Can companies thrive by giving away products and services?

Executive Summary

For a growing array of companies, giving their product away is now a business plan. Games, music, software—just about anything that can be digitally replicated and distributed via the Internet—all are available at no cost to consumers. Some businesses follow a cross-subsidy model, where one product or class of customer supports another. Some rely on free trials or on revenue from third parties such as advertisers. And other businesses are pursuing a “freemium” model, where the basic service is free of charge but upgrades cost. As the economy of free takes hold, companies and artists in some industries, such as music streaming, are pushing back against the pressure to offer their work for nothing. Among the questions now under debate: Is the freemium business model viable? Is free good for the economy? Can traditional businesses compete with free?

Resources

Bibliography

Books

Anderson, Chris, “Free: The Future of a Radical Price,” Hyperion Books, 2009. The then-editor of Wired magazine writes the definitive book about what he calls “freeconomics,” explaining the practice of various business models involving product giveaways and advocating for the growth of the free economy.

Baxter, Robbie Kellman, “The Membership Economy: Find Your Super Users, Master the Forever Transaction, and Build Recurring Revenue,” McGraw-Hill Education, 2015. A consultant who has advised Netflix, SurveyMonkey and other start-ups discusses the pros and cons of the “freemium” model.

Seufert, Eric Benjamin, “Freemium Economics: Leveraging Analytics and User Segmentation to Drive Revenue (The Savvy Manager's Guides),” Morgan Kaufmann, 2014. A marketer outlines how to analyze data generated by freemium products to boost retention and add revenue.

Articles

Doctor, Ken, “Newsonomics: 10 numbers on The New York Times' 1 million digital-subscriber milestone,” NiemanLab, Aug. 6, 2015, http://tinyurl.com/pywg39j. A media analyst gives his approval to The New York Times' strategy that reaped the newspaper 1 million paying subscribers after years of giving its content away for free.

Gladwell, Malcolm, “Priced To Sell,” The New Yorker, July 6, 2009, http://tinyurl.com/pzozyzy. The author of best-sellers “The Tipping Point” and “The Outliers” objects to author Chris Anderson's contention that “free” is the future of business.

Jefferies, Duncan, “Responsibilities of the Gaming Industry In Protecting Children's Rights,” T Partner zone UNICEF, The Guardian, July 21, 2015, http://tinyurl.com/oz5lq92. A brief produced by UNICEF details the efforts by a number of U.K. organizations to establish principles for free-to-play games popular with children.

Keep, Elmo, “The Case Against Free,” Junkee.com, Nov. 3, 2013, http://tinyurl.com/d3htrge. A digital media producer argues that artistic products have value, and that giving them away diminishes their value.

Leonard, Devin, “That's Business, Man: Why Jay Z's Tidal Is a Complete Disaster,” BloombergBusiness, May 28, 2015, http://tinyurl.com/oeyp4wq This piece is part Jay Z biography and part scathing review of the rapper's latest effort, the subscription-only music-streaming service Tidal.

Sehlhorst, Scott, “The Freemium Business Model and Viral Product Management,” Pragmatic Marketing, 2009, http://tinyurl.com/owrw4ku. A product management consultant explains the economics of the freemium business model.

Wilson, Fred, “My Favorite Business Model,” AVC, March 23, 2006, http://tinyurl.com/oh2kpuj; Wilson, Fred, “The Freemium Business Model,” March 23, 2006, AVC, http://tinyurl.com/nkdrz3y. A venture capitalist brings early attention to the emerging practice of giving a basic product away for free and then charging for a similar premium version. In his first article, he challenges readers to come up with a name for the business model. In his second, he coins the “freemium” label.

Reports and Studies

“Is Freemium the Right Business Model? 10 Questions to Answer,” Zuora Academy, http://tinyurl.com/pyspbey. A business management company offers advice about when “free” is a viable business strategy.

“Mobile App Advertising and Monetization Trends, 2012–2017: The Economics of Free,” App Annie, March 2014, http://tinyurl.com/q3hadjh. Business intelligence company App Annie makes the business case for “free.”

Bryce, David J., Jeffrey H. Dyer and Nile W. Hatch, “Competing Against Free,” Harvard Business Review, June 2011, http://tinyurl.com/oarggrh The authors, professors at Brigham Young University's Marriott School of Management, explore the conditions under which an established business should combat a competitor that is using a free business model by adopting the same strategy or by waiting to learn whether the newcomer will be successful.

