Penguin Specials

‘We believed in the existence in this country of a vast reading

public for intelligent books at a low price, and staked
everything on it.’
Sir Allen Lane, founder of Penguin Books

The first affordable quality books for a mass audience

were brought out by Penguin nearly eighty years ago. And
while much has changed since then, the way we read
books is only now becoming different. Sometimes it is
still only a hardback or paperback book that will do. But
at other times we prefer to read on something either more
portable – a dedicated reading device or our smart mobile
phone – or more connected, such as a tablet or a computer.
Where we are or how much time we have often decides
what it is we will read next.
Penguin Specials are designed to fill a gap. They are
short, they are original and affordable, and they are
written by some of today’s best and most exciting writers.
And they are available only in digital form.
 Written to be read over a long commute or a short
journey, in your lunch hour or between dinner and
bedtime, these brief books provide a short escape into a
fictional world or act as a primer in a particular field or
provide a new angle on an old subject.
Always informative and entertaining, Penguin Specials
offer excellent writing that you can read on the move or in
a spare moment for less than the price of a cup of coffee.
 ABOUT THE AUTHOR

Nicholas Lovell is an author and consultant who helps

companies embrace the transformative power of the
internet. His blog, GAMESbrief, is read by those seeking
to learn how digital is transforming gaming – and how to
apply that knowledge to other industries. His clients have
included Firefly, nDreams and Square Enix (creators of
Tomb Raider), as well as Channel 4 and IPC Media. His
articles have appeared in TechCrunch, Wired and the Wall
Street Journal. He lives in London.

@nicholaslovell
www.nicholaslovell.com

A free ebook by Nicholas Lovell, author of The Curve.

www.thecurveonline.com
 Contents

Introduction

10 Ways

1. Use free to find an audience

2. Use technology to be able to talk to your audience again

3. Use technology to understand what your audience wants

4. Enable your superfans

5. Forget the mass market

6. Escape the tyranny of the physical

7. Stop thinking about units sold, think ARPU

8. Love your freeloaders

9. Be creative and ambitious

10. You don’t have to be free

Notes

The future

The Curve: Preface

The Curve: Contents

 Introduction

Free is coming.
Digital files are easy to share. They can be reproduced
with almost no extra cost. The music industry knows this.
The games industry knows this. The book industry is
learning this. Artists, photographers and anyone who uses
creativity in their work is at risk.
And as digital manufacturing and 3D printing become a
reality, industries which thought they were immune to
digital threats will face the challenges of ridiculously easy
filesharing and casual piracy. Even those industries which
seem insulated, like events management or the installation
of swimming pools, face challenges in a digital age.
There is good news too. The same technology that
enables files to be shared easily also offers an
unprecedented opportunity to build one-to-one
relationships with your customers and fans. The web
enables artists and businesses to share what they do at a
very low cost while building relationships with
customers, some of whom will become fans, some of
whom will become superfans. How you choose to respond
to this opportunity will determine how you fare in the
digital age.
The list of businesses being affected by these
transformations is vast. It affects any industry that sells
products, services and experiences to consumers and many
that don’t. It affects artists and creators ranging from
sculptors and painters through musicians and writers to
photographers and movie makers. It can transform the
working practices of people who sell flour or
woodworking tools or tractors. If you need to connect with
other people, using free and building relationships are
becoming the cornerstone of what you do.

Zoe Keating is a cellist with 1.2 million Twitter

followers. She also doesn’t mind if people steal her
music.
‘Go ahead. Stream it. Share it. Pirate it. Torrent it as
much as you want. But keep in mind I am 100 per cent
DIY. I trust that if you love my music, your moral code
will compel you to come to a concert, or buy an album, or
a T-shirt directly from me.’[1]
 This may seem like an odd attitude from someone
whose livelihood depends on consumers paying for her
music. But Keating is a musician of the digital age. She
has abandoned the preconceptions of the traditional
industry and is a making a living from a new way of
building relationships with her fans.
In 2003, Keating was an ‘information architect’. She
wanted to be a musician, but fear – ‘of rejection, of
performing in front of an audience, of poverty’ – had
stopped her from making the leap. Then she turned thirty-
one and a different fear gripped her. ‘I was suddenly more
afraid of the regrets I’d have if I didn’t try.’
Keating become a full-time musician. It was not easy.
She paid the bills by playing with the cello-rock band
Rasputina. She performed her own music for free, touring
in a VW campervan and selling her homemade CD at
shows and via her website.
The next step seemed obvious: get signed by a record
label. In a pre-digital age, this was the only way to reach a
wider audience. An artist needed the resources,
relationships and reputation of a label. She needed their
help to get on the radio, to get press coverage and for her
records to appear in stores across the country or around
the world.
 Keating’s timing was fortuitous. In the same year that
Keating turned her back on the world of information
architecture, iTunes opened its doors to unsigned artists.
Any artist could sell music and get the same percentage
deal from Apple as the record labels could get for their
acts. Obscurity remained a real problem for any new
artist, as did the difficulty of selling physical CDs. But, as
Keating says, ‘An unsigned artist could now sell music
alongside bestselling artists in the largest digital music
store in the world.’
Her first album was a success. It went to No. 1 in the
iTunes Classical charts and stayed there for a long time.
Her income from her music – without a record label or a
manager – has allowed her to buy a house, a reliable car
and health insurance. The monthly payments from iTunes
allowed her to take time off when her son was born in
2010.
Keating is a big fan of Spotify. In the six months to 31
August 2013, Keating netted $808.01 from 201,412
streams on Spotify and $1,610 from 1,242,030 plays on
Pandora. Rather than seeing these sums as derisory, she
sees these services as being the start of her relationship
with future fans. ‘Spotify is awesome as a listening
platform. Artists should view it as a discovery service
rather than as a source of income.’[2]
Streaming services are why Keating is aware that she
can’t rest on her laurels with albums on iTunes.
‘Subscription streaming and YouTube are finishing what
Napster began,’ she says. The story of music is no longer
about fans taking back control of their music from a
resented industry. It is now about personal economics.
‘Only a fool or a true fan would pay to own music that is
available for free listening at any time on a subscription
music service.’
Keating is now adapting what she does. She is
changing, as the music industry is changing. ‘The business
of music continues to evolve, but the essence of being a
musician remains the same: we make music, and we want
people to hear it.’
Now we just have to find ways to make sure that it
pays.

