A conceptual framework of providing content for free

When firms (e.g., content owners) consider the addition of an online distribution channel that offers products free of charge that are sold elsewhere in the online market, they face a trade-off between potential opportunities and threats. As we will outline below, extant theories that can be used to make predictions about consumer behavior in the presence of free alternatives do not provide unequivocal predictions about the favorability of the addition of a free online channel. The situation is complicated by the fact that attractive features of a free, ad-based download store might, on the one hand, attract new customers who would otherwise refrain from commercial downloading (create a “lift” in the total number of consumers). On the oth-er hand, it might encourage consumoth-ers to abandon the use of incumbent download stores in favor of a free, ad-based service (create a “shift”; Geyskens, Gielens, and Dekimpe 2002). To shed light on factors that characterize consumer behavior in online marketplaces when free alternatives are introduced, we derive several behavioral factors from extant theories that are likely to shape consumer choice for a music download service. These behavioral factors may motivate users to (1) remain with their previous choice, keeping the number of adopters for an based service low, (2) switch to an based download service, or (3) adopt an ad-based service without having used a commercial download service before. We elaborate on each of these below and follow Geyskens, Gielens, and Dekimpe (2002), who distinguish between those factors that increase demand by creating a “lift” versus those that create a

“shift” in demand (Figure 1). Because we model choice for a specific business model we cannot equate demand for a given business model and demand for music because we do not analyze the amount of music obtained through a given business model. We therefore define

“lift” as a total increase of users who adopt a commercial downloading service and “shift” as users adopting an ad-based service while abandoning the use of incumbent services.¹

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2.1. Factors that suggest low attractiveness of ad-based services

Consumers may find a free, ad-based download service unattractive for several reasons, which would create neither a shift nor a lift but would keep the number of adopters of an ad-based service low.

2.1.1. Signaling of low product quality. It is likely that consumers will make inferences about the reasons why a company offers its products for free when being confronted with a free download service. Consumers may use the price of zero as a signal of inferior product quality, which may result in a lower valuation and reduced preference for the product, mak-ing the product less attractive and keepmak-ing the number of adopters of ad-based services low, both among new and existing customers of incumbent business models (Campbell 1999;

Kamins, Folkes, and Fedorikhin 2009).

2.1.2. Dislike of advertisements. Although the ad-based models offer music free of charge, consumers in return have to “pay” by devoting some of their attention to advertisements. It can be assumed that consumers prefer download stores without advertisements over those that use advertisements (Prasad, Mahajan, and Bronnenberg 2003). People may dislike ad-based stores because they do not want to be exposed to ads and might view ads as intrusive.

Consumers will therefore balance the utility they derive from free downloads against their dislike for advertisements. If a dislike for advertising is prevalent, the number of adopters of an ad-based service will be low, both among new and existing consumers of incumbent ser-vices.

1 We thank an anonymous reviewer for pointing out these distinctions.

2.2. Factors that suggest high attractiveness of ad-based services

Other behavioral factors suggest that ad-funded models may be attractive for consumers. It is likely that the importance of these factors varies between previously inactive consumers (or those who have used illegal file-sharing) and those consumers who have purchased music downloads on the Internet before.

2.2.1. Justification of illegal file-sharing. One major source for consumers who want to download music for free is file-sharing networks, where a broad variety of content is offered free of charge but, in most cases, illegally. As long as no free, ad-based services operate in the market, consumers can internally and externally justify their decision to use file-sharing networks, e.g., because they might not be able to afford the prices demanded by commercial download ventures, such as iTunes or Napster 2.0. If, however, free and legal options are available, it will be more difficult to justify the use of illegal file-sharing. Continuing to use p2p networks might cause cognitive dissonance (Festinger 1957), which can be resolved by either developing a negative attitude towards ad-based models, or by refraining from illegal downloading and adopting a free, ad-based offer. If these considerations are operant when consumers evaluate the benefits of different business models, it is likely to increase the total number of customers using commercial downloading services by creating a “lift.”

2.2.2. Risk of illegal file-sharing. Similar reasoning can be used for the legal consequences of file sharing. Consumers who engage in the illegal use of p2p networks are exposed to risks of lawsuits (Bhattacharjee et al. 2007) and possibly files that contain malicious software. If a consumer can avoid these risks at no costs, he or she may adopt a free, ad-based service, again, creating a “lift”.

2.2.3. Low reference price and WTP. Previous research suggests that consumers form ref-erence prices and price expectations based on previous encounters with price information

(Winer 1986). If consumers incorporate the content available for free through file-sharing networks into the computation of their reference price, this will result in reference prices of close to zero for these consumers. As reference prices are an important driver of willingness to pay, consumers who are characterized by these reference prices can be attracted to legal business models only if they are offered free of charge. This will make an ad-based model a potentially attractive candidate for consumers with low reference prices and low WTP. This will primarily concern consumers who have previously refrained from using commercial download stores, therefore creating a “lift” in total number of adopters.

2.2.4. Positive Affect. Frequently, consumers value free products disproportionately higher than products offered at a low price. Possible explanations include the positive affect that consumers associate with free alternatives. Furthermore, a free option relieves consumers of the burden of actively evaluating costs and benefits (Shampanier, Mazar, and Ariely 2007).

Hence, this positive affect may attract customers towards the free, ad-based business model.

If this effect is strong, it will both attract new consumers as well as consumers who have pre-viously been paying for content downloads.

2.2.5. Reducing WTP. Consumers who are confronted with a free download service are likely to define their valuation for an incumbent business model that requires payments (e.g., iTunes, Napster 2.0) against the utility they derive from using a free, ad-based service. The presence of a free alternative might therefore negatively affect their WTP for those services that charge consumers for downloading music. If this effect is strong, it will create a shift in the number of adopters in favor of ad-based models.

2.3. Net effect

Although one can draw upon several behavioral theories to make predictions about the favor-ability of a free, ad-based download service, it is a priori unclear which effect will dominate

and whether the net effect will be positive or negative. Content owners will only be able to use a free, ad-based model as a tool to reach previously inactive consumers and, thereby, ef-fectively segment the market if those factors that will create a lift will dominate over the oth-er factors. An ad-based soth-ervice will only work as a market segmentation tool if it is capable of attracting users who have not been using commercial download services before. If factors that will shift preferences towards ad-based services (e.g., a positive affect and a reduced WTP for incumbents) dominate consumer decision-making and a majority of consumers feel that they can maximize their rent in an ad-funded store, ad-based services will cannibalize customers from incumbents. Assuming that utility-maximizing consumers take into account the behavioral factors discussed, the degree to which a shift occurs will depend on the degree of substitutability between an ad-based service and the incumbent offers. If the two types of business models (pay vs. free models) are too close in their intrinsic value, consumers who had previously been paying for downloading music will abandon the incumbent in favor of the ad-based model. Therefore, the effect of the factors that might shift consumer choice will depend on the degree of substitutability.

Although it would be of interest to test the effect of each of the factors discussed above separately, it is of foremost importance to empirically identify the net effect of those factors that create a lift or shift in the total number of adopters of commercial download offers, re-spectively, as theory does not provide unambiguous predictions about the magnitude of the effects.