Future of Business FreeEnomics
At the age of forty, King Gillette was a pissed off inventor, a sour anticapitalist, and a salesman of cork-lined bottle caps. It was 1895, and despite ideas, energy, and loaded folks, he had small to show for his work.
He blamed the evils of market competition. Indeed, the year before he had broadcast a book, The Human Drift, which disagreed that all industry should be taken over by a single enterprise owned by the general public and that millions of Americans should live in a giant town called Metropolis powered by Niagara Falls.
His head honcho at the bottle cap company, in the meantime, had only one piece of recommendation : Invent something folk use and dump. One day, whilst he was shaving with a straight razor that was so worn it could not be sharpened, the idea came to him.
What if the blade might be made from a thin metal strip? Instead of passing time keeping up the blades, men could simply drop them when they became lifeless. Some years of metallurgy experimentation later, the disposable-blade safety razor was born. In its first year, 1903, Gillette sold a total of 51 razors and 168 blades. Over the next twenty years, he attempted each selling gimmick he could think about.
He put his very own face on the package, making him both mythical and, some folk thought, fictional. He sold millions of razors to the regiment at a steep discount, hoping the habits squaddies developed at war would carry over to peacetime. He sold razors in bulk to banks so they could dump them with new deposits ( “shave and save” campaigns ). Razors were bundled with everything from Wrigley’s gum to packets of coffee, tea, spices, and marshmallows. The freebies helped sell those products, but the method helped Gillette even more.
By giving away the razors, which were pointless by themselves, he was making requirement for disposable blades. Some bn. blades later, this enterprize model is now the foundation of complete industries : Give away the cell telephone, sell the monthly plan ; make the videogame console inexpensive and sell dear games ; install fancy coffeemakers in offices at no charge so you can sell bosses costly coffee sachets. Video produced by Annaliza Savage and edited by Michael Lennon.
Thanks to Gillette, the idea you can earn money by giving something away isn’t radical. But till lately, almost everything “free” was actually just the result of what economic gurus would call a cross-subsidy : You’d get one thing free if you purchased another, or you’d get a product free only if you paid for a service. Over the last decade a different kind of free has appeared. The new model is based not on cross-subsidies the shifting of costs from one product to another but on the indisputable fact that the price of products themselves is falling fast. It’s as if the cost of steel had dropped so close to nil that King Gillette could give away both razor and blade, and make his money on something else wholly. You know this freaky land of free as the Internet .
10 years and a half into the great online experiment, the last discusses over free vs pay online are ending. In 2007 The NY Times went free ; this year, so will a lot of the WSJ. ( the leftover fee-based parts, new owner Rupert Murdoch said, will be “really special and, sorry to tell you, doubtless more expensive.” This calls to mind one version of Stewart Brand’s original saying from 1984 : “Information wants to be free. Info also wants to be costly That tension will not go away.” ). Once a selling gimmick, free has emerged as a full-fledged economy. Offering free music proved successful for Radiohead, Trent Reznor of 9 In. Nails, and a swarm of other bands on MySpace that grasped the audience-building merits of nil.
The fastest-growing parts of the gaming industry are ad-supported casual games online and free-to-try massively multiplayer online games. Just about everything Google does is free to customers, from Gmail to Picasa to GOOG-411. The increase of “freeconomics” or as I say FreeEnomics is being driven by the underlying technologies that power the Net . Just as Moore’s law dictates a unit of processing power halves in price each eighteen months, the cost of bandwidth and storage is dropping even faster. Which is to assert, the trend lines that establish the price of engaging in business online all point the same way : to zero.
But tell that to the poor CIO who just shelled out 6 figures to buy another rack of servers. Technology sure does not feel at liberty when you are purchasing it by the gross.
Yet if you look at it from the opposite side of the fat pipe, the economics change. That pricey bank of hard drives ( fixed costs ) can serve thousands of users ( marginal costs ). The Net is all about scale, finding paths to attract the most users for centralized resources, spreading those costs over larger and bigger audiences as the technology gets more able. It isn’t about the price of the kit in the racks at the info center ; it’s about what that kit can do. And each year, like some variety of wizardry clockwork, it does more for less and less, bringing the questionable costs of technology in the units that we people consume closer to 0. As much as we whinge about how pricey things are getting, we are encircled by forces that are making them less expensive. Forty years back, the principal nutritional problem in America was hunger ; now it’s obesity, for which we’ve the Green Revolution to thank. 40 years back, charity was controlled by clothing drives for the poor.
Now you can get a T-shirt for under the cost of a mug of joe, thanks to China and worldwide sourcing.
So too for toys, gadgets, and commodities of each sort. Digital technology benefits from these dynamics and from something else even stronger : the 20th-century shift from Newtonian to quantum machines. We are still just starting to exploit atomic-scale effects in revolutionary new materials semiconductors ( processing power ), ferromagnetic compounds ( storage ), and fiber optics ( bandwidth ).
