Fred Wilson on Free & the Freeconomics of Freemium

I did not say yesterday that I believed there would be paid content on the web. I do. As does Fred Wilson, a VC who puts his money where his mouth is. Says Fred:

[L]et’s talk about freeconomics. I don’t believe everything will be free on the Internet. There will be plenty of paid business models. For example, if you want to watch Major League Baseball games live over the Internet, you’ll pay for that. If you want to use services like the FT and the WSJ frequently (more than 10x per month), you’ll pay for that. If you want to watch HBO over the Internet, you’ll pay for that. If you want a Twitter desktop or mobile client, you might pay for that too.

That said, Fred’s favorite business model is freemium. It works by offering basic services for free, and makes money by charging a premium for advanced or special features.

Fred spent part of his 4th of July weighing in on the Chris Anderson/Malcolm Gladwell contretemps around Anderson’s book, Free: The Future of a Radical Price, released this week. Noting that “Gladwell got pretty negative on Anderson and his book in the New Yorker piece” [link], Fred responds:

Lambasting file sharers and entrepreneurs who rightly recognize that free is the right way to build market share on the Internet might be fun and make certain people feel good. But it’s ignorance of a fundamental fact. And that fact is that free, ad supported media works best on the Internet. We have seen it again and again. … Once you have built that audience, you can deliver upsells via freemium models, you can monetize it via advertising and you can branch out into other services which are easier to monetize.

His backup example comes from a Silicon Alley Insider post on Facebook that estimates revenues this year at:

• $125 million from brand ads
• $150 million from Facebook’s ad deal with Microsoft
• $75 million from virtual goods
• $200 million from self-service ads.

Fred considers those numbers reliable.* He expects self service ads and the virtual goods revenues to grow strongly in the next year and the company to be profitable. His conclusion:

The Internet allows an entrrepreneur to enter a market with a free offering because the costs of doing so are not astronomical. And most entrpreneurs who take this approach will maintain an attractive free offering of their basic service forever. But that doesn’t mean that everything they offer will be free. That’s the whole point of freemium. Free gets you to a place where you can ask to get paid. But if you don’t start with free on the Internet, most companies will never get paid.

In Chris Anderson’s response to Gladwell’s review, he understands that newspapers are one of the industries most affected by Free and anticipates the bane of his year ahead will be questions about the future of the newspapers from journalists.

I hate to get all Jeff Jarvis-y on you but, again, the question for journalists isn’t where is journalism going? The question is how to get there from here. Rather than digging in their heels and bemoaning the loss of a status quo remembered through rose-colored glasses, they should be pushing the business side of the house to figure out a freemium model that works.

* ADDED LATER: Mikkel’s comment below suggests I didn’t do Fred’s post justice. Of the Facebook numbers he says they are “Low for sure, but enough to operate at breakeven.” What I’m reading says Facebook is not losing hundreds of millions. If you can point me to something, I’m always interested.