How do you make money when everything is going free?

The consumer behaviours, technological advances and
competitive behaviour that have decimated the music
industry are not going away. In fact, they are spreading
from industry to industry. The games industry has already
adapted to an environment where many games are given
away for free. Ebooks have an unclear pricing future, with
recent price wars in the UK seeing bestsellers dropping in
price to just 20 pence.[3]
Physical manufacturing is not immune either. We are
entering an era of digital manufacturing. In this era,
physical objects exist as virtual objects too, either
because they were created in a Computer-Aided Design
package (CAD) or because they have been scanned and
turned into one. 3D printers are still expensive and for
hobbyists. A Makerbot 2, which can manufacture 3D
objects through placing down layers of plastic in a 3D
version of how the 2D laser printer sitting on my desk
works, costs over $2,000.
Like much consumer technology, it is a sign of things to
come. Prices are falling and quality is rising fast. While
we may be decades away from having a 3D printer in
every house, it is a realistic prospect. With the potential
for easy manufacturing of physical objects comes the
spectre of easy piracy of physical objects, a challenge that
manufacturers have not had to deal with before. It is one
thing to fight the criminal organizations that run
counterfeiting operations on a global scale. It is quite
another to work out how to address piracy when the
people doing the pirating love what you do and want to
share it with the world.
The website Thingiverse contains digital files of
physical goods. At the time of writing, its homepage
featured small figurines of dragons and gnomes that you
can slide on to a spoon ‘to keep you company while you
eat’, a miniature gnome to use in tabletop gaming and a
Back-to-School competition where individual users have
submitted their designs for pencil cases, rulers and pen
holders.
Dig a bit deeper and you can find designs that look
similar to Alessi’s iconic Juicy Salif lemon squeezer,
designed by Philippe Starck. You can find soap dishes and
cookie cutters and stackable plastic cups. You can find a
key ring with the embossed logo of Aston Villa Football
Club and a shoelace badge featuring the Batman logo.
You could argue that these will be much lower quality
than officially licensed merchandise. You could argue that
printing a soap dish would be more expensive, more time-
consuming and of poorer quality than buying an injection-
moulded version manufactured in China and shipped
around the world. You would be right.
But you couldn’t shape the cookie cutter just how you
want it. You couldn’t make it overnight to make fish
biscuits for your daughter’s third birthday. You couldn’t
experiment with colours and shapes and styles to get
exactly what you want. At the moment, 3D printing is for
early adopters. It is something that you do for the joy of
doing it, not because of the end result. But if the history of
technology has taught us anything, it is that deriding new
entrants into a market as being too expensive, too low
quality or too complicated is dangerous. Over time,
tinkerers and entrepreneurs will figure out ways to lower
the price, improve the quality and make the product
accessible to the ordinary consumer. That day is coming.

There are two approaches to how you adapt to the

changing circumstances of the digital age.
Denial is the approach favoured by many large
organizations. When you have a business that has made
money over many years, accepting that the revenue streams
you relied upon are drying up is hard to accept. The
natural response is to fight it. That might involve lobbying.
It might involve litigation. At its most foolish, it involves
suing the very customers you need to value what you do
enough to want to pay for the things that you create, or
manufacture, or distribute.
 This approach has one major flaw. It sees the threat to
existing businesses as technology, when the real threat is
competition.
In the world of economics, even competition theories
have competition. Two rival theories vie for being the best
way of understanding a business: Cournot competition and
Bertrand competition. Cournot competition is an
equilibrium where rival companies limit their production
– quite naturally and without collusion – to ensure that
everyone makes a profit. Under Bertrand competition,
companies reduce the price they charge for their products
to the marginal cost, perhaps best defined as ‘the amount it
costs to increase output by one unit’. In the case of
products that can be shared digitally, the marginal cost can
be very close to zero.
Until recently, Bertrand competition was considered
more theoretical than practical. It excludes such
substantial influencers of consumer price discrimination
as the cost of comparison for consumers, the value of
branding, the distribution challenges (such as would a
customer really travel twenty-five miles to save $1), and
so on.
Bertrand competition works best when a comparison of
prices is easy, where distribution challenges are low and
where the quantity of products being produced can be
increased rapidly and efficiently. The web has made many
industries look as if they might exhibit the features of
Bertrand competition where previously they looked more
like Cournot industries.[4]
That is why the denial approach is so challenging. The
transition to free is not driven by an entire audience
suddenly believing that it is OK to steal, or no longer
valuing music. It is being driven by iron laws of
technology and economics that can be as easily turned
back as the tide.
Which leads us to the alternative approach of adapting
to the digital age: to embrace the changes, both positive
and negative. To accept that which we cannot change and
to take advantage of the amazing opportunity to connect
with the people who love what we do.
That is what I call the Curve.
The Curve comes in three parts: use free to find an
audience. Use technology to stay in touch with that
audience and figure out what they value. Allow those who
love what you do to spend lots of money on things they
really value.
If you run a business that may be affected by the
changing digital landscape, that is to say, any business, the
Curve shows you how to take advantage of the free end of
your market while making more money from your biggest
supporters at the other.
If you work in a business that is affected by the web, the
Curve will help you understand what skills you need to
operate in a digital age. Some existing skills are less
valuable than they used to be, particularly for businesses
that were business-to-business and have become business-
to-consumer. There is hope though: consumers are still
happy to pay for stuff that they value. We just need to get
better at identifying what it is that they value and selling it
to them. Hint: it may not be the same stuff that you used to
peddle.
If you create art for a living, you are probably already
used to connecting with your audience in some way. You
need to find ways to make the connection personal but
efficient, to ensure that you are able to talk to your fans
when you want to, and to find ways to turn what you do
into something that people will pay tens, hundreds or
thousands of pounds to be part of.
And if you are consumer or a fan, the Curve will show
you how the social contract between business and
consumer or artist and fan is being rewritten. You have
more access to more stuff for free than at any time in
history, yet if you want the businesses that supply the
things that you value or the artists who create the art you
love to continue supplying and creating, you will need to
pay for something. The Curve shows you a glimpse of this
new social contract, one that is being rewritten all around
us as businesses and artists experiment with new business
models for the digital age.
This ebook is about helping you to understand how to
embrace free while also finding the superfans who will
enable your business to thrive or who will finance your
art. To get you started, here are ten ways to make money in
the Free world. You will need to change your perception
of the relationship between consumers, businesses and
artists and fans. You may just save your livelihood in the
process.
 1. Use Free to Find an Audience