In the arc of history, all 3 substances are still new, and we’ve a lot to study them. We are only a couple of decades into the discovery of a new world. What does this mean for the concept of free? Well, just take one example. And the surprising thing is that no-one was stunned ; plenty of had believed infinite free storage was the case. For excellent reasons : It’s now clear that most everything Net technology touches starts down the trail to free, at least as far as we purchasers are anxious.
Storage now joins bandwidth ( YouTube : free ) and processing power ( Google : free ) in the race to the bottom. Basic economics tells us that in a competitive market, price falls to the debatable cost. There has never been a more competitive market than the web, and each day the questionable value of digital info comes closer to nothing.
One of the old jokes from the late-’90s bubble was that there are only 2 numbers on the web : infinity and nil.
The 1st, at least as it applied to market valuations, proved fake. The result’s that we presently have not one but 2 trends driving the spread of free business models across the economy. The 1st is the extension of King Gillette’s cross-subsidy to more industries. Ryanair, for example, has interrupted its industry by outlining itself more as a full-service travel agency than a seller of airline seats ( see “How Can Air Travel Be Free?” ). The second trend is just that anything that touches digital networks quickly feels the results of falling costs. There’s nothing new about technology’s deflationary force, but what’s new is the rate at which industries of all sorts are becoming digital companies and therefore ready to exploit those economics. When Google turned advertising into a software application, a classic services business formerly primarily based on human economics ( things get more costly yearly ) switched to software economics ( things get less expensive ).
So, too, for all kinds of things from banking to betting. The instant a company’s first costs become things based in silicon, free becomes not merely an option but the unavoidable destination.
40 years back, Caltech professor Carver Mead identified the corollary to Moore’s law of ever-increasing computing power. And so it probably did, going from tens of greenbacks in the 1960s to roughly 0.000001 cent today for every one of the transistors in Intel’s latest quad-core. Waste is a mucky word, and that was particularly true in the IT arena of the 1970s. A whole generation of PC pros had been taught that their job was to dole out dear computer resources sparingly. In the glass-walled facilities of the mainframe age, these systems operators exercised their power by selecting whose programs should be permitted to run on the expensive computing machines. Their role was to preserve transistors, and they not only decided what was deserving but also inspired programmers to make the least expensive use of their PC time.
As a consequence, early developers devoted as much code as feasible to running their core algorithms efficiently and gave tiny thought to user interface.
This was the era of the command line, and the sole conceivable reason somebody may have wished to employ a PC at home was to organize recipe files. In fact, the planet’s first private PC, a stylish kitchen appliance offered by Honeywell in 1969, came with integrated counter space. They scratched their heads how does one waste PC power? It took Alan Kay, an engineer working at Xerox’s Palo Alto Research Center, to show them. Instead of preserve transistors for core processing functions, he developed a P. C. Idea the Dynabook that would frivolously employ silicon to do stupid things : draw icons, windows, pointers, and even animations on the screen. The point of this profligate eye candy? Simplicity of use for regular people, including youngsters.
Kay’s work on the graphical user interface became the muse for the Xerox Alto, and then the Apple Macintosh, which modified the world by opening computing to the remainder of us.
( We, in turn, found no deficit of things to do with it ; tellingly, organizing recipes wasn’t high on the list. ). Naturally, PCs were not free then, and they aren’t free today.
But what Mead and Kay accepted was the transistors in them the atomic units of computation would become so countless that on a customized basis, they’d be close enough to costless that they would as well be free. That meant software writers, liberated from troubling about limited computational resources like memory and CPU cycles, may become more aspiring, targeting higher-order functions like user interfaces and new markets like entertainment. And that meant software of broader appeal, which brought in more users, who in turn found even more uses for PCs. Thanks to that wasteful throwing of transistors against the wall, the world was modified. What’s engaging is that transistors ( or storage, or bandwidth ) do not have to be absolutely free to invoke this effect. At a certain point, they are inexpensive enough to be securely overlooked. The Greek thinker Zeno wrestled with this concept in a marginally different context.
As you run, you split the distance to the wall, then split it again, and so on. But if you continue to subdivide space forever, how are you able to ever essentially reach the wall? ( the solution is that you cannot : Once you are inside some nanometers, atomic repulsion forces become too robust for you to get any closer. ). In economics, the parallel is this : If the unitary cost of technology ( “per megabyte” or “per megabit per second” or “per thousand floating-point operations per second” ) is halving each eighteen months, when does it come close enough to nil to claim that you have arrived and can safely round down to nothing? The answer : virtually always earlier than you suspect.
What Mead accepted is a mental switch should flip as things head toward 0.
