Friday, October 16, 2009

The FREE Attack Report

FREE is a powerful word and a powerful force – but it doesn’t always work out the way you expect. For example this FREE iBreakfast had our lowest turnout ever - and it was essentially FREE. Apparently, people will always pay for things they are think are worthwhile to them or somehow elevate their status – and FREE never does that.

This certainly applies to the world of physical goods (atoms and bagels). What about digital?

In this iBreakfast we took a deep long look at the digital world where FREE is really big and almost everything online has a zero marginal – once you cover your base there are minimal additional costs. By now everyone in the business gets this.

The real issue is what happens when digital FREE goes after non-digital or quasi-digital business. This is the essence of the FREE attack. We see it in Eric Frank’s Flatworld Publishing company which is going after he high-priced College text book publishers. Flatworld can ride the industry down from $10bn to $1bn because their business model is digitally energized: they get, in effect subsidized professors who developed teaching materials on the job to create textbooks inexpensively and then give them away for free on the web- but then charge for the printed versions and other learning support services.

Tim Fielding at Riverphonic advises mobile clients on dealing with FREE and increasingly this will be an issue – especially as web-based services crowd out the telco’s hold on the phone deck. Additionally, almost every paid or premium web service today is likely to come under a FREE attack empowered by localization (a free feature of mobile) e.g. localized free Yelp vs. Paid Zagats. Likewise Apps are quickly tuning into free ad fodder and so on.

The big question people are asking everywhere is – how do you compete with Free? The answer seems to be (1) figure out how the competitor is being funded and meet or beat that and then (2) offer a better experience (e.g. personalized, pro version or celebrity back) or rely on (3) tribe, community or status tends to trump everything. If people are on your side they’ll keep paying.

Then, take this advice for what it’s worth – FREE.

Download presentations: Flat World Knowledge Riverphonic

Note: As we write this report one of our colleagues in the Industry is facing a Free Attack – hope he takes notes. His company charges for higher priced events that give entrepreneurs access to investors. Another group wants to give it away for FREE. But if he follows the above tenets – he should do just fine. Right?

Response to Jason Calacanis' Attack on Mike Segal & Private Equity Forumss

I know Mike Segal of Private Equity Forums and we even promote his events. So let me stick up for him in this way: his events bring out-of-town investors and entrepreneurs to New York. That is his strong suit and has been doing that well for years, filling up room after room with investors and entrepreneurs. He deals with what I call pedigreed starts-ups: people who have serious experience in their fields, have put a good amount of money into it and can afford to pay to be in this league. Dotcoms are a small part of his world - most of his Entrepreneurs have biotech, heavy engineering, energy, packaged goods or financial services businesses.

These obey very different rules from the digital world that Jason and his cohort inhabit – so before we get into some version of class war let’s understand that we are dealing with other classes of new enterprise.

As the organizer of the iBreakfast I should state that we run very modestly-priced start-up events and we give our winning entrepreneurs tickets to Mike Segal’s events so they can see what his world looks like. Some of it is familiar but a lot of it is very different – his investors usually look for revenue, tangible assets, assumable debt and a host of things dotcoms start-ups are oblivious to.

I can’t argue with Jason or anyone that access to investors ought to be Free. Why not? If Fred Wilson or Steve Jurvetson wants to see you – go ahead. They might even throw in a VitaminWater or buy you lunch. But unless you’re a serial entrepreneur and were recommended to them, the chances are the don’t want to see you. So events like Mike Segal’s and to some extent, the iBreakfast have emerged put you right in front of investors and get you into the general recommendation system. By organizing it into a marketplace they are entitled to charge what the market will bear. In that respect Mike is no different from a trade show producer or the Wall Street broker that takes his commission and the spread.

If you think he is charging too much – don’t pay. The iBreakfast offers a low-cost pitching event that grooms, educates and gives start-ups access to investors for a nominal $125. We don’t market it like crazy but then we also don’t pack dozens and dozens of investors into one place. So take your pick. As for the groups that do it more or less free, go to them – but they are probably oversubscribed and they’ll make you wait.

So, should one approach drive out the other or should all of these coexist?

If Jason can attract Investors and Entrepreneurs from all over the region – or the country to an event, do it on a regular basis and give it away for Free, I say more power to him. I might have a plan or two I’d like to trot out myself.

But keep in mind a few things. Free often drives out the good. Without a financial incentive there is a good chance the forum will run out of steam. Even if the forum continues, they still have to add some kind of value that makes it worthwhile for the investors to show up and for the best pitches to rise to the top. If they can do that, Free may win. Even so, many companies would still rather pay for all kinds of reasons like speed to the investor market or controlling their destiny.

A big question is why would Jason do it for Free. I buy his “sticking up for the hood” motive up to a point, but the real deal is publicity for his Mahalo “people powered” pedicab of a search engine, he needs to attract contributors, fire up his base them up and make them feel important.

