'Free' wants to be big

This is a post I've hesitated to write, but given the recent back-and-forth over the book-length version of Chris Anderson's "Free" theory, I figured it was time. Because while I agree with Anderson's thesis, I also see in it the ironic demise of much of what I love about the DIY culture of networked media.

Stewart Brand said "information wants to be free" and got called a hippie for it. But if Information wants to be free, then Free wants to be Big.That principle suggests the reversal of another popular dictum of our decade, "Small is the new Big." And as a fan of Small, this disturbs me.

It's not all bad news, of course. But for professional content creators, it means we're still a long way from a robust business model, and that our future is likely to involve new bosses who may not be that different than the old ones we used to suffer..

Economies of scale

In an excellent piece on freeconomics posted Saturday, venture capitalist Fred Wilson delved into estimates of Facebook's numbers: If Facebook is running on monthly revenues of roughly $50 million, then the monthly value of an active Facebook user is about 25 cents. 

On the one hand, spending $50 million to break even doesn't sound like a great deal. You could break even with a quality Small product for a lot less.

But here's the thing: If Facebook can hold the line on costs and boost the per-month value of each user from 25 cents to 50 cents (Wilson thinks it can), then it's looking at an annual profit of roughly $600 million. No amount of marketing could ever turn Talking Points Memo or other quality Small media sites into that kind of revenue engine.

So these are your choices: Invest lots of money in Big and you take a risk for the possibility of getting rich. Invest a little money in Small and you take a risk for the possibility of... well, what, exactly?

In the old days, you hoped your investment in a Web-based garage start-up would blossom into a property that you could package into a multi-million-dollar sale to Google or Amazon. Those deals have gotten extremely rare over the past two years, and with the expanding availability of free/low-cost tools, many new Web start-ups don't require investors in the first place. Innovation, it seemed earlier this year, was shifting from Big to Small.

But appearances can be deceiving. Consider these limits:

1. Using free services limits how you can make money off your new service/product.
2. Participating in someone else's platform (say Facebook's) means someone else controls the cap on your value -- and can reset the rules of your agreement, Darth Vader style, whenever it suits them.
3. Bootstrapping generally means you're investing your time in making things work -- and unless you're a skilled programmer, that means your "system" is probably human-powered. Human-powered systems have advantages, but low unit costs generally isn't one of them. 
4. The old bootstrap-to-sell-out path to Internet wealth was based on a simple exit strategy: convincing bigger companies that the combination of your system/solution/brand was a better value than creating their own version of the same service/product. Given the three conditions I just listed, that's now an extremely tough sell.

Result? I see two futures for Small media. One is shoddy, tawdry and cheap. The other is higher quality, local... and generally only borderline sustainable. Despite all the stress and risk involved, running your own small-scale Web media start-up is essentially just giving yourself a job. 

Of course, for many of us, that job is all we want. That's part of the beauty of Small.

But here's the problem: If you're running your own small site or service, odds are you're too busy to do much else -- like positioning your company for the rapidly approaching future..Sure, Big companies may turn like ocean liners, but the smaller your business, the greater the likelihood that a relatively minor technological or economic disruption will wipe out everything you've built..

The Wal-Mart Factor

Despite the waves of citizen media it has unleashed, freeconomics is more likely to replicate the Wal-Mart experience than it is to create some hippie media utopia. Just as the expansion of the Wal-Mart franchise wiped out local economies around the United States in the 1990s, so too is the expansion of free content and services likely to obliterate online business niches.

Nowhere is this more obvious than in the display advertising market. The Dot-Com bubble was based on the idea that Web advertising rates would be similar to their print forebears. They weren't. Today's CPM ad rates are even cheaper, and it's not clear that they've hit bottom.

Making a living doing something on a small scale means charging a relatively high price for it, and if you can't compete on price and you can't invest in innovation, you're pretty much stuck with what you've got. That's a bad place to be today.

None of this would be too worrisome if there were an obvious way to progress from a Small Web start-up to something resembling the profitable-but-stable mid-sized companies of the 20th century. But the reality is that today's Small media start-up is so fundamentally different from a Big media company that the possibility of "scaling up" simply isn't available.

Big, Open, or Along for the Ride

I've got friends who believe the recession is over, that reports of "green shoots" herald the coming of a new bull market. I'm sorry to disagree, but I think we've got at least one more dip to go in this recession, and that portends the longer, slower recovery so many economists feared. It's likely to be even worse in the media industry.

Of course, one thing about recessions is that they tend to be the periods in which significant capital formation occurs. So while many of us go scraping around with our Small ideas, Big companies are investing millions of dollars in new tools that will change everything as soon as they're released (See: Wave).

Small can't compete with Big for that. The days of the garage start-up are ending, not because people lack vision, but because the next generation of tools is likely to be so much more complex. Two bicycle mechanics built the first airplane. The likelihood of two bicycle mechanics building the replacement for a Boeing 747 is exactly nil.

Small might be able to stay relevant by collaborating with Open, expanding the Open Source Movement into something we might call The Open Source Sector. This could be everything from community-run projects (Mozilla) to big company releases (Google's new Chrome OS) to cooperative ventures (Melody).

But let's be realistic about Open. Most open-source projects are funded by Big companies, and the power of Open is now so obvious to Big that it's become the deployment method of choice for Google. Expect others to follow.. 

All of which means one thing: If you're not Big or Open -- or both -- then you're probably just along for the ride.

So what should we do?

I catch a lot of shit for openly advocating the death of brain-dead newspaper companies, but let's be clear: It's the brain-deadness that I want to see purged, not the news. I spent years trying to figure out how to help newspapers make the transition from the old model to a new one, and brain-deadness got in the way every time. It's doing it again this summer. 

In 2005-07, I figured newspaper companies had a great chance to bridge the gap to 21st century media. Now I suspect most won't. But there's one example of a newspaper that has an excellent chance to take the advantages of Big and the values of Small and combine them into a model that could produce something remarkable: The Gazette in Cedar Rapids, Iowa. 

The Gaz is family owned. It isn't absurdly over-leveraged with debt. It has a free-thinking, creative boss (Chuck Peters) who went out and hired one of the most visionary people in the business (Steve Buttry). At a moment when everybody else in the news business seems committed to doing things wrong, these people seem intent on getting it right. It's a messy, frustrating process, but what The Gaz is attempting is what Big media everywhere should be doing: Using the power of Big to build innovative tools that make money by connecting people and communities. 

Xark can't do that. Google could, but it hasn't yet.

I hope The Gaz is successful, because we desperately need it to be (and yes, I promise to blog about my visit to Cedar Rapids soon). If there's a successful proof of concept there, then perhaps new capital will form in the vacuums left by failing newspapers. Perhaps we'll see the spread of tools and revenue-producing relationships that will provide reasonable profits for investors and sustainable incomes for content producers. Perhaps.

In the meantime, I don't know what to tell you. The future isn't written, and it's likely to be diverse and experimental.

But what's becoming increasingly clear to me is this: Just as the beginning of this recession dispersed power, its end is likely to see power re-focused in Big new ways.