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Mysteries of Online 3: Free versus Fee Information

I have been thinking about Chris Anderson’s article “The Economics of Giving It Away” here in the Wall Street Journal, Saturday, January 31, 2009. I spoke with a couple of people and read the thoughtful posts that are plentiful. A useful one is Staci Kramer’s “‘Long Tail’ Author Anderson: Free Doesn’t Work As A Standalone Business Model” here.

Mr. Anderson is a clever wordsmith and he’s pretty good with numbers. I don’t disagree too much with his analysis. I have encountered similar arguments over the years, and now I understand where the mind set that generates these interesting analyses.

I come from a different mental space, and I think the free – fee duality has several twists that keep the economists thinking and the pundits punditing. Economists and pundits have quite a track record in financial matters in the last nine months.

I want to capture some of the ideas that have not been developed in my previous monographs that touch upon this subject. Relevant information appeared in Publishing on the Internet: A New Medium for a New Millennium (Infonortics, 1996) and in New Trajectories of the Internet: Umbrellas, Traction, Lift, and Other Phenomena (Infonortics, 2001). Both of these publications are out of print. These two specialist monographs were written years ago and may have been among the first to address some of the free – fee issues. I will not repeat that information, confining my comments to the information I have in my notes and not in my for fee work. While not an idea approach from the point of view of today’s reader, I am keeping within the guidelines I set for this Web log as a combination of recycled ideas and some new thoughts I don’t want to let slip away.

Feel free to challenge these ideas. I am still struggling with them.

When a Person Will Pay

In the free – fee arena, I want to give an example of when you, gentle reader, will probably pay anything for specific information. A commercial database, now owned by Thomson (a dead tree publishing working hard to keep up revenues as it tries to reinvent itself), is Poisondex. The idea is that when you know what poison in a person’s system, you can consult the database and get pointers for saving the person’s life. Poisondex is a pay to use database. It is not free. There are situations in which you personally could access the database, but I will comment on those in a moment. Back to the main point.

Your three year old child is dying. You think she ate a household substance. The doctor tells you that he has to consult Poisondex before taking steps to save your child’s life. The nature of poison is such that it is possible to accelerate its effects unless the doc has the specific information at hand. The doctor tells you that you have to pay to save your child’s life. Let’s say that the cost of the three minute database search is $1,000.

Image source: http://2.bp.blogspot.com/_C-gWvTLiIH0/RwMDlffvMpI/AAAAAAAAAGQ/FnFMzGrWOys/s320/Death-Creative-Life.jpg

Will you agree to pay?

In my experience, most Americans, even trophy kids or azure chip consultants with progeny, will say, “Yes. Get the data.”

I have asked focus groups about this situation over the years, and the answers range from “I will pay anything” to “Are you crazy? Of course, my wife and I will pay.” Okay, so now we have established that you will pay for information, and most people don’t ask, “How much?”

The reasons are:

1. Your child’s life to you is priceless. You will literally pay anything. This is the reason why bad guys can get people to do almost anything by threatening a child. So much for security unless the victims have had special training.
2. You assume that the source is going to be accurate. You “trust” the doctor. You don’t know enough about Poisondex to “trust” its data, but the doctor “certifies” that the information is what’s needed to save your child’s life. In fancy Dan talk, this is provenance of information. You have to know yourself as a subject matter expert or via a proxy that Poisondex will not include information that will increase the likelihood that your child will die.
3. Your decision process is necessarily constrained. In short, you don’t have the luxury of time. You don’t negotiate. You don’t call around and get information from contacts whom you think “know” something useful to you at this decision point.

We have, therefore, established with some certainty that information has “value”; in this case, $1,000. How much more will you pay right now? You perceive that your child’s life is worth more to you than any “cost” the doctor or the database imposes on you to save your child’s life. We also know that time is limited, so you can’t stand around and think about searching Google or calling your roomie from your days at Yale University.

You decide. You pay. You wait to see if the child lives.

