Have you ever tried typing the word “free” into your Yahoo! or Google search engine? No? Well, if you were to try it right now, two very cool things would happen.
First, your search would deliver a long list of links to nearly four billion separate Web pages. And the vast majority of these could be viewed by you at no charge. Second, you’ll discover that the search itself costs you nothing — even though you’ve just received unfettered access to more information than you could ever possibly hope to read.
For the average consumer, this instant access to unlimited free information and media at one’s fingertips is clearly the greatest thing since sliced bread. No question, the Internet is a goldmine for consumers. But how does all this “freeness” help those of us who are trying to run a business and — heaven forbid — hoping to make a profit while doing it?
Truthfully, in most businesses today, “free” tends to be a dirty word. It’s widely assumed that there’s no profit in free stuff. Free music is blamed for ruining the record industry. Free news on the Web is leading to the decline of the newspaper industry. And so on.
But if you look more closely at the exploding phenomenon of freeness, as author Chris Anderson recently did, you’ll find that a handful of innovative businesses are actually embracing the concept of “free,” and are doing quite nicely for themselves as a result.
Anderson, who currently serves as editor-in-chief at Wired magazine, is widely regarded as one of America’s most engaging and influential writers on business and technology. His previous book, The Long Tail, looked at how the Internet is rapidly creating unlimited shelf space for online retailers such as Amazon and iTunes. In his latest book Free: The Future of a Radical Price, Anderson shows how the concept of “free” is evolving in transformative ways that can no longer be ignored. Indeed, the idea of “free” is creating dozens of new industries and, as Anderson notes, “Many people are making lots of money by charging nothing.” This summary explains why, and how, this is happening.
A Brief History of “Free”
We’ll begin this summary, as Anderson starts his book, with a quick overview of how the concept of “free” was applied during the previous century. By taking a quick look in the rear-view mirror, you’ll then start to see how “free” is changing in very profound ways.
Anderson begins with the story of a soon-to-be-famous American inventor named King Gillette who, at the age of 40, was growing increasingly frustrated and disillusioned. The year was 1900, and despite all of his energy and ideas, he had little to show for his work. He was forced to take a job at a bottle cap company to pay his bills. And it was there that Gillette had a game-changing idea: Invent something people use and throw away.
One day, while he was shaving with a straight razor that was so worn it could no longer be sharpened, the idea came to him. “What if the blade could be made of a thin metal strip?” he wondered. Rather than spending time maintaining the blades, people could simply discard them when they became dull. A few years of metallurgy experimentation later, the disposable-blade safety razor was born. But it didn’t take off immediately. In his first year, 1903, Gillette sold a total of 51 razors and 168 blades. At first, he tried every marketing gimmick he could think of, but his sales didn’t take off until he started giving away the razors for free. Naturally, the razors were useless by themselves, but by injecting them into the marketplace, Gillette was creating demand for disposable blades.
A few billion disposable razor blades later, King Gillette’s business model is now the foundation of entire industries: Give away the cell phone, sell the monthly plan. Make the videogame console cheap and sell expensive games. Install fancy coffeemakers in offices at no charge so you can sell companies expensive coffee packets. Hence, in the second half of the last century, a disposable consumer culture emerged, and flourished.
The Future of “Free”
According to Anderson, the most important story of the twentieth century was the extraordinary social and economic change that was driven by abundance. Not that long ago commodities used to be scarce and people were loathe to waste them. Even something as simple as table salt used to be considered a luxury good. Yet now it’s simply given away with any meal in a fast-food restaurant — too cheap to meter. The effects of globalization during the last century were such that many commodities, and the labor needed to fashion them into finished goods, became highly abundant, almost overnight. Today, basic necessities such as clothing can be made so cheaply as to be essentially disposable. For example, in 1900, the average American owned just eight shirts. Today, we can buy twenty five shirts for the (inflation adjusted) price of what one cost back then. The same is true of furniture, appliances and other consumer goods.
Thanks to King Gillette, the idea that you can make money by giving something away is no longer radical. But until the twenty-first century, practically everything one received for “free” was really just the result of what economists would call a cross-subsidy: You’d only get something for free (e.g. a razor) if you bought another (e.g. a disposable blade). Over the past few years, however, Anderson has observed the emergence of a different sort of “free.” The new model is based not on cross-subsidies but on the fact that the cost of products themselves is falling fast, as a consequence of the rapid pace of globalization. It’s as if the price of certain kinds of goods and services has now dropped so close to zero that the current generation of entrepreneurs is now able to give away both the razor and the blade, and still make their money on something else entirely.
Nowhere is this new business model more prevalent than on the World Wide Web, because the underlying technologies that power it (i.e. processing power, digital storage and bandwidth) are literally becoming cheaper by the second. Consider this: the speed at which data can be transferred over fiber-optic cables is doubling every nine months. Which means the cost of moving data is dropping by 50%, every nine months. Consider too the cost of the processor chips that power our computers. These processors are made up of billions of tiny transistors. And in 1961, a single transistor cost $10. By 1978, it was ten cents. Today, a transistor costs about 0.0000015 cents.
In other words, the cost of a transistor is now effectively too cheap to meter.