There is one thing that the web is uniquely well-suited for:

it enables you to share stuff for free.
That stuff might be your product (if you are a musician,
an artist or a writer). It might be insight into what you do
(if you blog, or create YouTube videos, or use social
media). It might be high-quality material that you generate
using your marketing budget, something that has become
known as content marketing.
There is one important difference between free on the
web and free how it used it to be. It used to be sufficient to
offer a free sample. A hobbled version of your core
product that was time limited, or feature limited, or in
some way not as good as the real thing.
I don’t think that works any more. People can find great
content for free with very little effort. To get them to
engage with what you have to offer, you need to give them
the good stuff upfront. Otherwise, it’s a bit like going on a
date and saying, ‘Hey, I know I seem a bit grumpy and
offhand, but that’s because you haven’t committed yet; if
you go out with me for a while, I’ll be much nicer.’
 One simple way to think about how to create something
of value to your potential audience: think about what
questions the ordinary users of what you offer might want
the answer to. Then answer it. If you are a bakery, you
might give away recipes. Perhaps your audience would
search for the techniques that are your bread-and-butter:
how to roll up a croissant before you bake it, how to
decorate a cupcake or the best way to crimp the edges of a
pie. A luxury watch brand might take the long view by
answering questions on engineering and metallurgy that a
student might need to know, while enticing current
potential customers with aspirational content such as high-
end photography or fashion tips.
When I was discussing how to promote my book, The
Curve, with my publisher, Penguin, we thought about
releasing two chapters as a free ebook. But that would
only be about 15 per cent of the argument. You would need
to buy the whole book to understand the point. Instead, we
decided to write and release this free ebook: a self-
contained set of thoughts that, we hope, are valuable in
their own right.
We hope that if you like this ebook, you will go and buy
The Curve, to get more examples, more evidence, more
nuance and more specific advice for different industries
and artists. But even if you don’t, my ideas have spread
and you can share this free ebook with friends and
colleagues, some of whom might decide to buy the book.
So go ahead, share it.
 2. Use Technology to be Able to Talk to
Your Audience Again

The number one job of free content is to build the ability

to talk to your audience a second time.
That is why so much content marketing fails: it is
created under the flawed assumption that the creation of
content is an objective in its own right. It isn’t. Not unless
the sale of content is your primary objective.
If you are an artist of any sort, you want to start building
a one-to-one relationship with your fans. If you are a
marketer, you want to use your content-marketing strategy
to encourage your customers to want to let you contact
them in again in the future.
Marcus Sheridan is the owner of River Pools and Spas,
an installer of in-ground fibreglass pools in Virginia and
Maryland. His pools cost a lot of money, anywhere from
$20,000 to $200,000. His website lists all the
disadvantages of a fibreglass swimming pool. It lists the
costs in an upfront way. He even provides a list of all his
nearest competitors. As a result, Sheridan builds trust with
potential customers. Eighty per cent of people who book
an appointment with him buy a swimming pool, compared
with an industry average of 10 per cent.[5]
There are many ways to talk to your customers again.
Create a YouTube channel with how-to guides like Home
Depot does, and encourage users to subscribe. Build a
social media channel where you talk to your fans, as Zoe
Keating does with her 1.2 million followers. Give stuff
away for free in return for an email address, as I do at my
business-to-business website, GAMESbrief.
Or subvert someone else’s Customer Relationship
Management (CRM) system. We are not asking you to give
us your email address to get this ebook. We are hoping that
the recommendation algorithms of iBooks and Amazon
will encourage you to buy The Curve if you have read this
ebook. We are aiming to use someone else’s CRM system
because that is where our customers are.
Of course, if you do want to know more about my ideas
in the Curve, do feel free to come to
www.nicholaslovell.com and sign up for my blog.
 3. Use Technology to Understand What
Your Audience Wants

