Biz Doc: It Has Come To This

Free Isn’t Free

October 2012

Happy Monday.  Recently I was thinking deeply about something.  My colleagues refer to such a preamble as a signal to start another pot of coffee and hide the white board markers.

I am now convinced that the eReader / tablet device war is heating up too fast and the orange that is about to be squeezed is content.  The market is headed toward “free” devices and it is not far off.  There you go.

Bear with me for a moment… Let’s look back at the history of mobile phones in the USA, something that I lived through and know in excruciating detail, free phones changed the game – and the consumer did not benefit in the long run.

Free Devices Drove Market Penetration.
This cannot be under-emphasized.  Suddenly there were 2nd phones at home and college students could afford them. These happy entrants were not previously paying to be in communication with friends and family anytime & anywhere.  The inflection point can be seen in the stock prices and M&A activity from 1999 – 2004 which was the golden era of the wireless industry in the USA.

It’s Not Free – It’s a Lease.
The free phone came with a 2-year contract and minimum monthly cost (a hidden lease).  For those that used fewer minutes per month –OR– wanted a more economical monthly cost, they simply chose a basic phone vs. a high-end phone.  Great for the consumer… and great for wireless carriers who now enjoyed the fruits of recurring subscription revenue.  Subscription also leads to addiction – in some neighborhoods we call this “crack.”

Fallout – A Price War, Then Consolidation, Then Less Competition.
The free phone bonanza triggered a price war among carries and the victim in the mix was the price per minute.  Minute plans grew to well-over 1,000 minutes for $50 per month – and eventually unlimited plans arrived.  The carries eventually became less profitable and started consolidating (remember Cingular, VoiceStream and Airtouch?).  This week MetroPCS and T-Mobile announced a planned merger followed by Softbank buying a massive piece of troubled and debt-ridden Sprint.  The number of options available to the consumer is dropping.  And, if you have been paying attention, the unlimited monthly plans are going away.

There is no magic or devil here – this is how the market works and sorts out the intended and unintended consequences of competition.

Now, let’s look at the eBook space and play out a scenario.

There are a ton of new eReader and tablet devices in the market and getting them into the hands of consumers is key to driving sales of content (duh).  Causing this to happen faster will assumedly drive content sales faster (double duh).  Free tablets with an associated monthly fee for content, anyone?

What if I offered you a free Kindle Touch and it came with a $19.99 monthly content plan that was a slightly modified Kindle Prime deal with a cap of 5 books a month?  All the elements are in place today: devices, billing plans and content revenue sharing arrangements.

Now let’s say Barnes & Noble responds with a free Nook and $19.99 per month for 10 books?

There you go – as they say, “It’s On!” and the imputed average price per piece of content will quickly be squeezed.

When the financial war gets too bloody, as it certainly did in wireless, the giants will enter into a M&A phase to gain economies of scale and slow the erosion of profit margins.  There will be fewer players in the eBook space and me thinks the fallout will happen MUCH faster.

It all starts then the first free eReader hits the market along with a monthly plan to buy books.

There is a lot more to this story and that’s for another day.  Stay tuned.


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