Freeconomics
Until recently, most “free” commericial products were the result of a “cross-subsidy”: You’d get one thing free if you bought another, or you’d get a product free only if you paid for a service.
The costs of products on the Web are falling fast.
Offering free music proved successful for Radiohead, Trent Reznor of Nine Inch Nails,etc. The fastest-growing parts of the gaming industry are ad-supported casual games online and free-to-try massively multiplayer online games. Virtually everything Google does is free to consumers, from Gmail to Picasa to GOOG-411.
Moore’s law dictates that a unit of processing power halves in price every 18 months, the price of bandwidth and storage is dropping even faster.
40 years ago, the principal nutritional problem in America was hunger; now it’s obesity, for which we have the Green Revolution to thank. Forty years ago, charity was dominated by clothing drives for the poor. Now you can get a T-shirt for less than the price of a cup of coffee, thanks to China and global sourcing. So too for toys, gadgets, and commodities of every sort.
Digital technology benefits from these dynamics and from the 20th-century shift from Newtonian to quantum machines. We’re just beginning to exploit atomic-scale effects in new materials — semiconductors (processing power), ferromagnetic compounds (storage), and fiber optics (bandwidth).
Last year, Yahoo announced that Yahoo Mail, its free webmail service, would provide unlimited storage.
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 marginal cost, and every day the marginal cost of digital information comes closer to nothing.
Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely different business.
In the traditional media model, a publisher provides a product free (radio & television), or nearly free (newspapers & magazines) to consumers, and advertisers pay to ride along.
There are dozens of ways that media companies make money around free content, from selling information about consumers to brand licensing, “value-added” subscriptions, and direct ecommerce. Now an entire ecosystem of Web companies is growing up around the same set of models.
The priceless economy can be broken down into six broad categories:
1. “Freemium.” What’s free: Web software and services, some content. Free to whom: users of the basic version. (Think Flickr and the $25-a-year Flickr Pro.) A typical online site follows the 1 Percent Rule — 1 percent of users support all the rest.
2. Advertising. What’s free: content, services, software, and more. Free to whom: everyone. Examples: pay-per-pageview banners, pay-per-click text ads, pay-per-transaction “affiliate ads,” site sponsorships, paid inclusion in search results, paid listing in information services, lead generation (where a third party pays for the names of people interested in a certain subject), product placement (PayPerPost), pay-per-connection on social networks, etc.
3. Cross-subsidies. 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. Expensive wine subsidizes food in a restaurant. In any package of products and services, the price of each individual component is often determined by psychology, not cost. Your cell phone company may not make money on your monthly minutes — it keeps that fee low because it knows that’s the first thing you look at when picking a carrier — but your monthly voicemail fee is pure profit.
4. Zero marginal cost. What’s free: things that can be distributed without an appreciable cost to anyone. Free to whom: everyone. (Best example: online music.)
5. Labor exchange. What’s free: Web sites and services. Free to whom: all users, since the act of using these sites and services actually creates something of value. When rating stories on Digg, voting on Yahoo Answers, or using Google’s 411 service, the act of using the service creates something of value, either improving the service itself or creating information that can be useful somewhere else.
6. Gift economy. What’s free: anything & everything, be it open source software or user-generated content. Free to whom: everyone. From Freecycle (free secondhand goods for anyone who will take them away) to Wikipedia, money isn’t the only motivator.
Thanks to Google, we now have a handy way to convert from reputation (PageRank) to attention (traffic) to money (ads). There is a limited supply of reputation and attention in the world at any point in time. These are the new scarcities — and free exists mostly to acquire these valuable assets.
“Free! Why $0.00 Is the Future of Business,” by Chris Anderson