Any fool knows that you don't get rich by giving it away. And yet, in today's digitally connected world, free content is an increasingly popular catalyst for commercial success. Nicholas Lovell's new book explains all.
If you're a fan of American industrial rock band Nine Inch Nails you'll have noted the limited edition 'ultra deluxe' version of the album Ghosts I-IV, going for a song at $300. Well it was once upon a time. But it's not today, because the run of 2,500 units sold out almost instantly, meaning that the brains behind the marketing – front-man Trent Reznor – grossed $750,000 in a little over a day. By the end of the first week, sales of Ghosts I-IV in other formats had grossed $1.6m. Not bad for music that is free to download, music that the artist wants you to download for nothing.
Reznor is a clever man says Nicholas Lovell, author of 'The Curve'. The musician knows that while a significant proportion of welcome 'freeloaders' will be delighted to access free music straight to their computer, a small, affluent and diehard base of "superfans" would be only too happy to spend a small fortune on the 180-gramme vinyl, four-LP set that comes with fabric-bound hardcover books, numbered and signed by the artist. Something is clearly going on here.
"Welcome to the curve," says Lovell both at the start of his new book and of our conversation in a caf' in Victoria. He is about to explain his observations on how product distribution has changed in the digital world, how price points vary, and how we can either be on the curve or not. With a background in digital gaming, Lovell is something of a frontiersman for "the transformative power of the Internet". For him, the change from the physical to the digital world means that we have to re-evaluate the concepts of pricing and value. This is because "when something goes digital it can be shared so cheaply that it naturally becomes free".
"That may be driven by competitive pressures, or it may be driven by illegal file sharing." Either way, what concerns Lovell is how, once a product has become free, we remain able to manufacture it. "How does business continue to function when digital presents an inexorable downward price spiral?"
Lovell says that the basic thesis of 'The Curve' is that we should accept, even embrace, the concept of 'free', not least because it is inevitable. "We've lost that battle. And we have to accept that out of the seven billion people on the planet, most don't want to pay for your product."
But, he explains, there is a small minority that still wants to pay, and importantly, will happily pay more than what the market appears to accept as being the norm. This might be due to additional value created by extra elements being supplied with the original products, as with Nine Inch Nails. But the underpinning concept is that you need to "let people spend their money on things they really value".
"Never before have we had such an opportunity to figure out how much people are prepared to pay and supply stuff at those price points." It follows, says Lovell, that the curve falls into three parts. First, you use the power of 'free' to work out what people initially want. Second, you harness technology to figure out how the free stuff is valued. And third, you open creative channels to people who want to unbuckle the purse.
One of the ways to look at what the curve means is to examine what goes on when we buy music digitally. A decade ago, when we used to walk into music stores to buy CDs we were spending our money on two things. First there was the music; and second there was the physical access device that enabled you to listen to it. "Now, the access device has other values," says Lovell. "It has status and display values. But for people who don't want physical artefacts in their life, the disc can also have negative value, which is why they'll buy their music from, say, iTunes."
Lovell explains how as a student he would routinely check out other people's CD collections to see if there was the prospect of long-term compatibility with the person he was visiting. "Now you can't do that. You need access to other people's MP3 players and playlists, but it will tell you nothing because most music is free. This is one of the reasons why music on vinyl is resurgent. People who are true audiophiles want to show off their collections." Lovell says that it is what we buy, rather than what we get for free, that makes a statement about ourselves.
What part of the curve?
Although we may tend to think of ourselves as either ahead of, or behind the curve, this is not how Lovell applies the term. "It comes from two sources. First there is the demand curve from classical economics, and the other is the Pareto principle. In free games such as the Candy Crush Saga a huge proportion '' maybe up to 95 per cent – of the players never pay any money at all. The remaining 5 per cent might spend maybe an average of £10 over the lifetime of their involvement with the game. But that doesn't mean that everyone is paying '10."
Lovell goes on to explain that in the digital world we don't see the sort of distribution you find in the physical world. In the digital domain where "there are not the constraints of the physical world, you start to see the bell-curve breaking down and you start to see a distribution much more around a power law curve. A very small percentage of people will represent the lion's share of your income, while a huge percentage will spend nothing or very little."
What this means is that our instinctive picture of the distribution of our clients could be misleading. Thanks to digital distribution the 'long tail' has replaced the bell curve. So does this mean that the world has now divided itself into digital superfans and freeloaders? "No," says Lovell, "there are a lot of people in between. We have to make sure that we aren't mislead by the way we used to think."
'The Curve' by Nicholas Lovell is published by Portfolio Penguin, £16.99.