My recent background is working in games, an industry

that has embraced free. In July 2013, twenty-five of the
top-grossing apps in the AppStore were games. Twenty-
two of those games were free. Two of those free games,
Hay Day and Clash of Clans, both from the Finnish
developer Supercell, were grossing $2.5 million every
day between them. Supercell was recently valued at $770
million. Not bad for a business whose only product is two
free games.[6]
Technology has enabled us to figure out what our
customers want. Games companies use analytics to
pinpoint what their customers are doing and to adapt their
game to respond to what their audience wants. Companies
have always done this, but they have been forced to rely
on focus groups or on responding to the vocal minority
who write, telephone or comment on websites. Now they
can use analytics to understand what the vast majority of
their audience value, not just the loudest members.
 The web also enables people to test what people want
cheaply. Eric Ries, author of The Lean Startup, describes
his experience as founding CTO of web community IMVU.
The original vision of the product was as a 3D avatar
system that sat on top of the instant-messaging services
that were popular back in 2004, services such as AOL
Instant Messenger, Yahoo Instant Messenger and ICQ. Ries
and his five-strong tech team spent six months building a
3D system that interfaced with multiple different services
to allow customers to chat with each other using animated
characters, rather than simply in text. At the end of those
six months, they spent an afternoon building a web page to
encourage people to sign up and turned on the PR machine.
The PR machine worked. Lots of users turned up. None
of them signed up for the service. They didn’t want to
invite their friends to use it without knowing if it was
cool, but they couldn’t use it without inviting their friends.
Ries didn’t need to spend six months or thirty person-
months to figure this out. He just needed to put up that
website that took an afternoon to build and he would have
had the same information at a fraction of a cost.[7]
Not all decisions can be reduced to this extreme level.
But the principle is that you can use the power of the web
to test your ideas, and to generate data to confirm or
disprove your hypotheses at speeds that were unattainable
in a pre-digital age.
You could use the technology in a sophisticated way,
such as by offering different customers different prices for
the same product. You could then charge all your
customers the same low price, explaining the difference
away as a checkout discount, and in the process
discovering how price sensitive your customers are.
A craft fair could run a Kickstarter-style pricing
structure, offering attendees a range of different options
such as early access to the show, a lucky dip goody bag or
one-to-one tuition from some of the expert craftspeople
amongst the exhibitors. The joy of the web is that you can
test these experiences at a very low cost. If no one takes
up the offer of the goody bags, you don’t have to supply
them, and you have discovered the market appetite for the
cost of a few lines of copy on your website and an
ecommerce link.
Learn how to test whether people want your products
and what price they will pay for them in the cheapest
possible way. You will be surprised by the results.
 4. Enable Your Superfans

The heart of the Curve is to enable those who love what

you do to spend lots of money on things they truly value.
Many creators and businesses believe that they already
do this. Book publishers make a book available as a cheap
paperback and also as an expensive hardback. Movie
makers release movies in the cinema and then use
windowing to let people spend different amounts of money
depending on how much they want to see the movie.
This is not a superfan strategy. A superfan will spend
10x the average. Or 100x. Or 1,000x. A superfan loves
what you do, and is happy to spend lots of money with
you.
The easiest place to get a sample of what superfans will
pay for is to look at a crowdfunding site such as
Kickstarter. Crowdfunding is not a replacement for a
publisher but it is a marvellous way of enabling superfans.
Tim Schafer is a game maker who makes games that
publishers think are no longer popular: point-and-click
adventures. He turned to Kickstarter to raise $400,000 to
make a game he called Double Fine Adventure. Fans
could pledge any amount from $15, for which they would
receive a digital copy of the game when it was released,
to $100 for a physical package that include the game, a
documentary, an art book and a T-shirt, up to $10,000 for
unique artwork from the game and lunch with Tim Schafer
himself.
He raised $400,000 in the first day. The thirty-day
campaign raised over $3.3 million. Over 50 per cent of
the 87,000 people who pledged money to the Double Fine
Adventure campaign pledged $15, yet they represented
only 20 per cent of the revenue. The 0.1 per cent of the
pledgers who pledged $1,000 or more made up 6 per cent
of the revenue. The 15 per cent who pledged $100 or more
were more than half the total revenue.[8]
Schafer used Kickstarter to enable his biggest fans to
spend lots of money on things they really value, such as
bespoke artwork, connecting with their hero and being
part of a creative journey. This is not unique to Schafer.
Again and again on crowdfunding websites, we see that
around half the revenue comes from a fifth of the audience.
Indiegogo, another crowdfunding site, says that the $100
reward tier makes more money for artists using its
platform than any other tier and makes up nearly 30 per
cent of total funds raised. Rewards priced at $50, $100,
$500 and $1,000 make, combined, 70 per cent of total
income on the site.[9]
To become remarkable, you need to be inventive. A
digital magazine publisher could experiment with offers
ranging from preferred status in the comments section to
privileged access to the magazine’s editorial staff to VIP
events for high-spending users only. They could create
annual physical anthologies of their best work and sell
them as premium coffee-table books. The purpose would
not be to package the content: the subscribers already have
access to that content in a digital form. It would be to give
superfans a physical artefact to display, to touch and to
admire, to use as a physical manifestation of their sense of
self. It would be a token of their fandom.
Superfans exist, and always have done. It’s just that
now it has become cost-effective to find them and to offer
them bespoke products or experiences on which they may
spend substantial sums. The problem is that most
businesses and creators are set up to deliver products or
art to the mass market, just when the era of the mass
market is coming to an end.
 5. Forget the Mass Market

