Free has become a very attractive proposition for users. Nevertheless, ceteris paribus (all things being equal) using a freemium model must enable the company’s revenue-generation. Below we outline the five critical pillars on which a freemium model must rest to maintain a viable business.

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1) Value proposition
The user must believe that the time spent using the product – think games – or working with a tool or software, adds value. The latter can be measured as just having fun or being able to spend less time getting one’s accounting done by using the right software.

Unless the value exceeds that gained with a competing product (e.g., smartphones such as the Nokia N97, which sold half a million units in a month after its June launch vs. the Apple iPhone 3GS, which sold more than one million units in three days after its June 19 launch), the user will either not sign up or simply switch to another service as soon as possible.

2) Diffusion: The more, the merrier
Early on, mobile phones were not attractive for very many because neither one’s business associates nor friends used one. As economics has taught us, only once an application con only spread effectively to others once it becomes prevalent in a niche market (e.g., business associates, movie buffs or friends).

A perfect example is Skype’s runaway success with Danish students in early 2004 because it helped them save on phone charges. As a student, one had to ‘be on Skype’.

3) No fixed costs but pay to play
In Europe, one reason for prepaid SIM cards’ success is that users do not pay a monthly subscription fee and charges accrue only according to use (i.e. outgoing calls). Still, a monthly subscription service is required to get some services such as unlimited monthly calls and Internet service.

The mobile phone business has demonstrated that this model of pay to play/talk can work very successfully for service providers.

4) No such thing as a free lunch
Beta users of Skype and Facebook felt that both provided value and a rapidly-expanding user base led to diffusion beyond critical mass, thereby making success possible. Facebook and Skype remain super hard to compete with because they are also free.

Nonetheless, in all these cases free is either a gimmick (e.g., Starbucks’ or the Second Cup’s free WiFi service) or part of the basic service that helps the provider to generate revenue by selling advanced features and/or serving online ads (e.g., Skype sells add-on services such as phone numbers).

5) Investing in one’s brand: Risk management
In European football (or soccer), clubs pay ever higher transfer fees for better players. This helps to win more games, while building a global brand. All clubs shown to the right use the freemium model here and there, such as free soccer camps or free attendance to exhibition games for school kids.

Here, freemium builds the emotional link between youngsters and clubs, thereby making parents more willing to:

- fork out a substantial amount of money for each game they want to see with their kids, and to
- purchase club merchandise, such as t-shirts, at astronomical prices.

Nevertheless, none of the clubs listed above has managed to be in the black without help from their owners, such as Silvio Berlusconi picking up the tab for AC Milan… again!

Bottom line: Make money or die
While freemium exists in infinite variations, unless one feels one needs a product (e.g., worth dying for if it is a fashion accessory), people will:

a) neither try it (e.g., Google Chrome), nor
b) be willing to fork out cash for the privilege of using advanced services (e.g., using Skype to make cheaper international calls from your mobile).

Letting a user try your service for free is different than letting them use it for free.

The freemium model only works if it supports the company’s efforts to make the revenue required to assure a positive cash flow, one way or another. When Qualcomm no longer got the revenue stream it needed from Eudora Pro, it gave the rights, including those for Eudora Light, to the Mozilla Foundation - Penelope.

In order to pay the bills and finance growth we have decided to use the freemium model (free to use – pay to play with advanced features) for My.ComMetrics.com. Right now, Twitter can still do without charging, but how much longer before investors pull the plug?

Check out:
- FREEMIUM: Give basic service away for free, acquire a lot of customers , then charge for premium service.
- a venture capital firm (VC) might ask, “… would I want this if it were free?“
- besides Twitter, LinkedIn, MySpace and Facebook, there are a plethora of social networking sites that are failing.

Okay, now it’s your turn. Would you have answered any of these questions differently? Did I miss something in one of the answers? Agree, disagree, shout with joy, cry with pleasure… please share your thoughts.

