Week 4: The Pandora experience and the zero cost model

Let me share an experience of the one that was discussed in the podcast and the Factiva article in WSJ on

Essay: The Economics of Giving It Away. The discussion was 'How do companies generate something from nothing?

The professors talked about WSJ teasing the free customers into buying the subscription using the subscription model, perhaps the most common business model after the advertising model.

I am an avid music listener on my iPhone and the my best app is the Pandora. This is a music (radio?) app that caters to any music taste one has. It keeps feeding in full music of any type. It also allow you to bookmark a track that you like. The ony caveat is that when you start as a free user (the most common way for any internet based application) if you search for an artist or a song etc, it does not necessarily play that exact song, but close enough either from the same band or a similar band. Once initiated, you create a station and it keeps playing full songs of that flavor, For example, I love the Beatles and it keeps playing Beatles or band similar to them in that station with some interlude of ads popping up now and then. Very often it tempts you to become a paid customer where the benefit is that you can now get that track and skip ads. Bookmarking a track for a free subscriber is just a sample of that song. The point here is that over time, you get so used to listening to your favorites that the model believes that you will end up becoming a paid subscriber thereby generating revenue for the company.

This is exactly what the Twitter CEO mentioned in the podcast. Even though the paid subscribers may be minority, the total number is still in millions and a small fraction of them is enough to generate revenue which equates to profit since the cost is amost zero.