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AndFree 09-11-148 |
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Free The
Future of a Radical Price Chris
Anderson Hyperion,
2009, 274 pp. ISBN 978-1-4013-2290-8 |
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Chris Anderson is the editor in chief of Wired magazine. He is also the author of an international
best seller, The Long Tail. In this book he makes the case that
businesses can often make more profit by giving things away than by charging
for them. Free is a business strategy
that may be necessary for business survival. The paradox of Free: "People are making lots
of money charging nothing. Not nothing
for everything, but nothing for enough that we have essentially created an
economy as big as a good-sized country around the price of $0.00." (Prologue) "Free is full of apparent contradictions:
You can make money giving things
away. There really is a free lunch. Sometimes you get more than you pay for. (Prologue) The Google Generation has grown up online simply
assuming that everything digital is free.
(Prologue) 1. The
Birth of Free Genessee was only able to open up the market for
Jell-O by handing out free booklets of recipes to homemakers. Gillette sold his razors cheaply to
companies that gave them away as promotional items and he made money on the
blades. Companies give away the cell
phone and sell the monthly plan. But
this century's "free" is a new economic model where the primary
price is zero. This is being driven in
the digital age by the rapidly dropping cost of computer processing power,
bandwidth, and storage. 2. Free 101 - A
Short Course on a Most Misunderstood Word "All forms of Free boil down to variations
of the same thing: shifting money around from product to product, person to
person, between now and later, or into nonmonetary markets and back out
again. Economists call these
'cross-subsidies.'" (20) Examples: • Paid
products subsidizing free products (Loss leaders) • Paying
later subsidizing free now. (Cell
phone contract) • Paying
people subsidizing free people (Kids get in free) • A free
product entices you to buy something else (Buy one get one free) • Third
party market (CBS provides free TV and advertisers pay for it.) • Freemium
(The basic level is free but you can pay for a better version.) • Free
with no expectation of payment (Wikipedia, Freecycle) • A
price of "less than nothing."
You might get paid to use a
product or service, e.g. for purposes of a research or marketing study. 3. The History of Free - Zero,
Lunch, and the Enemies of Capitalism "The story of the twentieth century is
extraordinary social and economic change driven by abundance." "Just as water will always flow
downhill, economies flow toward abundance.
Products that can become commoditized and cheap tend to do so, and
companies seeking profits move upstream in search of new scarcities."
(52) "…as commodities become
cheaper, value moves elsewhere. …the
highest profit margins are usually found where gray matter has been added to
things." (54) "Abundance thinking is not only discovering
what will become cheaper, but also looking for what will become more valuable
as a result of that shift, and moving to that." (54) 4. The Psychology of Free - It
feels good. Too good? Sometimes "free" discredits the item
but other times it doesn't. Price is
all about perception. A lower price is
better for subscribers but a higher price is better for advertising because
it means people value the product enough to pay for it. Paying anything is a disincentive. It raises a flag. We have to make a choice. If the price is zero the flag doesn't go
up. We tend to choose things that
require the least thinking. Charging
any price creates a mental barrier that most people won't cross. Free speeds right past the decision. The difference between Free and almost Free
is monumental. "The imposition of
a price, no matter how low, typically decreases participation, often
radically." (67) Here's one business model: (69) 1. Build
a community around free information and advice on a particular topic. 2. With
that community's help, design some products that people want, and return the
favor by making the products free in raw form. 3. Let
those with more money than time/skill/risk-tolerance buy the more polished
version of those products. (That may
turn out to be almost everyone.) 4. Do it
again and again, building a 40 percent profit margin into the products to pay
the bills." 5. Too Cheap To Matter - The
Web's Lesson: When Something Halves in Price Each Year, Zero is Inevitable Computer processing power, digital storage and
bandwidth are getting too cheap to meter.
(77) Since prices keep
dropping, you can afford to sell it today for what it will be worth
tomorrow. This is called
"anticipating the cheap." (79) "Ideas are the ultimate abundance commodity,
which propagates at zero marginal cost.
Once created, ideas want to spread far and wide, enriching everything
they touch." (83) "And the
more products are made of ideas, rather than stuff, the faster they can get
cheap." (84) 6. "Information Wants To Be Free" - The
History of a Phrase that Defined the Digital Age There is an economic link between technology and
ideas. "Information wants to be free in the same way that life wants to
spread and water wants to run downhill."
(97) "Commodity information (everybody gets the
same version) wants to be free.
Customized information (you get something unique and meaningful to
you) wants to be expensive."
OR "Abundant information
wants to be free. Scarce information
wants to be expensive." (97) The "bits" are virtually free but their
meaning may have a wide range of value, from nothing to priceless. (100) 7. Competing with Free
- Microsoft Learned How to Do It Over
Decades, but Yahoo Had Just Months 8. De-Monetization -
Google and the Birth of a Twenty-First-Century Economic Model Google is the biggest company in history built on
giving things away. It offers nearly
100 products from photo editing software to word processors and spreadsheets,
and almost all of them free. It hands
out a lot of things to make money on a few.
It makes enormous amounts on advertising. New services start with asking what would
be cool? What might people want? How to make money from it is a later
question. Build something people want. Use Free to test whether it works and
people like it. If they do, figure out
what consumers might pay for or how else to make money. (120, Paul Graham, the founder of Y
Combinator, a venture capital firm for small start-ups) Free is Google's default because it reaches the
biggest possible market. Google is
always dreaming up new things to give away.