As for the profit motive, well excuse me, Jason had no trouble charging over $1,000 for his Silicon Alley conferences when he could – thereby keeping good information and contacts away from the needy. Tech Crunch 50 is not Free. So why should these organizers behave differently? If Mike Segal can save his Entrepreneurs from traveling all over the country just to see investors and get the word out at once, then there is a value in it. Something like a road show in one place. Plus, many investors take this kind of effort seriously and see this as separating these Entrepreneurs from the pack – those which just can’t afford the effort and therefore may not be as viable.

That’s why these events take place at fancy ballrooms and not at a taco stand – it makes people take these presentations seriously. Maybe the investor should be paying for the lunch but the market dictates otherwise. Trust me, the doctor who just prescribed Jason his self-righteousness pills didn’t pay for his own lunch either if he didn’t want to. The drug company was happy to pick up that tab. More importantly, if an Entrepreneur is flying in from Minneapolis, Free starts to look very iffy while a paid event says “this is happening” and his time and travel costs will not be wasted on a flake out. Likewise, investors realize their time is unlikely to be wasted by people who are not really committed to their new enterprise.

Having said all that, I actually welcome Free because it forces the paid guys to do a better job or else. Plus it gives the posers a chance to discover their real selves before they do something silly like empty their trust funds.

As to which approach is really better – let’s say they are different and serve different purposes that may ultimately harmonize. A free event favors just-out-of-college start-ups with those big moonshot ideas like the next Twitter, iPhone Killer App or Search Engine (know of any?) Few succeed but the ones that do, make it really big. They change the world.

Paid events favor the seasoned player – the pedigreed start-up that has 10 years of experience in a field, often a mundane one where they see the real opportunity in their space, know the players, the customers and so on. There is less pizzazz and few ground-shaking ideas. The payoff is more earthly but to the investor, is also a safer bet.

The true serial (and successful) entrepreneur which includes Jason, only has to pick up the phone. The sensible entrepreneur has to know which category they belong in before they choose their path but they all have their place.

My prediction – a year from now, all these forums will exists in one way or another. All will do a better job and all will charge about the same – even the Free.

Thursday, October 1, 2009

The New Free Attack

An introduction to our Oct. 7 (almost) FREE iBreakfast

When you make something FREE something else becomes valuable. That, according to Chris Anderson, the author of the popular new book FREE, is the secret to fighting against the phenomenon that more and more industries are having to battle: The FREE attack.

The Recording Industry, Newspapers, Magazines and Hollywood have already faced this assault – so maybe we think we’ve learned a thing or two. We know ad-supported FREE (as in get eyeballs and ads will follow) and Freemium (give away the low end so that 5-10% will pay for the high end).

What's worse, according to a study reported in the Silicon Alley Insider - when you get a FREE Attack - you can't have it both ways and be a mix (a/k/a Freemium) you either go completely FREE or completely subscription.

Even as we absorb that message - we also need to look at something new that's coming.

The new FREE ties to together the major themes of the past few years – Social Media, User Generated Media and Open Source – and then turns it on entrenched players. That could be your typical Fortune 500 Company, the Government or you.

Just to be clear, the Internet introduced a kind of growth based on abundance (low-cost bandwidth) and zero-marginal cost – so once a site paid off its ever-lower set-up expenses, adding new customers cost very little. That’s standard digital FREE.

The New FREE is when companies aggregate Crowd Wisdom and particularly, Social Media groups, to go after high value targets. Flat World Knowledge is using this to go after the high value college text book industry: by using professors without typical publishing advances they are able to give away the books to students – and still make money. How long before mobile apps are harnessed in a high value way, like providing a virtual guide or legal assistant – an crowdsourced expert who comes to your phone – and goes after areas where customers are paying for high value information?

It doesn’t have to be completely FREE to qualify for an Attack. Just being so abundant that it is, as Anderson puts it, too “cheap to meter” is good enough. Look what happened to AOL’s hourly charge when the Internet become to too cheap to meter. Could that happen with the hourly billing system at a PR Agency, law firm or even Con Edison, when renewable energy really kicks in?

Abundance has its problems too. Facebook may be FREE but who pays us for stealing my children’s attention for hours a day as they jockey for social standing? FREE email means spam. When 18h Century settlers around the Appalachians learned to grow corn in abundance they soon found the best way to store it was to make whiskey. That lead to oddities like farmers drinking whiskey for breakfast. When the government tried to levy a tax it sparked a rebellion. The solution, as it runs out was Canal and then Railroad transportation which brought the corn to market while it was still fresh.

So yes, where there is FREE there is a solution of one kind or another. It just may not be obvious and it may not come quickly - but its there.

Soon, the tobacco industry and all the governments that depend on their steep taxes will be embroiled in a similar Attack as e-Cigarettes bring on “almost FREE” both in terms of health and cost to this age-old practice.

Barry Diller is latest Media Baron to take on FREE and believes he can get people to pay for content that others expect to get FREE. Maybe he knows something. But as the smartest players have found out, FREE and Paid can coexist in many ways – often reinforcing each other with FREE offering exposure and paid offering quality assurance, times saving, exclusivity and status.

Our next iBreakfast on October 7 will take this whole issue apart at our first (almost) FREE event. It's FREE to members and their guests……..and as our New FREE definition explains, that qualifies as FREE.