The Days of Free Products Are Over

The attention economy moat just got significantly wider

I’ll begin by acknowledging we are in painful times not seen for more than a decade. Many are ill or worse, many have lost jobs, and many companies have closed temporarily or will soon cease to exist. We are already seeing this in spades. What we’re also seeing is that the Coronavirus pandemic has tipped the scales on a global economy poised to falter after 10 or more growth years.

For those of us who have been working for 15 years or more, this is not the first time we’ve hit rough patches. The dot-com crash hit within months of my move to Silicon Valley in 2000. I finished an MBA while still in a recession in 2003, and of course, the 2007–2009 sub-prime mortgage crisis hit everyone. For younger career professionals, this might be the first time you’ve lived through a dramatic negative economic event in your own working life. As a product manager, I believe we will start seeing the economy directly affect products and business-model choices.

Business models under pressure

From a product management perspective, these are very interesting times, and they give me an opportunity to connect the dots on many business topics I’ve studied and lived. Dramatic economic events cause people to sharply shift their spending habits to only the essentials. Holidays, new cars and accessories get put on long-term hold when people need to focus on health, food and rent. I’ve been observing, during this time, that businesses are also reassessing their business models and concluding that cash is king (again).

Specifically, I am starting to believe that audience first, revenue second business models will face strong adversity, as the economy continues to contract. Your audience isn’t necessarily leaving, but they may never show up with dollars in hand to support you if your product isn’t critical to their lives. In fact, we may see a return to older, well-established business models, such as selling your products or services directly, and in advance of consumption. This will still include paid subscriptions for ratable income. This isn’t the dark ages, after all.

Return of the paywall

Last week, I listened to the last free episode of a podcast called “Hit Parade” by Slate, which I’ve been enjoying for the past half a year or so. This podcast is now only available to paid subscribers. This may signal the decline of the “build it for free,” advertising-supported business model for companies that are not at the scale of many millions of users. Of course, for companies that have already built that scale of users, an advertising business model may still be fine, since they have the audience with which to generate revenue. Facebook, Instagram, Google and YouTube, for example, are doing just fine and will continue to do so. It’s the small-audience businesses still trying to reach critical audience mass that will suffer. Some won’t make it.

The moat for success in attention-based businesses just got a whole lot wider. It takes a very large audience to sustain an advertising business model from unpaid users. That’s not new, but creating that audience feels like it’s getting harder, with vastly more competition. In the meantime, building products still takes time and financial investment.

Newspapers have been increasingly dealing with this problem for two decades. With the extreme leakage of advertising dollars away from newspaper classifieds to online non-newspaper classifieds, such as Craigslist, eBay, LinkedIn and Nextdoor, etc., during the past 15 years, newspapers have had a very hard time staying afloat and paying for high-quality journalists who attract readers. They’ve been working harder to gain and keep subscribers while seeing various channels steal away attention.

Many older, physical, print-based products have closed shop entirely. When’s the last time you actually saw or picked up the Yellow Pages? Do you even know what the Yellow Pages are? If you’re under 20 years old, you probably don’t.

The collision of interests and behavior

Here’s where it hurts businesses: when user behavior and business models collide. With mobile apps such as Flipboard, and Apple or Google News, I don’t have to pay for access to basic news coverage. When I click over from a newsletter to a paid, blocked-access article, I just close the window and move on with my day, despite potentially enjoying that particular article or analysis. I applaud the conversion efforts by many periodicals to give you 3–5 free articles per month as a lead-generation method, however. I don’t know if this actually works, but it seems low-cost to try to maintain.

The erosion of free

Many great products were, in fact, built on delivering value for free and aggregating millions of users: Google, Facebook, Instagram and LinkedIn, for example. Some have expanded into paid products while retaining the freemium core. Others remain cost-free for end-users. With an expanding moat to cross, it will be difficult for a new business to reach their scale of free users without funding. Instagram may be the most recent company to have achieved this.

If it’s getting harder for newer companies or products to do this, then an unpaid-user business model may be untenable. Adding users is seductive, which can lead to thinking you’re growing. Gaining users feels great, because it means people like your product. These people aren’t paid customers, however. As your audience grows, so do your costs or, at minimum, your time investment. That’s a hard model to sustain if this is your primary business.

If you’re building a product that relies on thousands of users before you can make money, you could be in that bind for years. How long can you work to keep your audience happy, while you’re personally unpaid? In the case of a podcast, your audience members are listeners (free) vs. customers (they paid for access). Lifetime value (LTV) for a free listener is zero, if your audience is too small to attract advertisers, and they won’t pay you directly.

Hit Parade by Slate just decided to make you choose, and I don’t blame them. They are well-researched, produced, recorded, and most of all, interesting and entertaining. If you like them enough, you can choose to pay a relatively low amount per year ($35) to continue to listen. After all, they’ve produced 59 episodes before this point. I must like it, because I keep listening.

Money in minus money out

People, buildings, utilities and tools take money, and you normally only have a few different ways to pay for these:

• Revenue from customers. When people pay you, you have money. Ideally, this revenue exceeds your costs of doing business, and everyone is happy.
• Investment from someone else. People give you money, and you use it. The cost of that investment may mean transfer of a percentage of company ownership. They may need some convincing that investment is worth it.
• Your own savings. You pay for everything, until you run out of money or transfer to a different source of funds. This can be the hardest, if you don’t figure out a revenue model soon enough. Hitting zero dollars in your savings may mean game over.
• You borrow resources. I once worked for a start-up that had free office space for two years, because another company let them use space they didn’t need. This is a great deal if you can get it.
• You have a benefactor who gifts you money. Your rich aunt or uncle who just want to see you happy would be an example.

