The Marginal Cost of Creativity & Free

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Continuing my thoughts from my previous post Assumptions of “Free”…

One of the strongest arguments made in Free is that in a competitive market (namely the Internet for sake of discussion) all prices are driven towards Zero or Near-Zero Marginal Cost. In economic terms I completely understand the principle, but as a creative I find the notion disconcerting on multiple fronts.

Back in 1993/4 I was a research associate in a genetics research lab at my alma mater, the University of California at Santa Barbara. In those days experiments had a lot of downtime, upwards of 3 hours, as we waited for DNA to run on an agarose gel. During this downtime a lot of time was spent surfing the web and checking email, but the experience was quite different to today’s standards. Email was checked through a UNIX account via vi editors (command line based email) and surfing the web was done by Lynx a text based browser. There were no photos, videos, or anything graphical in nature to see. Compared to what we’re used to today it was certainly the dark ages of the Internet.

One day a co-worker wanted to show me something mind blowing and we went upstairs from our lab to a computer and used the first web browser, Mosaic. It took upwards of 5 or 10 minutes to load a small photo on the very fast university network. It took so long in fact that I quickly lost interest. It took a while before I revisited using Mosaic, but I did begin using it regularly and eventually transitioned to the earliest form of Netscape.

The significance of this story is that the web owes its adoption to the creative content that fills it. As a photographer I find it very satisfying to know that photography had a huge influence on the adoption and transformation of the web. At the same time I find it alarming that its so widely believed that the content that fueled the early web is now so commoditized that its worth very little to nothing.

Looking at Near-Zero Marginal Cost in relation to photography I can see validity to the argument that Chris Anderson makes, even if his focus is perhaps on other types of products & services. In reading his thoughts on this subject I began to think as a photographer less in terms of Near-Zero Marginal Cost and more in Marginal Cost of Creativity.

At the moment, there is an increasing discrepancy between the value of photography and the cost of creation. It is fairly common knowledge that the photography market is becoming increasingly saturated and as a result much, but not all of created content in this market is experiencing downward price pressure. From an economic perspective photographers are or will soon be on a path to losing money as they attempt to create content, but overtime I’d expect (and hope) this will automatically correct itself… hopefully before too many photographers are forced from the profession. Time will tell.

As perception of photography having a low value persists its important to keep in mind what the Marginal Cost of Creativity is, and its not just the cost of doing business (CODB). The Marginal Cost of Creativity is different for every photographer, but it does share common attributes:

Time
Time in the sense of not just how much time it takes you to complete a job, but time in relation to…

Thought
For the lucky or blessed, depending on your perspective, creative concepts easily come to mind. For others it takes time to think about creative ideas and work through a variety of creative options. Far too often people think of the creative process as an easy instant one, and often it is not. If it is instant or of a shorter duration then it often is due to…

Experience
Every creative and the way they see the world is different, no doubt as a result of different life experiences and paths to becoming a creative. My creative outlook has been shaped by experiences, events, environment, etc. that are unique and different from any other artists. Even the slightest difference in experience between I and my nearly identical evil twin that exists some where in this world creates individuality and as such drives different interests that require…

Out of Pocket Expenses
Out of pocket expenses are what you’d think in regard to cost of creativity or CODB and this indeed is the very tangible part of our industry. My interest in nature, landscape and travel photography requires use of rental cars, air travel, rented camera gear, etc. The prices I set for print sales and/or licensing is dictated by my need to cover cost and generate profit to sustain my family. Getting to my destinations of choice are only the tip of the iceberg as I do need to own equipment to prepare my work for sales accounting for…

Capital Expenses
The equipment I opt to own such as computers, software, computers, cameras, etc. carries a cost and is also something associated with CODB. This is certainly what most people associate with cost, but everything added together leads to the cost of…

Research
Here every component of Marginal Cost of Creativity previously mentioned comes together to leverage creative thought to identify what and how to create. Discovering, evaluating and planning are critical components of research, but in the end it comes down to…

Execution
The ability to execute is what differentiates creatives. Those that can execute command respect, authority and earn a client base. Much in line with the assessment of Malcolm Gladwell’s finding in Outliers: The Story of Success the truly exceptional emerge as a result of a variety of reasons and I would argue the non-financial attributes noted here with an emphasis on Execution are what define Creative Outliers.

As you consider the merits of Free, is the Marginal Cost of Creativity a consideration or is it irrelevant to the “hard economic certainties” painted in Chris Anderson’s vision of the online economics?

Next Up: The Value of Free: Where Is It?

