Survival in a sea of ‘free'

In the publishing industry, there is the long tail — of ‘rare, out-of-print, esoteric, or low-demand titles' — and this can find new life in ‘Espresso Book Machine,' writes Saul J. Berman in Not for Free: Revenue strategies for a New World ( >www.landmarkonthenet.com ).

The machine, from On Demand Books (ODB), literally makes books, one learns. “Part copy machine, part digital printer, part Gutenberg press, the Espresso allows bookstore customers to print and bind any one of millions of titles on demand in minutes.” Designed also for the self-publishing industry, the machine enables anyone with a USB device to upload, print, and bind ‘a few copies of their master's thesis, small-business sales pitch, annual report, baby journal… within minutes.'

Alternative innovation to Amazon

A map of installations in www.ondemandbooks.com shows scores of locations in the US, apart from China Publishing Group (Beijing), Abu Dhabi National Library (UAE), and Asian Development Bank (Manila), though none are in India, as yet. “And we're Green, since we eliminate shipping, returns, and the pulping of unwanted books,” announces the site. “Ultimately, our technology is intended to distribute virtually every book ever published, in any language, anywhere on earth, as easily, quickly, and cheaply as e-mail.”

Acknowledging that, in an era when the biggest news in publishing is the battle between Apple and Amazon for control of the e-book ecosystem, a machine that allows readers to get physical versions of rare books seems hopelessly anachronistic, the author reminds that millions of readers still buy physical books. He notes that for such readers and the booksellers, the ODB product looks like an alternative innovation to Amazon that still breaks through the limitations of shelf space.

A takeaway from the Espresso example is that though, in your industry, growth opportunities may depend on innovation, technology change happens unevenly across consumer segments and the installed base is often lucrative and resistant to change, reminds Berman. Successful innovation means capturing opportunity at the ‘right' rate in the right venues to gain maximum profitability from both the existing revenue streams and the future ones, he explains.

Three behavioural consumer segments

In a chapter on segmentation, the author cites the findings of study conducted by the IBM Institute for Business Value about ‘digital divide.' The study speaks of three important behavioural consumer segments in media, viz. the Massive Passives, the Gadgetiers, and the Kool Kids. Massive Passives are traditional ‘one size fits all' consumers, elaborates Berman. “They watch network television on a television while sitting in their living room. They are not active adopters of new technologies. If they own a TiVo or another digital video recorder (DVR) at all, it was most likely a gift or bundled with their cable subscription, and is hardly, if ever used.”

It can be instructive to know that Massive Passives are still the largest media consumer segment, making up 65 per cent of all consumers; because of their established brand loyalties, their consumption accounts for the majority of revenues for the major media companies. The author foresees that the television will continue to be their device of choice, even as they become more proactive in how they choose and consume media.

In contrast are the Gadgetiers, who are active adopters of new technologies; they make up around 15 per cent of the consumer market. “They balance their television viewing with PC use and five or more other multimedia devices as well. Nothing is sacred. They will abandon that iPhone in a blink if they think some other device is better, cooler, or sleeker.”

Kool Kids, the remaining 20 per cent of consumers, but with a disproportionate presence among the young, are highly skilled at customising their media experience — what they watch, how they watch it, and when — the author describes. They follow fads quickly, mix and match content streams into mash-ups, and create their own content – or at least consider what the industry calls ‘user-generated content' as equivalent to the slickly produced professional content that is the only thing consumed by Massive Passives, he adds. “They actively trade music and video (shared and paid) either directly or over peer-to-peer networks.”

Types of cross-subsidy

To finance professionals, the must-read chapter is ‘Pricing innovation,' where the author discusses the many methods and sub-methods of pricing. For instance, a section on ‘cross-subsidies' (which involves giving one product away, or selling it at a deep discount, to generate demand for another), speaks of three types of cross-subsidy, viz. the razor blade model, the reverse razor blade model, and tiered pricing.

“The razor blade model, named after the first major practitioner, Gillette, which gave away razors in order to sell high-margin razor blades, is applied today to any number of products: Bloomberg terminals used by Wall Street traders, for example, or TiVos.” Cable companies also practise this model when renting set-up boxes or cable modems for a few dollars a month, while making money on the services delivered through those devices, points out Berman. “And cellular service companies rely on a similar strategy when they subsidise or give away the phone and make up the difference in subscription plans and add-ons.”

The second method, the ‘reverse' one, has as examples the popular revenue models of Apple or Amazon. Apple, for instance, sells its own devices at top dollar, and then has a store for the sale of integrated content and applications that work on Apple devices, the author distinguishes. The content adds value to the device and helps lock in customers, and Apple makes money by taking a cut of App Store sales, he continues. “The real money for Apple, however, comes from the razor – the iPhone, iPod, and iPad that consumers buy and replace in two- to three-year cycles. For Apple, songs and apps are the inexpensive blades that give the profitable razor its value.”

Freemiums in tiered pricing

The third method of cross-subsidising is to price in a tiered manner, as in the pharmaceutical industry, with one set of customers subsidising another by paying a higher price for the product. Freemiums (coined by venture capitalist Fred Wilson, to refer to free, stripped-down versions of products, built to allow a customer to test the product, risk free) are commonly offered within a tiered pricing structure, observes the author. “There is some content available free to readers online, while a paid subscription lets readers see more. The Wall Street Journal is constantly adjusting and adding tiers as it tries to find an optimum revenue model.”

An example of freemium in software is Intuit, which offers a free version of its popular tax preparation software, TurboTax, for filers who have only the most basic tax returns. As Berman underlines, the free versions are useful, but for anything beyond the 1040EZ form – capital gains, a home office deduction, say, or a new income source – you need one of the more functional versions, which start around $29.95 and go up from there in price and complexity.

Mentioning also the free, online version of Quicken, the home accounting tool of Intuit, he traces how the freemium model was beaten by Mint, a start-up that made money via advertising and sponsorship. “Ultimately, Intuit threw in the towel on its free version of Quicken and acquired Mint to be the ‘free' part of its freemium model.”

Challenge of finding meaning

A chapter on ‘Payer innovation' shares an insight of immense value – that efforts at using analytics have not delivered to expectations for most companies because different divisions within the same company often resist sharing what they know. Berman rues that digital businesses are often incubated in separate units walled off from the traditional core of the company; and these walls are difficult to break down once they have been erected.

The case he uses as illustration is of the daily newspapers, which face the challenge of navigating between offline customers with paid subscriptions and online, often non-paying, readers. “Publishers have realised they should offer a somewhat different experience on the Web from what they have in the paper. Blogs, question-and-answer forums, and moderated discussions are all part of the online newspaper experience.”

But the problem, as the book discerns, is that the digital editor is someone other than the print editor, and their content is less than seamless with print. Frets Berman, that these product managers are not always aligned, so it is hard for them to share knowledge and help inform revenue models based on what consumers are reading and how that readership could be monetised.

Recommended read for businesses to help survive in a sea of free through smarter pricing approaches.

>dmurali@thehindu.co.in

Tailpiece

“When our CEO boldly presented his haircutting bill, our smart accounting software turned it on its head.”

“As personal expenses charged to business?”

“No, it reclassified it as ‘charity,' considering his baldness!”

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