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Over the past decade, however, a different sort of free has emerged. The new model is based not on cross-subsidies the shifting of costs from one product to another — but on the fact that the cost of products themselves is falling fast.

-With the boom of the web and the ability to do EVERYTHING online….there was a way to fix this problem.

From the consumer’s perspective, though, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely different business, one of clawing and scratching for every customer. The psychology of “free” is powerful indeed, as any marketer will tell you.

-We are very stingy people, we will take anything free ( and maybe even complain about it..most likely actually) but as soon as we are charged anything for it, it is a whole different ball game.

This difference between cheap and free is what venture capitalist Josh Kopelman calls the “penny gap.” People think demand is elastic and that volume falls in a straight line as price rises, but the truth is that zero is one market and any other price is another.

Anderson describes the “priceless economy” in 6 categories:

“Freemium”
This term, coined by venture capitalist Fred Wilson, is the basis of the subscription model of media and is one of the most common Web business models. It can take a range of forms: varying tiers of content, from free to expensive, or a premium “pro” version of some site or software with more features than the free version.
(Flickr, Picnik)

“Advertising”
All of these approaches:
-paid inclusion in search results
-paid listing in information services
-product placement
are based on the principle that free offerings build audiences with distinct interests and expressed needs that advertisers will pay to reach.

“Cross-subsidies”
What’s free: any product that entices you to pay for something else. Free to whom: everyone willing to pay eventually, one way or another.
-Anderson discusses this in the beginning of the article, this is the way the concept of “free” sort of came about. The goal was to offer one free product in hope that you would in turn buy ANOTHER product from this store/company.

When Wal-Mart charges $15 for a new hit DVD, it’s a loss leader. The company is offering the DVD below cost to lure you into the store, where it hopes to sell you a washing machine at a profit.

“Labor exchange”
What’s free: Web sites and services. Free to whom: all users, since the act of using these sites and services actually creates something of value.

“Gift economy”
What’s free: the whole enchilada, be it open source software or user-generated content. Free to whom: everyone.
-These are usually the best…anyone likes ANYTHING free!

“Today it’s digital technologies, not electricity, that have become too cheap to meter. It took decades to shake off the assumption that computing was supposed to be rationed for the few, and we’re only now starting to liberate bandwidth and storage from the same poverty of imagination. But a generation raised on the free Web is coming of age, and they will find entirely new ways to embrace waste, transforming the world in the process. Because free is what you want — and free, increasingly, is what you’re going to get.”

-I believe that we are at a HUGE advantage in this aspect. Because we are living in this information age.. and discovering innovative ways to use our resources and tools to get anything we want online.. and we want it to be FREE!

“Zero marginal cost”
What’s free: things that can be distributed without an appreciable cost to anyone. Free to whom: everyone.

“This describes nothing so well as online music. Between digital reproduction and peer-to-peer distribution, the real cost of distributing music has truly hit bottom. This is a case where the product has become free because of sheer economic gravity, with or without a business model.”

-Because the internet gives us so much power, in turn we will be receiving these products for free… there is no way to take that away from us.

In “The Long Tail”  Anderson discusses an entirely NEW business model for the media and entertainment industries. He discusses how more sales, more algorithm-fueled recommendations, and the positive feedback loop kicked in and developed the Long Tail. Unlimited selection is revealing truths about what consumers want and how they want to get it in service after service, from DVDs at Netflix to music videos on Yahoo! Launch to songs in the iTunes Music Store and Rhapsody. As they wander further from the beaten path, they discover their taste is not as mainstream as they thought (or as they had been led to believe by marketing, a lack of alternatives, and a hit-driven culture).

Hit-driven economics is a creation of an age without enough room to carry everything for everybody. Not enough shelf space for all the CDs, DVDs, and games produced. Not enough screens to show all the available movies. Not enough channels to broadcast all the TV programs, not enough radio waves to play all the music created, and not enough hours in the day to squeeze everything out through either of those sets of slots.

“This is the world of scarcity. Now, with online distribution and retail, we are entering a world of abundance. And the differences are profound.”

Robbie Vann-Adib  -CEO of Ecast
Asks this question….
What percentage of the top 10,000 titles in any online media store (Netflix, iTunes, Amazon, or any other) will rent or sell at least once a month?
-The right answer is 99%. Most people… in fact almost ALL people get this question wrong.

People get Vann-Adib’s question wrong because the answer is counterintuitive in two ways. The first is we forget that the 20 percent rule in the entertainment industry is about hits, not sales of any sort. We’re stuck in a hit-driven mindset – we think that if something isn’t a hit, it won’t make money and so won’t return the cost of its production. We assume, in other words, that only hits deserve to exist. But Vann-Adib, like executives at iTunes, Amazon, and Netflix, has discovered that the “misses” usually make money, too. And because there are so many more of them, that money can add up quickly to a huge new market.

