Comments for Beware of Freeconomics

Beware of Freeconomics

2008-02-26T21:43:14Z

A few weeks ago we published a piece on this blog entitled The Danger of Free, in which we discussed the rise of free - a marketing strategy where digital products are given away. This month's issue of Wired magazine features a cover story on the topic by editor-in-chief Chris Anderson. The article is a preview of his forthcoming book, called (you guessed it) Free. However in this post we look at two issues that make this new economic model rather worrisome: monopolistic markets and complex transactions.

]]> Chris and other advocates of freeconomics argue that with costs of digital products rapidly dropping, it is best to give them away for free. This ensures customer commitment, because people would much rather get stuff for free than pay even a penny for it. Chris cites examples like free web mail, free DVR, free 411 and even $20 airline tickets (not quite free, but getting close) as evidences of the emergence of freeconomics.

While it is true that people like free stuff and it is true that large companies can afford to give away stuff for free, what is not clear yet is whether freeconomics is a good thing.

Monopolistic Markets: The Tale of GMail

One of the main examples that Chris cites is web mail. Yahoo! had a free version with limited space and charged for extra storage. Then Google came along and made email free along with a ton of extra storage. So some people (albeit mostly early adopters at this point) moved away from Yahoo! and began using GMail. But the trend was apparent, so Yahoo! had no choice but to add more storage and make it all free to stay competitive. Seems like a clever move by Google and a win for the customer. But is this a fair tactic?

The argument that it cost Google nothing to develop and offer GMail is wrong. Likely it costs millions of dollars each year. The fact of the matter is that GMail was offered for free mostly because Google could afford it. This is a standard monopolistic tactic used to enter a new market - drive the price down (in this case to $0) and kill off the competition. Yahoo! was actually first to market and had a perfectly good product with a fair model: they offered a basic product for free and a premium product with more storage for a price. But when Google made its move, Yahoo! could not compete.

Monopolistic Markets: The Tale of DVR

Another example used in the article is that of digital video recording devices (DVR). Comcast gives out DVRs for free, just like cell phone companies give out basic cell phones for free and then make up the money with the service charges. Perhaps DVRs are a bit of a stretch, but this example is very different from GMail. This is a case of something given away for free in order to get the customer to pay for service - and the cost is recovered over time. It is not the same as when a company offers a product for free to enter a new market.

Yet, the other aspect of free is quality. Anyone who owns a Comcast DVR knows that humans have never invented a worse remote control. It is just bad. Even with my masters degree in computer science, it took me a long time to master it. Free is not always good. Sooner, rather than later, free might deliver a punch on quality. If it's free, put less engineers on it. If it's free, then why do we need to fix bugs? It's free - so this is good enough.

Monopolistic Markets: The Tale of the Unfunded Startup

Perhaps the biggest worry of free are startups. To begin with, how do you compete with free? Suppose someone has a great idea for improving web mail. Entering the market is really difficult. A lot of inertia is now behind Google and in the new world of freeconomics, you can no longer compete on price. Not that long ago the concept of better and cheaper allowed startups to make the bet. But now that cheaper has been replaced with free, that axis is shut out.

Even more problematic is funding. How do you fund a startup that a priori can not charge the user? One might argue that we're now living in an ads-only monetization world, which of course we are, but things are not that simple. First, how many startups are actually making money on ads? Sure Google is doing great, but is Yahoo!? We used to live in a world where Flickr could charge $25 per year for premium use. Now we are talking about a world where Flickr has to be completely free to everyone and have unlimited storage to survive. What's the model for ads next to your own pictures?

The entire model sounds broken and certainly venture capitalists are going to be cautious until proven methods of making money arise. This is a bit of a chicken and egg problem, but in the meantime there may be an impact on innovation. If the monetization is difficult and financial upside is unclear, entrepreneurs will think twice about jumping into the game.

Complex Transactions: The Tale of The Middle-Man

Nothing good can come from a monopoly. It smiles at us first by giving a carrot, but the stick is sure to follow. Yet, there is another worrisome aspect about freeconomics - the middle man. To understand the worry, consider any company that makes an ad-supported product. The man in the middle is the ad network. You have the core product that the company makes and you have the audience that is interested in the product, but does not want to pay for it. Here come the ads - a panacea for the problem.

