The Hong Kong Institute of Education. A5B059 Bachelor of Education (Honours) (English Language) Year 2 ( )

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1 The Hong Kong Institute of Education A5B059 Bachelor of Education (Honours) (English Language) Year 2 ( ) IIT1080 Foundations of Information and Communication Technologies Essay The Adoption of Freemium Pricing Strategy in IT World & Its Implications for Service Providers and Users Tutorial Group: Tutor: Name: 82C Dr WONG, Tak Lam LEUNG, Wai Ho (Michael) A5B059 BEd in English Language (secondary) Date of submission: Friday, 12 th December 2014 HKIEd

2 Introduction Paying for services or goods that we would like to have is what we do every day. The same is true in the IT world. The discussion here is not related to e-commerce websites like Amazon.com or Taobao.com where customers can buy merchandise and make payments online. It is the discussion that the freemium pricing strategy of IT-related goods or services is showing signs of being in the ascendancy, instead of merely either paying or paying nothing at all. In this essay, charging schemes of software and online services are going to be taken into account in terms of the adoption of the freemium pricing strategy. Main Discussion According to Anderson (2009), with the help of the Internet, the marginal cost of software or services that can be or are provided online is approaching zero. Free provision is going to be inevitable as a result. The way out for making money out of software and services is to provide them free, yet money can still be earned by adopting the freemium pricing strategy, and it is in the ascendancy now. The word freemium is a portmanteau word combining free and premium. In the context of this essay, it means that in the IT world, a piece of software or a kind of service is provided free, yet if users want to upgrade to a premium version of it that has more advanced features or functions, they have to pay for it. Software For software charging scheme, software licences aside and generally speaking, there are three types of charging methods: paid (aka commercial), trial (aka shareware), and free (Wang, 2011). With the adoption of freemium, the distinctions between these three have been blurred: the pricing scheme of freemium software is not as sharp as software that adopts one-off payment scheme (i.e. paid / commercial software), and the basic functions of the freemium software come complete, whereas trial software has some basic functions locked or set with trial limits. 2

3 The Microsoft Office suites on Apple s ios platform are provided free, which means ios users can edit and view documents, slides and spreadsheets without any charge. For more advanced features like change tracking, unlimited paragraph styles, advanced SmartArt charts, and so on, users have to pay to subscribe to Microsoft s Office 365 (Haslam, 2014). It is believed that in this world full of free alternative applications, Microsoft can t simply continue making its Office suites be paid software. Instead, it is hoped that monetisation could be achieved by adopting this freemium strategy in the hope that users are willing to pay for advanced features for genuine Office suites made by Microsoft. LINE, a cross-platform social instant messaging app, ranks third globally in terms of monthly active users (Canalys, 2013). For first-ranked WhatsApp, it charges users an annual fee after the free period of the first year. For LINE, it is always free. The way that LINE monetises is not as one-off as WhatsApp does. Instead, it sells stickers that look attractive and appealing to users. If users want to make use of this advanced feature (sending special emoticon stickers to recipients), they have to buy those stickers. The revenue of merely selling these stickers can be as huge as ten billion USD per month (Russell, 2013). That is clearly a large amount of money. Services Google makes money mainly from its advertising business (Bott, 2014). On the surface, services provided by Google to the masses are free, while actually some of them are freemium, for example, Gmail. For the first 15 GB of storage, it is free. If users want more storage space, they have to pay on a tier basis (Google, 2014). This freemium pricing strategy of Gmail has made Google become a major player in the cloud-based system playing field (Gartner, 2011; Levie, 2011). Even the Hong Kong Institute of Education, where I am currently studying at, has adopted Gmail as its system for students since 2010 (Office of the Chief Information Officer, n.d.). The same is true for online cloud storage services. For instance, Google Drive, Dropbox, Microsoft OneDrive, and so on. They all adopt the freemium pricing strategies (Mitroff, 2014). Google Drive and Microsoft OneDrive are backed by their own huge companies respectively. For Dropbox, it is a company founded by just two MIT students in 2007 (Dropbox, n.d.), and it is now making about 350 million USD per year (Kepes, 2014). With a 3

4 timely market insight and a right pricing scheme, Dropbox proves itself to be a successful market model. Spotify is a music streaming company that is based on the freemium pricing strategies. It is free for its desktop version. If a user is willing to pay for it, the user can get rid of the advertisements that are sandwiched between songs, and can use Spotify on their mobile devices (Smith, 2014). Its influence is so strong that its revenue may soon overtake Apple s itunes as the biggest music service provider in Europe (Hodgkins, 2014). All thanks to the users who are willing to pay for premium features of Spotify. Implication From a service provider point of view, the freemium pricing strategy does work and is profitable from what were shown above, no matter whether it is about a provision of software or services. In fact, the freemium pricing strategy itself has made traditional business models, e.g. oneoff payment for a piece of software or a kind of service, software bundling tax, etc., fail to work as they were before. Take the Windows operating system by Microsoft as an example. When a user buy a PC that comes with Windows preinstalled, seemingly that user is paying for the computer hardware itself, but the fact remains that the user has already paid the price of Windows because Microsoft charges every PC maker for their PCs with Windows preinstalled and the retail price of the PC has already included the price of Windows, aka bundling of Windows, or jokingly, the Windows tax (Guerrini, 2014; Foley, 2014). This bundling pricing scheme has worked for Microsoft since the launch of Windows. However, with the introduction of Chromebook by Google, Microsoft may not be able to rest on its laurels. Technically speaking, Google s Chromebook is a web thin client (Vaughan-Nichols, 2012) and therefore it may not be suitable to be directly compared with a Windows notebook. Despite this, in the US, there are signs showing that the Chromebook has the potential to, and has already been taking steps to replace the dominant position that low- and mid-end 4

