Just Because You Offer A Free Service, It Doesn't Mean Your Users Aren't Customers

from the blurring-the-lines dept

The world of Twitter got its collective knickers in a twist earlier this week when the company made a change to the settings of its service. The particular change was pretty small, but seemed to disproportionately effect "power users" and early adopters, so, of course, the uproar over it was pretty intense, and Twitter changed the change. The details of the change aren't all that important, but like with the response to Facebook's recent TOS change, it's dragged out some rather interesting opinions. A personal favorite of mine is the response to the backlash that since users aren't paying anything for these services, they have no right to complain. Apparently users should "pay up" so they have the right "to voice [their] displeasure as a customer rather than as a user" -- and this coming from a guy who writes a blog about open-source software. It's one thing for a business to ignore complaints that don't come from customers or potential customers, but in the case of free services, to imply that users' opinions don't count because they're not ponying up any cash is fairly ridiculous. Most free services rely on their users to create revenue in other ways, such as by providing traffic to monetize; alienation of users that results in a downturn in traffic, and in turn, ad revenue, has exactly the same effect as losing paying customers' repeat business. The distinction between "customer" and "user" is, in many cases, becoming increasingly irrelevant. And never mind that in many instances, such as with Twitter and Facebook, it's impossible for users to become paying customers. It's hard to imagine that either company thinks it's okay to ignore its users simply because they don't pay.

Carlo Longino is an expert at the Insight Community. To get insight and analysis from Carlo Longino and other experts on challenges your company faces, click here.

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Valve Exec Explains How To Compete With Piracy

from the service,-value,-pricing dept

Last month, an exec at Valve Software noted that "Pirates are underserved customers" and said when someone realizes that, they also discover: "I can do some interesting things and make some interesting money off of it." It looks like the company is sharing some data to back that up now as well. A whole bunch of you have been sending in reports from Gabe Newell's keynote speech at DICE. Newell is the founder and managing director of Valve, and he provided plenty of reasons that show that "piracy" is not the issue at all: service, value and pricing can easily trump piracy.

He started out by pointing out something that we've discussed in the past: digital content is best viewed as a service, not a product. As a service, you focus on providing continual value -- and people are paying for that future value (which is a scarce good prior to delivery), rather than an infinite good already created. There's value in paying for that future (scarce) service, and it trumps paying for an abundantly available good.

From there, he noted that the reason "piracy" is doing so well is that the "pirates are ahead not just on price, but on service." In fact, he noted that since DRM decreases the service value for customers, it also tends to increase piracy, rather than decrease it.

Then, he showed how that combination of service and smarter pricing allowed the company to run experiments and make a lot more money -- competing quite successfully against piracy. The most stunning example: last weekend, the company ran an experiment with the game Left 4 Dead. It heavily discounted the price, and sales shot up 3,000%. And this wasn't just a case of building off a small base. The sales over the weekend were more than when the game launched.

In fact, it looks like a big part of the problem facing the industry is that they charge way too much for their products. Here are the numbers Newell shared from Valve's experiments with "sale" pricing:

• 10% off = 35% increase in sales (real dollars, not units shipped)
• 25% off = 245% increase in sales
• 50% off = 320% increase in sales
• 75% off = 1470% increase in sales

Newell then says when they decrease the price by 75%, they are making 15% more than when they were charging at full price -- though, I'm not sure how that math works out from what's stated above (I've been playing around with the numbers, and something is missing...).

Between all of this, it's pretty clear, yet again, that "piracy" is hardly the issue. If you provide a valuable ongoing service at a much more reasonable price, there's no problem at all. Once again proving that the issue is a business model issue, rather than a legal issue. It's too bad so few old school content providers are willing to recognize this, and quite troubling that some folks in our government are still missing this as well. It's going to lead to bad laws and even worse enforcement of the law.

