybe.

Mr. ANDERSON: Three-axis accelerometers. You know, it's really narrow.

CONAN: Really very narrow. And Brad Feld as you're looking at applications like that and narrow-cast advertising, but also, does this issue of privacy come up as you're analyzing the way these business models are played out to you?

Mr. FELD: Yeah. There are some cases where privacy matters, but the vast majority of them don't. And, you know, to add on to what Chris just said, another good example is geo targeting, where I'm sitting in Edwards, Colorado, right now, you know, you're sitting wherever you are in D.C. If we hit the Web at the same time on the same site, that site could be running software that helped, in real time, tell that I was coming from Edwards, Colorado. But it wouldn't know anything about me specifically, so it could surf content that was organized around something in Edwards.

In addition, I think the challenge of privacy is one that lots of people like to blow up into a much bigger issue. There are plenty of issues around, you know, Social Security number-type data and credit card data. But even going back to the mid-'90s on the Internet, there was this whole discussion about how there are needed to be different payment mechanisms because nobody will feel comfortable using their credit card on the internet.

Of course, the vast majority of purchases on the Internet are still made with credit card that the system sort of absorbs some of these privacy dynamics, and it translates nicely into using historically effective ways of doing commerce or communicating. And really, what it does is it steps up the ability to provide very relevant content to targeted advertising, et cetera, without being intrusive.

CONAN: Let's get another caller on the line. Brian(ph) is with us from Burlingame in California.

BRIAN: Yes.

CONAN: Go ahead.

BRIAN: Yes. Sorry about that. Basically, my business is - I run a company. We're digitizing thousands of old yearbooks. And the challenge for us is this pay model versus a free model. And the way our business works is we partner with many of the schools to digitize their archive and many of these yearbooks go back over 100 years. And what we're thinking about doing is making the recent yearbooks available free with an ad-based model and the older yearbooks that are used more for genealogy searches as a subscription-based model.

CONAN: And how do you define recent, Brian?

BRIAN: Well, that's what we're kind of grappling with. The vast majority of our users today are kind of the baby boomer generation, so we're thinking about making the, like, 1960's through to the most recent yearbooks free, and then the ones pre-1960 as more of a subscription genealogy search-type of content.

CONAN: And Brad Feld, I assume this is a conundrum that is, well, specifically Brian's but one that not just his business feels.

Mr. FELD: Yeah. And, Brian, my recommendation to you would be to turn the problem on its side, which is, I think that what you really should be doing is trying to get back to what Chris led with, which is if you are going to use a freemium approach, what's the one-tenth of a percent or 1 percent of things that all the people engaging with your service might be willing to pay for? And find that and charge specifically for that, and try to get as many people using the service even if it goes back 100 years for that sort of more shallow level where you capture their attention for the first time.

So, you know, whether it's you do something where people can print out pictures or they can - you have some sort of find-your-friend program where you can get paid for matching back to other people in the network and you use an affiliation with a company like LinkedIn or even Facebook for something like that. And you try to figure out a dimension where you can charge across your entire customer base versus stratifying it by age, especially given the last thing you mentioned which is that your early adopters and probably the lion's share of your users are going to be more recent kids.

BRIAN: And, you know, one other commen, just - and I think that those were some great ideas. One thing, too, that we found is when people are doing more kind of a social networking, entertainment-related Web surfing, we find that they're more likely to click though on ads, whereas people that are from an older generation doing research, kind of heads down genealogy research, they're very less likely to click on these advertisements, and also the volume of traffic is not quite as great.

But we are going to be adding print ordering services would you think that's going to be a strong revenue stream for us because we get lots of requests for that. And the only thing I'd like to mention is the Web site is e-yearbook.com. And I'll take the comments off the line, thank you.

CONAN: All right, Brian. Thanks very much and good luck to you.

BRIAN: Thank you.

CONAN: Joining us now is Kevin Rose. He's the founder and chief architect of the social media site Digg and cofounder of the new micro-blogging site Pownce, that's spelled P-O-W-N-C-E. And he joins us today from member station KQED in San Francisco. Nice to have you on the program with us.

Mr. KEVIN ROSE (Founder, Digg.com, Pownce.com): Thanks for having me.

