Imagine you are a designer of high-performance automobile engines. You design engines and then sell the designs to automobile manufacturers. You have customers of all sizes: from lone hobbyists and weekend racers to major car companies. You give them the engine design, they give you some cash and that's that - flat fee, regardless of how many engines they actually build and use. As long as they aren't re-selling or giving away your design, and aren't just building and selling completed engines based on your design, everything is cool. In other words, you aren't selling to people who would then use your designs to compete directly with you - you only sell to people who use your engine designs as part of something bigger.
Some of your customers are in the drivetrain business. They design a transmission, drive shaft, axles, wheels and a suspension system to use a modified version of your engine, and then they sell that design to car makers. The car makers build the drivetrain, attach a frame, an interior, headlights, etc.. These drivetrain designers pay you for every unit they sell, and most of your income comes from these companies.
Musical interlude: Gillian Welch, "Everything Is Free":
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Everything is free now, That's what they say. Everything I ever done, Gotta give it away. Someone hit the big score. They figured it out, That we're gonna do it anyway, Even if doesn't pay. I can get a tip jar, Or I can get a straight job, |
What a great song! She's a treasure. Now, back to the story.
Imagine one of your drivetrain customers is faced with growing competition from a set of popular free drivetrain designs. As in: you can go to the web and download Bob's Free DriveTrain Design, stuff it into your manufacturing system and out comes a drivetrain (there are also plenty of free engine designs, which have steadily eroded your own share of the engine design market). In response to this, your drivetrain customer is thinking about giving away some of his low-end designs, for free, in hopes of getting some visibility among people who would normally not even think of paying for a drivetrain design, given the abundance of free options. The plan is to give away some low-end designs, and hope they are so pleased with the free stuff that they'll eventually want to upgrade to one of the company's higher-end, non-free, designs. You get no money when someone downloads a free design, but would get your standard payment for an 'upgrade'.
The problem for you: if they were to give away their drivetrain design, they'd also be giving away your engine design (because it's an integral part of their drivetrain design). And that is forbidden by your licensing contract. So, they've offered to buy your entire engine design business, giving them complete ownership of your designs, for roughly two years of what they're currently paying you in royalties. But you declined, because you enjoy designing engines.
The next option seems to be: allow them to give away your design (to whoever wants it, unlimited, "free as in beer"), in exchange for an up-front fee. In effect, you would sell them the right to distribute your designs for free.
What's a reasonable fee ?
Are there any other options ?
So, ah, how hypothetical is the situation under discussion?
“Everything is Free” came on the car stereo on the drive home — thanks for the note, I hadn’t really listened closely to the lyrics previously. It’s a touching song.
So, ah, how hypothetical is the situation under discussion?
well, i don’t produce automobile engine designs – it’s graphics toolkits. other than that… 0% hypothetical.
Hard to say, is there really any difference between selling them the whole thing and allowing them to give your design away for free?
the difference is: if i sell the whole thing, i’m out of that particular business for good, which i don’t really want to be. i like doing it. i was doing it before i made a business out of it.
if we work out a deal where they can give away stuff, it will probably cannibalize future sales (hopefully, offset a bit by the fee i’d charge). but i’m still in the business.
i should also note that the market for free is not the same as the market for non-free. some people prefer to pay because you get better support, and you get accountability. free stuff is pretty-much “as-is”, you’re on your own. maybe the developer will fix bugs, maybe not; maybe he’ll abandon the product tomorrow and send all bug report emails directly to his Spam folder – he’s not accountable in any way for what he puts out.
so the choice really is: do i think allowing them to give away my stuff along with their stuff will generate enough new sales for them that it would offset any potential sales lost to the free stuff. they, the ‘drivetrain’ guys, think it will work for them. if it works for them, it will work for me – it’s really about how much they can sell vs what they will lose to people who will stick with their free stuff instead of upgrading. also, their market is not exactly my market, though there is overlap.
thing is, i don’t know if they’re right or wrong. i’m not a marketer. and since i don’t know, i don’t know how much i should charge them, if i give the OK for them to do the giveaway.
Why not ask for slightly less than what they would buy the whole business for? Or, say, 75% of that?