The mass market does not exist because it is what

consumers want. It exists because it is what manufacturers
need.
At the turn of the twentieth century, manufacturers such
as Henry Ford developed modern manufacturing. Henry
Ford analysed his market like this:
‘Ask a hundred people how they want a particular
article made. About eighty will not know; they will leave
it to you. Fifteen will think that they must say something,
while five will really have preferences and reasons. The
ninety-five, made up of those who do not know and admit
it and the fifteen who do not know and won’t admit it,
constitute the real market for any product.’[10]
Ford set about making manufacturing cheap and his
products accessible to the masses. He gave his customers
one option – the Model T. He sought out every efficiency
improvement he could find, whether it was by observing
the overhead lines the meat packers of Chicago used to
butcher a beef carcass and adapting their principles to the
manufacture of automobiles, or by analysing every step in
the manufacturing process to reduce the number of
movements a worker had to take. It worked. In 1914,
13,000 workers at Ford made 260,720 cars, while the rest
of the industry combined made roughly the same number of
cars (286,770) with over five times as many workers
(66,350).
It was not enough for it to be cheap to make lots of the
same thing. People have to want lots of the same thing. So
over the course of the twentieth century the mass
producers worked with the mass media to create the mass
market: an audience of consumers who wanted the same
things.
This era is coming to an end. It is coming to an end
because the twenty-first-century audience is demanding
something different. We already assume that almost
anything we might want is available at a reasonable price
and is of good quality. What we care about now is how it
makes us feel.[11]
We are moving into a post-consumer world. What
matters is how what we buy affects our emotions, how it
makes us appear to others and whether it offers us an
experience. We still care about status, and self-expression,
and all the other hallmarks of consumerism, but we can
also choose to demonstrate them in a variety of ways.
 Take the example of music. When I was a student, if you
went back to someone’s room, you would look for a
chance to check out someone’s CD collection to see if
there was any basis for long-term compatibility. Students
today can’t do that, when every student has access to every
piece of music ever made via the web, whether legally or
illegally. Yet music is still an important part of identity
and young people have to find new ways to display that
identity.
That might be through the T-shirts they wear or the gigs
they choose to attend. It may be through the special-edition
boxed sets that they buy to display their allegiance. They
are not paying for access to music. They can get that for
free. They are paying for the status gained from and self-
expression demonstrated by choosing to spend their scarce
resources on that particular band. Instead of paying $10
per album to every band, they will get all their albums for
free but pay $100 to a few bands for something special
and personal.
The web does not mean that there are no shared
experiences. The big are getting bigger. Viral sensations
such as Gangnam Style can reach a billion views on
YouTube in only a few months. The Superbowl still gets
enormous audiences, as do reality TV shows like The X-
Factor or Dancing with the Stars. Fifty Shades of Grey
can become a ubiquitous bestseller while games like
Grand Theft Auto can make $800 million on the first day
of release.[12]
But the niche is getting more viable too. Content,
services and experiences that connect with their fans and
have a marketing story that is remarkable will thrive. It is
no longer enough to create something mediocre and pump
it through a retail channel hungry for product. There is
enough product out there on the web to mean that standing
out is key. There will still be products that appeal to a
mass audience but the mass market is coming to an end.
If you are not remarkable, you are in trouble.[13]
 6. Escape the Tyranny of the Physical

The transition from physical to digital saves you money,

but not in the way that you think.
Many critics of those who believe in the
transformational power of digital distribution point out
that the physical cost of many products, particularly media
products, is a fraction of the total cost. A CD is not
expensive to produce. Nor is a DVD. Even the printing of
a book is a small fraction of the retail price.
This is both true and missing the point.
The real cost of physical production lies not in the
physical manufacture but in the opportunity cost and the
consequences that physical manufacturing has for
organizations. Let’s take as an example the book industry.
The actual cost of printing is low, but the tyranny of the
physical has a much wider influence.
Every commissioning editor knows that there is
enormous cost to commissioning a book. There is editorial
cost: the commissioning editor, the copy-editor, the
proofreader. There is production cost: designing the cover,
laying out the text, correcting proofs. There is physical
manufacturing cost.
 Then there is working capital cost. Each stage of that
process needs to be paid for before the publisher gets
paid. The author gets an advance, the editor gets a salary
and the freelance proofreader gets a fee long before the
book hits the shelves. The book has to be printed in
volume. It has to be shipped around the world. It has to be
stored in warehouses or on the shelves until a consumer
chooses to buy it. Worse than that, once the consumer pays
for the book, the retailer can sit on the money for three
months before paying the publisher. It all adds up to a lot
of working capital.
And then there is opportunity cost. An editor only has
the time and a publisher the working capital for so many
releases a year. A failed release puts a big dent in the
financial results, so editors and publishers work hard to
ensure that they maximize the chances of a book being
financially successful. They can do that by being choosy
about which books they take on, by being risk averse or by
doubling down on the bets that they do choose to make.
They can spend more money on marketing or more time in
the editing process to improve the chances of the book
being very successful.
The paradox here is that in order to reduce risk, they
have increased risk. They have reduced the operational
risk that the book fails by increasing the financial risk, that
is to say the amount of money at stake if it does fail. There
is not a right or wrong here: both risks exist and need to be
managed, but the existing risk management structure is
built to minimize operational risk by increasing financial
risk. That is the tyranny of the physical.
In the digital world, the operational risks are much
reduced. The working capital requirements for the
production of the book are still there, although they can be
lower: a digital product can be updated after launch and
the option to worry less about the editing and proofing
process can be taken, as shown by the rapid rise in self-
publishing. The working capital cost of the physical
distribution is all but eliminated. There are no copies
printed, no capital tied up in stock, no risk of returns from
retailers who have failed to sell the product.
So it becomes cheaper to publish more and rely on
filtering rather than to publish less and rely on curation.
This transition favours those who can adapt to different
ways of finding their market and reducing the reliance on
expensive risk management processes that exist to manage
a risk that is much diminished in a digital age.
If you think of your digital business as being just like
your physical business, only digital, not only will you see
digital dimes replacing physical dollars, but you will also
fail to embrace the cost reduction and organizational
change that will enable your digital business to thrive.
Learn how to create products cheaply to discover if
there is a market, and then move fast to iterate on ideas or
product lines that are working. Create a poster to support
the thesis of a book but use print-on-demand services so
you don’t take stock risk. (You can buy such a poster of the
ideas contained in The Curve at
www.thecurveonline.com). Publish an ebook that covers
20,000 words, even though you have 100,000 words of
ideas. If the first is popular, write the next 80,000 words
as four stand-alone ebooks, increasing the chance of
discovery, offering the joy of collection for superfans but
saving you 80 per cent of your effort if it turns out that
your ideas don’t resonate with an audience. Offer an
expensive personalized service, such as lunch with an
author or a tour of your game studio that will be expensive
to deliver if someone buys it but cheap to explain on your
website in case no one does. Realize that in order to sell
something, it doesn’t need to exist yet.
But do keep your promises. In the world of the niche,
your reputation is critical.
 7. Stop Thinking About Units Sold,
Think ARPU

