Monday, July 20, 2009

Does Free Lead to Paid?

There is an interesting debate swirling around media industry blogs in response to the following question:

Does it make sense (and lead to long term profitability) to invest tens of millions of dollars in a new media platform, give it away free for years, build a big following and then figure out how to make money?

I think it is fair to say that the jury is still out on the 3 highest profile examples of this model – Facebook, Twitter and YouTube. All have massive followings, have become iconic brands and yet are losing significant sums of money every month.

Advertising seems to be the best way for these companies to monetize such enormous reach, but initial response from the ad industry has been circumspect as they question the impact and acceptance of ads in social media and user-generated content environments.

Another compelling option is to charge consumers and/or companies for some customized and/or premium use of the service. I guess at the end of the day, this model depends on how valuable the service really is to its users.

A year ago I started using Pandora – the free online music service. It would be an understatement to say that I am completely hooked - 95% of the music played in my home is streamed through the Pandora iPod app.

The company recently announced that free listening will be limited to 40 hours per month, but can be extended to unlimited for that month for 99 cents. Seems they will also be focusing more aggressively on advertising. Advertising around songs is a long-proven model. (They also have a premium version of the service that is ad free.)

As I provide my credit card info to Pandora, I guess free does lead to paid in this sample of one.