Is Freemium Worth The Price?Is Freemium Worth The Price?

The big Skype outage is just the latest example of the perils that accompany the benefits when users opt for "free" services.

I find it impressive how many free services I use and rely upon. Google Apps, Google Voice, Skype, News, Hulu, the local newspaper, Adobe Reader, multiple browsers, and more. Take a look at your bookmarks and plugins. Take a look at the apps installed on your mobile phone. Some of them are there because they are free, and many of them are their in lieu of competitive paid services.

As a case in point, consider a small organization that moves from Microsoft's Exchange to Google Apps. I am not suggesting the features and functionality are the same, but if Google Apps meets requirements--the costs associated with hardware, Microsoft software, antivirus software, anti-SPAM software, and IT services are mostly eliminated with Google Apps, which is free when there are fewer than 25 employees. Google Apps additionally provides calendaring, mobile integration (no need for Blackberry Enterprise Server--BES), and Office apps.

This phenomenon is not unique to these products. It seems that just about every service has a free or near-free alternative, and many free services have free alternatives. As an active blogger, I grew frustrated with Google's Blogger service and was about to change to a different free service until I discovered Microsoft's (free) Live Writer Client. My list of free and important--daresay "daily"--tools is truly impressive. Right now, my browser has 29 tabs open, and not one of them (nor the browser itself) is to a site I pay for. Open pages include blogs, Twitter, periodicals, weather, productivity applications, reference sites, travel sites, and a news aggregator. Free has become the expectation.

The freemium model is fairly popular--give away a core service and charge for enhancements. Skype is a great example--the company gives away free IM, voice, and video communication capabilities and charges for things like the ability to call someone’s phone number instead of their computer. Skype earned a record $406 million in the first half of this year. Freemium revenue usually requires a loss leader--only 6.5% of Skype's users actually pay money to Skype. The vast majority simply consume free services and compose its future market for more revenue. I like freemium. I prefer it over just free, which makes me suspicious.

It's been a bad month for free, and one might conclude that users of free services actually place quite a high value upon them. There was the news (rumors?) that Yahoo is to kill Delicio.us bookmarks--a free service it acquired years ago. Such uproar over a rumored death of a free service has been impressive. Recently, I got an email from Etacts, a free contact management solution that says, "we will be shutting down the Etacts service. Effective January 31, 2011, the service will cease to operate and your user data will be deleted." Turns out Salesforce.com bought Etacts. Then of course Skype's huge outage last week--disrupting nearly all of its loyal customers including the 93.5% who don’t pay a dime.

It wasn't just closures and outages either--disappearing cloud services made other news as well. Take Amazon's decision to shut down Wikileaks. Amazon AWS shut down Wikileaks on arguably its busiest day of its history for a violation in terms of service. So much for due process, or notification, or arbitration. Regardless if Wikileaks deserved it not, this example should stick in the memory of CIOs considering public clouds.

Terms of service violations act as judge, jury, and prosecutor. YouTube is also known for some pretty fast rulings. Earlier this month, YouTube shut down WatchReport, a business that produces video demonstrations of watches. The channel had over 2,000 subscribers and 50 videos, but was shut down "due to multiple or several violations" of their community guidelines. TechCrunch, a prior victim of YouTube censorship, picked up the story, and the site was mysteriously restored 45 minutes later. WatchReport was unsuccessful in getting any clarity or response of any kind to its appeals to YouTube.

All of these stories are bad news for the cloud. Telecom and IT providers have known for years to diversify risk with multiple vendors, ownership, and stringent SLAs where services are necessary. Data ownership has some risks too, particularly with pre-litigation discovery--but that seems relatively minor in comparison to complete loss of data. Litigation, after all, involves a real judge.

The cloud is young--data exporting and retention is still immature. The notion of "five nines" is well understood in the data center--but not as much with freemium providers. Skype is targeting the enterprise with Skype Connect, a SIP trunk solution, but offers no SLAs. Google Voice is increasingly penetrating the office, but without SLAs or live support options. AWS now allows entire data centers to be imported via a VMWare image, but evidently it's a one way migration.

The conversation is changing--most of the conversation about the cloud versus premise was about security--protection from third parties. The shift is now that bigger threats are increasingly from the cloud provider itself; its business model, terms of service, and likelihood of survival. Many organizations have little control over how employees use a hosted service--consider hosted voice: how can employers ensure all conversations are within the scope of the terms of service? Every business has a right to shut down non-compliant users, and doing so does not require notice, a means of export, due process, or even support. Most disaster contingency plans are designed around failure assumptions, not necessarily a terms of service violation.

Freemium is a great model for the consumer. It is realistically one of the only models that can work anymore, as the amount of choice makes it hard to even consider paid alternatives. Freemium is particularly attractive during tougher economic times. But is Freemium a reasonable strategy for business? Skype is promising to reimburse its paying customers for the outage; the other 93.5% get exactly what they paid--thanks for nothing.

Dave Michels is a regular contributor and blogs about telecom at www.pindropsoup.com