For certain information, therefore, a market exists. If information is “free” but does not have the provenance to allow you to make a decision quickly, you will almost always go with the information for which a proxy or your own perception says, “This for fee information is probably better than this free information.” You don’t know whether the information in Poisondex is right. You don’t know if the information in Yahoo’s results list is right. You go with your perception.

When a Person Won’t Pay

A person may not when he or she doesn’t really care whether the information is right, fresh, or convenient. Examples of this type of information is what you find on a poster slapped on a wall announcing a concert. Who really cares whether the information is 100 percent accurate? If a person loves the band, the person may use the information as a reminder that you want to buy a ticket. Convenience, not life and death value make the band info a blow off.

Web content operates in a similar way. A person can run a query for movie times, restaurant hours, and weather in Chicago. The person may expect the information to be “sort of” accurate. If it is not, the person may  have other low cost, reasonably low hassle ways to get the needed information.  A person can, for example, whip out his or her smartphone and make a call to your friend in Chicago and ask about the weather.

The costs for getting these pieces of information are buried in a bunch of other costs that a person has decided are important. Who thinks about this type of “extra” benefit to an online or mobile service? I don’t. The idea that Internet access or a smartphone is important to a person means that certain functions have greater value than others. Maybe the person uses the smartphone to make business calls. The email and Web surfing are nice extras, and the person uses those once in a while. But the smartphone is a phone first. If it won’t make calls, the person will dump the provider and look for an alternative. The person picks a package that meets his or her  perceptions of value and what he or she thinks is needed.

Note that the subjective nature of the subjective decision influences the willingness to put up with:

1. Information that is wrong
2. What context is “right”
3. The hassle associated with getting and verifying the information.

Research can provide some useful sign posts for the relative importance of these factors. But I believe that for certain types of information, getting a “free” source is okay or “good enough”.

Free is a matter of perception. Here’s why:

In the early days of online, commercial vendors would provide services to universities. A student could walk into a library, run a query on the system, and get information. The librarian smiled. The information was “just there”, and it was beyond the ken of most users of an online system in the late 1970s to know much beyond entering a few key words and printing out abstracts.

The college students since the 1970s perceive the computer terminal in the university library as a system that provides information. The student did not care about the cost. Tuition made then many services “free”. When a student paid for dorm meals, the student could or could not eat. The cost of a meal was of little interest to her. With a loan or mummy paying, the student was operating in a “free” environment. Money was for clothes, booze, and road trips. The student would pay for pizza. But pay for abstracts from the library, not much chance.

The database vendors did everything in their power to expose students to their online services. LexisNexis and Westlaw made access to their really expensive legal information services widely available. Libraries gave classes to teach students how to use such must-have databases as ABI/INFORM. Heck, I even showed up and explained how to wring real nuggets from the business databases with which I was associated.

From the point of view of the database producers and the commercial online services, these students were tomorrow’s customers. Until the Web took off, who knew that online access would be like water or electricity. In the 1970s, online information was really expensive but users in universities and libraries were insulated from the cost.

From the point of view of the universities and libraries, these services were not free, but the vendors would make information available on an educational discount. Institutions wanted to give students access to the hot new online services. Everyone hoped that students would grow up to use these services and maybe create new and better services, which some students did.

The key point is that since the 1970s, users in college were addicted intentionally to free electronic information. Free was part of marketing. Free was an institutional cost. Free was not even the issue. Learning how to use electronic information was an educational focus.

Who really paid?

That’s easy to answer. Prior to the Internet, commercial entities, organizations, and the government paid for online information. The vendors would cut deals with these outfits and then the organizations would permit access to the systems. The vendors wanted a one password, one user rule, but in reality, most organizations shared that one password. After all, if one  were working in a corporate library that had a single password, would anyone in his or her right mind want to run queries for the five people who wanted “everything about GM” or “data about light bulbs” on the spur of the moment. I  would run a training program for those who were power users, and teach those early adopters to run their own queries. Some searching had to be intermediated. The boss would just expect a librarian or power user to produce information. The word “intermediation” is important in online and it means that a person listens to your information request and then goes and gets it or does the work. Consultants are intermediaries, but that word is viewed as inappropriate to the worthies who sell their expertise most of which is updated using Google and other online services, asking colleagues, or just inventing based on prior learnings.