But is it really? We are in an economic downturn and suddenly companies do not want to spend money on advertising. So your business is immediately impacted, even though the demand for your product has not diminished. How strange is that? Even as your customer base grows, you'll still be losing money.

The fundamental problem is that every business needs to now learn the intricacies of advertising. Not only do you need to be good at delivering your core product, but you need to be really good at placing advertising on top it. You need to make the tough choice of using someone else's ads or building your own ad network, which is a costly proposition.

Complex Transactions: The Tale of, well... Complexity

Speaking broadly, freeconomics leads to a family of indirect monetization techniques. Chris cites an example of a European airline that charges people only $20 for the ride. The rest of the money they make up on meals, drinks, priority boarding, credit card handling, advertising revenue, etc. This sounds incredibly complex for both the business and the customer.

The cost of inventing and accounting for all these different small channels of revenue is high. And to the customer it's just a headache. Oh, you mean you actually wanted to sit on this flight instead of standing? That will be an extra $20. What seems to be forgotten is one of the lessons large companies have already learned: you should sell bundles for one price. People want all inclusive, not all excluded.

Conclusion

While we are certainly seeing more and more examples of products being given away for free, it is not necessarily a good thing. There are different aspects and faces of free. The Flickr free, which Fred Wilson calls freemium, is the model where the basic version is free and the premium one costs money. This model is very different from the GMail model where the entire product, with full features, is completely free. The downside of freeconomics is a monopolistic market, with barriers to entry, and little incentive to innovate. In addition the middle-man and transactional complexities are the other side effects of this new economic trend.

Is this good or bad? Please tell us what you think in the comments below.

Image credit: Wired Cover, March 2008

Comment from Adam on 2008-02-26

2008-02-26T22:10:49Z

Bold, I like it.

Comment from abm on 2008-02-26

2008-02-26T22:15:05Z

The horizontal free services market works for some, and drags others down. My business is helping just these sort of Web20 productivity app developers re target towards paying vertical and skilled trade markets. Very hard sell.

I came to the Valley to research this very issue at a major telecom R&D lab, i.e, are free services the defacto way forward? What if free does not work? What then?

There are numerous technical, skilled trade, and industrial markets that are perfectly ready - even accustomed to - pay per account. Why not explore these markets.

The hostility I get from certain founders and newbie veeps is just shocking, "we would rather do it our way until the money runs out".

I can help. Really. There are many contract technical product manager-helpers that can contribute to re-jiggering the features and target market of an otherwise good, ad-supported Web20 app, and get these apps into markets that pay.

Shameless plug, I know, but it has been a slow start here in the valley pushing against the freemium noise level so I hope you will let me post this outreach link, 'cause I need the work:

http://bizcast.typepad.com/clients/professional-outreach-let.html

Comment from Varun Mahajan on 2008-02-26

2008-02-26T22:16:13Z

It is law of economics that price move towards marginal cost, which is zero for many things on the internet.
I don't think that the freeonomics(good buzzword, though) impact innovation as such. Otherwise you won't have seen google adsense on every mom-and-pop startup web site.
And the point that yahoo is losing and google is winning is true only because google is showing efficiency and yahoo is not.
Your last point is correct, however. All inclusive will always be better business model than all exclusive, because then you don't have to employ a lot many resources to tell people inticacies of your all excluding packages

Comment from abm on 2008-02-26

2008-02-26T22:19:07Z

And, by the way, all of these "Social Media Consultants", that suddenly appeared within the last 9 months out of nowhere, can't help you if you have a ad-supported product that is just...languishing. You need someone who knows their specific, target markets. These are not instant, johnny come Lately vocations; these are techniques and relationships that are the result of years of clean living.

Comment from Alex Iskold on 2008-02-26

2008-02-26T22:29:07Z

@Varun Can you please breakdown for us how marginal cost of GMail is 0?

Comment from David Repas on 2008-02-26

2008-02-26T23:01:34Z

Also, check out this incredibly insightful article by Kevin Kelly regarding free. It's a must read.

http://www.kk.org/thetechnium/archives/2008/01/better_than_fre.php

Comment from Adam on 2008-02-26

2008-02-26T23:09:00Z

So by the same token, just because yahoo loses and google wins in this case, that means free is bad?

