The End of the Free Lunch?

Stephen Yagielowicz
A recent article in The Economist magazine entitled "The end of the free lunch — again" and subtitled "The demise of a popular but unsustainable business model now seems inevitable," caught my attention and I'd like to share it with you.

While the author remained unattributed, the points brought out in the article and the dozens of well-thought-out reader comments posted to its online version make this piece a must-read for anyone involved in new media marketing — adult or mainstream — but also a read that must be taken with a grain of salt; but more about that later.

The article lays out the basic argument that free online content models are economically unviable over the long term — a situation which adult webmasters trying to sell product in a market shaped by their years of giving "samples" away wholesale, may understand.

"In recent years, consumers have become used to feasting on online freebies of all sorts: news, share quotes, music, email and even speedy Internet access," the article begins. "These days, however, dotcoms are not making news with yet more free offerings, but with lay-offs — and with announcements that they are to start charging for their services."

At first glance, the above quote seems to sum up the current market quite nicely, but as The Economist pointed out, the lede was from an article which appeared in April 2001 — but it applies just as well today. The basic premise of the story is that the dotcom boom fostered the common notion that offering free Internet services was a viable means of doing business in what was a new and not well understood communications medium.

Companies thought that by giving away content and services, they could market their messages to viewers — driving revenues from advertising in much the same way that traditional broadcast TV had done for decades. Why wouldn't this well-proven business model transfer seamlessly to the new medium?

Well, for one thing, the Internet isn't TV.

This is where the fallacy of mass media marketing comes in, with slick ad execs selling the idea of the efficacy of broadcast advertising spots — using nebulous terms such as "branding" when describing the millions of consumers that they are so certain are being exposed to and positively influenced by your multimillion-dollar advertising campaign.

But the web doesn't lie: it allows you to easily count clicks and gather an unlimited amount of data on customers, their behaviors, and their feelings towards your company and use/acceptance of your product.

And this is where the disconnect sets in, as the web's numbers demonstrated that once consumers got past the novelty of banner ads and other online advertising, they stopped clicking and started ignoring the ads, much as they ignore TV commercials. But those Madison Avenue types can do a great job of selling the Emperor a new set of clothes that only "smart" people can see — thus while many decision makers may still accept the "benefits" of broadcast advertising, they are reluctant to invest similar dollars in the more measurable online arena. An odd contradiction, but there you have it.

As such, the amount of ad dollars being spent online, while huge, isn't up to many folks' "blue sky" projections, and as a result, the number of advertising-supported operations will be less than some had hoped for.

This is reflected in the scrambling to develop sustainable business models for online adult, where in today's market it's hard to sell porn and becoming less profitable to give it away in exchange for audience share to which you hope to present ads.

But it's not just adult that's grappling with the issue, with major mainstream operators such as Facebook and Twitter worrying about how to sell ads and make money without having to charge for their services — a certain death-knell that will launch an endless wave of potential usurpers. There's some pretty smart people working on this problem, and they haven't figured it out either.

"It is not surprising that rival search engines, social networks or video-sharing sites give their services away in order to attract users, and put the difficult question of how to make money to one side," the article offered. "If you worry too much about a revenue model early on, you risk being left behind."

"Ultimately, though, every business needs revenues — and advertising, it transpires, is not going to provide enough," the article concluded. "Free content and services were a beguiling idea. But the lesson of two Internet bubbles is that somebody somewhere is going to have to pick up the tab for lunch."

With so many customers willing to "dine and dash," or to just eat a "free" meal at home, the question remains unsettled as to whether or not the restaurant serving this lunch will be able to stay open. In my opinion, the answer lies in how good the restaurant is at preparing and presenting its food and service — in other words, will going out to eat there be worth it, or would you, after dining there, wish you had dined elsewhere instead?

The return on investment of the consumer's entertainment dollar is a relative thing and it is a mistake to assume that nobody is willing to pay for entertainment media. Even in a "down economy" folks still go to the theatre, rent videos, and buy CDs (or even old vinyl record albums), books, magazines and more: pay-per-view movies, premium cable and satellite services — the sky is the limit.

Heck, we even went to The Pink Floyd Laser Spectacular the other night. Held at the beautifully restored avant-garde Cascade Theatre, we paid $33 each to sit and listen to one side of "The Dark Side of the Moon" and a mix of other Floyd tunes, accompanied by a laser light show and special effects.

I've been to such shows in the past. We have this music and play it at home too, and we hear it on the radio when we drive — all for free. But what isn't free is the presentation of the event: it's been a decade or two since I frequented the Grateful Dead laser shows in the planetarium of the Boston Museum of Science, and my wife and I have never attended such a show together. The cascade is a beautiful venue, and the "street theatre" of several intoxicated attendees "tripping balls" and wandering around muttering and waving their shoes and such just added to the festivities and made the price worthwhile.

Sure, I can — and do — get this same content for free, but the packaging is what made me open my wallet and spend a fair amount of money for the experience.

This is why there will always be customers willing to pay for porn, even when the exact same content is available for free, pirated or otherwise. As long as a paysite can provide a worthwhile visitor experience, some folks will be willing to pay a premium to get it.

But does this mean that the genie can be put back in the bottle and consumers weaned off of the notion that content should be free, as some in the advertising game suggest? In the opinion of this observer, no, not completely, consumers will always demand free content. It's up to savvy marketers to figure out ways to profit from that demand — even through means as simple as tiered services, where basic services are offered for free with upsells to bigger, better, faster and more.

You can read the Economist story and its comments online.