CONAN: And those two different projects, compare and contrast them, if you will. How does Digg generate revenue?

Mr. ROSE: So Digg is a different animal altogether in that all of our content on the site is created by the users. So all of the stories that you see on the site, all the videos and images that have been submitted is 100 percent user-driven. So for us, we're really just creating a platform for the users and then we sit back and put ads on the site to monetize that content.

CONAN: And how is that working?

Mr. ROSE: It's been great. I mean, I started off - as Chris was mentioning, launching a site nowadays with just limited resources is very easy to do. I started off with just a few thousand-dollar investment to get the site off the ground and really just use Google AdSense to kick it off. And the revenue checks were very small. We're talking, you know a few hundred dollars a month. But it was enough to pay for those initial servers, and I still had my full-time job.

And then, as we began to grow and attract more and more users, it was clear that we needed to raise a little bit of venture funding to help keep up with that growth and hire more developers. But then, also along with that growth came more eyeballs and more clicks, and, you know, we're doing just fine. We have a clear path to profitability.

CONAN: A path to profitability, meaning that you are not there yet.

Mr. ROSE: Meaning we're not there yet. We are fully funded, meaning we won't have to take another round of funding. And we're talking, you know, something that was making hundreds of dollars a month in revenue to now, you know, we're making million dollars, millions of dollars a year in revenue.

So right now, it's just deciding where we want to spend that money. I mean, if we didn't want to invest in R and D and some other things that we're doing, we could be profitable today. But, you know, we want to continue to innovate and spend the dollars where we need to.

CONAN: And now this new site, Pownce, what's the difference?

Mr. ROSE: So, Pownce is all about kind of microblogging and sharing media with your friends. So, if you have a large video that you want to share or you have pictures, it's very easy for you to send them and blast them out to a large group of people.

So with Pownce, the model's a little bit different in that we put ads in between the different messages as they are coming in - the different notes that we call them, as they're coming in. But if you don't like the ads and you want to customize your profile a little bit, you know, with a custom theme or something along these lines, we have a kind of a freemium-based model where everything is free up until a point where you want to send extremely large files or customize your experience.

CONAN: So…

Mr. ROSE: So if you pay that $20 a year, we'll strip out all the ads, you won't have any advertising whatsoever and you'll have those added capacity and the ability to customize.

CONAN: And, again, that's - is that the freemium model, would that be an accurate description.

Mr. ROSE: Yeah, I'd say so. I mean, everything is free up until a point when you're starting to use for kind of commercial more - more commercial purposes or you just want to, you know, support the company.

CONAN: And, again, I don't mean to treat the founder of a very popular site like Digg the same way as some of our callers who called up with some schemes. But I wonder, Brad Feld, did these models make sense to you as a venture capitalist?

Mr. FELD: Yeah, they make good sense. I think that key differentiator is Kevin has created a site in Digg that's immensely popular. And the number of sites that get created from scratch that become immensely popular are very, very small on a percentage basis. So what you see is a very, very low entry cost, you know, a couple of hundred bucks, server get going, write some code, get something up and going. But getting past to that next level of enough traffic to make $2 a day, that's not a business.

When you get to the point where you have enough traffic where you're actually making interesting money, then all of a sudden you really do have to make some investment in additional software development, uptime on the system scale, et cetera. So there's this step function that happens in the vast majority of the ideas that are sort of consumer-Web ideas get stuck in that first category and never get further. You know, Kevin and Digg have gone a long way partly because they built something that's unique and creative and partly because, you know, they've developed a great following and executed really well with them.

CONAN: And, Kevin, as I understand it, loyalty is really critical to a site like yours, but you were mentioning, effectively, your users create your content and then you sell them advertising. Do those users who create your content - has there ever been a rumbling that, you know, we might want a percentage of that income revenue stream?

Mr. ROSE: Well, I mean, I think the users of the site understand that we have to pay the bills and we have to be able to support all the development behind the scenes that makes the site possible. Digg is essentially - uses the masses to surface the best content. So behind the scenes, as these users are submitting in all their favorite stories and videos and images and whatnot, we have algorithms that we've developed that look at that attention and look at those votes on that content and how many digs are around that content and then promote the best ones to the front page. And in order to do that, I mean, we have to basically combat spammers and really spend a lot of time and money to create those platform. And so they realize that that's, you know, it has - at the end of the day, it has to be a business in order to survive.

