Free'er than Freemium, "hmm....BUT...."

I've written about Freemium several times before, discussing it's impact on existing markets and incumbent companies in several industries. Brian Gurley (Partner, Benchmark Capital) does an excellent job explaining how Google is further leveraging their mobile services like StreetView to further move into Mobile Advertising.

As an MBA student, Google is an interesting company to study and analyze. On one hand, so many of their projects are difficult to apply typical MBA skills to (NPV, Cash Flow analysis, etc.) because they are fundamentally experiments, and they make not drive direct revenues. On the other hand, their ability to expand upon their core strategy of "organize all the world's information" is incredibly interesting to follow. It is a massive concept that has so many possibilities, but I suspect it only works within a culture that allows large amounts of freedom to explore "crazy" ideas.

Having a cash cow like AdSense or AdWords obviously makes it a little easier to fund and maintain the Google culture, but it still requires employees and managers to take huge risks. Personal risks, technology risks, strategy risks.

I'm trying to imagine what a conversation at Google a few years ago might have gone like:

Employee: Mobile devices are going to take off and people will consume huge amounts of data on them someday.

Manager: Agreed. We should figure out ways to accelerate this, as we could drive ads to their mobile devices.

Employee: My kid was reading about Lewis & Clark the other day. We should try and be the world's source for mapping information.

Manager: But what can we do interesting with maps?

Employee: Eliminate paper maps. Make maps that move with the touch of a finger. Show live traffic overlaid on a map. Street-level views. Open it up to any location-based service (voting, gatherings, flu outbreaks, restaurant listing, etc..)

Manager: How might we do that, besides buying mapping data?

Employee: What if we had a fleet of cars that drove around the country with a camera on the back? We could pay high-school kids, college kids, starving artists, or anyone willing to drive around?

What would your manager have said at that point in the conversation? Would it have started with something like, "Hmm, interesting.....BUT....". I suspect that in most companies it would. At Google, I doubt there are many "hmm....BUT...." moments when ideas are being formulated.

Imagine the possibilities at your company if you had the ability to hire really smart people and not feel like you had to "hmm..BUT..." them all day long.

Free vs. Fee - Learning a Foreign Language

I've written several times about my interest in the nuances of the freemium business model. I've also written about my struggles to learn some basic Chinese (Mandarin) both prior to our China Trip and since then.

So when I came across this article from Bill Gurley (VC) recently, it peaked my interest because of the intersection of these two recent passions. It highlights the differences between Rosetta Stone and Live Mocha, both in their business models (fee vs. free) and their approach to teaching (individual vs. social communities). As Mr.Gurley points out, free or freemium might not be the next generation of business models for everyone, but every company needs to consider how a competitor using those models could impact their business.

Having struggled with the Rosetta Stone model of teaching, I'm going to give the Live Mocha approach a try. I'm intrigued by the community aspects, as I truly believe that the real trick to learning a new language is putting it to use. I was willing to pay for Rosetta Stone in the past, but I truly believe that community-based learning is the way of the future. I hopeful that Live Mocha leads to better success.

It's Difficult to Focus on Multiple Things at the Same Time

As the Germans learned in WWII, after bombing Pearl Harbor, it is very difficult to fight a competitive battle on multiple fronts. Valuable resources get spread too thin. The best people aren't all aligned to a common strategy. Communications becomes more difficult.

The recent Google Chrome OS announcement is going to create an interesting battle for a number of reasons:

• Technology innovation (Desktop OS vs. an Internet OS)
• Freemium vs. Premium Pricing Models
• How many battles can either company sustain and still be successful in their core businesses?
• How much is Google willing to put into their non-search businesses in order to keep Microsoft from gaining traction in search?
• How much is Microsoft willing to put into Core OS (Windows) or the Internet version (lower margins) to maintain those cash flows?

And of course the most important question for MBA students - do each of these projects create a positive NPV? (ok, being sarcastic)

It must be fun to sit in the war rooms of either Google or Microsoft and plot how to block or take the other guys market (on a huge scale). Of course we do need to continually ask ourselves, are any of these actions add real value to their customers, or are they potentially opening themselves up to new competition?

"Free" - Business Model, Crossroads, or Jumped the Shark?

My StratMktg professor, Dr. Jim Narus, thought I was crazy to keep talking about strategies and concepts built on free or freemium. None of those fit into the existing models or textbooks, so they can't possibly be viable, correct?

