The Freebie Road to Digital Riches

Eric Flint is a self-described socialist, but he's also a businessman. After 25 years as a union activist and stints as a meatpacker, machinist, and steelworker, in 1992 Flint decided to concentrate on his true love -- writing science fiction. His first novel, Mother of Demons, was chosen by the Science Fiction Chronicle as one of the best novels of 1997. Since then, Flint has written 13 books. Last year, he earned $100,000 from his literary labors -- a 35% increase over his 2000 take. His explanation? He's giving away some of his books on the Internet.

For evidence that this accounts for his new prosperity, Flint cites an analysis of his book sales, starting with Mother of Demons. In the autumn of 2000, he made the entire novel available online via the Free Library project, a Web site where his publisher, Baen Books, posts more than 30 books in electronic format for no charge. Up to that point, the book had sold just under 10,000 copies, or 54% of those that had been distributed -- not bad for a work by an unknown author. Yet in the 18 months since the book has been free electronically, Flint has sold nearly 10,000 more print copies.


  Better yet, he says, he has received hundreds of letters from fans who tell him they've bought one or more of his books after reading one of the three he has now published online. "I may be allowing three readers free access for every one who pays, but sales are climbing, so what's the problem?" Flint asks.

His isn't an isolated case. Massachusetts Institute of Technology President Charles Vest recently bragged that when the MIT Press put up free e-text of some of its textbooks in their entirety at the time of publication, sales of printed books rose. (The MIT Press declines to reveal detailed sales information.)

For publishers, record companies, and Hollywood studios, the question has been how to maximize revenues, audience, buzz -- whatever is important to you -- in the Digital Age and still protect the value of the intellectual property? While they search seemingly in vain for ways to defend their current business models against the Web, entrepreneurs, indie bands, and some academic book publishers are quietly testing new strategies that seem to indicate the answer may be to abandon efforts to protect digital products at all costs. Instead, the key may be to carefully, selectively set significant amounts of it free.


  The concept of free stuff on the Web is nothing new, of course. Even the Establishment concedes that it's so easy to copy and share music, movies, and books in digital formats that such activity may be impossible to stop. Yet just as surely, the evidence that nontraditional business models may produce profits is starting to mount. Hal Varian, dean of the University of California at Berkeley's School of Information Management & Systems, says thinking multidimensionally about how to distribute what's now loosely called "content" can increase, rather than reduce, companies' options for creating value.

The focus could be on selling "complementary" products and services

Instead of simply selling a book, a CD, or a movie via the Net, he says, entertainment companies could focus on selling a variety of "complementary" products and services, such as merchandise or tickets to special events with artists and authors. "Distribution is being commoditized," says Varian. "The cheaper the distribution, the more important marketing new products and services becomes."

The move toward hanging new revenue generators off a relatively cheap core product already is in full swing in the software industry. IBM now markets open-source Linux software, a radical move away from proprietary software systems. With Linux, IBM gets paid not for the code, which is written by a community of volunteer programmers, but for the technical support and services its Linux customers need. The strategy is based in part on Big Blue's historical success in information-technology services. The division, which originally was set up to provide customer support for IBM mainframes, brought in revenues of $34.9 billion in 2001, up from $7.6 billion in 1993.


  Could such a model work for entertainment companies? The experience of authors such as Flint may not be foolproof. After all, you can't read a book in electronic form in the bath, the way you can listen to music on your MP3 player just about anywhere you want. But with a little effort and creativity, more daring Web-based business models have potential.

Take the music industry, the entertainment sector that claims to have been hit hardest by the digital revolution. Beleaguered record labels might succeed -- perhaps even do better than now -- with a strategy similar to that of software makers. A software publisher can turn out upgrades only so often, points out digital media expert Clay Shirky. Music companies, by contrast, can deliver unlimited numbers of "upgrades" -- albums, concert tickets, T-shirts, and other merchandise. A true fan will buy every one -- and ask for more.

It's a tested strategy. Look no further than one of the highest-grossing bands of all time, The Grateful Dead. Unlike nearly every other rock group in history, The Dead didn't threaten bootleg recorders -- rather, it aided and abetted them. At live shows, The Dead invited fans to plug into the engineer's sound board, allowing them to burn CD-quality recordings for free. In exchange, The Dead routinely grossed as much as $50 million in ticket sales and $70 million in merchandising annually from their religiously loyal fans.


  In fact, companies are springing up that see the Web more as a marketing tool for uncovering new riches than as a haven for pirates. Fanscape, a Los Angeles outfit founded by two ex-record executives, tries to connect artists to their fans through Internet mailing lists and grass-roots efforts such as "street teams" that keep word-of-mouth recommendations flowing. After just four years in business, Fanscape boasts an impressive list of clients, such as top stars Sheryl Crow, Enrique Iglesias, and Jewel, along with lesser-known bands such as Midtown and Jimmy Eat World.

The latest album from Midtown, a developing rock band on MCA/Drive Thru Records, debuted at No. 90 on the Billboard charts on Apr. 24 with more than 11,000 sales in its first week. Such an impressive debut -- more than 90% of artists never sell more than 10,000 albums -- will spur new sales. The Billboard charts are the Bible of radio programmers, who will now be more likely to play Midtown's singles. Radio play will expose the band to new listeners, who in turn will visit record stores and purchase the album.

Transforming record labels into marketing powerhouses won't be easy

Even more impressive is that Fanscape says 55% of the 20,000 fans registered at the band's Web site purchased the album. "The future of the record business is having a direct connection to the consumer," declares Larry Weintraub, Fanscape's co-founder and CEO. Weintraub argues that while the Internet can spawn piracy, it also makes for much more efficient marketing. Until now, labels had no way to know exactly who bought which records. As a result, they spend millions on untargeted campaigns on TV, radio, and outdoor billboards -- sometimes with limited success.

Granted, the record labels' transformation from talent agency and distributor to consumer marketing powerhouse won't be easy. For one, communicating with millions of fickle fans requires different skills than cutting deals with retailers and radio stations. And during the inevitable transition period, record companies' revenues and profits will fall as sales of CDs drop -- nothing to look forward to when companies have to report to Wall Street every three months.


  "Right now, [these companies are] at the top of the analog hill. They have to go down before they can climb the new, higher digital peak," asserts Jim Burger, a partner at law firm Dow Lohnes & Albertson in Washington, D.C., who represents technology companies, sometimes in disputes with record or entertainment companies. "There's no straight path from A to B."

Until that path is clear, it'll be hard to persuade the entrenched powers in the entertainment biz to become more adventuresome. "We have to give consumers...a satisfying music experience, but we have to do that without giving away the right to worldwide distribution," says Cary Sherman, the Recording Industry Association of America's senior executive vice-president and general counsel (see "The RIAA: 'The Piracy Rate Is Growing'").

Still, change the record companies must, as must Hollywood studios and New York's publishing elite. The only other choice is probably slow but eventual extinction. The tendency of intellectual-property owners to focus on control and protection is the equivalent of Wal-Mart trying to stop shoplifting by requiring full body searches every time a consumer leaves a store. It would work. But at what cost?

By Jane Black in New York

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