As we enter the digital age, we will stop selling products.

Instead we will serve customers. Very few businesses or
creators were in the business-to-consumer business in the
pre-digital age. Only retailers sold to consumers.
Everyone else sold to someone in the chain that began
with the producer and ended with the consumer.
That chain is now much shorter. Most creators are now
able to talk directly to their customers, and to sell directly
to them too. Most businesses that used to be in the
business of selling 10,000 widgets to a buyer at a retailer
chain have to adapt to selling a single widget to each of
10,000 people. That is a very different challenge, with a
different set of skills required.
Perhaps the easiest way to figure out if you are thinking
about your business in a way that takes advantage of the
benefits of digital is to ask yourself if you care about units
sold or ARPU. If you are thinking about units sold, you are
thinking in a pre-digital way: you are focused on your
product, not your customers. If you are thinking about
Average Revenue per User (ARPU), you are putting your
customer at the heart of your business. This allows you to
think about all of your customers, ranging from freeloaders
to superfans and everyone in-between, and to start
understanding what it is that takes someone from one
extreme to the other. Only then can you start thinking about
how to move your customers along the Curve from
freeloaders to superfans, a strategy which will stand you
in good stead as more and more people expect to get your
stuff for free.
 8. Love Your Freeloaders

If you think of your freeloaders as one step above evil

pirates, you are making a big mistake. Your freeloaders
are the base on which your entire business rests, and it is
time to embrace them.
Freeloaders have many benefits for your business.
Starting with the obvious, you can show advertisements
to them and charge other businesses money for access to
your audience. In many cases, you would be better off
trying instead to upsell your own products, and advertising
is a volume game, but it can be done.
Each freeloader is a potential convert. You never can
tell which customer is going to be a freeloader for life and
which one is on the path to becoming your most ardent
supporter. By treating freeloaders badly, you risk
alienating those people who might go on to be your
highest-spending customers. Even if they never become a
paying fan, they might become evangelists, spreading the
word about your product or service to friends and friends
of friends and driving the word-of-mouth
recommendations that are the cheapest and most effective
way of marketing your product.
 Above all, each freeloader is a gawker. As you aim to
create ever more exclusive or valuable products, services
or experiences for your biggest fans, you need to do so
within a social context. The value of the gawker is
perhaps easiest to understand if you consider your thought
process when you stand in front of your wardrobe
contemplating which outfit to select for the day. If you
expect to spend the day sitting at home with no visitors,
you are more likely to choose to slob out in jeans and a T-
shirt than if you expect important social interactions. We
are more likely to spend time, effort, skill or money on
something if we expect other people to see it. That has
always been the case, but the interactions that previously
took place in a physical social context are now amplified
by social media and spread across the globe as a result of
the web’s transformation of communication and
distribution.
Your freeloaders are the core of your business and of
the creation of your art. They may not be the most
profitable part, but that does not mean that they do not
matter. Love them.
 9. Be Creative and Ambitious

This is a time of rapid change. While the basics of

business remain the same, what people will pay for is
changing. They are less inclined to pay for access and they
are more inclined to pay for that which has value in a
social context, even when that context has been
internalized.
It is an opportunity to experiment cheaply with new
ways of charging for what they do. Will readers pay 300
for lunch with an author? Will an organization pay 10,000
for a hundred copies of a book and a masterclass on its
content?
In a B2C (business to consumer) context, the American
miller King Arthur Flour sells a basic commodity: flour. It
has built a relationship with its baking customers through
offering free recipes, how-to guides and a helpline for
baking emergencies. It has branched out from selling flour
to selling cookery equipment, publishing books and
charging hundreds of dollars for bespoke baking
masterclasses at its Vermont headquarters.[14]
You can experiment too. Make something for free.
Connect it to a service that enables you to speak to your
customers again, whether that be by email, a YouTube
channel or a social media account. Experiment with
different ways of giving your customers value, whether
that be through personalization, through exclusivity,
through offering experiences or through connecting your
customers and fans with the people who make what they
love. There is no fixed answer, but there is a real
opportunity for those who choose to adapt.
 10. You Don’t have to be Free

If a product or service can be shared digitally, it will be

hard to keep the price above free for ever. This is not an
issue of piracy, but one of competition. Yet it doesn’t have
to happen immediately or rapidly. The music industry
fought its customers and came out of the battle badly: in
1999, the annual revenue of the recorded music industry
was over $14 billion. By 2009, it had fallen to $6 billion
per annum, a loss of over $8 billion in annual revenue.
Yet ebooks are still paid for, and it is still possible to
sell many digital products to many customers for a price
that is higher than zero. If your business is doing well
without giving stuff away for free, then great! You don’t
have to go free. But it makes sense to start building
upwards to embrace your superfans now, so that you are
ready for the day when digital competition drives the price
of your core product to zero.
And if that day never comes, then you get the best of all
possible worlds.
 Notes