I'm not sure what the world will look like in 5 years, but here are a few other opinions:

• Malcolm Gladwell - Priced to Sell
• Seth Godin - Malcolm is wrong
• The Financial Times - Free does not like up to its billing
• Mark Cuban - Free vs. Freely Distributed
• Mark Cuban - When you succeed with Free, you are going to die by Free
• Chris Anderson - Malcolm, why so threatened?
• Squidoo Lens on "Free" - Does Free make sense? (public discussion)
• Fred Wilson - Freemium and Freeconomics
• A recent digital business example - When SaaS hits Critical Mass, the Game Changes

Whatever the future holds, the concept begs us to ask ourselves if we are being competitive in the market and continuing to add value to customers. Just as I wrote about the impact that China will have on our world, the idea that digital assets, goods and services will change your world is inevitable.

It's now up to each person to decide how they will react to the new rules.

Searching for Real Experiences - The Flipside of Freemium

I've written about Freemium business models in the past, but this is a continuously evolving model. With Chris Anderson's new book coming out soon, I suspect it will get another round of discussion and scrutiny started since the Web 2.0 world of 2006-2008 is now economically different.

This recent article in Forbes highlights the flip side of freemium that is beginning to emerge as more and more people seek to broaden their experience with the brands they love online. This isn't surprising. Digital connections are about abundance, hence the free price tag. Real connections are about scarcity, hence the price premium. The two models co-exist to provide breadth to the user experience, and in turn they continue to feed both sides of the model.

Just as I believe that the upcoming economy will be filled with 2 Guys and the Internet companies around the edges, I also believe that product-centric companies will be looking for new ways to create the scarcity and abundance models that are highlighted here. It's a natural evolution of brand loyalty, this just extends it to micro-targeting and user opt-in. In the past it was too expensive to allow your customers to associate with the brands they loved (except for fanactics), but now the economics have completely changed.

"Hacking" Education

Fred Wilson at Union Square has been writing about "Hacking Education" for a few months, under the theme that maybe the same guidelines that drive VCs and Entrepreneurs could be useful to advance the struggling education system in the US. Various events and discussions have spawned from these posts. One from today caught my eye, as Fred looked at turning students into teachers, which is a similar concept to one that I discussed with my team earlier in the year. I haven't been as successful as I hoped in steering people away from a "grades first" approach to a "learning & exploring" first approach, but I am making some progress. Some of the late night weekend discussions have been very interesting lately, especially with the economy forcing people to thinking creatively about their next hustle.

The things that jumped out my about this concept were:

• How much it sounded like my G&T program in 4th and 5th grade, which is probably the most fun I ever had in school and the time when I truly learned how to think creatively....to the point that my group finished 9th in the world in the Olympics of the Mind competition (Michigan State Champions). To Bob Jedd, I am truly grateful for that experience.
• The kids in the example that excelled were the ones that didn't require structure and guidance in their life. Seems to sum up entrepreneurs vs. non-entrepreneurs pretty well.
• It almost completely aligned to the discuss we had in our ITMgm't class last weekend as we discussed Disruptive Technologies. The majority of the class, trained in traditional MBA skills, quickly shifted from disruptive thinking to sustaining thinking without any prompting. Find the structure. Find the well-known.
• When I brought up the idea that "freemium" might be a starting point for MBA programs of the future (ie. the courses are free and the revenues for the school evolve from there), it drew the expected "are you from Mars?" look from Deans of the Winston-Salem and Charlotte programs.

I'll be following Fred's work in this area closely, both because of my secondary interest in teaching as well as my primary goals of providing educational opportunities for my two daughters.

Freemium Marketing Strategy (and Business Model)

Our assignment for this week's StratMktg class was to define one of our favorite marketing strategies, which would then be aggregated by Dr.Narus and put into a single "book" for us to take away from class. I selected "Freemium", which is sort of a hybrid between a Business model and a Marketing strategy. Below is a copy of the paper I submitted.

I used Google's various free applications (Search, GMail, Maps, News, Reader) as an example of using "free" to drive other aspects of their business (AdWords). Perfectly valid example that people can easily understand. If I had this project 6-12 months from now, I probably would have used a Twitter example.

Freemium

Contributor: Brian Gracely

Source of Strategy: Chris Anderson, Free: The Future of a Radical Price, (Hyperion; July 2009). ISBN-10: 1401322905

Type of Strategy: Market Growth

Description of Strategy: With the growth of Internet devices and users, the demand for online services continues to rapidly expand. Due to the relatively low cost of entry into the marketplace, online services must growth their customer acquisition counts at tremendous rates to avoid users switching to another service. Initially offering the service free ensures that the user does not have to make an initial value decision before joining. Once a large population of users become active and perceives value, the opportunity to offer premium (paid) services becomes a possibility. In addition to user-paid revenues, additional partnership opportunities are available to online companies that provide a service that allow adjunct services (advertising) to be created around the user community.

