Chris Anderson: The Economics of Abundance

I have spent the last few days at the BAI TransPay Conference in the Dallas area.  In this brief period I’ve attended a multitude of conference sessions, met with some folk regarding IP Commerce, wandered a show floor, and started this particular blog entry at least 5 times.

Why so many attempts to write?

Quite simply, the material is challenging to describe concisely.  I suppose that is no surprise; it is the focus of an upcoming book.

The keynote presenter for this conference was Chris Anderson (editor-in-chief for Wired Magazine and author of The Long Tail).  I read Chris’ blog regularly, so I was prepared for the material that he would likely present.  What has surprised me, however,  is the buzz that his presentation generated. . .I have had numerous conversations with attendees and they have all asked for my opinion of the keynote.

If I had to summarize an entire keynote address in a single statement, it would be:

Technology is changing the way business is done; it is also changing how business is monetized.  Recognize this change and adapt properly.

The base premise of the address is that we are entering a new economy.  This economy, built on digital transactions, is driving down cost.  As this cost approaches negligible, there is an inherent value in "free."  Free is a powerful word.  It carries a connotation for the consumer. . .but it equally carries weight within a business.  In my experience, most bankers and payments professionals view free as dangerous.  It is this thinking that was challenged.

Take a personal example, my parents have been using the same Credit Union for years.  At one point, recently, they opened an account with a new firm.  However, they haven’t switched all their services to this firm for one simple reason.  The new provider charges a monthly service fee for online bill payment.  Their familiar credit union has kept them as a customer, has built increasing balance in their operating account, has been able to upsell other products, and has a "sticky" relationship simply because a fully online service (with negligible operating cost) is provided for free.

There is value in free.

Banks are already somewhat familiar with one of the mechanisms of "free". . .the gift for account opening (a toaster, a beach ball, some other trinket).  But this is only one of the several modalities, or taxonomies, of the "free" economy.

NOTE:  I have taken this list directly from the presentation.  And I eagerly await the book where they will also be detailed.

Taxonomy of Free

  • cross-subsidy (give-away to drive purchase.  e.g. free cell phones)
  • ad-supported
  • "freemium" (an upsell model, give service to 99% to sell 1% premium services)
  • digital economy (production costs drop to zero)
  • marketing (free samples coupled with the viral power of the internet)
  • labor exchange (consumer creates value in exchange for goods.  e.g. open source software)
  • gift economy (no money changes hands.  e.g. wikipedia)

The most intriguing model of the above, to me, is that of the digital economy.  Chris used the example of Prince giving away his most recent album in the UK.  This was performed solely to drive behaviour of increased sales of concert tickets.  In essence, Prince is not in the CD business. . .he is in the business of performing concerts.  To quote, "the album is a commodity; the experience is unique."

How is this applicable to commerce?

Payments are, like it or not, a commodity.  Due to the nature of the value chain, competition is primarily driven by pricing.  As Chris said, it is time to "redefine the business you are in."  Even though the nature of commerce does not presently allow for "free" credit-card processing, ACH, or Remote Deposit Capture, the concept of focusing not solely on pricing competition but on workflow is amazingly applicable.

The challenge of the industry is to move from simply selling payments to offering Commerce Services with tight integration to applications the customer desires.  It is necessary to provide a range of choices and simple navigation of those choices in order to attract the widest range of customers.  The commerce market is more complex than a simple buyer/seller relationship. . .but the digital economy provides for an amazing opportunity to provide a wide range of choice in services, worfklows, and experiences for the edge.

There were several other elements of the presentation that I will discuss in the next few days. . .but the challenge to the industry was clear.  Banking, payments, commerce are changing.  We will either be positioned to adopt new technology to address those changes, or we will continue to do business as usual and miss out on a substantial market segment. 

"Free" is not bad, free has value.

What’s your perspective? Agree? Disagree? Anything to add? Critiques?
The comment form is below. . .
(Seat 6F from DFW to DEN)

February 7, 2008

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