[1] ‘The Sharps and Flats of the Music Business’, Los Angeles Times, 1
September 2013, http://www.latimes.com/opinion/commentary/la-oe-0901-
keating-labor-pains-music-20130901,0,7684809.story
[2] http://www.theguardian.com/technology/2013/aug/19/zoe-keating-spotify-
streaming-royalties
[3] Nicholas Lovell, The Curve (Penguin Books, 2013), p. 184.
[4] See Chris Anderson, Free (Random House Business Books, 2009),
Chapter 11, for a detailed discussion of Bertrand competition.
[5] Lovell, The Curve, pp. 24–5.
[6] Forbes, ‘Is This the Fastest-Growing Game Company Ever?’, 6 May 2013,
http://www.forbes.com/sites/karstenstrauss/2013/04/17/is-this-the-fastest-
growing-game-company-ever/
[7] Eric Ries, The Lean Startup (Penguin Books, 2011), pp. 40–42.
[8] Lovell, The Curve, pp. 137–45. Schafer may have raised over $3 million,
but the scope of his project increased with this windfall and Double Fine
Adventure is facing production challenges.
[9] http://blog.indiegogo.com/2012/07/indiegogo-insight-perk-pricing-
practices.xhtml
[10] Henry Ford, My Life and Work (NuVision, 2007), p. 35;
http://books.google.co.uk/books?id=bUbdMRx43JgC
[11] For more on availability, price, quality and feelings, see James Gilmore and
Joseph Pine, Authenticity (Harvard Business School Press, 2007), and
Gilmore and Pine, The Experience Economy (Harvard Business School
Press, 1999).
[12] http://ir.take2games.com/phoenix.zhtml?c=86428&p=irol-
newsArticle&ID=1856046
[13] See Seth Godin’s entire body of work on the importance of being
remarkable, particularly Tribes (Piatkus, 2012) and Purple Cow (Penguin
 Books, 2005).
[14] Lovell, The Curve, pp. 187–8
 The Future

Your next steps are to start thinking about how your art or
your business can embrace the Curve. How you will use
the power of free to attract an audience, technology to
figure out what they want and then enable those who love
what you do to spend lots of money on things they truly
value.
You could start by paying attention to what Superfans
spend money on with crowdfunding services such as
Kickstarter or Indiegogo. You can visit
www.nicholaslovell.com, where I blog about successful
businesses taking advantage of the Curve.
And, if you have enjoyed this book, I hope that you will
consider buying The Curve, a book that expands on many
of the arguments in this free ebook and provides examples,
illustrations and practical advice to take advantage of this
new way of doing business.
We’ve added a sample of The Curve as a final chapter
of this ebook. I hope you enjoy it.
Thank you for reading.
Below follows the Preface to and Contents of The Curve
by Nicholas Lovell (Portfolio Penguin, 2013).
 The Curve: Preface

‘Steal it. Steal away. Steal, steal and steal some more and
give it to all your friends and keep on stealing, because
one way or another these mother fuckers will get it through
their head that they’re ripping people off and that’s not
right.’

The words of an anarchist? A member of the Pirate

Party? No, those are the words of Trent Reznor, the front
man of Nine Inch Nails, an industrial rock band that
released its first album, Pretty Hate Machine, in 1989. By
2007, at a gig in Sydney, here was Reznor exhorting his
fans to steal his music and calling his record label ‘greedy
fucking assholes’.

How did it come to this, and how did Reznor expect to

make money if his fans were all downloading his music
for free?

Reznor grew up in rural Pennsylvania, a place where

‘there was nothing going on but the cornfields’. Music was
his outlet and he started playing the piano at the age of
five. At high school, he played tenor saxophone and tuba
in the jazz and marching bands. Reznor’s musical
accomplishments are not limited to piano and brass: the
instruments he plays include guitar, piano, synthesizer,
Mellotron, keyboards, bass guitar, saxophone, cello,
double bass, drums, tuba, sousaphone, harmonium,
marimba, pan flute, harpsichord and vibraphone.

Despite his musical abilities, Reznor chose to study

computer engineering at Allegheny College, but dropped
out after a year to move to Cleveland with the intention of
becoming a full-time musician. His break came when he
got a job at Cleveland’s Right Track Studio as an assistant
engineer and janitor. Studio owner Bart Koster was
impressed by Reznor’s work ethic and intensity: ‘He is so
focused in everything he does. When that guy waxed the
floor, it looked great.’ Reznor asked if he could use the
studio to record demo tracks himself. ‘How could I
possibly stand in this guy’s way?’ said Koster,
interviewed in 1995. ‘It wasn’t costing me anything, just a
little wear on my tape heads.’

Reznor had found a recording studio. The trouble was

that he couldn’t find musicians willing to work between 3
a.m. and 8 a.m., without pay. So he did what any self-
respecting, driven perfectionist would do. He decided to
play all of the instruments himself. After all, he reasoned,
it had worked for Prince.

It worked for Reznor, too. He soon signed with TVT

Records and released the Nine Inch Nails’ debut album,
Pretty Hate Machine. It sold a million copies, and TVT
put pressure on Reznor to create another commercial
success. In a pattern that was to be repeated throughout
Reznor’s career, and would ultimately lead to his split
from the traditional record-label system, Reznor resisted
this interference in the creative direction of Nine Inch
Nails, leading to a vicious court battle.