Kumar, Vineet, et al., “The New York Times Paywall,” Harvard Business School Case 512-077, Harvard Business Review, February 2012 (revised January 2013), http://tinyurl.com/p743ooz. Harvard Business School professors trace the history of The New York Times' experience with free content and examine the potential impact of the newspaper's 2011 decision to put up a paywall to convert nonpaying readers into paying subscribers.

The Next Step

“Freemium” Model

Statt, Nick, “Jimmy Iovine wants Apple to save the world from free music,” The Verge, Oct. 7, 2015, http://tinyurl.com/qg8pqv5. Music-streaming services could earn more revenue and thus better compensate artists if they stop offering free versions of their products, according to a record producer and executive at streaming service Apple Music.

Titlow, John Paul, “YouTube inches toward Netflix with its new paid subscription tier,” Fast Company, Oct. 21, 2015, http://tinyurl.com/qxkbszz. Free video-sharing website YouTube launched a paid version of its service that allows viewers who pay $10 per month to watch ad-free videos and exclusive content, among other features.

Waters, Richard, “Zenefits stretches ‘freemium’ business model,” Financial Times, Nov. 3, 2015, http://tinyurl.com/pup5fps. Silicon Valley-based software provider Zenefits offers businesses free human resources software without additional benefits plans; it earns commission from brokering other companies' benefit offerings, such as insurance policies, to its clients.

Free Trials

Butterly, Amelia, “Amazon Prime 30-day trial advert ‘misleading’ says ASA,” BBC News, March 4, 2015, http://tinyurl.com/ng38a6n. The United Kingdom's advertising regulator said advertisements by Web retailer Amazon for a 30-day free trial of its Amazon Prime service misled customers by not clearly stating that a paid subscription would automatically begin after the trial.

Jurgensen, John, and Barbara Chai, “Apple to Pay Artists After Taylor Swift Protest,” The Wall Street Journal, June 22, 2015, http://tinyurl.com/oposvmv. Apple Music reversed its decision not to pay royalties to artists during its initial three-month free trial period after popular singer Taylor Swift publicly objected to the company's policy.

Manning, Brendan, “Free trials return low profit but high engagement,” The New Zealand Herald, April 28, 2015, http://tinyurl.com/qacwnb7. Consumers who sign up for free trials subscribe for one-third as long as paying subscribers but respond more to marketing campaigns, according to a study by researchers from the Netherlands and New Zealand.

Online Games

Bogost, Ian, “The Logic Behind the Sky-High Candy Crush Deal,” The Atlantic, Nov. 4, 2015, http://tinyurl.com/np4jbx7. American gaming company Activision Blizzard paid $3.6 billion of its $5.9 billion purchase of Irish mobile phone gaming company King Digital, maker of the popular free game Candy Crush, with money from offshore accounts, avoiding an additional $1 billion in repatriation taxes.

Chang, Andrea, and David Pierson, “Nintendo unveils its first game for smartphones in long overdue move,” Los Angeles Times, Oct. 28, 2015, http://tinyurl.com/o7on52k. Japanese electronics company Nintendo will release its first free online mobile phone game in spring 2016, a long-awaited move by the former top-selling console video game company.

Takahashi, Dean, “Game Insight's Anatoly Ropotov explains how to build sustainable free-to-play mobile games,” Venture Beat, Oct. 19, 2015, http://tinyurl.com/ovbbwp3. Mobile gaming companies can generate customer loyalty by offering updated games, offline play and graphically advanced products, according to the CEO of mobile game developer Game Insight.

News Industry

Alpert, Lukas I., “For New York Times, a Gamble on Giveaways,” The Wall Street Journal, Aug. 3, 2015, http://tinyurl.com/pac45hg. The New York Times has developed low-cost or free mobile products to attract more young readers as potential paid subscribers while also raising online and print subscription fees to offset declining print advertising revenue.

Borchers, Callum, “Undaunted by others' setbacks, Brockton startup targets hyperlocal news,” The Boston Globe, Sept. 27, 2015, http://tinyurl.com/p24rvxx. A recently launched subscription-based news website devoted exclusively to local news will sell advertising space to businesses in Brockton, Mass., where other free hyperlocal news publications have failed.

Mance, Henry, “Rebekah Brooks to pull down Sun's online paywall,” Financial Times, Oct. 30, 2015, http://tinyurl.com/o2f4zpy. The Sun, Britain's top-selling tabloid newspaper and the only one with a paywall, will make its online content free to increase the publication's relatively low online readership.

DOI: 10.1177/2374556815621290