The global downturn may have bottomed out, but shrinking advertising revenue has forced newspapers to tighten their belts:
- New York Times: 1,300 editorial staff, 54 percent of revenue from advertising, big losses in Q1 of 2009
- Financial Times: 550 editorial staff, faltering advertising in Q1 of 2009
- Tages Anzeiger: 177 editorial staff after May 2009 cuts of 50 full-time editorial positions
All newspapers are feeling the pain, most due to lower spending on real estate, automotive, help-wanted and movie or theatre ads. Will this trend continue and will ever more newspapers be filing for bankruptcy?

Things change
When I was growing up, my parents read the Neue Zürcher Zeitung (Mon – Sat, three editions daily!) and the local Anzeiger des Bezirkes Horgen (thrice weekly). As a young adult in Los Angeles, there was the Los Angeles Times (daily), the Progress Bulletin (daily), the Daily Report (daily) and the Claremont Courier (twice weekly). Today, the LA Times is under bankruptcy protection, the Anzeiger des Bezirkes Horgen is part of a larger group, the Daily Report and the Progress Bulletin have merged to become the Inland Valley Daily Bulletin, and the Neue Zürcher Zeitung only publishes once a day.

Trend 1: The overall market size of paying newspaper subscribers continues to shrink – fewer people are willing to take the time to read a newspaper and even fewer (especially the young) will part with their hard-earned cash for this service.

The allure of a zero
Many cities are ‘blessed’ with a free daily that is distributed at railway stations or other high-traffic public places.

We ourselves have experienced that even additional intelligence and analysis does not make some people (see image at right) willing to register in order to download content for free.

Trend 2: Resistance to paying for news in print or online is increasing, in part because it is already available for ‘free’ somewhere else.

Of course, this does not address quality or depth of reporting and insights provided through ‘free’ news vs. paid content. Nevertheless, ‘free’ is so popular that quality concerns seem too small to sway many to paying for content.

Watch the trends
To make matters even more complicated, it is becoming more difficult to easily assess whether paid content really is better than ‘free’ content. In part, this is the fault of newspapers themselves. For instance, newspapers increasingly publish supplements that carry little editorial content but much glossy advertising (e.g., How to Spend It from the Financial Times).

A similar problem is illustrated by the LA Times, which decided to provide ad space on the front page for a fake news story (see yellow highlighted story in image at left).

Such and other developments mean making a distinction between quality editorial and paid content ever tougher for subscribers. As a result, reluctance to pay for anything is growing.

Unfortunately, publishing a digital version of the newspaper does not appear to be the answer to decreasing subscriptions and lower advertising rates for the printed version of the paper. For instance, a monthly Kindle subscription for the Financial Times is $9.99, plus tax in the US. Rumour has it that Amazon wants 70 percent of such subscription revenue and the right to republish the newspaper’s stories on other portable devices. Making a mere $25 from an annual digital subscription as the content provider leaves something to be desired from a capitalist’s point of view.

Multi-platform distribution (e.g., using video, digital and print channels) is here to stay, but it will not stop media houses’ revenue-erosion. Worst is that not only did print advertising drop, but online advertising growth seems to have slowed as well in the first quarter of 2009.

Trend 3: Newspapers are becoming ever more dependent on different revenue streams, making the protection of news content from advertising interference a growing challenge.

Bottom line
A viable strategy for stopping the revenue-erosion for news providers requires addressing two key issues:

1) using content across platforms: a two-hour interview with an expert can result in different content for different platforms – besides publishing the interview in print, it can also be made available as video (in part or complete) and/or an edited version can be made available to subscribers as a free podcast; and,
2) finding different revenue streams: a newspaper can explore different ways to generate revenue in addition to advertising, such as delegate fees collected for attending workshops, conferences, cultural events, etc. as organized and promoted by the newspaper.

The above indicates that a shrinking market with ever greater competition requires innovative use of high quality content. Most importantly, the latter helps in distinguishing oneself from the free sheets that may re-print corporate press releases or syndicated stories as delivered to them by such services as Bloomberg or Reuters. Survival of the fittest in a shrinking market for paid content requires savvy and innovative use of both technology and content to produce a desirable product for the niche market of consumers who are willing to pay for what they get.

Also of interest: results from the 2009 FT ComMetrics Blog Index.