This cost shifting has long been a part of online. Google and other online advertising plays are little more than variants.

The point of this is that for about 40 years, online users were taught that online information was free information. As part of that process, most of the users did not pay for their drug — information and its kick of immediacy, efficiency, omnipotence, or whatever other notion everyone under the age of 40 has in their head.

So what’s free? The answer is, “Anything in electronic form.”

Free information lacks the context for the Poisondex example. There are quite a few fancy economic buzzwords to describe this situation. I prefer to point to companies that flop because people won’t pay for their digital information regardless of form.

For What Does a Person Pay?

This is an easy question. One pays to satisfy a specific need for the information context in which one finds oneself. Here’s how this works.

A lawyer’s child  wants a particular song. If she is an iTunes customer, she determines whether to go the mall (bummer), calling a friend to get a copy, or just click and buy. The price point is low enough to lets her act in a way that meets her needs. She may not like the integrated iTunes experience, but it is convenient. She may have her own credit card. Her dad may pay. After all, that’s his job. She has other things to do.

The key is that if a person has money, that person may pay because it is easier, faster, more convenient.  When the person has no money, then the person will decide to skip the info or take what’s available without cost.

If a person is hip to the ways of online, some people will download the song for free. The complex actions needed to locate and obtain a pirate song are second nature to you. Anyway, kids learned in middle school that online information is abundant and comes out of computers like water from a tap. Some think that any one dumb enough to put information online should know that it will be suckable. If the song is corrupt, may a person can get someone to rip it for him or her. The person getting the song may not know if the tune is a keeper. Some folks rationalize that if he or she really likes a song, he or she might buy  a concert ticket to hear the artist perform–someday, maybe. The digital information is, therefore, a free sample like the cigarettes that once were handed out on street corners as a promotion.

The reasons people pay for information include (and this is not an exhaustive list):

1. Convenience. It’s easier, faster, more reliable to pay for specific information than go through hoops to get it for free
2. Bundle. A person pays once and then gets other  online information. All-you-can eat buffets work the same way.
3. A person is law abiding (afraid?)
4. A person himself or herself wants to be paid for your work so he or she pays even though he or she doesn’t really want to pay.

When Will a Person Pay?

In my notes, I have captured some situations in which people will pay for electronic information:

1. A company does not want to take certain information because the consequences outweigh the value of the information. Wall Street outfits, in most cases, will pay for Bloomberg, Thomson Reuters, and Financial Times information. (There are exceptions. Click here for one alleged situation. Ah, MBAs. What a delight.)
2. The customer perceives the information as having value commensurate with the cost. An example would be a person paying to see a netcast of a mixed martial arts fight.
3. The user has access to lots of different information as part of one month fee; for example, a mobile phone service may allow customers to access certain high value information as part of the deal. An example would be registering to get online access to certain information as a subscriber. The cost of this information disappears into the maw of the mobile phone company.
4. The user gets something like a hard copy or some other fungible or psychic reward for paying. An example would be buying the USA Today $5 inauguration edition of MacPaper.
5. A company or organization pays for information on the hoof with a digital saddle. A consultant to tell you what you need to know. You buy a package, image, snootiness, class, whatever.

Database producers, publishers, and others in the sprawling “information business” have discovered that their business models don’t work very well in the online arena. These companies are like old gladiators who have to fight Googzilla barehanded. The fight isn’t even interesting to me. Googzilla has thick scales, breathes fire, and possesses some really big incisors.

Who is a pirate? Maybe our kids?

What about the Middle Ground?

Now we come to the core of the free – fee discussion. The user has money. The information has a price. What allows the user to make the decision to pay the price and access the information.

