Tuesday, January 18, 2011

(Crowdsourcing + Long Tail) x Freemium = 0

Every so often, I read a book that claims to have discovered a whole new way of doing business. The theory's always the same. Using the power of the Internet to interact directly with zillions of people, the old capitalist model of business has become obsolete and a new type of business will take its place. And you can prove it with this small list of examples.

They're always fascinating reading, right up to the point where you realise that it's idealistic bullshit, that it won't work for the majority of businesses, that it's not sustainable, and that showing a few successful examples is a fallacious way to prove a theory. That's usually when I flip to the back cover or dust jacket and start looking for the words "contributor to Wired" in the author's bio.

Let's take the three examples from the title of this post.

Crowdsourcing

This basically says that instead of paying your workforce, you get them to work for free. In order to motivate them, you may give some of them a small amount of compensation, or you can run it like a competition where the best performing workers get a prize. Either way, you slash your running costs and reap the rewards.

Here's three real examples of how this works.
  1. The local newspaper that sacked all its professional journalists and editors and replaced them with ten amateurs, paying them $250 a month to submit stories and post them online. They made $175,000 a month in ad revenue.
  2. The company that got rid of its $20m a year R&D department and instead offered a prize of $25k to anyone who could solve a particular problem.
  3. The company that gets people to submit photos for free and then sells them at a fraction of the price of its competitors, and turns over $100m+ a year.
All sounds great, but that's basically exploitation. A whole load of people found themselves unemployed and replaced with free labour. Yes, one guy got $25k for something he did in his spare time, but several thousand others got absolutely nothing for their efforts. And, most importantly, all these people who are working for nothing still need a day job to pay the bills.

You see, it works on one fundamental, flawed principle. Somebody else pays for what I use. Someone else has to employ these people in a regular way so that they can pay their bills and give me their time as a leisure activity. It doesn't scale up. It's only good for skimming some surplus labour off the top. It's not the future of business.

Long Tail

This theory sounds like a dream come true for small producers. It says that while regular shops can only stock a relatively small number of items and therefore focus on what they can sell most easily, online shops can carry an infinite catalogue and therefore can continue to make very low volume sales of obscure items for a long time. So, no more deleted records or out of print books. Just keep digital copies online forever, and someone, somewhere, will occasionally buy them. Consumers happy, retailers happy, authors and bands happy, right?

Well, no. It's great for retailers, sure. If they make a buck a time from sales of a thousand small items, that adds up to a healthy bit of revenue. But when you dig down, it's not so good for the suppliers, though. Your one item only counts for one of those bucks. By the time the retailer's taken their cut, you're going to see 50c or less from each sale. In fact, you're probably not going to see any of it until your total has reached $50, so you could be waiting a while. You're certainly not going to make a living out of it.

Again, it doesn't scale up. As with crowdsourcing, suppliers depend on their day jobs to pay their bills. What's more, there's only room for a few retailers when anyone can stock everything. It's not the future of business.

Freemium

This one's the consumer's dream. Don't pay for anything. It's all free. Well, there's a Pro version that costs money, but you don't need that.

It's another example of a model that relies on the principle of someone else pays. The guys who need the Pro version will subsidise the free users. The investors trying to build market share will subsidise the free users. The guy who donates via PayPal will subsidise them.

In practice, it rarely works. Not enough paying users come along to cover the cost of supporting the moochers, and when the money runs out, the company folds and the moochers move on to the next free lunch. It's not the future of business.

From each according to his ability, to each according to his need

Put them together, and what do you get? In a business environment based on crowdsourcing, long tail and freemium, what you get is the following.
  1. People donate their labour with little or no expectation of reward.
  2. People get what they want for free.
This works fine as long as we universally abolish money and ensure that everybody in society contributes.

If I want a new garage, I'll crowdsource a bunch of handymen who will come over and build it for free, and the hardware store will give me free building materials (because you only pay for the top of the range stuff). The grocery store will of course give me free food, as long as they can crowdsource people who don't mind stacking the shelves for free, and the farmers are happy to donate their produce. I'm sure they can crowdsource people who will work the fields for nothing.

In other words, let's all become Amish.



Maybe that's the future of business?

3 comments:

Willie said...

Loved this blog Matt! Seriously, you touched on a lot of very valid points. I've realized many of them recently as I've attempted to make a living out of making film. Then I take that realization and apply it to my current career and then my previous careers. I could go on and on, but conversations like this require libations.

Again, a great blog! Thank you!

Crowd Sourcing said...
This comment has been removed by the author.
Crowd Sourcing said...

Dear KELLAND,

I have like your article it is really nice. This article is very helpful to me for business. you have explain the crowdsourcing is good medium for the business. You can aslo distribute your ideas and views on Crowdsourcing