Transcript Freeconomics - Temple Fox MIS

VALUING INNOVATIONS
“The most important discoveries of the next 50 years are
likely to be ones of which we cannot now even conceive.” John Maddox
Importance of Innovation
• Innovation creates a competitive advantage in
business.
• Can be the difference between success and failure.
Difficulties
• Short Lived Advantage
• Rapidly changing digital world
• Competitors can easily copy innovation
• Risky
• No guarantee technology will be successful
• VHS vs. Betamax
• Organizational Requirements
• Firms must work together in harmony
• Need many skilled workers to deploy new IS
Predicting Future Technology is Hard
Disruptive Innovations
• A product that surpasses the dominant technology to
become the norm.
Innovation Process
Choose Emerging Technologies
1.
•
Create processes that are dedicated to discovering
disruptive innovations
2. Match Technologies to Opportunities
•
Determine the purpose served by the emerging
technology
Innovation Process
3. Execute Business Innovation for Growth
•
•
Select the emerging technology.
Act on opportunity to increase customers and market share.
4. Asses Value
•
•
Assess value of the technology used.
Continuous.
e-Business Innovation Cycle
CANDY
CANDY
CANDY
Hypothetical situation
Hypothetical situation
Choose one:
$.14
$.01
@poll 337503
@poll 337504
Hypothetical situation
Choose one:
$.13
FREE
@poll 500507
@poll 500508
Background to experiment
Conducted by MIT professor Dan Ariely
The original study found that:
27% selected Hershey
73% selected Lindt
Background to experiment
The second study found that:
69% selected Hershey
31% selected Lindt
Why?
Understanding the power of free
When Free is Dangerous
FREECONOMICS
Online, there is such a thing as a free lunch.
HOW DO WE VALUE IT…..
…when we increasingly give it away for free?
Gordon
Moore
Co-founder of Intel
Published an article
in Electronics
magazine on April
19th, 1965.
This article became
known as Moore’s
law
Moore’s Law
The number of
transistors in a
processor will
roughly double
every 18 to 24
months.
Moore’s law
In 1961, a single transistor cost $10.00
In 2010, you can get 2 billion transistors for $1,100.00
or one transistor costs $0.00000055
Freeconomics as economics
What happens when the
marginal cost is essentially
$0.00?
Free! Why $0.00 is the future of business
http://shar.es/gCAoJ [/twitter]
Different freeconomic models
Type
Known example
Advertising
Google’s pay per click
Cross Subsidies
Comcast
Zero marginal cost
YouTube Videos
Gift economy
Wikipedia
1.
Consumer Google’s something…
2.
Consumer clicks on a sponsored link (an “ad”)
3.
Consumer is redirected to advertiser’s website
4.
Consumer gets advertiser’s product, and the advertiser
pays Google.
Different freeconomic models
Type
Known example
Advertising
Google’s pay per click
Cross Subsidies
Comcast
Zero marginal cost
YouTube Videos
Gift economy
Wikipedia
A single DVR costs Comcast $250.00, and they give
them away to each new customer.
How does Comcast make their money back?
1. Subscription fees
2. Faster internet speeds
3. Pay-per-view movies
Different freeconomic models
Type
Known example
Advertising
Google’s pay per click
Cross Subsidies
Comcast
Zero marginal cost
YouTube
Gift economy
Wikipedia
How can you charge people effectively for watching
YouTube?
In 2010, it cost Google $0.25 to have someone stream
HD video for one hour
In 2011, it was $0.15
2012 projection – less than $0.10
Different freeconomic models
Type
Known example
Advertising
Google’s pay per click
Cross Subsidies
Comcast
Zero marginal cost
YouTube Videos
Gift economy
Wikipedia
All content is user generated with non-monetary
returns for those who invest in it…
How can this exist?
Remember Chris Anderson’s video on Free!
FREEMIUM CASE STUDY
Background
Founded in 2007 by Drew Houston, a forgetful MIT
graduate.
Dropbox has only received $7.2 million in venture
capital
What is the pricing structure of Dropbox?
Dropbox - The business model of free
Dropbox rents users space in the cloud, similar to how
students rent apartments or dorms from the Temple.
However, unlike Temple dorms, one of Dropbox’s options is
free, for everyone.
Dropbox pricing scheme:
2 GB – Free
50 GB – $9.99 / month
100 GB - $19.99 / month
1000 GB – $100.00 / month
How can Dropbox make
any money when
its main product is free?
Dropbox news
As of October 2011, Dropbox has over 50 million users.
Over 96% of Dropbox’s users use their services for free.
In 2009, Steve Jobs offered to buy Dropbox for a reported
$800,000,000.00.
Dropbox declined.
Today, Dropbox is valued at over $1,000,000,000.00
So, what’s the secret?
Moore’s law and
freeconomics!
Freemium in a Dropbox
Cost of adding a user to Dropbox is essentially zero.
However, as users use the product, some will become paying
users.
The profit from paying customers, less than 4%, is enough to
make Dropbox a wildly successful company.
Dropbox can offer its product for free because of
the marginal cost is essentially $0.00.
Profitability of:
Profitability of: