A reporter asked me yesterday whether I thought Chris Anderson was right, or whether I thought he was too glib. I don't think an either/or question.

What I've come to realize while researching and writing reports like our paid content forecast is that yes, free can be a business model–but only for much, much smaller businesses than most media companies as they exist today, with their Manhattan skyscrapers or sprawling Hollywood studios, thousands of employees, unions, factories, warehouses, and debt obligations.

So Anderson is right, but not right enough to be much comfort to the media companies on which we depend.

Here's why. In the digital world:

  • "Free" isn't big enough. According to Forrester's interactive marketing forecast, online advertising in the US is a $25 billion business in 2009, of which $15 billion is search. In five years, those figures will double, and will comprise 21% of all US ad spend. Sounds like a lot, yes? But consider this: 70% of all ad spend goes to just 10 companies. That means if you're not Google, Yahoo, MSN, AOL, or a few lucky others, you are left to fight over the scraps. Ads can definitely support a "free" business model, but for most companies, there just isn't enough free to go around.
  • "Paid" isn't either. In my report, "Eight Models For Monetizing Digital Content", I outline the different ways to make content pay. There's the freemium model (Flickr Pro) and the marketing loss model (Radiohead), both core to Anderson's argument that free can pay the bills. There are also other models like the incremental paid content and service model, in which companies develop entirely new products that are sold separately from a core product, which can be free. These models are all well and good, but here's the problem: Individually, they all constitute relatively small revenue streams, even when done successfully. There's a lot of overhead involved in creating new products, and adoption of each individual product or service is likely to be small.

Can media companies downsize their appetites to feed themselves on smaller pieces of pie? In other words, how do big companies get small?

I have a few ideas in the works that I'll be incorporating into future reports. Would love to get feedback (srotman@forrester.com) on what you see happening in your companies.