Freeconomic recovery - Page 2

Law of free

But this is part of the problem with freemium. While it's almost necessary for businesses such as Moshi Monsters, where Smith was reluctant to use an ad-supported model because the site is targeted at children; for most businesses a freemium model yielding an average conversion rate of around 5% isn't enough and some, such as Spotify, have to use advertising to back up their income from the subscriptions. Even Club Penguin, which doesn't use an ad-supported model, has seen reported a 20% drop in revenue during its third fiscal quarter this year.

The major challenge, explains Alastair Mitchell, whose collaboration workspace website Huddle is one of the most celebrated offerings to come out of the UK tech scene in the past few years, is building up the number of paying users websites need before they can support themselves.

"There isn't money available from VCs and investors to throw at these things and people are having to rapidly figure out how to make money and keep their team and business going," he says.

"I'd love to be able to tell you I have it all figured out, but in reality there are very few people who have," he says. "If you look at people like Spotify, who are still figuring out how to get people to pay, or Skype - who pays for Skype calls?

"It's so complex and so different for every business that we're going to see a lot of change in the next year or so. If there's one thing which is going to change, it's this law of free, if you like."

It's this 'law of free' which is causing so much uproar on the internet at the moment. As their readerships and ad revenues plummet, newspapers are having to work out how to make money, and improving how they monetise their online content seems the most obvious answer. The Financial Times has decided on a freemium model - users can view 10 articles a month before they are asked to pay - while the Wall Street Journal has opted for a nominal charge of $1.99 a week.

Both have been reasonably successful - so successful, in fact, that media magnate Rupert Murdoch has confirmed he plans to charge for access to content from some of his own newspapers including The Times, The Sun and The News of the World. "The extent of the downturn has only increased the drumbeat for change," he told The Guardian. "Classified revenues will never again reach the levels once seen in print."

"My customers were very angry. They formed the Society for the Protection of Free Websites for Kids and demanded we make the site free or they were going to shut it down"

The trouble is, internet users expect free. How would you feel if Google charged you 10p each time you wanted to perform a search? Or if suddenly, one of those scary emails warning Mark Zuckerberg wants to charge a monthly subscription for Facebook was actually true? Users would be in uproar. But despite this, would they really leave in their droves?

According to Smith, it's workable. Moshi Monsters didn't start charging for its content until a year after launch. "My customers were very angry," he laughs. "They kicked and screamed and shouted and wrote letters. A few kids even banded together and formed a group called something like the Society for the Protection of Free Websites for Kids and demanded we make the site free or they were going to shut it down - like Russian cyber hackers.

"They eventually calmed down when they realised they could still play the game for free - possibly even too much of it - without having to pay. But getting that balance right has been tricky. You can't give too much away, nor can you hold too much back."

Challenging times

The major challenge for web entrepreneurs is to find a way to meet users' expectations of free while getting them to bear the cost of running the site right from the beginning, which will give the business the opportunity to experiment with that balance. According to Mitchell, it's all about creating the perception of free.

"The science behind what people will pay for is phenomenally complex. It's about making the payment almost invisible to the user," he explains.

"I'll give you an example: I am invited into a phone conference. It looks free to me, but I'm still paying for it because the cost is consumed in my phone bill which I don't think about. And that's the most amazing business model for a company. It's all about the perception of thinking you're not paying for something when you actually are. And that's the next challenge for Huddle."

'Anything free is worth what you pay for it', goes the old adage - and it's a shame that particular one hasn't quite filtered through to online consumers, whose increasingly unrealistic expectations mean struggling online businesses are being forced to give away their offering for free.

Still. While freemium goes some way to providing a solution, except in the most successful examples, it isn't always realistic - which means someone, somewhere needs to work out how to persuade consumers to foot the bill without realising they are spending money.

For Mitchell, and for other freemium businesses which still haven't yet reached the scale where a marginal percentage of paying users can support the rest of the business, that's the ultimate goal. "And the person who does that," adds Mitchell, "will be very, very successful indeed."

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