Free markets apply here. If the product for the consumer suffers, better options will come aboard. And those options will either be so good that they'll be able to pay for it (for a time only, perhaps) or they'll figure out a way to make money in some ancillary way. There's nothing in your argument that actually points to how free is bad. Maybe it isn't good, but is it bad? I don't think so. It's just a different business model. If in the end, free is bad, then the markets will self correct.

This is a moot discussion...

Comment from Dominic on 2008-02-26

2008-02-26T23:12:30Z

Nice reality check. As for the middle-men, the ad networks, doesn't it worry anyone that you really have no idea how much the advertiser is paying or what your cut actually is?

Entirely anecdotal, but has anyone noticed how rates per click suddenly drop near the end of a quarter?

Comment from Uri L. on 2008-02-26

2008-02-26T23:50:42Z

Great reading, thanks.

I wonder how affiliate marketing and merchandising channels fit in the freeconomics models?

Are there good examples for free services that manage to generate substantial revenues through aff marketing or related merchandising?

Comment from SJones on 2008-02-26

2008-02-26T23:57:53Z

Many great points, especially about the advertiser/middle-men.

Of course, Google is its own middle-man for ad-supported GMail. But, I disagree that Google got into GMail just to undercut, say, Outlook/Exchange. They profit from "free" email both by directly placing ads and by using the links and keywords in email to boost the effectiveness of their bread-and-butter search. So, their "free" email service buys them page views, a huge marketing channel and rich metadata that keeps them way ahead in search.

Likewise, Flickr/Yahoo gives away free image space to attract 1) a huge community to which they can market stuff, 2) a massive volume of page views (i.e. ad revenue) based on user-generated content, and 3) a fantastic pool of tagged images that Yahoo can serve as search results.

In this freeconomics world, startups still have a chance because startup costs are rock-bottom low. However, it is not enough to build a "killer app". They have to build a "killer honey pot" that uniquely attracts workers/customers that generate the content that both attracts page view "honey" and (virally) more workers/customers.

Is this bad or complex? Not really, just a different skillset. In this "honey pot" world, effective social architecture is more important than sheer quantity of application features. You don't charge (or charge much) for the "application." Instead, you harvest value out of the content/attention of your worker-bee customers.

Comment from Joshua Harrison on 2008-02-26

2008-02-27T00:48:25Z

It is unbalanced not to mention things like Google Apps and Google Search. Google follows the freemium model on many of its products: Google Apps is competing directly with Zoho. The google search appliance has many large corporate competitors. I am sure there are others. In this day and age, a free product can compete by being better. Larger companies will buy the user base, and shoulder the cost of "free." Witness Google's acquisition of YouTube for $2 billion; even though it already had Google Video, which was just as free. This is how it's done.

I agree with your doubts about online, ad-driven revenue though.

Comment from StrongList on 2008-02-26

2008-02-27T00:52:30Z

The "Tale of the unfunded startup" section is spot on. Startups that charge for a service have to increasingly compete against companies that are giving their service away for free.

Startups are in tough. With no barriers to entry new startups will keep coming into your market until no money remains.

New startups have to be very careful about the space that they enter. Here's a tip to building a web app that will make you money.
The key to building a web app that succeeds and makes you money

Comment from Smith on 2008-02-26

2008-02-27T00:58:08Z

The interesting thing here is that people have thrown out the "rules" of marketing, because there is no marketing for these apps. They are "platforms" rather than "applications". Marketing has always really been about NICHE's willing to pay to remove large pain points, never the mass market using platform technologies. Early on this can be misleading though! Mass markets are far different, and if you can't target, you can't get money in the long term!

What these new startups are doing is simply targeting EVERYONE and forgetting that very profitable businesses can be made that target niches. Talk about blinded by the tip of the iceberg such as delicious, flicr and youtube! Sure, we won't sell out for a billion dollars, but we will quietly sit on our millions of profit laughing at those burning money!

Anyway, my point is that we are seeing the costs of the new web PLATFORM trend towards zero, but this just creates new opportunities for targeting niche's. Most technologists don't think like this, they think in platforms rather than applications, which is why all the buzz is about platforms.