5 Windows notebooks have in the business and education sectors (Covert, 2014). Unlike Windows PCs, since the Chrome OS preinstalled on Chromebook comes free, the price of a Chromebook is generally lower than the one of a Windows notebook with roughly the same specifications. Users can save more as a result, or they can spend the money saved on purchasing advanced features from Google, for example, more storage space for Gmail and Google Drive. With the signs of Chromebook replacing the low- and mid-end notebook market, Microsoft is cutting its Windows tax by 70% (Bass & Culpan, 2014). Users who love using lower end notebooks that come with Windows should thank Google for making an influence brought together by its free software (Chrome OS) and freemium services (Gmail, Google Drive, etc.), so that Windows PCs may be more inexpensive than before. Apart from software bundling, users nowadays are not interested in paying for software. Take WhatsApp as an example. When it asked its users to pay last year in Hong Kong, it sparked a tide of opposing voices (Chen, 2013), while LINE was still welcomed with its stickers that users have to pay for (Canalys, 2013). It was so welcomed that it even had its pop-up store open and T-shirts with LINE cartoon characters sold in Hong Kong (HKDigit, 2014; U Beauty, 2014). With more and more software adopting the freemium pricing strategy, users seem to take free for granted. The road ahead, as mentioned earlier in this essay, is to go with the freemium pricing strategy (Anderson, 2009). Conclusion In this freemium age, users simply take everything for granted. The way out for service providers is to turn downloaders into customers by adopting this pricing scheme (Rubin, 2013). From what were discussed above, it is proven that using the freemium pricing strategy can make profits, and at the same time users are getting used to and welcome this pricing scheme. 5

6 References Anderson, C. (2009). Free: The future of a radical price. New York: Hyperion. Bass, D., & Culpan, T. (2014, February 22). Microsoft Said to Cut Windows Price 70% to Counter Rivals. Bloomberg. Retrieved December 10, 2014, from to-counter-rivals.html Bott, E. (2014, February 6). Apple, Google, Microsoft: Where does the money come from? ZDNet. Retrieved December 10, 2014, from Canalys. (2013, December 19). Cross-platform social messaging apps are making social networking increasingly competitive. Canalys. Retrieved December 10, 2014, from Chen, S. [ 沈帥青 ] (2013, January 31). WhatsApp bombarded for charging $8 in age of free [ 免費年代 WhatsApp 收 8 蚊捱轟 ]. Hong Kong Economic Times [ 經濟日報 ]. Retrieved December 10, 2014, from a365-5fb29d2256c Covert, A. (2014, March 14). Microsoft's next big headache: The Google Chromebook. CNN Money. Retrieved December 10, 2014, from Dropbox. (n.d.). About Dropbox. Dropbox. Retrieved December 10, 2014, from Foley, M. J. (2014, February 27). Microsoft's monetization dilemma: Bundling's not all it's cracked up to be. ZDNet. Retrieved December 10, 2014, from 6

7 Gartner. (2011, September 16). Gartner Says Google Gmail is Now a Viable Alternative to Microsoft in the Enterprise Market. Gartner. Retrieved December 10, 2014, from Google. (2014). Buy and manage storage plans. Google Help. Retrieved December 10, 2014, from HKDigit. (2014, May 1). LINE Friends at Hysan Place and Lee Theatre Hong Kong. Hong Kong Digital PhotoVision. Retrieved December 10, 2014, from Hodgkins, K. (2014, April 25). Spotify Approaching 10M Paying Users, Revenue May Soon Surpass itunes in Europe. MacRumors. Retrieved December 10, 2014, from Guerrini, F. (2014, October 10). The Windows tax fight is finally over: Buyers can get a refund on their Microsoft OS in Italy. ZDNet. Retrieved December 10, 2014, from Haslam, K. (2014, November 7). Microsoft Office now free on iphone and ipad: edit Word, Excel, PowerPoint docs. Macworld UK. Retrieved December 10, 2014, from Kepes, B. (2014, February 24). Confirmation Of Dropbox's Monster Raise. Forbes. Retrieved December 10, 2014, from 7

8 Levie, A. (2011, December 20). When the Price Is Free(mium). MIT Technology Review. Retrieved December 10, 2014, from Mitroff, S. (2014, November 30). OneDrive, Dropbox, Google Drive, and Box: Which cloud storage service is right for you? CNET. Retrieved December 10, 2014, from Office of the Chief Information Officer. (n.d.). Google Apps for Students. Office of the Chief Information Officer of the Hong Kong Institute of Education. Retrieved December 10, 2014, from Rubin, R. (2013, October 7). The roads to freemium: Turning downloaders into customers. CNET. Retrieved December 10, 2014, from Russell, J. (2013, August 21). Japanese messaging company Line makes over $10 million per month from selling stickers. The Next Web. Retrieved December 10, 2014, from 10-million-per-month-from-selling-stickers/ Smith, C. (2014, January 16). Spotify frees your music, at least on the desktop. BGR. Retrieved December 10, 2014, from U Beauty. (2014, March 25). New 2014 spring summer outfits! UNIQLO LINE characters UT out officially [2014 春夏新裝!UNIQLO X LINE 公仔 UT 正式登場 ]. U Beauty. Retrieved December 10, 2014, from 春夏新裝! UNIQLO%20X%20LINE%20 公仔 %20UT%20 正式登場.html 8

9 Vaughan-Nichols, S. J. (2012, June 18). It's 2016, and Chrome OS is ascendant. Computerworld. Retrieved December 10, 2014, from Wang, W. (2011). Macs All-in-One Desk Reference For Dummies. New York, NY: John Wiley & Sons. 9