The challenge is how to convert it to cash. "It's all about engagement into Google
and that if we can get you, at some point in your engagement with Google, to
end up using Google for something that we can monetize, the sums work."
(125, CEO Eric Schmidt) "Everybody can use a Free business model, but
all too typically only the number one company can get really rich with
it." (132) 9. The New Media Models -
Free Media is Nothing New. What Is New
is the Expansion of That Model to Everything Else Online. Six Reasons for Free (141-42)
Ways to make money virtually (for example in
online free games): •
Sell virtual items (like virtual clothes
and power) •
Subscriptions - for a higher category of
games •
Advertising - showing up as billboards and
brand names in games •
Real Estate - virtual property and
upgrades of property •
Merchandise - real stuffed animals that
are in games, such at Webkinz •
Live shows promoted by free music •
Real books promoted by free downloads of
sections or whole books 10. How Big is The Free Economy -
There's More to It Than Just Dollars and Cents "Facebook 'friends' are a classic unit of
reputational currency. The more
'friends' you have, the more influence you have in the Facebook world, and
the more social capital you have to spend." (163) "The value of attention and reputation
is clearly something, or companies wouldn't spend so much on advertising to
influence them." (164) 11. ECON 000 - How a Century-old
Joke Became the Law of Digital Economics In a competitive market, price falls to the
marginal cost, i.e., the cost just above production costs. Today we are building the world's most
competitive market where the marginal cost is close to zero. When a great many people use a product, others
feel compelled to do so also and it creates a monopoly that can charge high
rates (read Microsoft software). On
the contrary, on-line companies can't command monopoly-like prices. Ad rates on Facebook are extremely
low. A lot of people ride for free,
but they make their billions on the few, simply because the few may still be
thousands or millions of people. It is
a matter of scale. If you don't have
the scale, you must get more creative! 12. Nonmonetary Economies - Where
Money Doesn't Rule, What Does? A wealth of information creates a poverty of
attention. (Herbert Simon, 1971) "Every abundance creates a new
scarcity. We tend to value most what
we don't already have in plentitude."
(180) When more products are offered for free, we are
working in an "attention economy" and a "reputation
economy." "Good
recommendations build trust with a readership, and being recommended confers
trust, too. And with trust comes
traffic." (183) On a typical web site ¼ to ½ the traffic comes from
Google searches. People can build
reputational capital and turn it into attention. "What our 'free labor' in an area that
we value grants us is respect, attention, expression, and an
audience." "No wonder the
Web exploded, driven by volunteer labor--it made people happy to be creative,
to contribute, to have an impact, and to be recognized as expert in
something." (189) 13. Waste is (Sometimes) Good - The
Best Way to Exploit Abundance is to Relinquish Control "Today's innovators are the ones who spot
the new abundances and figure out how to squander them. In a good way!" (191) Waste is relative to your sense of
scarcity. The dandelion scatters its
seed indiscriminately and dandelions occur in every sidewalk crack. "Perhaps the best example of a
glorious embrace of waste is YouTube." (193) All the random videos on YouTube are
dandelions seeds in search of fertile ground. (195) You must be discriminating for valuable air time
on CBS News, but on YouTube the cost of failure is miniscule so take
chances. But so far, YouTube has
failed to make money for Google. 14. Free World -
China and Brazil Are the Frontiers of Free.
What Can We Learn from Them? "China is a country where piracy has
won." Chinese music consumers can
find everything they want for free.
"Piracy is a form of zero-cost marketing, which brings their work
to the largest possible audience." (199)
It's up to the celebrity to find ways to convert their celebrity to
cash. If she makes her money on the concert
tour, then her pirated CDs are her best marketing. "Piracy extends to virtually every industry
in china…. Today, an entire industry
exists in China to clone designer goods overnight." (202)
People who can't afford the real things buy the fakes. All the fakes create publicity for the
real. You can even buy fake price tags
and fake receipts. It's the status
that's important. 15. Imagining Abundance - Thought
Experiments in 'Post-Scarcity' Societies, from Science Fiction to Religion "Our brains are wired for scarcity; we are
focused on the things we don't have enough of, from time to money. That's what gives us our drive. If we get what we're seeking, we tend to quickly
discount it and find a new scarcity to pursue. We are motivated by what we don't have, not
what we do have." (213) 16. "You Get What You Pay For" - And
Other Doubts About Free Anderson refutes fourteen arguments against Free. "It's easy to compete with Free: simply
offer something better or at least different from the free
version." People still walk past
the free coffee in the office break room to go spend $4 for a venti latte at
Starbucks. "The way to compete with Free is to move
past the abundance to find the adjacent scarcity. If software is free, sell support. If phone calls are free, sell distant labor
and talent that can be reached by those free calls…. If your skills are being turned into a
commodity that can be done by software,…then move upstream to more
complicated problems that still require the human touch. Not only can you compete with Free in that
instance, but the people who need these custom solutions are often the ones
most willing to pay highly for them." (231) CODA - Free
in a Time of Economic Crisis "If your firm is less than three years old and
under $1 million in revenues, you can use Microsoft's software without charge
under its BizSpark program. When those
companies get bigger, Microsoft is betting that they'll keep using its
software as paying customers. In the
meantime, the program costs Microsoft almost nothing." (239) "Free is not enough. It also has to be matched with Paid. …today's Web entrepreneurs have to invent
not just products that people love but also those that they will pay for. Free may be the best price, but it can't be
the only one." (240) |
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