1. Challenging notions of “free” February 11, 2009

2. Overview Why revisit “free”? Approach What we found What next? 2

3. “Free” is not “new” … A long and successful history Galleys, ARCs, blads, sample chapters Digital sampling on the rise … but only a small set of experiments using fully “free” content 3

4. Why look at this now? Growing sophistication of ebook readers Proliferation of digital content Ongoing debate about the true impact of free Perceptions of a piracy threat 4

5. Why O’Reilly and Random House? O’Reilly MediaPioneered discussion of the distribution of free content Active in promoting widespread access to its content Perceived as vulnerable to a piracy threat Random HouseLargest U.S. publisher A wide range of book types reaching a variety of audiences Engaged in a number of experiments with “free” 5

6. Book marketing: growing content discovery and access High Discovery High Access Low Discovery Low Access Appearance on Oprah Coop Marketing Corporate Web Site Museum Stores Amazon Promotion Catalog & BEA Over time, increase both discovery and access 6

7. Options to focus marketing Build or extend an individual brand Market cost- effectively across a content niche Cultivate relationships to drive sales Audience- specific Author- specific Subject- specific 7

8. Our approach Document and assess prior work Address data quality Analyze and share results Assess implications Develop and propose next steps The research is data-driven, open (without compromising publisher data) and structured to share knowledge. 8

9. Overall findings Not binary Measures must evolve Does not appear to parallel other media P2P “threat” may be overstated – Low incidence – Significant lag – Technical skills are not commonly held 9

10. Proposing a more nuanced model “White” market “Gray” market “Back channel” Print sales DRM-protected digital sales “Trialware” Unprotected digital sales Galleys, ARCs “Free” promotions Unauthorized duplication Pirated content 10

11. Overall findings Not binary Measures must evolve Does not appear to parallel other media P2P “threat” may be overstated – Low incidence – Significant lag – Technical skills are not commonly held 11

12. There is value in structured testing Track a robust set of variables Provide appropriate segmentation Capture content characteristics Test hypotheses (validated or refined) 12

13. The sample matrix (illustrated) 13

14. An initial look at sales impact Testing free (Random House) 8 titles, 12 formats tested in the first half of 2008 Sales up 19.1% during promotional period Sales up 6.5% during promotional and post-promotional periods Ranged from 155% up to 74% down Monitoring P2P (O’Reilly) 8 titles that were posted O’Reilly front list in 4Q 2008 Average post-seed sales were 6.5% higher in the four weeks after Ranged from 18.2% up to 33.1% down Low seed and leech volume Average first seeds appeared 20 weeks after publication date 14

15. We tested the results in a few ways Did pre-sale volume matter (i.e., would sales lift be greater for a previously popular book)? Is there a relation between immediate (during promotion) and post-promotion lift? To create comparability, we used “average sales” for each period (pre-, during and post-) 15

16. Promotion and post-promotion sales not correlated with prior sales volume Correlation coefficient = 0.03

17. Promotional sales also not strongly correlated to prior sales volume Correlation coefficient = 0.12 17

18. What does this tell us about “free”? Average results in a small sample were “up” A range of possible outcomes exist No correlation with prior sales, even when isolating print sales as a channel Important to collect more results and grow the sample size 18 We took a similar approach to testing the data collected on pirated O’Reilly titles…

19. It’s not clear if prior sales volume changes the impact of pirated content Correlation coefficient = 0.67 (-0.30 if outlier is excluded) 19

20. The number of seeds is correlated with growth in print sales Correlation coefficient = 0.35 (0.74 if outlier is excluded) 20

21. The number of seeds peaks quickly 21

22. The number of leeches peaks immediately and quickly declines 22

23. Lag time before seeding varies Average = 20 weeks 23

24. Some research surprises… Number and range of “under the radar” free experiments available for analysis Strong interest among trade publishers Some strongly positive correlations Low volume of P2P incidence Lag time on P2P seeding 24

25. The work will continue … Matrix offers 20 possible options (and even more permutations) 16 covered in this first pass, but several with only a limited set of data points More promising opportunities to test – Young adult – Backlist, especially for series – Trade nonfiction 25

26. Three useful cautions Correlation isn’t causality Larger samples may uncover an existing skew What works today may not work as well at some future date 26

27. Next steps Additional Random House tests queued Continued P2P monitoring More publishers can help fill in the test matrix Gathering feedback Refining the analysis 27

28. For more information “Rough Cut” research paper coming soon – Includes research covered here – Also provides background on free and P2P brian.oleary@magellanmediapartners.com mac@oreilly.com 28