If you are not using free, you will be competing with free – Peter Froberg

Shaping digital content becomes a major challenge for publishers as the shift from content to platform has resulted in the development of new business models. Traditionally, a focus on improved editing, design and marketing are the key features that a publisher develops and adapts to change. However, these changes are not sufficient enough to persist in the modern digital age because the internet has “facilitated the dissemination of artistic works by allowing users to mass distribute files within seconds”(Bittar, 2014, p.1). Instead, a continued integration of innovative solutions is needed where added value and personalized services are just as important as the content itself. Freemium, is the combination of the words “Free” and “Premium” and the idea behind this model is to offer a product or content for free while reserving additional content or services for paid users, also known as premium users. Even though freemium business models does not benefit niche products and content, by adopting the freemium business model, publishers are enabled to expand their audience reach which leads to an increase in revenue in a highly saturated digital market.

Free content is effective for converting users to paid subscribers as it lowers the barrier of entry for readers. Digital products are distributed through different channels and face different distribution cost structures. Often, the only costs associated with distributing a digital product are hosting expenses and platform fees. Low marginal distribution and production costs create the opportunity for a product to be adopted by a “large number of people, quickly, at little to no expense on the developer’s part”(Seufert, p.4,2014). With content being easily accessible via the internet, making content free can lower the barrier of entry for readers. Charging for content suggests that the quality of information is valuable to that certain reader and that they would not be able to find similar or related information elsewhere. A professional reader in search of information about a particular topic would be prepared to pay if it “provided better insight, highly relevant choice in the selected area, and is prepared to pay”(Book Industry Study Group 2013). However, occasional readers desire a range of information from various fields, therefore, such readers can withdraw from the purchase because of high prices as content is to niche for them (Book Industry Study Group 2013). The Los Angeles Times and The New York Times (NYT) each tried charging for access to some content online, then dropped the requirement because it cost them audience and advertising revenue(Salmon, 2011). The introduction of paywalls combined with a freemium strategy proved that freemium model can work in news industry. The NYT wanted to increase their user base, so they created a business strategy that was primarily a freemium model combined with a metered paywall, where users are able to read 10 articles for free. It allows anybody anywhere to read any NYT article they like, which makes them more “open and inviting”(Salmon, 2011). The premium features include, “Subscription to the print edition, digital access to all content on nytimes.com and mobile/tablet apps”(Froberg, 2015). In fact, the NYT after just four months,  converted 224,000 free users to paying ones, which had premium access to the NYT website. (Salmon, 2011). The NYT has taken a different approach and their paywall, which is a modal box that pops over the web browser after reaching your limit has allowed the company to increase its revenue by at least 18% from 2011 Q1 to 2014 Q4 (The New York Times, n.d.). This creates a situation where you can give away the core product for free and create a profitable business model from just up-selling to a few percent. If you hit the paywall on a regular basis and decide to dismiss it, eventually you start feeling a bit of guilt and pay up. One thing to note, if “freeloaders value what they’re getting, a lot of them will end up paying anyway” (Salmon, 2011). In addition, value of free users can take two forms: Some of them become subscribers, and some draw in new members who become subscribers. Typically, a free user is worth “15% to 25% as much as a premium subscriber, with significant value stemming from referrals” (Kumar, 2014). So, a free user can contribute to your revenue model through other means, such as helping publishers grow their user base through referrals and Word of Mouth.

By adopting the freemium business model, it enables publishers to drive engagement with readers and authors. Since you are giving away a core part of your business for free, it is crucial that publishers understand the needs of their users. To be profitable in a freemium business model, without strictly relying on advertisers, 80% of respondents believe that the combination of a subscription model with a freemium strategy would be inevitable (Despot, 2015). Premium features need to convince readers of its value of converting from a free user to a paying one. However, publishers realize that readers are not their only source of revenue and are creating business strategies that can engage multiple users to and have a monetization strategy from both the reader and author. Flat World Knowledge, a well-known textbook publisher, published their material under a Creative Commons license, which means that not only can “readers access the material for free, but they can also reuse it and modify it as they please”(Doscdoce,p.20,2015). Their business model consists of selling different downloadable formats of the same book in PDF format, chapters, and modules, while providing extra assistance. The business model coming from authors include “reduced publishing times, creativity support, and the chance to update their texts”(Doscdoce, p.20,2015). Whereas, the focus on the readers, which is students can read textbooks online for free and are only charged if they want to print the material on demand or if they want to download the eBook version (Dosdoce, p.23 2015).

In my opinion, another method that could help generate revenue could be offering the material for free in a single format, but charging for DRM (Digital Rights Management) free EPUB files so that content would work on multiple ecosystems. As defined by Bittar (2014), DRM is a technique that allows “copyright owners to enforce their rights by controlling what users can do with their digital files, for instance, DRM can determine under what circumstances, how many times, for how long, and on which platforms a user may access a file” (p.5, 2014). A restrictive DRM causes a lack of interoperability, which can increase barriers to entry, switching costs, and network effect, which locks consumers into an e-book ecosystem. In addition, the extent of the DRM restrictions imposed on a file is determined by the copyright holder, which raises serious concerns about users’ privacy and fair use(Bittar, p.20, 2014). Thus, the premium feature of offering an unrestricted DRM file format has a value proposition that allows readers to interact with multiple systems and read on different ebook device without getting “locked” down to one.

