The great unbundling: why the rise of the niche may prove a turning point for microbusinesses

How do you make money in a world where things are increasingly free?

Take the music industry. Just a few years ago we were paying close to £15 for a single LP.  Now you can stream as much music as you like on Spotify for the same amount. The result has been a dramatic fall in revenue for music labels, and in turn a big drop in income for the musicians under their banner. Lady Gaga, one of the most prolific artists in the world, estimates that a million plays on Spotify had netted her a meagre £108. And similar stories are playing out right across the music, publishing and software industries.

The question is, what can we do about it? One person who thinks he has the answer is Nicholas Lovell, who recently spoke at the RSA to launch his new book, The Curve. His argument is deceptively simple: don’t fight it, embrace it. In fact, learn to love it. He argues persuasively that firms should stop charging for many of their products, services and content, and start making the real money by selling things to the high value customers – aka the ‘superfans’. Central to this is knowing exactly what each customer is willing to pay, and then working out how to extract that value from them. It’s price discrimination on steroids.

But why take these steps now? Lovell's answer is that piracy, enabled by ever more sophisticated technologies, is simply becoming unbeatable. Every customer with a computer and an internet connection has a whole raft of free products at their fingertips – whether that’s Radiohead’s latest album, J K Rowling’s most recent book or the new Woody Allen film. And with so many things available for nothing, the only option for firms is to fight fire with fire and join the fray, giving away more of what they used to sell. The money will have to come from providing higher value activities, which cannot be pirated.

Nowhere is this tactic more visible than in the app industry, with app makers giving huge amounts of content away in the hope that they can make up their losses among the more lucrative superfans. Farmville, Smurfs and Pocket Frogs are just a few of the apps that generate revenue by selling virtual items to its users within the game. Lovell points out that 22 of the top 30 revenue grossing games are ostensibly ‘free’. And this trend is spreading fast. Gartner estimate that in-app purchases (IAPs) will account for 48 per cent of app store revenue by 2017, up from 11 per cent in 2012.

Nor is this phenomenon limited to bits. Many firms dealing in material ‘atoms’ are also beginning to feel the heat. Again, the source of this angst can be found in technological advancements, namely 3D printing and other additive tools. Lovell uses the example of the well-known Alessi lemon squeezer (the one that looks like something from War of the Worlds). Whereas once this could only be found in retailers like John Lewis (£38.40), you can now download the product design from a website called Thingiverse and print it yourself (although the first versions look rather flimsy). As a result, Alessi is stepping up its game by creating premium, limited edition versions of the same product that are harder to make and which appeal to higher-value customers.

Of course, not everyone is so cheery about giving things away for free. From Jaron Lanier to Thom Yorke, a growing community of activists are genuinely and understandably worried about a world in which products and services no longer need to be paid for. No wonder, given the number of middle-skilled jobs that have already been ‘hollowed out’ by emergent technologies.

But can we really put this thing into reverse? Surely it’s better to expend our energy in adapting to these changes. Indeed, many in the music industry are already doing so. They’ve realised that new sources of income can be made in selling collectible items and in organising multiple sell-out tours. It’s why we’ve seen the rise of new apps like Eventful Demand, which allow fans to group together to ask bands to play in their home town.

And there, in a nutshell, is where the real benefits of these changes lie: with the consumer. They are forcing producers to refocus their attention on developing something that is of real value to people (both the more expensive offerings and the free stuff). As Lovell explains:

In the commodity era of limited availability, we asked ‘Can I get it?’ In the goods era of manufactured product, we asked ‘How much does it cost?’ In the service era of quality, we asked ‘Is it any good?’ Now that we can get great products cheaply whenever we want, we have started asking a new question: ‘How will it make me feel?’

As Slavoj Zizek put it when he spoke here some time ago, it’s no longer what you’re buying anymore that's important, it’s what you’re buying into. This sounds innocuous enough, but the implication is that we may see a ‘great unbundling’ of big markets into niche ones, with firms coming up with specialised offerings that can more easily stoke emotions and make consumers feel something in what they buy. Indeed, Lovell argues that the only way that many firms (at least in the industries affected) will be able to survive is if they can satisfy the specific needs of individual consumers – for instance through tailoring and personalised products – and ultimately grab their attention (something increasingly scarce in the 21st century).

Which brings us to what this means for the microbusiness. On the face of it, you might think that the whole freemium model would be disastrous for small businesses, given their limited cashflow and capital base. Surely they can’t afford to offer free content. But that’s missing the point. It’s not all about the rise of the free; it’s also about the growth of the niche. And microbusinesses are perhaps the ideal economic unit for meeting the needs of customers that demand to feel something, and for creating tailored products that pull their heartstrings.

This is because 1) they are arguably more nimble than their larger counterparts, and therefore better placed to tweak products and services to suit clients (this happens thousands of times everyday on the likes of Etsy); and 2) they have the advantage of being (or at least appearing) more genuine, trustworthy and earnest. Of course, this is not to say that big business cannot satisfy customers in the same way. In no way is this a simple black and white, big vs. small binary. But undoubtedly there are a wealth of opportunities here that small businesses could benefit enormously from.

Anyway, don't take all of this from me; go ahead and listen to Nicholas Lovell's talk at the RSA. You'll be glad to hear it's free...

The Curve: the future of business by Royal Society Of Arts on Mixcloud

The RSA and Etsy are exploring similar themes in a new project, The Power of Small.

Follow Ben Dellot on Twitter.