Can you compete with free?

On the Digital Production BuZZ show of February 15th the BuZZ in Depth segment (50 minutes into the show or use the chapter mark) was on Competing with Free where I drew heavily from a Techdirt article Saying you can’t compete with free, is saying you can’t compete, Period.

The Techdirt article and discussion on the show revolved around the thought that the price of everything ends up competing at the marginal cost of producing the good. The way to add value, and therefore make profits even when the marginal cost is zero with digital distribution, is to differentiate with branding, convenience or service.

Then today an email list discussion that’s been ongoing about the need/no need for DRM. Naturally opinion is somewhat divided. However one of the examples chosen to highlight the “need for DRM” cited a proposed book in the UK written by chef and personality Jamie Oliver. A draft of the book got leaked by pdf and appeared on the Internet. The entire projected run of 200,000 books was cancelled because bookstore owners cancelled pre-orders because they thought they could not compete with free.

And yet, Cory Doctorow, who is an opponent of DRM, practices what he preaches.

“I’ve been giving away my books ever since my first novel came out, and boy has it ever made me a bunch of money.”

In the Forbes Magazine article he tells of his first novel Down and Out in the Magic Kindom published by Tor Books in January 2003. Since then the book has had six printings – a serious commercial success in a publishing world where few books make it to a single reprint. During this same period more than 700,000 copies were downloaded from his website, free.

Don’t fall into the trap of saying that those 700,000 “freeloaders” would have been potential sales. That would be to fall into the same trap as the IRAA and MPAA! This author is smart enough to realize that an eBook download is not a lost sale.

Most people who download the book don’t end up buying it, but they wouldn’t have bought it in any event, so I haven’t lost any sales, I’ve just won an audience. A tiny minority of downloaders treat the free e-book as a substitute for the printed book – those are the lost sales. But a much larger minority treat the e-book as an enticement to buy the printed book. They’re gained sales. As long as gained sales outnumber lost sales, I’m ahead of the game. After all, distributing nearly a million copies of my book has cost me nothing.

It’s not just books. By the time they released their album Barenaked Ladies Are Me in Q3, 2006 they’d been offering the album as unprotected MP3 files at 196 Kbits/sec. BNL offer the album for $9.99 as an MP3 and $12.99 for lossless quality. And yet, in the week following the official album release, BNL grossed $970,000 from “intellectual property” sales. Selling direct, the artists are getting a much better deal, about $5 an album and much better than the 4.5 cents/download that artists like Cheap Trick and the Allman Brothers reportedly get from each download of their material under their contract with the record company. Nearly a million dollars in gross revenue and yet the same material was available free. (It should be noted that BNL get income other than from digital download sales that would fall into the “Intellectual property” category.)

Also consider the example of The Shins, who had never been higher on the Billboard 200 than 86 prior to the last week of January this year. That week Wincing the Night Away” sold 118,000 copies, a career best for The Shins. What makes this remarkable is that the album had been widely available on file-sharing networks since October, three months earlier!

An independent study by economists Felix Oberholzer-Gee and Koleman Stumpf concluded…

there is likely no effect of downloading on US store sales.

Clearly you can compete with “free” when the product is differentiated again. The UK booksellers clearly do not believe in the value of their product – the book – and their shopping experience – the bookstore. Had they not blinked Jamie Oliver might have had his best-selling book ever: the opposite to what happened because of a lack of insight.

Edit: Apparently the book did get published and is called Cook with Jamie and it sells in Australia for Au$49.95 (about US$39.25) and is differentiated from the PDF by being in a splash-proof vinyl cover, fabric tape marker and great visual and physical appeal. I’d love to know how it has sold compared with the original prediction.