After spending millions of dollars over the past decade fighting the free exchange of their products over the Internet, some media companies are now yielding. The best way to get something in return, they are deciding, may be to accept that consumers want to play but few seem to want to pay. If enough of them join the game, there can still be a payback — either from consumers themselves or, increasingly, from advertisers.
LONDON: “FIFA 07,” a video game for soccer fans, costs around €50 in Europe. In South Korea, five million players have downloaded the online version free — yet Electronic Arts, the publisher, is cheering them on.
Realizing that it was impossible to sell “FIFA Online” in a country where piracy is rampant, Electronic Arts started giving away the game last spring. Once the players were hooked, the company offered for sale ways to gain an edge on opponents; extending the career of a star player, for instance, costs less than $1. Since May, Electronic Arts has sold 700,000 of these enhancements.
The human quest for something for nothing may be inevitable, said Gerhard Florin, executive vice president for international publishing at Electronic Arts in Geneva, “but now at least we have a way to monetize it.”
After spending millions of dollars over the past decade fighting the free exchange of their products over the Internet, some media companies are now yielding. The best way to get something in return, they are deciding, may be to accept that consumers want to play but few seem to want to pay. If enough of them join the game, there can still be a payback — either from consumers themselves or, increasingly, from advertisers.
“Free is the new paid,” said Kenneth Parks, chief operating officer of Brilliant Technologies, a company based in New York and Melbourne that is developing a service called Qtrax, which will provide free music — legally — to Internet users.
Mass media given away freely or at low cost is hardly new, of course. In many countries, over-the-air television and radio have long been financed primarily by advertisers, at no direct cost to consumers.
But the Internet is pushing the concept into new areas. Consumers can make free phone calls, watch free video clips or scroll through the Web sites of their favorite publications for free. In some competitive broadband markets, even high-speed Internet access is “free” for some consumers — though they have to subscribe to a package of other services, like telephone calls or pay-TV, to get it.
In the traditional media world, as well, readers are turning to free: According to the World Association of Newspapers in Paris, at least 28 million free newspapers are distributed every day around the world, 19 million of them in Europe, where the total has doubled over the past three years. And digital over-the-air TV systems like Freeview in Britain now offer dozens of channels, providing an alternative to pay-TV for consumers who refuse to limit themselves to a handful of viewing options.
Even the music business, which has long insisted that consumers should pay for its products despite the ease of free downloading, is softening its stance. Major record labels have licensed their music to services like Qtrax, which promise consumers free digital music as long as they agree to watch or listen to advertising.
Qtrax will resemble illegal file-sharing networks, using peer-to-peer technology to help users find and download music. But executives hope that the promise of a licensed, safe and legitimate service will attract users weaned on digital music but unwilling to pay for it.
“There's a whole generation of consumers who think free music is a birthright,” said Allan Klepfisz, chief executive of Brilliant Technologies, which is developing Qtrax. “The closer you are with a business model to current consumer behavior, the better your chance of success.”
Analysts say record companies have warmed to the idea of free music paid for via advertising amid a growing feeling that paid-for digital downloads from services like Apple's iTunes, held out as the music industry's great hope, may not live up to the hype long term. After several years of heavy promotion, digital sales made up only 10 percent of total music industry revenue in 2006, according to the International Federation of the Phonographic Industry.
“If it continues to level off, as it seems to be doing, this is not going to make up for people not buying CDs anymore,” said Josh Bernoff, an analyst at Forrester Research. “In that environment, it makes sense for the music companies to investigate any way of generating revenue.”
Qtrax executives said the service would begin in the United States in the coming weeks, followed by an international rollout. Similar services, like Spiral Frog, are in the works. Established digital music sites like Napster are also experimenting with free music, hoping to turn users into paying customers. Even in China, where piracy is widespread, EMI Music agreed this week to make its music available for a free, ad- supported service run by Baidu, the country's largest search engine.
There is no guarantee that ad-financed music will transform the industry. These services will come with some serious limitations, analysts say, including, generally speaking, an inability to work with Apple's iPods, for instance. Some people in the music industry are pushing instead for digital music sites to drop restrictions on buyers' ability to copy the tracks they purchase — something that will also require the music companies to accept some free distribution of their products.
Will the movie industry have to follow? Hollywood studios are casting about for new methods of distribution and making more video available over the Internet, as weakness creeps into formerly reliable revenue earners like home video. Richard Greenfield, an analyst at Pali Capital, predicted recently that 2007 would be the first year that U.S. sales of DVDs fall.
Many of the new experiments in “free” are pinning their new hopes on advertising, which has roared back online after the Internet bubble burst in 2001. Analysts at Zenith Optimedia, a buyer of advertising space and time, said they expected Internet ad spending to total $31 billion worldwide this year, up from less than $10 billion in 2002.
