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Despite concerns, freemium model is here to stay

In a recent article about the falling cost of setting up in business, I mentioned the price of internet access. Twenty years ago, paying almost £20 ($31) per month in the UK for snail-like dial-up internet access seemed normal. Today, many people are paying more than that for their broadband, but the connectivity and bandwidth they get in return is vastly superior.

Even so, that sum is far out of reach of some, and not just in developing countries. Many people have more pressing demands on their money. If you live in a city then you probably have alternative methods of internet access: libraries, cafés and even free council-provided Wi-Fi. But plenty of people don't live in cities, and their options are limited.

Now those options are growing. Internet companies are scrambling to provide free access to those who can't afford to pay. Obviously this isn't driven by altruism. There's always a cost: it just might not be immediately apparent. For large organisations that thrive on advertising revenue, such as Facebook and Google, the cost isn't too onerous for the end user. More internet users simply means more eyeballs seeing – and fingers tapping on – paid advertising.

And advertising is only part of the package, since companies of this size are adept at extracting money from users in more subtle ways. So it makes sense for the big firms to want to increase their audiences, even as a loss-leader. But there are also much smaller organisations and startups planning to offer free internet access. What's in it for them?

Freemium versus shareware

The answer is the freemium business model: users get a basic service for free, but can choose to pay for added extras. In the case of freemium internet providers, those extras might be higher speeds, greater monthly bandwidth or access to some form of premium content.

The word 'freemium' is relatively new, and often used in conjunction with in-app purchases to 'enhance' the gaming experience. But its roots go a long way deeper. Older readers will remember the shareware concept. It started with applications and utilities, then moved into the games market in the 1990s, most spectacularly with Doom. In some cases shareware was time-limited, either by code or by licence. That meant you were free to use it for a limited period, after which you were required to pay. But other shareware gave you something for free; really, truly for free. If you liked it so much that you wanted more, you could buy more.

Shareware games would have the first episode (perhaps 10 levels) free, then you'd pay for the next two episodes if you really enjoyed the game. If you didn't, there was no obligation to pay anything. Business shareware would offer basic features for free, but any 'pro' features would have to be paid for. This was very similar to today's freemium model, right down to the equivalent of in-app purchases: premium-rate phone numbers for gaming hints or tech support.

Walled gardens

The early ISPs used a variation on this tactic. Companies such as CIX, CompuServe and AOL offered more than just dial-up access. They had their own ‘walled gardens’ of communication, where people could share files, connect with other users and access content that wasn't available on the rest of the internet. But only if they were willing to pay for it.

It was possible to get a cheaper connection. CIX had an 'internet only' option, with full forum access costing considerably more each month. To me though, the forum package was worth the extra, and many early internet users chose to pay more for access to better content. And that's not just because AOL's CD-ROMs were stuffed into virtually every magazine on the shelves.

The freemium business model is based on good psychology, and good business sense. Once you have someone using your product or service, it requires less cognitive effort for them to pay a fee for extra features than to switch to a new product or service entirely.

There were no concerns about internet neutrality in the 1990s. But now there are, and it's here that freemium internet services create a paradox.

On the one hand, any internet access is surely better than none, isn't it? Governments around the world are seriously starting to treat internet access as a basic right. So providing free internet to people who previously couldn't afford to get online sounds like a great idea. Surely if you see someone starving in the street, it's better to give them a pork pie than nothing at all, even if you're on your way to an expensive restaurant at the time.

On the other hand, charging more for premium internet access goes against the principle of net neutrality. It means that people who can afford to pay will get a better internet service. They already do, of course, but having zero internet at all puts you outside the remit of the net neutrality arguments.

So is this new model of connectivity fair? Yes. And also no. Like a Necker cube it all depends on your perspective. One thing's for sure, though: the business model is nothing new. It therefore seems likely that freemium internet services are here to stay.

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Alex Cruickshank

Alex Cruickshank has been writing about technology and business since 1994. He has lived in various far-flung places around the world and is now based in Berlin.  

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