Ovum: The Future of Digital Content is not Free

By Marisa Peacock (@marisacp51) Apr 2, 2010

The internet is not free. Or so says London-based research firm Ovum. Recently, in an extract from Ovum’s new research program examining the monetization of digital content online, they outlined what they believe to be the misconceptions of “freeconomics.”

1. The Misconception of Marginal Costs

While many may believe the internet is a hotbed of free stuff, from newspapers to search engines, Ovum argues that free can’t be sustained for long and that it’s not likely to last.

To think that the future of digital media is based on the concept that the “marginal cost of distribution on the Internet is approaching zero” is misleading according to Ovum. Theories of marginal cost ignore that it takes money to develop digital platforms, from raising capital to covering marketing costs. As well, it doesn’t include the costs associated with rights and royalties, or the mere fact that companies may actually seek profits. In other words, a free market cannot thrive on a free internet.

Even though we enjoy many free services on the web, from sites like Google and Hulu, Ovum maintains that they are hardly profitable, saying that:

…to date, free ad-supported digital content services (e.g. YouTube, Hulu) haven’t reached a profitable scale using advertising alone. Even Facebook’s enormous scale has not quite enabled it to move into profit.

2. The Misconception of Market Externalities

What if you were able to finance “free” using market externalities? Another wasted alternative, that’s what.

Scalable models built from “considerable network effects — the more people that are on a social network, the more people want to be on that social network” — that rely on others’ content can work as long as you don’t have to pay for content.

But what happens when you have a digital platform that offers entertainment that you have to pay for?

3. The Misconception of Competition

Perhaps Ovum’s most compelling argument is that which tackles rights ownership. A successfully scaled free service, it is argued, would monopolize the market share, becoming too powerful and capable of dictating the terms of ownership. Furthermore,

Digital entertainment platforms will find it difficult to build the scale required to support free services because of the friction created by rights ownership. Globally fragmented release windows, and slow rights clearance of back catalog due to multi-party negotiations and exclusivity agreements, will make it difficult to produce a massive range of content, essential for triggering network effects and building scale.

So there you have it. Three reasons why free isn’t free. But is Ovum just over-reacting? If history is any indication, the internet has a way of surprising us all. And maybe the point of the internet, at this point in time, isn’t to make money. Perhaps it’s just a matter of not being evil.