When to Use This Strategy: Freemium is a marketing strategy that has been deployed by Internet-based companies since 2004, and is synonymous with the term “Web 2.0”. The primary concepts of Freemium are:

• Extremely low customer acquisition and transaction costs due to web-only assets. These low costs allow the strategy to address both mass markets and niche markets under the same cost structure.

• Basic services are provided free to customers.

• The company allows numerous opportunities for the services to be expanded by the users, allowing viral growth through user-centric marketing.

• The company allows numerous opportunities for the services to be interlinked with partners to create “mashed up” new services that can be co-branded and cross-promoted.

• Revenues can be generated through premium versions of the basic service, through online advertising, or through various types of partnership programs.

In most successful Freemium models, only 2-3% of the users need to engage in revenue services in order to break-even or become profitable.

Example(s): In 2009, Twitter has become the poster child for Freemium. Having grown it’s user count 1900% over the past year to 10M, with a staff of just 35 people, it is now beginning to introduce revenue models targeted at advertisers, business users and local media. A private company, Twitter has gotten buyout offers of $500M from Facebook and $1B from Google.

From 2006-2009, Google was the best example of a Freemium and Reverse-Freemium model. Google initially offered their search without ads (free to users, no revenues), but soon added AdWords to generate tremendous revenues. They then added free services (GMail, Maps, News, Reader) to generate more content that could be monetized through advertising revenues.

How Open Systems Change Economies

One of my favorite activities is thinking about ways in which radical ideas can completely change existing rules. While this typically doesn't happen as a "radical change=new rules" model (not that simple), what does frequently happen is a small change with built-in flexibility can radically change the rules. The secret ingredient is typically to allow people (users/partners/etc.) to be able creatively modify the change, usually in ways that you never image.

I was originally going to write about this topic because I'm exploring certain aspects of the Freemium business model for my Strategic Marketing course. With the drop in online advertising due to the economic downturn, I'm interesting in exploring how companies that have grown through Freemium (or just Free), will survive. Will their growth drive enough ad revenue, even at low CPMs? Will they begin to charge for corporate usage or partnerships? Or will they develop new business models that change for newly created value (whatever that might be)?

Reading through the blogosphere this evening, I came across this interesting article about how the adoption of cell-phones in Kenya, and the subsequent creation of phone-minute based economy has evolved the country. Nobody could have predicted that the country would begin using a non-currency as the currency for trade, but it happened because the originators of the system allowed it to remain open, even after it began expanding beyond their original model. It allowed the market to define their own "value" and evolve around it. The incredible line in that piece was,“Within about a year, (Safaricom) became the biggest bank in East Africa.”

Imagine if your company had that opportunity placed in front of it? Could you react to that much change? Would you be willing to allow that much change to happen?

Twitter is Mainstream - Will this change the Freemium Model?

A classmate, Jim Schweitzer, posted this update to his Facebook page today "CNN likes twitter now too:http://www.cnn.com/2009/TECH/02/12/twitter.shorty.awards/index.html i don't know if it's cool anymore."

For those that haven't heard about Twitter, it's an online "micro-blogging" service that let's people and companies communicate in short, 140 character messages.   People use it for fun to send status messages to friends ("at work but want to meet up at bar for drinks at 7pm") and various companies are starting to use it as a way to communicate with customers or about their current projects.

Twitter is a free service, with over 1,000,000 users.  To run this service, Twitter obviously has to provide massive amounts of computing services (servers, bandwidth, software programming).  So how does it stay in business if it collects no revenue?  Welcome to the "freemium" business model, where the primary goal is to create as many users of your online service as possible, and then figure out how to eventually get at least a small percentage of them to pay for an enhanced version of the service. Or maybe nobody ever pays for the service, because it's subsidized by online ads. 

I bring this up for a couple of reasons:

1. People have become such big fans of Twitter that others are running contests to help Twitter come up with a business model.  Most of these models involve Twitter charging users for some aspect of the service.  
2. With the economy being where it is today, people have less to spend, VCs are funding fewer opportunities, and companies that aren't cash-flow-positive aren't going to survive very long.  This means asking for money will be difficult (from customers or VCs), but it's almost mandatory to survive.  Tough spot to be.
3. For one of my StratMktg Analysis projects, I'm going to explore the Freemium business model and how companies can evolve into hybrid-Freemium or full-paid serivces.  I suspect it's going to be interesting psychological research, since most customers prefer to see prices go down than up.  

The project isn't due until April, so I have a little bit of time, but I'm really looking forward to seeing what ideas may come out of this challenge.  It's not the same problem I recently mentioned with Facebook, but they have similar challenges.  I hope to explore both aspects.  I'll post the results when the paper is finished. 

[UPDATE:  Looks like Twitter just got a bunch more VC money, and hired their first BizDev person.]