Thursday, January 27, 2011

Freemiums are Frenemies of Creativity

The current resurgence in creativity is a natural result of the economic forces that dominated the last century.  From the creation of assembly line manufacturing by Henry Ford to Walmart’s obsession with supply chain management, 20th century businesses maintained a relentless focus on lowering costs and prices.

In the last quarter of the 20th century, automation and globalization pushed costs down even further to the point where it became difficult or impossible to manufacture many products in the United States.  However, it was an environment where software developers and similar types of creative enterprises could thrive.

The rewards for creating a hit software application or a hit song were enormous.  Once the initial costs of development or recording were covered, the only incremental costs of each additional sale were the packaging and distribution. Mass marketing campaigns and limits on shelf space in retail stores concentrated the successes into a few “hits” each year.

Everything changed in the 21st century. The first step of that change was documented in 2006 by Wired Magazine Editor Chris Anderson in The Long Tail. Anderson observed that the Internet economy makes it easier for electronic retailers to stock and for consumers to find a much broader selection of products.  Using Rhapsody, Amazon and Netflix as examples, the book shows how the Internet democratizes the forces of production and distribution while bringing suppliers with broad product offerings together with consumers with eclectic tastes. As a result, you can now pick from more than 25,000 DVDs on Netflix and more than 100,000 books at Amazon.

Anderson documented an even greater change in 2009 with Free, The Future of a Radical Price. Growing adoption of high bandwidth Internet connections in the home allow digital products like software, music, movies and games to be downloaded directly to the home. This digital distribution pushes the incremental cost of each unit to zero.  With the cost of these digital products at free, it wasn’t long before many of these products were offered to the final customers for free.

The term “freemium” was coined to describe the disruptive practice of making products available to most consumers for free and charging a fee only to those who want a more powerful premium version.  Another approach, perfected by the casual game company Zynga, combines free-to-play games with selling virtual goods like farm animals or weapon upgrades that enhance the players performance or experience. Zynga thrives by selling these items to a tiny percentage of its total users.

There is  a lot of room for debate on whether freemiums are friends or enemies of creativity. I think they are both and declare that freemiums are frenemies of creativity.

A market expectation of free places tremendous stress on traditional content creators.  Free doesn’t include any margin to amortize development costs or cover royalty payments or licensing fees. It makes it much harder to maintain a large revenue stream from a single creative act.  Free also raises quality expectations.  To sell a product in a market crowded with free alternatives, the product has to be really good.

On the other hand, freemium and virtual goods revenue models place a high value on continuous creativity. When a company like Zynga discovers strong interest in one of their games, they assign a creative team of 30 to 40 people to develop a continuous stream of virtual items to keep the players interested and involved. Musicians who make studio recordings of their music available for free are building audiences willing to pay to see their club and concert performances.

In many ways, the new economy limits the value of one-time acts of creation while celebrating the art of continuous creation.  One more reason why all of us need to develop our creative abilities.