CONAN: Kevin Rose is the founder and chief architect of the social media site, Digg. Also with us, venture capitalist Brad Feld of the Foundry Group. And Chris Anderson, who's the editor in chief of the Wired magazine. You're listening to TALK OF THE NATION from NPR News.

And Chris, I wanted to bring you back into the conversation. As you're looking at all these different approaches, these different ideas of trying to generate revenue basically from free sites, is this going to change the nature of the way we use the Web, or are sites adapting to the way we use the Web?

Mr. ANDERSON: I think it has already changed the nature. This consumer expectation that everything online is going to be free has both caused people to be really creative in sort of how to - you know, how do you make something free? Could physical goods be free, you know? Could you have a free car, could you have a free airline seat, et cetera? And then, it's also created something we - that Kevin sort of hinted at which is the notion of an entire non-monetary economy, where there's no business model whatsoever.

Now, you know, the users who create the content for Digg expect no payment. But look at Wikipedia, you know, look at Craigslist, look at the blogosphere in general, these - this is a kind of an economy-sized phenomenon with millions of people and there's - no one's monetizing eyeballs. There's no expectation that anyone is going to make money. It's all being done for reasons about - like attention, reputation, expression. These all turn out to be valuable things that in many ways we value more than money. And the rise of the kind of the free economy - the gift economy as it's known - is perhaps the most exciting thing that's going on right now.

CONAN: Yet, we're talking about social network sites where the underlying cost of these ventures is, as you're saying, low and getting lower. What if you're talking about sites like news content, where the price of gathering the news is very expensive, and if enough people don't buy the newspaper, well, you got a real problem?

Mr. ANDERSON: So I run one of those companies. I'm in the dead-tree business and we're also in the Web business, we have a print magazine and we have a Web site. You know, there's two sides to the cost equation for media. One is the, you know, generation of the content and the other is the distribution of the content. When we distribute in print, we have paper, we have trucking, we have newsstands, we have returns/pulping - all that kind of stuff - actual printing cost, and that's about half of our costs.

On the Web, we don't have that half of the cost. And so, you know, when you look at the - like for a newspaper business, the question is, where's the real value there? Is the real value in printing paper and shipping it around, or is the real value in reporting and newsgathering and analysis? If the answer is the second, then the Web is a way to do it at a much lower cost. And with every bit, potentially, as much news value just much, you know, just a way to have a profitable business with lower revenues.

CONAN: Yeah, but unlike Brad Feld - excuse me - unlike Kevin Rose's contributors, those darn reporters they want a salary, health coverage, all kinds of stuff.

Mr. ANDERSON: There's definitely a, you know, a role for professionals and amateurs as we've discovered, so it's not - I think, you know, the old world was all professionals. The new world - we've seen worlds that are just amateur and I think there's clearly a demand for, you know, for analysis and insight and kind of professional qualities on top of that.

Mr. ROSE: Yeah. Absolutely. I think one of the things that Digg is really good at is kind of leveling the playing field, so it really comes down to the quality of the content. So we can have a story on the front page from a blogger, getting the same amount of traffic as the story on the front page from the New York Times or The Wall Street Journal.

CONAN: And final question to Brad Feld. As you look around, are these freemium kinds of companies - that's what you're going to be interested in investing in?

Mr. FELD: No. We invest across a wide range of things. And we take what we call thematic approach. And freemium is a particular business model that can apply to a number of different themes. One of the insights I think that is important for entrepreneurs and, you know, users of the Internet a like, is that what we've seen in the last couple of years is the huge amount of innovation on the consumer Internet side, and what we're seeing now is much of this innovation that people are used to using and have had access to because of, you know, mobile computing and ubiquitous broadband and all of the free consumer Internet sites are starting to find their way into enterprises and, you know, voila, the historical approach of selling software still works in the enterprise.

CONAN: Thanks…

Mr. FELD: So you've…

CONAN: I'm afraid we're going to have to end it there. Brad Feld, you just heard. Our thanks, too, to Chris Anderson and to Kevin Rose. And stay with us. When we come back, we're going to be talking about lifting people into the middle class and why it might not be a good thing.

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