The answer is, “Context.” In certain situation, the factors (value, time, need, perception) combine to ring the cash register. If a factor shifts, the customer may not buy. Because electronic information does not “disappear” or “get used up”  when transferred, it’s different from a printed book.

The argument about free – fee is tricky. Most of the people talking about free or fee don’t articulate their motives. Here are some examples:

1. Open source software. The supporters want to get out of the proprietary software trap, replacing it for a nerd trap with consulting services needed to make the stuff useful.
2. Sales. The free software is like the drug dealer giving the 10 year old some crack. Get them hooked young and put them to work making money for the drug dealer. The example rankles some white shoe information mavens, but think about those “addicted” to online information.
3. Time on one’s hands. Some people volunteer like my mom who racked up 50,000 hours as a hospital volunteer. Others write Web logs, make lists of the order of battle for World War II in Europe, or write Amazon book reviews, among other displacement activities.
4. Build reputation. Some companies offer shareware or freeware to be noticed and get a reputation for quality or cleverness or whatever.
5. Learn. Information in a Wikipedia or Knol post provides a person with a way to learn and show that expertise. If the person is goofy, then the article may be goofy, but the person still learned how to use the system. That learning may have been the whole point of the exercise in the first place.
6. Agitate. Check out Reddit.com for examples.

You get the idea. The information is a means, not an end, for some. Digital information is a magic substance: lubricant, commodity, high value, and possibly indestructible until someone pulls the plug.

As a result, the boundary between free and fee is fuzzy, really fuzzy. Some companies think that if they give away their commercial information, their market will grow. This may work for general interest information but it doesn’t work too well for narrow, complicated data. The reason is that the market is too small. If a commercial information product can’t make it with its information in a narrow segment, it probably will fail by giving it away to a larger group. No one will care. Specialist information almost has to have a price tag in order to have credibility. Think about the Poisondex example and your child in this context.

Shifting Who Pays

When I first encountered the pay for traffic plays that made Google possible, I realized that traditional business models were in for rough sailing. The reason is that the trophy child user gets information in a way that looks free to her, but shifts the cost to an advertiser who will pay and pay and pay. Furthermore this model operates like the old AT&T. You wanted to make a call that worked, you bought AT&T. Google is in this position now.

The point is that the Google users don’t pay for basic services. A Google user can pay for services that push the buttons for value, need, context, etc. For that reason Google is a  disruptive company, and it is too late to slow the GOOG. Competitors are metaphorically behind the eight ball. Hoping that Google will self destruct may be some companies best shot at survival in my opinion.

If a user perceives information as free, that user may have little interest in digging out who foots the bill and implications of that relationship.

Disintermediation

Disintermediation is alive and well. True, libraries have been disintermediated. Users can get their own online access and run their own queries. Anyway, every time I meet a 20 something I learn that the person honestly believes himself or herself to be an online search expert. This is like the freshmen in a English 101 perceiving themselves as good writers. Or math majors who see themselves and user interface designers.

What’s happened is that a value chain in information exists. Some links in the chain have been chopped out. The value chain still exists. If a person works as an intelligence agency manager, that person may depend on intermediaries which are filling the librarian role. The same applies to financial analysts. The reason intermediation exists is because the people in the chain have different contexts. Some tasks are more important than others, so some online information work gets delegated. Not even the wizards at a hot online start up can do everything informational themselves.

The grousing about Disintermediation comes from those links chopped out of the value chain. Newspapers and news being disintermediated. I have written about other examples as well. The object is to make oneself and one’s knowledge have value.

This is the heart of the knowledge value strategy first articulated by Taichi Sakaiya.

Net Net

Information is a complex notion. Paying for information thrusts an addled goose like me into the murky boundaries between free and fee. The crispness of digital zeros and ones gives way to a subjective world in which the value of information and its price vary by the observers’ contexts. There is a reason that theoretical physics has made significant contributions to some of Google’s systems and methods.

I will leave it to the wizards who are more informed than I to simplify the effect of quantum theory for pricing online information.

Stephen Arnold,, February 2, 2009

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