Previously Discussed: Assumptions of “Free”

Technorati Tags: Chris Anderson, Free, Review, Free: the Future of a Radical Price

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Posted by Jim on 07.22.2009 at 9:00 am
Tagged: Photography, Reviews, Technology , Review

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Taylor Davidson

A small note: many of the costs you point out as marginal costs are actually fixed costs.

Once a photograph is created, the marginal costs of production and distribution are far more important in guiding market prices than the largely sunk costs of creating said photograph.

Agreed, a "marginal cost of creativity" does exist, but there is a huge difference in how fixed and marginal costs impact our business models.

Jim

I would disagree. I think in many ways the creative cost is far greater than the cost of production and distribution. Everything that leads to the creation of a product is costly and often unaccounted for.

Of course I may be getting tripped up on terminology. Time to me is not fixed and neither is cumulative experience leading to experimentation, research and the ultimate execution of a photo or any piece of art. I defer to MBA's for such definitions :)

Taylor Davidson

I think we're getting a bit crossed on terminology, and missing the finer grain that I meant to draw out, but didn't.

"Photography" is a broad industry with many different products: assignments, stock, workshops et. al.

Each of those products has different cost structures with different key cost components (like the ones you laid out in this post). Each of those types of costs have fixed and marginal costs embedded in them.

For an assignment shoot, time is a marginal cost. For stock photography, time is a fixed cost, since the investment one makes in time is an investment that is amortized over future sales.

For an assignment, the cost to deliver the images is a marginal cost. For stock, the cost to deliver the images is fixed, the cost to get into an agency, on the web, available for sale, is fixed.

Be careful that "capital expenses" is a term used to describe investments that are amortized over time or product use, thus they are considered fixed costs. But obviously some equipment costs are fixed (e.g. buying cameras, lenses to use over many shoots), and some are marginal (e.g. equipment rentals, film).

But these are just clarifications to your main point, which is that creating and delivering an image has many different activities with their own components of cost, and that it is important to think about the true marginal costs of all of our activities instead of simply assuming it will be free.

However, the market will not compensate us for all of these activities. Some of these activities, by the nature of competition in a highly competitive market, will be driven to prices equal to or near marginal cost (and for many activities, marginal cost = zero) unless we use highly differentiated assets to compete: experience, brilliance, ability to execute, ability to create something nobody else could create, etc.

I won't speak for you, but I think that is what you were trying to say in this post.

Just be careful with terminology :)

Nelcha

In following this topic and Photography/Art as a Business in general, I feel there needs to be a line drawn as to whether 1) you are ONLY an online presence 2) Do you cover an aspect of the medium that is more unique? as in not used by the masses? or are you trying to compete with the masses?
3) Many still DO their art with rather low overhead, so how any of use choose our CODB is totally up to us..
Many use a small loss-leader, as mentioned above to draw buyers in. Create a book and give away a small print if they buy the book, for example. That's been around for years. As far as I am concerned unless you create your own "captive audience" or group of Loyal Followers there will need to be some form of PR used, types & methods will vary. IMHO the internet should be used just as any other form of PR to get the word out...not as your ONLY from of PR. Narrow your avenues = narrow your audience.

Jim

Nelcha and as I hope you've seen I've talked to these very points in the followup posts to this one. We're definitely on the same page.

Janne

As Gary points out above, creative goods are very much "marginal cost" kind of things, more so than most physical items since so much of the cost is upfront rather than in the production. A book takes the same time and cost to write, edit, and design whether it ends up with a print run of 100 copies or 100 million.

My favourite example for what's happening with many fields is graphical design. That field went through its crisis when the Mac appeared and suddenly everybody was a designer. The results were far below what a professional designer would accomplish (outline fonts with shadows, anyone?) but as it turned out, for a lot of stuff it was good enough. A large bread-and-butter market for graphical design - name cards, restaurant menus, invitations, signs and placards ... - disappeared as people started doing it themselves (or asked the neighbour 16 year old to do it for them). Much worse results than a professional but nearly free and good enough. Gradually, of course, the better amateurs got quite good, so the difference between them and the low-end professionals all but disappeared.

On the other hand, the explosion of amateur design gradually meant a whole new appreciation of the field. When you notice how crappy and amateurish design can be you want to improve on that if you have the budget. High-end graphical design is flourishing as never before.

So the best designers and firms are overwhelmed with work, and making more money than before the advent of DTP. On the other hand, the low-end, jobbing designers have been culled. There's much less call for the kind of low-budget, small scale jobs that many could eke out a living from. The field as a whole is making as much money (more, actually, with the need to design for the web too) as before. But the distribution of income has been more skewed, with more to the best and less to the rest.

