By Justin Adams, Erb MBA/MS student, class of 2011.
This blog entry originally appeared on the AshokaTECH Technology/Invention blog.
“Freemium is the first business model of the 21st century,” says Wired Magazine’s editor Chris Anderson.
Free + Premium = Freemium
The idea behind the Freemium model is to give something away in order to sell something else. Many of the Web’s best services, including Pandora , Dropbox, and LinkedIn, use this business model. The basic service is free, but if you want to get rid of the ads in Pandora or get more storage capacity from Dropbox or connect to more people through LinkedIn, you have to pay for it; otherwise you can continue to use the service for free.
In most cases, about 90% of customers don’t pay for these Freemium services. I’ve been using Flickr for years to share pictures and have never paid them for the value they’re providing me. Nor have I had to endure a single advertisement. Companies can afford to do this, Anderson argues in his book Free: The Future of a Radical Price, because the economics of bits are radically different than those of atoms. Things made from atoms tend to get more expensive over time while things made from bits get less expensive over time.
Moore’s Law + Metcalfe’s Law
The engine behind this economic transformation is Moore’s Law. For more than a century, the ability to process information has been growing exponentially. On average, the price of transistors drops by 50% every 18 months, the price of digital storage drops by 50% every 14 months, and the price of bandwidth drops by 50% every 12 months. In practical terms, this means is that every year it costs YouTube 50% less to store and distribute digital video.
The reason this matters to the social sector is because of the effects of Metcalfe’s Law. As the costs of collaboration plummet, the opportunities to provide innovative services and to take collective action increase exponentially.
The Mobile Web + the Developing World
Tom Hayes and Michael Malone, argue that cheap, Web-enabled cellphones are going to create a “jump point” for the Internet: the arrival of two billion new users from the developing world. These devices will triple the size of the Internet population and provide global broadband wireless coverage.
A few weeks ago I attended O’Reilly’s InsideMobile Conference and the interesting thing was that the people actually making money in the mobile space were using the Freemium model. Evernote helps you remember everything. It reached 1 million users faster than Facebook or Twitter. Youmail helps small business people make better use of their voicemail.
What I find hopeful about the Freemium model is that even though these companies are in the business of making money, they’re also making the world a better place at the same time. The Freemuim model simply doesn’t lend itself to hucksterism. Value isn’t captured in a one off transaction as it is in the junk sold on late night infomercials. Value is created by providing services that people are willing to pay – after they’re already using them.
What are the opportunities?
What’s the best way to provide value to the 2 billion people coming online via mobile devices? What are the implications of having full access from anywhere on the planet, anytime? What life-altering applications can be created? Is the Freemium model a good way for the social sector to create enduring services?
Justin Adams is an MBA/MS student at the Erb Institute for Sustainable Global Enterprise at the University of Michigan. Prior to graduate school, he worked as a telecommunications consultant, a television producer at MSNBC, an Internet application designer for Baxter Healthcare. He wants to use the disruptive power of the Internet to create a sustainable and just world.