Today I'll be liveblogging from WIRED magazine's "Disruptive By Design" technology and business conference. The first talk was by their editor in chief, Chris Anderson. In July, he has a book coming out called Free: The Future of a Radical Price. He spoke on that topic, giving a historical overview of how businesses give stuff away for free at first to eventually produce a profit. He even tried to apply his theory to newspapers.
He started with a slew of historical examples, including a timeline of how free product promotion has evolved in technology. This was especially relevant for software. Software is often bundled with other products for free, with software companies earning revenue through other means such as licensing costs, broader functionality or other complementary software.
He asserts through his historical examples, which range from the transistor to software, that as marginal cost approaches zero, so should price. For those unfamiliar with marginal cost, that's the cost to produce each additional good, after all fixed costs have been incurred. For example, if I'm making paper clips, the cost of the metal and energy the shaping machine uses to produce the clips probably results in the marginal cost. It would not include the cost of the machine or management of the company.
My recollection of economics might be a little rusty in regard to marginal cost, but I'm pretty sure that the relation between marginal cost and price is not an equal sign. If it were, then that would imply that fixed costs must equal zero. This leads to a conclusion for products with a marginal cost of zero that producers give away for free: those companies must have other sources of revenue that cover their fixed costs.
Let's apply this logic to newspapers. What's the marginal cost for a newspaper? In theory, it's pretty small. After you've got one copy, each additional copy probably costs pennies -- paper and ink are cheap. For online content it's even cheaper. Of course, this ignores the enormous costs of paying your reporters and editors. It also ignores their expenses like printing presses, transportation, computers and cameras. This is all obvious, which is why newspapers are having trouble now that their content is essentially free, despite Anderson's marginal cost thesis.
But he offers a theory on how newspapers fit into his theory. He believes newspapers need a mixed model of free and paid content. He uses the Wall Street Journal as an example. He asserts that newspapers can't charge for big exclusives that others will repeat for free or their most popular news (ex: weather). As a result, he suggests that newspapers cater to some niches and charge for that.
This seems plausible, as the specialized reporting is what newspapers really have to offer consumers that they might be willing to pay for. For example, local newspapers might have their huge news stories and national content all available for free, but charge a subscription fee for the more detailed local news.
The problem, however, manifests itself with the price equilibrium
between the cost of that content and the demand by the readers.
Wherever that market equilibrium is, economics tells us that price is
less than the price at which readers would have to pay in order to
support all of the other coverage and costs by that newspaper. That
means it won't pay for the reporting for those free exclusives, the
Associated Press subscription for national content and other fixed
costs. The only hope is that advertising steps in to fill the gap. So
far it hasn't.
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