Eventually, Reznor broke with TVT and signed to the

Interscope label, releasing the EP Broken in 1992. Over
the next decade, Reznor’s music career followed an
almost clichd path: huge success with The Downward
Spiral, a long period of drug-fuelled writer’s block and
successful collaborations with, amongst others, singer
Marilyn Manson, film director Oliver Stone on Natural
Born Killers and game developer id Software on Quake.

Reznor’s relationships with record labels had been

fractious in his early days, and they came to a head over
the prices that Interscope’s parent company, Universal
Music, charged for his albums in Australia. In an
interview with Music 2.0, Reznor said:
Year Zero is selling for $34.99 Australian dollars ($29.10 US). No
wonder people steal music. Avril Lavigne’s record in the same
store was $21.99 ($18.21 US). By the way, when I asked a label
rep about this, his response was: ‘It’s because we know you have
a real core audience that will pay whatever it costs when you put
something out – you know, true fans. It’s the pop stuff we have to
discount to get people to buy.’ So, I guess as a reward for being a
‘true fan’ you get ripped off.

That’s when Reznor exhorted his astonished fans to

steal his music. It was also when he started to look for an
alternative way to make money from recorded music.

Reznor was very familiar with digital technology. Not

only had he studied computer engineering before dropping
out, he was an avid gamer with a love of technology. Nine
Inch Nails had experimented with a technology-heavy
viral marketing campaign for his Year Zero album in 2007.
Fans attending his concerts found USB keys in the toilets.
They contained new songs but also a noisy audio file that,
when run through a spectrum analyser, drew an audio
wave in the shape of a phone number.*
 The phone numbers led to answering machines offering
conspiracy theories. Fans found other fake websites
strewn across the internet. Before long, internet forums
and wikis emerged to debate the messages and theories,
culminating in the release of Year Zero in April.

Reznor’s technology know-how, his dislike of the label

system and the emergence of the internet as a viable
distribution channel all culminated, in 2008, in a perhaps
inevitable outcome. Reznor split with Interscope Records
and formed his own label. His next musical release was a
perfect example of how an artist could harness the power
of the internet to make a financial success of an album that
he gave away for free.

Ghosts I–IV is a thirty-six-track instrumental industrial

rock album. In fact, it’s more like four nine-track albums
released as one. Reznor decided from the beginning to
offer his album at a variety of price points.

Ghosts I he released for free as a digital download.

Anyone could download it from his website in return for
an email address. Reznor went one step further. He wanted
to maximize his potential audience and to do so, he chose
to upload Ghosts I to filesharing sites such as BitTorrent
and The Pirate Bay.

The full album, Ghosts I–IV, was released as a digital

album for $5. Of course, many fans already knew how to
get this for free from filesharing sites, where the content
would appear as soon as the album was released, but
Reznor offered his fans an ‘honesty box’ where they could
give him money if they wanted to. There was also a
traditional physical CD for $10 and a Deluxe Edition for
$75, but Reznor’s brilliance lay in his $300 Ultra-Deluxe
edition.

The Ultra-Deluxe Edition contained a four-LP set of

Ghosts I–IV on 180-gram vinyl and three embossed,
fabric-bound hardcover books in a large fabric slipcase.
Each Ultra-Deluxe Edition was numbered and signed by
Trent personally. Only 2,500 were produced. They were
limited to one per customer.

Reznor sold every single Ultra-Deluxe Edition in less

than thirty hours, grossing $750,000. In the first week, his
record sales were worth $1.6 million. Yet he gave his
content away for free and showed his fans how to find it
on filesharing networks that would inevitably carry his
entire album within hours of it being released.

Reznor is a trailblazer who has shown us how the

transition from analogue to digital has destroyed our
preconceptions about the mass market, pricing and the
dangers of free.

Businesses of all kinds are under threat from digital and

the trend towards a price of zero. The real threat is not
piracy; it is competition. When people like Reznor figure
out how to give their product or creation away for free and
still make more than enough money to keep them in
business, it becomes much harder to keep existing price
points and ways of doing business.

The challenge of the twenty-first century is this: sharing

is easy but finding an audience is hard. Consumers expect
more and more for free, yet the creation of the products
they want is expensive. How can we afford to make the
stuff that our audience and customers crave?

The solution is to flip your thinking. To focus not on

finding the biggest possible audience but to seek out the
superfans who love what you do. To use the cheap
distribution of the internet to start the process of
connecting with fans – and then craft products, services
and artistic creations which they will pay lots of money
for.

The twenty-first century will be about relationships,

about variable pricing, and about the ending of the tyranny
of the physical.

Welcome to the Curve.

 The Curve: Contents

Preface

1 The Curve

2 Scarcity and Abundance

3 Competition, Economics and a Man Called Bertrand

4 Everything, Just for You

5 The Tyranny of the Physical

6 What’s it Worth?

7 Freeloaders

8 Gawkers

9 Superfans

10 The Power of the Crowd

11 Make-it-Yourself
12 We’re All Retailers Now

13 Harnessing the Curve

Afterword: The Curve Redux

Notes

Bibliography

Acknowledgements

Index
 Read More

The Curve is published by Portfolio Penguin in 2013. It is

available in print and ebook around the world.
Posters, an animatic, speaking packages and more can
be found at:
www.thecurveonline.com
PENGUIN BOOKS
Published by the Penguin Group
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First published 2013
Text copyright © Nicholas Lovell, 2013
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All rights reserved
ISBN: 978-0-241-00423-4
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 THE CURVE: PREFACE

* I am in awe of the fans who decided to run this file

through a spectrum analyser to see what they could find.