The rapid growth of Internet ad spending has encouraged some online media owners to give up on trying to collect from consumers. AOL, formerly a subscription service, has opened its Internet portals in the United States and Europe to all Internet users, free of charge, in the hope of appealing to more advertisers that way.
Worldwide, media spending by consumers and business users still handily outstrips advertising, by $944 billion to $385 billion, according to PricewaterhouseCoopers. But growth in consumer spending on media in the United States has slowed sharply in the past few years, analysts say.
Worldwide, PricewaterhouseCoopers expects spending on high-speed Internet access, which delivers digitized media, to increase faster than outlays on content that traditionally comes with a price tag — books, magazines, cinema tickets and CDs, for instance. Global consumer spending on Internet access is expected to rise at an 11.9 percent annual rate through 2010, according to the firm.
To be sure, consumer spending on media is not going to disappear anytime soon. According to a survey of 130 media executives from around the world, conducted recently by Accenture, 31 percent forecast that subscription models would be the dominant business model in five years' time, with 25 percent opting for so-called pay-per-play funding.
But 37 percent said advertiser financing would be the predominant business model in five years' time.
Doubters of the staying power of free, advertiser-supported media worry that the trend may not be as consumer- friendly as it seems over the long term.
Will consumers eventually lose out if media budgets are more heavily financed by advertising? Will diversity — in music, for instance — suffer if media owners have to rely on advertising to finance it? Commercial television, after all, often seems more concerned with ratings, to please advertisers, than program quality. And, is there a point at which advertising reaches overload?
“There's a definite balance here, and if you surround people with too much advertising, they get resentful,” said Bernoff at Forrester Research.
That is what happened in the American radio market, analysts say, where the free airwaves gradually filled with sound-alike stations, packed with more than 15 minutes of advertising an hour. That created an opening for satellite radio companies like Sirius and XM, which generate the bulk of their revenue from subscription fees and have few or no commercials.
Advocates of Internet advertising say consumers are more willing to accept it on the Web because ads can be channeled to relevant audiences. On a service like Qtrax, for instance, financial services ads could be directed to classical music listeners, rather than heavy metal fans, Klepfisz said.
Having seen the potential of Internet advertising, big media companies and start-ups alike are trying to push the advertiser-financed model into other media — mobile phones, for instance.
Despite the much-hyped advent of mobile television and other services, mobile operators have had a hard time interesting users in downloading anything other than musical ring tones — in part, analysts say, because consumers balk at paying. Yet operators have mostly insisted on trying to charge them.
“So many things on the Web are free, so a lot of mobile users say, 'why should I pay?'” said David Springall, chief technology officer at YoSpace, a company that runs a mobile video-sharing service, like a YouTube for cellphones.
YoSpace operates its video gallery for mobile operators like 02 and 3 in Britain; users typically pay a small fee, about 35 pence, or almost 70 cents, to download a short clip. Over the coming year, YoSpace plans to add advertisements to the clips in order to bring down the cost, Springall said.
Even if such services are not free right away, “2007 is probably the year when pricing of mobile content has a bit of a shake-up,” he said.
The promise of free mobile video was demonstrated during the World Cup soccer tournament last summer, when free, advertiser-supported match highlights from the British mobile network 3 attracted more than 3.6 million viewings.
The appeal of advertiser-supported new media may also soon be tested with the expected introduction of an Internet version of the most prominent free model in the “old media”: television.
Janus Friis and Niklas Zennstrom, the founders of the Internet telephone service Skype, are working on an online television platform called Joost, which aims to use peer-to-peer technology to deliver video programming to users around the world.
Unlike YouTube and other user-generated-content services, Joost aims to provide conventional, television-like programming rather than short clips from amateurs' video cameras, the founders have said.
Joost says its primary business model will be in the mold of commercial television, with programming supported by advertising and no cost to the consumer.
Can media companies adapt to a world in which “free is the new paid”?
As it gets harder to find paying customers, media companies need to be more flexible about how they pursue audiences and generate revenue, said Gavin Mann, head of the Accenture digital media practice for Europe and Latin America. Joining forces, instead of standing alone — as many media companies have traditionally preferred to do — can help, he said.
Google, for instance, has struck dozens of agreements with media partners, including the likes of eBay, AOL, MySpace and British Sky Broadcasting, the satellite TV company. For consumers, Google is free. But Google has developed the most powerful business model on the Internet: selling billions of dollars worth of advertising linked to its searches.
“Companies that say, 'We can't change because we do something that's different' — the market doesn't care,” Mann said. “It will change it for you.”