The freemium business model is a challenge for niche publishers as their target audience is much smaller. The broader the appeal of a product, the more potential users it can reach and the more widely it will be adopted. A broadly appealing product has a “widely applicable use case, or purpose” (Seufert,p.2,2014). Generally speaking, products that address a universal need, pain point, or genre of entertainment appeal to more people than do products that serve a specific niche. The freemium business model success relies on scaling the user base as there is a low proportion of users who monetize in freemium products, which contributes to the “necessity of large potential scale: a low percentage of monetizing users within a very large total user base might represent a respectable absolute number of people”(Seufert,p.4,2014).This concept is referred to as the 5% rule, or the understanding that “no more than 5% of a freemium product’s user base can be expected to monetize prior to product launch”(Seufert,p.5,2014). Therefore, a focus on growing a user base initially is crucial for publishers adopting this business model. A strategy to making this model work is to offer mixed variety of content, but also services and other features that can engage users to monetize. With topics that are niche, the initial target audience is too small to begin with and the potential for scale may be challenging for niche products and content.

Freemium includes a core of your business for free, but can offer a sustainable business model with additional payment for advanced functionality. The content packaging options and the methods for monetization of content or products will be a great challenge for publishers in the times ahead as premium features must engage users with a clear value proposition in order for free users to switch to paying users. Information wants to be expensive, because it’s so valuable as the right information in the right place can change your life. However, information wants to be “free because the cost of because the cost of getting it out is getting lower and lower all the time”(Levy, 2010), so you have this tension between the two principles. With the saturated digital modern age, publishers are faced with having to create new business models and develop new publishing products and services, which will continue to have an impact on business models in the publishing industry.

References:

Bittar, A. (2014). Unlocking the Gates of Alexandria: DRM, Competition and Access to E-Books. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2620354

Book Industry Study Group. 2013. “Digital books and the new subscription economy, a major new BISG research study, releases today” Accessed November 23, 2014. https://www.bisg.org/news/digital-books-and-new-subscription-economy-major-new-bisg-research-study-releases-today

Despot, I. Lebeda, I. Tomasevic, N. (2015). “Freemium” business models in publishing. New packaging for the needs of readers in the digital age. Retrieved from http://libellarium.org/index.php/libellarium/article/view/216/314

Doscdoce.(2015). New Business Models in The Digital Age. Retrieved from http://www.dosdoce.com/upload/ficheros/noticias/201504/new_business_models_in_the_digital_age__bookmachine_special_edition.pdf

Froberg, P. (2015). Freemium: The New York Times. Retrieved from http://www.freemium.org/new-york-times/

Kumar, V. (2014). Making “Freemium” Work. Retrieved from https://hbr.org/2014/05/making-freemium-work

Levy, S. 2010. Hackers. Sebastopol, CA: O’Reilly Media.

Salmon, F. (2011). How the New York Times PayWall is Working. Retrieved from http://www.wired.com/2011/08/new-york-times-paywall/

Salmon, F.(2011). The New York Times PayWall is Working. Retrieved from http://blogs.reuters.com/felix-salmon/2011/07/26/the-nyt-paywall-is-working/

Seufert, E. (2014). The Freemium Business Model. Retrieved from http://scitechconnect.elsevier.com/wp-content/uploads/2014/02/Chapter-1.pdf

The New York Times. (n.d.). Retrieved from http://www.responsiveads.com/new-york-times-paywall-starbucks-ads-local-advertisin/

2 Comments

  1. This essay begins with an interesting opening, providing some context and a framework while also enticing the reader to continue on. The author then delves into a description of their chosen business model, the “Freemium”. The concluding sentence of the introductory paragraph clearly outlines the author’s argument and the lens through which they will be analyzing this business model.

    The author then focuses on how exactly the Freemium business model can be financially effective. They use a particularly good example of the New York Times; this example is strong as it is representative of a branch of the publishing industry that is already using this model, and the success they are having. This makes the model seem quite feasible for other areas of publishing. Additionally, this example is backed up by quantitative data, adding to it’s strength.

    I feel that the structure of the essay breaks down slightly in the following paragraph; while the opening sentence talks about engaging with users and understanding their needs, the following text touches on a variety of topics. The author briefly mentions subscription services as well as how to engage multiple users simultaneously, neither of which I feel connect strongly to the introductory sentence. I feel that the example of Flat World Knowledge is relevant to the essay as a whole and a good piece to include; however, I wish that the surrounding text was stronger and that this section was more focused.

    The following section discusses yet another way in which the Freemium model can be effective for generating revenue, and that is through charging for DRM-free files, increasing the convenience of the product. I feel that this is a valuable contribution as it relates to how a wide variety of Freemium models have found success – by providing the bare minimum for free, and charging for an increase in convenience, comfort, and ease-of-use.

    Finally, I appreciate that it is not a one-sided argument in that it not only discusses the potential for this model, but also it’s potential downfall: the struggle that publishers of niche genres may encounter. I feel that other shortcomings could have been touched upon as well, such as how this would affect the print publishing business. Would publishers become focused strictly on digital formats that they can produce at a low cost and distribute free of charge? Would print books simply continue to be produced the way they are now, or would they disappear?

    In conclusion, this essay is supported by strong examples in the publishing industry where this model has seen success, as well as suggesting ways in which it could be expanded to become even more lucrative. I do feel that there was an overuse of direct quotations; while some were very practical, there are numerous that would be equally if not more effective paraphrased, which would show more original thought and demonstrate a deeper understanding of the texts. That being said, there was clearly thorough research conducted which added a lot of strength to the essay – all claims were backed up extremely efficiently. On a closing note I would recommend conducting a final proofread and edit to eliminate typos and grammatical errors, which would give this essay a more polished feel.

  2. This essay is filled with good paragraphs, but unfortunately they are not stitched together well into a cohesive argument. The essay presents good examples, uses some good quotes to back up arguments, and even explains some of the conditions for successful freemium models well. I wish that the essay had picked a line of argumentation before going into these aspects, so that it would feel less disjointed. There was a full essay, I think, in the idea of pay-to-remove DRM, which I also wish had been explored further.

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