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It's Good To Be A Monopoly: Rogers Prices iPhone Service At 2 Arms And 2 Legs

from the what-else-are-you-gonna-do? dept

There's been a fair amount of complaining about the pricing of the new iPhone 3G over the last few weeks. While plenty of people were initially enamored by the cheaper price for the actual phone in the US (and in some other countries), this subsidized low price often hid higher service fees (with a locked contract) that came with it. However, it appears that the folks at Rogers Communication up in Canada really went overboard in its service pricing: offering very expensive service fees that have excessively limited data amounts (and no unlimited data offering). Users also get less talk time. Basically, these service plans make the iPhone a hell of a lot less appealing -- but since Rogers is the only carrier offering the iPhone in Canada, it feels it can get away with such high prices. But, the impressive thing is that people are trying to fight back, putting together a petition against Rogers' decision. While online petitions are notorious for their ineffectiveness, this one seems to be getting an awful lot of attention -- creating a ton of negative publicity for Rogers. If the company has any sense of the harm negative publicity can do, perhaps it will rethink its pricing strategy.

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Security-As-A-Feature And The Economics of Abundance

from the a-feature-not-a-product dept

The always insightful Bruce Schneier has a new piece out arguing that the stand-alone security industry is doomed, as security increasingly becomes a feature of other products, rather than a product in its own right. He points out that hardly anybody wants to buy a "security product." They want to buy useful products -- operating systems, databases, web servers, whatever -- and take for granted that the developers of those products have designed it to be secure out of the box. Schneier points out that consolidation in the security industry has not taken the form of large security firms buying small security firms, but of non-security-focused software firms buying security firms to help bolster the security and reputation of their products. This may indicate that developers of other software products are recognizing that better security is one of the key features customers are demanding in their products.

If you'll excuse me for jumping on a Techdirt hobby-horse here, this is another example of the economics of abundance at work. Security products are increasingly becoming commodities. Obviously the software ones -- anti-virus tools, software firewalls, intrusion detection systems -- have a marginal cost of zero, and even many of the hardware devices are built on commodity parts that get cheaper every month. What hasn't gotten cheaper is the expertise required to put the bewildering array of security tools together into a coherent system that's customized for a firm's particular business. Indeed, as security products have gotten more numerous and more complex, it has actually gotten harder to keep track of them all and know which security tools are the best ones to use in any given situation.

And crucially, this isn't something you can outsource to a third party. I've written before (in the context of e-voting) that encryption isn't magic pixie dust that automatically makes a system more secure. The same point applies to security more generally. Having the best firewall in the world won't do you any good if it's not configured properly, or if your network hasn't been designed with security in mind. And because every large organization has different security needs, every organization needs a slightly different security setup.

This creates a huge opening for companies who understand that customers are not looking to buy a security software product, but a suite of software that they can count on to be secure without worrying about the details. We've pointed out that this is essentially the business Red Hat is in: not selling software but selling the expertise of its employees with respect to the software. Security is a big part of that. "Security software" is an infinite good, and the market for it will get increasingly crowded in the future. On the other hand, the expertise needed to build complex software systems securely is as scarce as ever, and such expertise is one of the key ways that software companies can distinguish themselves from the competition.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

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Stating The Obvious: Unlimited Data Plans Increase Usage

from the you-think? dept

Sometimes it's fascinating to see the type of research reports that analyst firms put out. For example, one firm has put out a report supposedly warning all these wireless firms hyping up "unlimited" plans that unlimited plans tend to increase usage. You think? Really? One would have hoped, given the long history of unlimited usage plans in other fields, that the mobile operators would have understood the basic economics equation in moving to such plans. Of course, what this also ignores is that the same "unlimited" usage often helps create much greater value because it opens up the possibility of new applications and services that simply weren't possible before. If the internet had remained a pay-per-hour solution (as it was for many in the early years) it never would have become nearly as useful, and the value of having an internet connection would have been significantly lower. So, yes, it can increase the strain on a network for providers who aren't prepared (or unwilling to understand the basic incentive structure), but it also tends to increase the overall value of having access. And that should only mean good things for the firms that offer such access.

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