Remember that profit is what you keep after bills are paid, not the money that comes in the door. If no money comes in, you’re either in the endgame or have an uphill climb ahead of you.

Audiences of personality

Influencers and YouTubers are an interesting new twist on advertising and promotion-based business models. As a member of Generation X, I have to admit I’m not all that attracted to influencer business models. While these are also attention-based businesses, such as free podcasts, in some cases they have very low costs to produce and no infrastructure-build costs whatsoever. They also seem to attract a young crowd of Millennials, Gen Z and Gen Alpha. Many of these demographics have had high-powered, always-on digital devices by the time they hit their teens. The demand was armed and ready to consume the content.

These entrepreneurs are also building businesses where financial success is built upon creating a fan base first. They then get paid by sponsoring products directly or product placement, and/or by advertising. In this case, they have a massive advantage, which is they don’t have to also build the platform. YouTube, Twitch, LinkedIn and Instagram already exist for the purpose of intermediating content providers and consumers. The start-up costs for an influencer, therefore, are almost zero to get started. For example:

Influencer DIY cost model

Fixed costs

If you’re a DIY influencer, and you already have a good-enough personal phone, your costs can be near zero. For example:

• iPhone 11 Pro with max memory (512GB) is $1,449 USD brand new.
• iPhone SE (2020) with max memory (256GB) is $549 USD brand new.
• The phone you’ve had for two years is $0.
• Back-lighting rings with tripods for a professional look start at around $40 USD.
• If you’re an online gamer, perhaps you only need an Xbox One for $399 USD, which might come bundled with your game of choice.
• If you got that gaming system for Christmas last year, it is $0.

Variable costs

This depends quite a bit on what you’re promoting. If you’re recording in your bedroom, then it may be $0.

• Time. This business can cost a lot of time you didn’t apply to something else.
• An internet connection. If you live with your parents, this may be free. Otherwise, it’s less than $50 month USD.
• Clothing. You might not care about this, depending on your topic, but if you’re promoting high-end clothing or lifestyle, this could be very expensive.
• Locations. If you’re a travel influencer, you need to travel. Air travel and hotels can be very expensive.
• Staff. Are you aiming for a high-polish, professional-grade product with writers, producers, editors, promoters, etc.? Now you look much more like a traditional business, after all.

The unfortunate truth is, regardless of low start-up costs, not everyone can do this, and not everyone will be highly successful. It can be very expensive to live an unaffordable lifestyle for show, or “flex for the gram.” It may not be surprising that people who are already famous, or uncommonly beautiful people, have an advantage when it comes to getting the attention of viewers. No one said life was fair.

I’ve also read it can take a half a million followers before big brands will start to ask you to represent them. Gaining that many people to follow you is a steep mountain to climb and can take years. Some will never achieve it.

Getting scrappy and inventive

Circling back at our current Coronavirus pandemic, I am inspired by the tenacity of restaurant owners whose businesses are under real strain. I live in San Francisco, and I’ve directly seen and heard about many companies closing down, temporarily closing their doors or cutting staff. I’ve also seen some companies simply grinding it out and doing whatever they can to stay alive.

This feels like real product management and survival. Many of these folks may feel like they don’t have a choice. It’s live or die as a business. Death of a business may very well mean a crippling, unrecoverable blow to personal finances for the owners. I’ve seen restaurants in my neighborhood keeping the front door open and turning themselves into a take-out only restaurant but staying alive. This is redefining the product to meet the changing market needs. They still don’t have it easy.

Just this past weekend, my wife attended a yoga class on Zoom with more than 100 attendees. This was not a class she even knew about prior to our shelter-at-home days. An enterprising teacher is giving classes from her home over online video. She has attracted more than 100 people per class and is collecting suggested donations from students. It’s really cool to see.

Making Choices

So did I end up paying for Slate? So far, I have not. This is the hard part for content producers. I have so much available content among YouTube, other podcasts, Netflix, RSS feeds, Reddit, news sites, etc., that my attention is fairly divided. Pair that with a day job that occupies the majority of my day, and I don’t have a lot of motivation to restore one missing channel.

I have paid for one podcast I’m enjoying quite a bit from Acquired, which they call their “LP Show,” however. One of the authors of that podcast was also involved in creating a podcast subscription-payment platform called Glow.fm. It’s an interesting way to monetize podcasts directly instead of the traditional advertising-only model. They built an audience with one show and built a paid listenership with the other. This is a view into the evolution of business models we can expect to see more of.

I hope everyone is keeping as safe as possible during these times. I hope, as well, to see the return of our smaller businesses and local communities to health and prosperity. As consumers and the internet, itself, continue to evolve, I expect that new ways of getting to users will also emerge, which will again disrupt the popular ways of doing things.

About the author

Luke Congdon is a career product manager living and working in Silicon Valley since 2000. His areas of focus include enterprise software, virtualization and cloud computing. He has built and brought numerous products to market, including start-up MVPs and billion-dollar product lines. To contact him, connect via luke@lukecongdon.com or https://www.linkedin.com/in/lukecongdon/.

Originally published at http://lukecongdon.com.