I have a friend named Jason who is currently in law school, drowning in student loans and paying a $1600-a-month-rent for a studio apartment in Brooklyn. He is a lot like the rest of us college students--BROKE. But here are a list of Jason's money-saving tips. Instead of basic cable, Jason catches up on American Idol episodes on Youtube. He watches free movies on Hulu. He listens to free music on Pandora. He types his papers using GoogleDocs. He reads the news online and he has even cancelled his home phone service and uses Skype to stay in contact with Mom and Dad.
Jason's money-saving methods proves that the marginal cost of information in the digital world can be close to nothing. Goods and services such as cable television, music, newsstand newspapers, and telephone have a marginal value. However, the cheaper alternative for these paid services can be consumed for free on the web. So if everyone uses Jason's method to save money, how are companies making money by giving it all away for free?
The fact of the matter is that some companies are experiencing a decline in sales due to the availability of free services. According to Douglas MacMillan's "The Music Industry's New Internet Problem," services such as Pandora, Imeem and Last.fm pose a threat to music companies. The scarcity of music no longer exists, as online streaming services make music so much more accessible. Instead of buying and owning records, consumers will settle for listening to music on the web. MacMillan points out that listeners use online music sites as a substitute for purchasing music, rather than serving as a catalyst for more purchases. So why do they keep giving it all away for free?
"Free" may not benefit the music industry. However there are many industries that benefit from providing free services. According to Chris Anderson, editor-in-chief of Wired Magazine, the "Freemium" model works as a successful marketing strategy for the gaming industry. Warcraft III is available as a free demo for immediate download. However it only allows you to play a few levels without charge. Games that have a combination of free and paid content are especially appealing for consumers because consumers want to try something before making the commitment of buying it. In addition, labeling something as "Free" is a marketing strategy that gets that attracts a consumer's attention to something they wouldn't normally be interested in. For example, McDonald's is planning a summer promotion of giving away free iced coffees on days that the weather hits the triple-digits. By luring the consumer into McDonald's with a free item, the consumer is more likely to want to buy a breakfast burrito or cheeseburger to go with that free iced coffee.
The growing digital world is the reason why free services are so abundant and successful. Amazon provides a number of free books available for Kindle download. Digital books have a low-marginal-cost, allowing the company to provide unlimited free digital copies to an unlimited amount of consumers. The same works for video games. It costs little to no money for EA Sports to provide a free demo of NBA Live for immediate download. Without the availability and accessibility of the digital world, EA Sports would've had to produce game discs and packaging which would cost money and only serve a limited amount of people. Today's digital world is the reason why free services serves as a catalyst for more sales.
So going back to my friend Jason, who I mentioned earlier. I've noticed that more and more consumers, especially people my age, are using free services as a substitution for paid services. And then I thought, what if Pandora or Youtube start charging a monthly subscription fee? Would people stop using these services? Or would Pandora's competitors like iHeartRadio and Last.fm take over its customers? What would replace Youtube? I;ve noticed that the New York Times has limited its online access to paying subscribers. Will these companies do the same? It is apparent to me that companies that make their profit off paid content need to accommodate and adjust to the constantly evolving internet.
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