The Classic Free Business Model

Of course there is no free lunch…

Someone, somewhere pays. The problem for a lot of businesses nowadays is that they have come to expect to get paid not one, but at every point that their particular piece of IP is used.

The place where I think the classic 'free' model got started was Dolby. I wonder if companies with valuable IP would go about constructing the business model that Dolby so successfully deployed if they were launching their product now.

I'm not sure if you know what Dolby actually does… Most people know that they have something to do with audio but have no idea what. In fact I think that the brand has more to do these days, in the average consumer's mind, anyway, with a sign of good quality.

So let me take you back to a general view of how they got started and why what they did was actually quite brilliant. (By the way I should also declare here that I consulted for Dolby for a period of time, and that what I am writing here doesn't fall under any NDA since it is generally available information).

Ray Dolby, who has nothing to do with the singer, Thomas Dolby (who actually changed his name to reference Ray, I believe), was an inventor. He was one of the inventors of video tape, so he has some serious engineering chops. He left the Ampex company, where he co-authored the video patent, to strike out on his own with a couple of friends. He and his friends had identified a problem that they thought they could solve. It involved being able to get rid of some of the nasty noise that various electronic devices added into the signal. They thought that the obvious application was to make radio less “noisy”. So they experimented, built a prototype, filed a patent – all those things that inventors do…. And then they tried to get some customers. They tried to get broadcasters interested in the technology – but to no avail.

So they went back to the drawing board and noticed that the same problem of noise – tape hiss – applied to cassette tapes, which had become quite popular. So they went to the music companies and offered them a solution to increase the fidelity of music delivered on cassette tape. One of the music companies thought that this would be an interesting product differentiator and agreed to put the technology into production provided that they didn't have to pay. So they put the onus on Ray and his partners to go to the cassette player manufacturers and get monetized by them. This they did, convincing the manufacturers that whoever had the technology on board would get the benefit of being able to offer a superior high fidelity device to consumers who were, at that time, very interesting in anything that was hi-fi.

It was in effect the first time (that I am aware) that a technology license was constructed with a big component of the offering being that it was 'free'. Of course someone did actually pay – the consumer. But the cost of a royalty on a hundred dollar device was relatively small, and the value of using the technology was relatively high.

Venture capital companies nowadays would probably applaud the concept. It was absolutely revolutionary at the time, and that business model was carried forward by Dolby when they developed the 5.1 sound system that is used for surround sound. This time, though, the company had become really smart about business models and about taking its time to get things right. This time they got themselves written into the specification for DVD's.

The invention was really relatively trivial. What was brilliant was that stroke of being the standard. Add to that 'free' and you have an amazing machine to print profit.

Could they do it again? Who knows? But what they did was to demonstrate that the way to success is to think long and hard about how to leverage the concept of free before going to market.

Most companies these days are too preoccupied about getting paid now and getting paid as many times as possible. I think that is what you would expect. It just may not be the best way to deliver a sustainable business.

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