“Never in the course of human history have the primary inputs to our economy fallen in price so dramatically,” writes Anderson. “This is the engine behind the new ‘free’, which goes far beyond an old school marketing gimmick or cross-subsidy. The cost of anything built on these digital technologies will always go down. And keep going down, until it is as close to zero as possible.” This opens up a whole new world of possibilities.
“Free” is not Just About Advertising
According to Anderson, one of the biggest fallacies of “free” on the Web is that it’s only about advertising. In other words, the only reason you can find so much free stuff online is because advertisers are subsidizing the content. While it’s true that advertising-based business models dominated the first era of the Web, other business models have since become just as ubiquitous. For example, more and more companies are starting to give content away for free initially, and then charging users for a premium subscription that includes extra bells and whistles after they’re already hooked.
The other myth about online advertising is the assumption that the market is already saturated. “Surely the advertising pie can only be so big,” warn the critics.
Although that may be true in theory, insofar as Anderson is concerned we’ve only just begun to scratch the surface and it’s not at all clear how much bigger the online advertising pie can get. For instance, Google has shown that online advertising can be different enough from print advertising (i.e. it’s measurable, targeted, paid only for performance) to attract an entirely new class of advertiser: small and medium-sized businesses buying “key words” for mere pennies a click. In this way, says Anderson, Google isn’t just taking a big slice of the advertising pie. It’s also making a bigger pie.
How to Compete with “Free”
Again, while “free” online content is clearly a boon for consumers, those forward-thinking businesspeople among us who are willing to embrace this “radical” new economy have no reason to despair. Free is not quite as simple — or as stupid — as it sounds, says Anderson. Just because products are free doesn’t mean that someone, somewhere, isn’t making huge gobs of money. Of course, as we read above, Google is the prime example of this. Yes, Google may be free for consumers to use. But by selling “value-added” subscriptions, key word-based advertising to businesses, as well as information about consumer trends, Google is capitalizing on “free” like no other company today.
The trick, quite simply, lies in finding ways to match “free” with “paid.” Just as King Gillette’s free razors only made business sense when paired with expensive, disposable blades, today’s online entrepreneurs will have to invent not just products and services that people love (e.g. Twitter, YouTube), but also ones they will pay for. “Free” may be the best price to attract droves of consumers initially, but clearly it can’t be the only one.
“The way to compete with people and businesses who are giving stuff away for free is to move past the abundance to find the adjacent scarcity,” advises Anderson. For example, if software is free (either because of piracy, or because your customers are increasingly moving toward open-source platforms), then sell support. If phone calls are becoming increasingly free (because of services like Skype), then sell the distant labor and talent that can be reached via those free calls (e.g. set up a call centre in India). If your skills are being turned into a commodity that can easily be done by software (hello travel agents) then move upstream to offer more dynamic and complicated solutions that still require a human touch (e.g. customized eco/adventure tours). Not only can you compete with free in these instances, but you’ll also find that the same customers who are looking for custom solutions are often the ones who are most willing to pay for them.
In terms of competing with free, it should also be noted that while the cost of online content (i.e. “bits” of information) continues to plummet towards zero, this isn’t always the case in the real world, where actual atoms (i.e. the physical “stuff” all around us) will always dominate. As such, entrepreneurs will need to find ways to give away bits, or digital content, as a means of driving up the cost of atoms, or real world goods and services. As an example of this, we need look no further than Anderson’s own book, which he is giving away for free in digital form. While the author suggests he is “perfectly happy” to give away copies of Free online because it costs him nothing to distribute the content, the widespread dissemination of his ideas is clearly driving up the price of his in-person speeches and customized business consulting offerings, thereby enabling him, he says, to “save enough money to send all five kids to college.”
Of course, Chris Anderson is not the only knowledge worker/artist who’s making money this way. The Internet may be destroying the value of most digital content, but it’s also simultaneously driving up the value of certain kinds of artistry, including live performances. Consider the example of Radiohead’s recent In Rainbows album, which the band gave away online on a “pay what you want” basis. Sure, they made little money on the album itself. But it triggered the sale of 1.2 million tickets for a post-album tour. Had Radiohead chosen to charge full price for the album, it’s doubtful their ticket sales would have been as strong.
Still, extracting a sustainable business model from “free” is not always easy (just ask the folks at Twitter, who have yet to turn a profit from their fantastically popular [and free, of course] 140-character instant messaging service). So, needless to say, giving cool content away for free online is not in and of itself a magic bullet. Doing so might create more attention for your business, but it will not make you rich by itself. “You still have to think creatively about how to convert all that attention into cash,” says Anderson. “Every company and every project will require a different answer to that challenge. And sometimes, it just won’t work at all. But this is just like everything else in life. There’s no sense in blaming ‘free’ for a lack of imagination, or a fear of failure,” he says.
As we’ve just seen, sometimes there really is such a thing as a free lunch. While many people may still have their doubts, Chris Anderson’s latest book proves that there’s already a global economy that’s grown up around a base price of zero, and it’s growing. Those who understand and embrace the new “free” economy will command tomorrow’s markets and disrupt today’s (indeed, they’re already doing it). Anderson’s book is about those people, and what they can teach us about the past and future of a truly radical price.