With no shelf space to pay for and, in the case of purely digital services like iTunes, no manufacturing costs and hardly any distribution fees, a miss sold is just another sale, with the same margins as a hit. A hit and a miss are on equal economic footing, both just entries in a database called up on demand, both equally worthy of being carried. Suddenly, popularity no longer has a monopoly on profitability. The second reason for the wrong answer is that the industry has a poor sense of what people want. Indeed, we have a poor sense of what we want.

-Anderson uses the music industry to describe these free phenomenons.. and it really puts thing in perspective as far as describing the things we are receiving almost automatically…that are FREE because of many other things that are making profit in order for these things to be free.

To get a sense of our true taste, unfiltered by the economics of scarcity, Chart Rhapsody’s monthly statistics and you get a “power law” demand curve that looks much like any record store’s, with huge appeal for the top tracks, tailing off quickly for less popular ones. But a really interesting thing happens once you dig below the top 40,000 tracks, which is about the amount of the fluid inventory the average real-world record store. Not only is every one of Rhapsody’s top 100,000 tracks streamed at least once each month, the same is true for its top 200,000, top 300,000, and top 400,000. As fast as Rhapsody adds tracks to its library, those songs find an audience, even if it’s just a few people a month, somewhere in the country. This is the Long Tail.

You can find everything out there on the Long Tail. There’s the back catalog, older albums still fondly remembered by longtime fans or rediscovered by new ones.

-This seems to be fitting the market out there….which is what ultimately matters, this model is WORKING, there is no question about that!

What’s really amazing about the Long Tail is the sheer size of it. Combine enough nonhits on the Long Tail and you’ve got a market bigger than the hits. In other words, the potential book market may be twice as big as it appears to be, if only we can get over the economics of scarcity.

-Venture capitalist and former music industry consultant Kevin Laws puts it this way: “The biggest money is in the smallest sales.”-

“When you think about it, most successful businesses on the Internet are about aggregating the Long Tail in one way or another. Google, for instance, makes most of its money off small advertisers. By overcoming the limitations of geography and scale, just as Rhapsody and Amazon have, Google and eBay have discovered new markets and expanded existing ones.”
-This is a valuable strategy to use, for several businesses in the world-

These are what Anderson calls the “Rules of the NEW Entertainment Economy”

Rule 1: Make everything available
As a result, almost anything is worth offering on the off chance it will find a buyer. This is the opposite of the way the entertainment industry now thinks.

That model may make sense for the true classics, but its way too much fuss for everything else. The Long Tail approach, by contrast, is to simply dump huge chunks of the archive onto bare-bones DVDs, without any extras or marketing.

Why not release all 255 on DVD each year as part of a discount Sundance Series?In a Long Tail economy, it’s more expensive to evaluate than to release. Just do it!

The same is true for the music industry. It should be securing the rights to release all the titles in all the back catalogs as quickly as it can – thoughtlessly, automatically, and at industrial scale.

Rule 2: Cut the price in half. Now lower it.
Ask the labels… they will tell you it is too low
Ask the consumers… they will tell you it is too high
-That is just the way economics work-

All this good news for consumers doesn’t have to hurt the industry. When you lower prices, people tend to buy more.

Such “misses” cost less to make available than hits, so why not charge even less for them? Imagine if prices declined the further you went down the Tail, with popularity (the market) effectively dictating pricing. All it would take is for the labels to lower the wholesale price for the vast majority of their content not in heavy rotation; even a two- or three-tiered pricing structure could work wonders. And because so much of that content is not available in record stores, the risk of channel conflict is greatly diminished. The lesson: Pull consumers down the tail with lower prices.

As Steve Jobs put it at the iTunes Music Store launch, you may save a little money downloading from Kazaa, but “you’re working for under minimum wage.”

So free has a cost: the psychological value of convenience. This is the “not worth it” moment where the wallet opens.

Rule 3: Help me find it.

an entrepreneur named Michael Robertson started what looked like a classic Long Tail business. Called MP3.com, it let anyone upload music files that would be available to all. The idea was the service would bypass the record labels, allowing artists to connect directly to listeners. MP3.com would make its money in fees paid by bands to have their music promoted on the site. The tyranny of the labels would be broken, and a thousand flowers would bloom.Putting aside the fact that many people actually used the service to illegally upload and share commercial tracks, leading the labels to sue MP3.com, the model failed at its intended purpose, too. Struggling bands did not, as a rule, find new audiences, and independent music was not transformed. Indeed, MP3.com got a reputation for being exactly what it was: an undifferentiated mass of mostly bad music that deserved its obscurity.

The problem with MP3.com was that it was only Long Tail.

This is the difference between push and pull, between broadcast and personalized taste. Long Tail business can treat consumers as individuals, offering mass customization as an alternative to mass-market fare.

The advantages are spread widely. For the entertainment industry itself, recommendations are a remarkably efficient form of marketing, allowing smaller films and less-mainstream music to find an audience. For consumers, the improved signal-to-noise ratio that comes from following a good recommendation encourages exploration and can reawaken a passion for music and film, potentially creating a far larger entertainment market overall. Such is the power of the Long Tail. Its time has come. Indeed it has…….