Though they may never become wholly free, as the price drops there’s great advantage available in treating them as if they were free. Not so inexpensive to meter, as Atomic Energy Commission chief Lewis Strauss declared in a different context, but too inexpensive to matter.
Indeed, the history of technological invention has been marked by people spotting such price and performance trends and getting in front of them.
From the patron’s point of view, though, there’s a large difference between cheap and free. Charge a single cent for it and you are in a completely different business, one of clawing and scratching for each client. The psychology of “free” is robust indeed, as any marketer will tell you.
This difference between inexpensive and free is what financier Josh Kopelman calls the “penny gap.” Folks think demand is elastic and that volume falls in a straight line as price increases, but the reality is that nil is one market and any other price is another. In a lot of cases, that is the difference between a great market and none whatsoever.
The massive mental opening between “almost zero” and “zero” is why micropayments failed. The issue of infinite storage wasn’t if but when.
Traditionalists wring their hands about the “vaporization of value” and “demonetization” of whole industries.
The success of craigslist’s free listings, as an example, has hurt the paper classified ad business. But that lost paper revenue is definitely not ending up in the craigslist coffers. In 2006, the site earned a computed $40 million from the few things it charges for.
That is about twelve p.c of the $326 million by which classified ad income fell that year. But free isn’t quite as straightforward or as dumb as it sounds. Because products are free doesn’t suggest that somebody, somewhere, isn’t making big gobs of cash. The financial advantages of craigslist are enormous as well, but they are distributed among its many thousands of users instead of funneled straight to Craig Newmark Inc To follow the cash, you need to shift from a basic view of a market as a matching of 2 parties buyers and sellers to a wider sense of an ecosystem with plenty of parties, only some of which exchange money. The commonest of the economies built around free is the three-party system. Here a 3rd party pays to take part in a market made by a free exchange between the 1st 2 parties. Radio is “free to air,” and so is much of TV. In a way, what the Net represents is the extension of the media business model to industries of all sorts.
This isn’t simply the idea that advertising will pay for everything. There are a lot of methods that media firms earn cash around free content, from selling info about patrons to brand licensing, “value-added” subscriptions, and direct ecommerce ( see How-To Wiki for a total list ). Now a whole ecosystem of Net corporations is growing up round the same set of models. Between new techniques firms have found to subsidize products and the falling cost of conducting business in a digital age, the occasions to adopt a free enterprize model of some sort haven’t been bigger. But which one? And how many are there? Doubtless hundreds, but the priceless economy can be broken down into 6 broad classes. This term, coined by VC Fred Wilson, is the root of the subscription model of media and is an example of the most typical Internet business models. It can take a variety of forms : varying tiers of content, from free to dear, or a premium “pro” version of some site or software with more features than the free version ( think Flickr and the $25-a-year Flickr Pro ). Isn’t it just the free sample model found everywhere from scent counters to street corners? Yes, but with a pretty serious twist. The normal free sample is the promotional candy bar handout or the nappies mailed to a new mother. Since these samples have real costs, the maker gives away only a small quantity expecting to hook clients and excite requirement for plenty more.
Apart from digital products, this proportion of free to paid is reversed. A common online site follows the one P.c Rule one % of users support all of the rest. In the freemium model, that implies for each user who pays for the premium version of the site, ninety nine others get the basic free version. The reason why this works is that the price of serving the 99 p.c is close enough to 0 to name it nothing.
Then came the following wave : paid inclusion in search results, paid listing in info services, and lead generation, where a 3rd party pays for the names of folk interested in a certain subject. Now firms are trying everything from product placement ( PayPerPost ) to pay-per-connection on social networks like Facebook.
When Wal-Mart charges $15 for a new hit DVD, it is a loss leader. The company is offering the DVD below cost to lure you into the store, where it intends to sell you a washing machine at a profit.
Dear wine subsidizes food in an eaterie, and the first “free lunch” was a free meal for anyone that ordered one lager in San Francisco bars in latter 1800s. On a busy corner in So Paulo, Brazil, street sellers pitch the newest “tecnobrega” CDs, including one by a hot band called Banda Calypso. Like CDs from most street sellers, these didn’t come from a record label. Calypso distributes experts of its CDs and CD liner art to street seller networks in cities it plans to tour, with full agreement the sellers will copy the CDs, sell them, and keep all of the money. The band is actually in the performance business and business is good. Traveling from city to the town this way, predated by a wave of supercheap CDs, Calypso has filled its shows and paid for a personal jet.
The sellers generate literal street cred in each city Calypso visits, and its omnipresence in the urban soundscape suggests that it is getting massive crowds to its rave / dj / concert events. Free music is just hoopla for a much more sweet tour business.
What’s free : things that may be distributed without a discernible cost to any one.
