- Not Free: this photo cost me several thousand dollars in fixed costs, so I should be paid if you use it.
- Free: sure this photo cost me money, but I did it for fun and I’m happy to share it with the world.
The deeper problem is there’s really no good pricing model for digital goods.
Specifically, production of digital goods involves a fixed cost (sometimes a very high fixed cost), but the marginal cost of copying a digital good is free.
How do you price something with zero marginal cost? An every-increasing percentage of goods and services have this characteristic, so I believe solving this problem is the key economic question of our times.
The current approach the movie and music and software industry takes is to:
- Charge the price that maximizes revenue.
- Rely on various legal and technical mechanisms to prevent copyright theft.
We’re all well aware of the enormous “pain in the ass” that copyright law inflicts on us. It sucks, it holds back innovation, etc. — but there are enough rants out there about copyrights.
The other big (but less discussed) issue is how to charge the appropriate price. I believe the main inefficiency here is the price for most digital goods falls into what I call the vast chasm of impossible pricing.
To illustrate, let’s say I have a cool photo I want to monetize. My options are:
- I can ask people to enter a credit card number and pay for it.
- I can offer it for free, and serve ads on the side.
The problem is asking for a credit card is a big deal. The customer has to get over a purchasing friction, and the merchant has to pay a fee. Essentially, you can’t charge anything less than around $5.
On the other end lie ads. Talking orders of magnitude here, a typical CPM is $1, so if you have an ad-supported revenue model, you’re basically selling each item for $0.001.
There’s a 5000x difference between the most you make from ads, and the least you can make from credit cards.
So what do you do if you took a nice photo? Or you wrote an insightful blog post? Or you sent an investigative journalist to Iraq and wrote an article? The fair price for whatever you did might be a nickle. And you’d probably be happy if you got a nickle every time someone viewed you page.
And many people might be perfectly happy giving you a nickle in appreciation, but they don’t want to deal with the cognitive load of authorizing a transaction.
Imagine if we had an easy way to charge a nickle. A very long tail of writers, photographers, musicians, and programmers would see a 50x boost in their revenue. There’s an incredible opportunity in solving the vast chasm of impossible pricing.