Here’s my take on Chris Anderson’s forthcoming Future of Free.
First, the notion that businesses can make money by giving something away for free isn’t new by any stroke of the imagination. It is also a pretty well studied phenomenon by economists. I think the earliest mathematical treatment I saw was in R.G.D. Allen’s excellent book on mathematical economics which was published in 1938. He showed that if a firm is selling complements (think razors and blades) it can be profit maximizing to give away the razor and sell the blades. Then of course there’s a post-2000 work on two-sided markets—or multi-sided platforms—which Dick Schmalensee and I have described in detail in Catalyst Code and others have in a recent HBR article, Strategies for Two-Sided Markets. Lots of businesses—from ancient ones like the village matchmaker to new ones like Facebook—create value by getting multiple customer groups who need each other on the same platform. For these businesses it is often profit maximizing to charge one group of the customers little or nothing or maybe even pay them to join the platform. The negative price is actually not uncommon. People who pay off their credit card balances at the end of the month probably make money (if you include the rewards) on the card. And people are paid with content to come to advertising supported sites where their eyeballs are sold to advertisers. The content is only there as bait.
Second, the notion is positively dangerous in the hands of amateurs. As far as I can tell from the write ups—I don’t have the book yet—Anderson has a pretty simplistic view of free. I work with a lot of new platform businesses and the biggest problem they have is figuring out which customers if anyone to charge low, zero, or negative prices to and doing this in a way to make money. The social networking sites have adopted free to users, free to app developers, and not free to advertisers. The jury is really out on whether that model will work in the long run—especially as the expansion of advertising inventory online drives down rates. The other point here is that who gets it for free is often obvious only after the fact. When the charge card industry started in 1950 it was obvious that to be successful one needed people to have the card and merchants to take it; was it obvious that cardholders should get it for free and merchants should pay—only in retrospect.
Third, Anderson is wrong to throw in the free music etc. into this mix. There’s a big difference between Google deciding not to charge searchers, Internet sites showing copyrighted content that they don’t have permission to show and haven’t paid for. One can debate whether copyright protection has gone too far or not, and what the boundaries of fair use are, but an awful lot of stuff is free because it has been stolen. Maybe musicians will need to develop a different business model based on “free” if they can’t prevent people from ripping off their songs. But that’s different than the case of complementary goods and two-sided platforms where there’s an economic rationale for businesses to voluntarily give things away for free.
“Free” could be the next “just build share” which entrepreneurs followed like lemmings in the late 1990s. Remember—just get a lot of users and figure out the business model later.
By the way, you can read this blog for free. You might think from Anderson’s book that this is something new. In fact people have been writing and speaking for free for many millennia. It would be hard to find a worse candidate for the claim that a business model is new and revolutionary.
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