Lottery, Insurance and Digital Media
October 20, 2009I listened to Chris Anderson’s “Free” podcast on EconTalk, which is very insightful, much like his excellent book. Both mentioned the interesting story of Google’s entry into the email market. I don’t agree that the reason Google is able to offer near “unlimited” storage for free is because it has a small user base. Google wants to have as many email users (if not more) than Yahoo, and as fast as it can. It has to fundamentally believe that the net benefit will increase with the number of users.
So why is “Free” a more feasible economic model for some than others? Free is the catalyst to reach mass market. So the real incentives are the consumers, or, the “demand” side in the traditional model. If a consumer creates value simply by participating, then the cost of participating will actually decrease as the number of consumer increases.
Rather than simply acting as a purchaser of goods (atoms), the concept of consumer value by participation is not new. Lottery is such an example: everybody contributes a small sum for an even smaller opportunity to win a large sum. Insurance is another example. The product does not exist without participants.
Neither lottery nor insurance is free, because there is a payout and facility cost. They happen to be very stable business models too, because facilitators are almost guaranteed a profit, as long as there are enough participants. So what has that to do with digital media?
Consider this model: Per Consumer Cost = Facilitation Cost / Aggregate Value
The abundance model as enabled by Internet and digital media continues to lower facilitation cost. Consequently, the lower per consumer cost leads to a larger user base, thus creating more aggregate value. The end result is per consumer cost approaching zero, hence, free.
A business that relies on charging for facilitation cost high will be under pressure. Examples include Yahoo email, long distance carriers, cable…
A business that can harness the aggregate value will do well in the digital economy. Goog411 becomes more valuable with more user voice prints. Facebook enjoys a snowball effect. Hulu grows as larger audiences bring more advertising dollars and better programming. Finally, the success of a business in the digital age is not only defined by the success of stock holders, but the collective interests of stake holders, as in the case of Craigslist.
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I like your blog
This is an illuminating analysis. I like the way you criticized the original material, and the way you analyzed it with economics knowledge.
The examples of “lottery” and “insurance” you cited in your article are good metaphors. Similarly, in digital media world, even though per consumer cost is approaching zero, they result in “larger user base, thus creating more aggregate value”.
As we all know, social media platform is free for the users, but with more and more people using this platform, they are actually creating the potential business opportunities for those platform, thus capture more attention to the social media platform, as you mentioned in your argument “ a snowball effect”.