I would expect to see the same thing happening in photography. Free (literally) images taken by amateurs and given away, or taken by the prospective clients themselves, is going to crowd out a lot of the low-end professional photography. The appreciation of images as a communications tool has already grown hugely, so expect the top end of photographers to flourish. The in-between people? No idea. It will be interesting to see where the cut-off to "good enough" is for photography.

Jim

Janne this is the best parallel I've heard so far. I am on board with our assessment.

Gary H

I haven't read the book or listened to the free audiobook, so my comments are not based on Free (the book).

For me it comes down to the scarcity of the goods. I develop training for a telecom company. My time is valuable to my employer, but we give away online training. It does have a cost to us, but we give it away. We charge a high prices for Instructor-led training in a classroom. It's not because a trainers time is more valuable than mine; it just the perception of value for the customers. Trainer time is the scarce goods here. Courses posted online do have cost, but the cost is the same regardless of how many people use it.

I believe it is the same for all digital content. A song distributed as download cost the same to produce regardless of how many people buy it. A photo viewed online has the same marginal cost regardless of whether one or 1 million people see it.

A CD of song is different, as is a print of a photo. I don't think anyone, even the young pirates, would dispute that. It's a matter of deciding what you should charge for and what you write off.

Licensing is a different issue, but I've said enough.

I've enjoyed reading your thoughts and am glad you posted them. I'm not sure I agree or disagree, I'm glad you took the time to make thought out and intelligent arguments and didn't just say Free is load of rubbish based on an emotional response.

Gary

Jim

Thanks for the comment Gary H. I hope you enjoyed the other posts that followed.

Noel

I'm playing a bit of catch-up here, but it strikes me that there is something between the execution and delivery of the service that could be a differentiator...

http://www.ted.com/talks/joseph_pine_on_what_co...

I'm trying to wrap my head around the very same thing - how to present a better value proposition to the client by involving them in the creativity-execution-delivery cycle... y'know, create the whole 'delight the customer' thing similar to the quality improvement movement of the last cycle. The 'Freemium' model fits in there somewhere... I just know it!

Jim

Noel I'm not convinced Freemium has a place in photography at least at an individual artist level. I'm sure you might be able to do something, but would it be a sustainable business decision? The jury is still out on that.

Taylor Davidson

Freemium definitely has a place for an individual photographer.

Jim, isn't this blog essentially a freemium product? Is writing a blog, with thoughts, news and photos available to readers for free (with upsell opportunities to stock and assignments), a good business decision for you?

Taylor Davidson

Jim, agreed, you're not using freemium. But you are using free.

You're creating and distributing content and context with a price of free. Doing this creates reputation and markets yourself, and this creates opportunities for selling other products. You're using free as a pricing tactic as part of your business strategy.

I want to be clear: that's not a negative thing, that's how creating in public works.

I'll admit that doesn't make it a freemium product; I used "essentially freemium" too loosely, since one can use free pricing tactics outside of a freemium business model. Since your free product isn't the same as your paid product, I'll admit it's not freemium. But it's not far off.

"The concept of freemium as I’m sure you know is that 80% of a content/service product is accessed for free while 20% (paying subscribers) pay for additiona/lmore advanced content/services."

To be clear, the % split between paid and free products in a freemium business strategy is determined by the marginal benefits and costs of the free and paid products. No reason for it to be any particular %, other than the fact that we associate freemium as a high % of the free product supported by a small % of the paid product.

Jim

Taylor nope this isn't a freemium product. It's a reputation economy vehicle. If I were selling a pay per access portion of the blog it would be freemium. No one is paying me for what I'm writing at the moment.

The concept of freemium as I'm sure you know is that 80% of a content/service product is accessed for free while 20% (paying subscribers) pay for additiona/lmore advanced content/services.

Not many blogs are "freemium" based and the most popular are free making money from advertising.

Reputation economy vehicles like blogs allow their writers/administrators to gain trust & respect in their readers. Building that trust/respect capital can translate through other marketing efforts (workshops, product sales, etc.)

One isn't necessarily better than another, but they certainly do have different adoption rates.

Noel

Right now I'd agree with you. The only way to 'Web 2.0-ify' the notion is to have a pool of resources, not just a single photographer or studio. The obvious solution is to create a market (literally, a website) to which clients would be attracted to get their work produced... at low/no cost through a bidding system; like an eBay for creative services type of model, but with features that suit media creatives, like portfolios/micro-sites, virtual/temporary design teams, etc.

The carrot would be enhanced services that make the process understandable for less savvy buyers; like a full suite of canned usage rights, production options, and deliverables/payment brokering... the 'premium' service offerings.

It's still a fuzzy notion, and one that if I had the time and team to execute I'd love to do myself... for now I'll satisfy myself by describing it, and hope that someone else can pick it up.