This describes nothing so well as online music. This could be a case where the product has become free due to sheer industrial gravity, with or without an enterprize model. That force is so powerful that laws, guilt trips, DRM, and each other barrier to robbery the labels can think about have failed. Some artists give away their music online as a strategy of selling concerts, goods, licensing, and other paid fare. But others have simply accepted that, for them, music isn’t a moneymaking business.
It is something they do for other reasons, from fun to creative expression. Which, naturally, has always been true for most musicians any way. Free to whom : all users, since the act of using these sites and services basically creates something with value.
You can get free porn if you solve some captchas, those scrambled text boxes used to dam bots. What you are actually doing gives answers to a bot employed by spammers to get access to other sites which is worth a lot more to them than the bandwidth you’ll consume browsing photographs. In each case, the act of using the service creates something with value, either enhancing the service itself or making information that may be helpful someplace else.
What’s free: any product that entices you to pay for something else. Free to whom: everyone willing to pay eventually, one way or another.
What’s free : the entire enchilada, be it open-source software or user-generated content. From Freecycle ( free secondhand products for anyone that will take them away ) to Wikipedia, we are discovering that money isn’t the sole motivator. Altruism has always existed, but the Net gives it a platform where the actions of people can have worldwide impact.
In a sense, zero-cost distribution has turned sharing into a sector.
In the financial economy it all looks free indeed, in the financial economy it’s like prejudiced competition but that asserts more about our shortsighted methods of measuring worth than it does about the worth of what’s made. Enabled by the miracle of excess, digital economics has turned traditional economics upside down. Read your school textbook and it is sure to outline economics as “the social science of choice under scarcity.” the complete field is constructed on studying trade-offs and how they are made. Milton Friedman himself reminded us time and time again that “there’s no such thing as a free lunch. First, a free lunch does not actually mean the food is being given away or that you may pay for it later it might just mean some other person is picking up the tab.
2nd , in the digital realm, as we’ve seen, the main feedstocks of the data economy storage, processing power, and bandwidth are getting less expensive by the day.
2 of the main insufficiency functions of normal economics the questionable costs of producing and distribution are rushing headlong to zip. It’s as if the eaterie all of a sudden did not have to pay any food or labor costs for that lunch.
Certainly economics has something to claim about that? The word is externalities, an idea that holds that money isn’t the sole deficiency around the planet. Chief among the others are your time and respect, 2 factors that we’ve always known about but have only in the near past been able to measure correctly. The “attention economy” and “reputation economy” are too fuzzy to merit an educational office, but there’s something real at the heart of both. Thanks to Google, we now have a handy way to convert from reputation ( PageRank ) to order ( traffic ) to cash ( adverts ).
Anything you can doggedly convert to cash is a type of currency itself, and Google plays the task of central banker for these new economies. There’s, possibly, a limited supply of reputation and attention worldwide at any time in time. These are the new scarcities and the arena of free exists often to acquire these valuable assets for the sake of an enterprize model to be identified later. Free shifts the economy from a target only that which can be quantified in bucks and cents to a more practical accounting of everything we actually price today. Between digital economics and the wholesale embrace of King’s Gillette’s experiment in price shifting, we are entering a time when free will be seen as the standard, not an absurdity.
How huge a deal is that? Well, think about this analogy : In 1954, at the start of nuclear power, Lewis Strauss, head of the Atomic Energy Commission, promised that we were entering an age when electricity would be “too inexpensive to meter.” glaringly, that did not occur, often as the hazards of nuclear energy hugely increased its costs. But what if he’d been right? What if electricity had in truth become just about free?The answer is that everything electricity touched which is to claim virtually everything would have been transformed. Instead of balance electricity against other sources of energy, we’d use electricity for as many things as we could we’d waste it, in reality, because it might be too inexpensive to fret about. All buildings would be electrically heated, never mind the thermal conversion rate. We’d all be driving electrical automobiles ( free electricity would be motivation enough to develop the efficient battery technology to store it ).
Giant desalination plants would turn seawater into all of the freshwater any one could need, irrigating massive inland swaths and turning deserts into fruitful acres, most of them making biofuels as a less expensive store of energy than batteries.
Relative to free electrons, traditional fules would be seen as ludicrously expensive and unclean, and so carbon emissions would plunge. The phrase “global warming” would have not entered the language.
Today it’s digital technologies, not electricity, that have become too cheap to meter. It took decades to shake off the assumption that computing was supposed to be rationed for the few, and we’re only now starting to liberate bandwidth and storage from the same poverty of imagination. But a generation raised on the free Web is coming of age, and they will find entirely new ways to embrace waste, transforming the world in the process. Because free is what you want — and free, increasingly, is what you’re going to get .
Tags: advertising, business, companies, digital, economics, free, free to whom, freeconomics, FreeEnomics, future of business, marginal, marketing, media, money, nevertheless, percent, technology, users, web, webeconomics, webenomics