Example: Long term an online spreadsheet is worth nothing. How you take that online spreadsheet and customise it to remove a specific market niche's pain is the way to make money.

// to afraid to post real name... you are braver than I

Comment from Sean Tierney on 2008-02-26

2008-02-27T01:28:50Z

Anyone know if Chris Anderson is planning to make the PDF of his book free? Failing to do so would seem pretty hypocritical...

sean

Comment from Kyle James on 2008-02-26

2008-02-27T02:39:04Z

Wow, this is an amazingly well written article. Everyone wants something free and no matter how close we get to things being free the old adage "There is no such thing as a free lunch" still holds true. Someone or something has to pay for these services that we enjoy for free. I've never really thought about it before, but your points about limiting innovation really ring strong. It is simply impossible to compete with free.

Comment from Mark Dykeman on 2008-02-26

2008-02-27T02:49:22Z

One could argue that one major aspect of "free" is merely the extreme form of price wars, which are normally a means to grab market share in a commodity market.

One of the biggest problems that I have with the "free" argument, which you've mentioned in your article, is the whole idea of marginal costs of zero, or virtually zero. Generally speaking (and I can't think of a good counter-example), the only way that you get to such low costs is through significant capital investment and mass production so that, over time, fixed costs are distributed over a huge volume of product.

Anything that's mass produced, or mass distributed, still requires a rather large up front investment. That takes deep pockets, which many smaller companies don't have. You've indicated this above in your comments about Gmail overpowering Yahoo Mail (although Hotmail is still around...?)

I think you've also identified the other main worrisome aspect of "free" - it's dependent upon deep pockets or subsidization by a third party - the advertiser. It's hard to say whether or not Ad Words revenues will be hit by economic downturns, although history and logic would tend to dictate that all advertising will suffer.

Increasingly, it seems like small businesses will have to survive and florish by continuing to find the niches not covered by the larger businesses and then exploiting them until they can build up their own economies of scale before their products become commodities.

Comment from Phil Baker on 2008-02-26

2008-02-27T02:53:15Z

First of all, Alex, I love your posts. They are always extremely enlightening and really help me understand things, especially the more technical stuff. You manage to distill trends so that even I can grasp it, recognize that’s exactly what’s been fuzzy in my mind for a couple of months and why it’s important. Thank you!

As for this post, I think the route to pursue in the face of price pressure (in this case free) is to transform the business and offer niche services to a valuable but smaller set of customers. Somebody already mentioned niches and I agree with them. It's not the conventional wisdom on the Web because the natural step after the initial goal of attracting users and establishing network effects (essentially exit barriers) is to try to monetize that traffic as a great big generic crowd of people rather than trying to find out who they are and distinguish between them.

Freemium kind of fits this model. I don't think many premium features really grow from the customer backwards, they're more product driven which is why they may not work or eventually become part of the free offering – because no one wanted to pay for them in the first place. But it’s definitely a viable model.

Quality is a totally moot point. If you make something crappy there will be no sustained demand for it whether it's free or not. It's not a winning strategy to get customers to pay for ongoing service or something else later on. It will only attract people that want something for free because it is free and those people are not likely to be the best (i.e. most valuable) customers.

As for advertising, I agree there are problems on the horizon. Eventually, there will be more inventory than ad dollars and companies will compete aggressively to win them just as in old media. I hope some enterprising startups can make ads more useful before that happens and I’m optimistic that they will. Affiliate schemes are really interesting to me in this respect because they are can manually add context to ads. For example, if Hype Machine takes commissions from concert ticket sales and music downloads (I don’t know if they are, I think they have some affiliate revenues) it is really paid advertising for Ticketmaster and iTunes but that has disappeared into the fabric of the Hype Machine service because they are so relevant and useful.

Comment from Chui Tey on 2008-02-26

2008-02-27T03:17:28Z

The last time I checked, Altavista, MSN Live, Yahoo and Google are free search engines. (As opposed to PubMed and other database searches)

Will an advertising downturn affect their revenues? Sure.

Would they be able to charge for it? Possibly.

When Google was first launched, it was so good I was prepared to pay for the service.

Comment from hyokon on 2008-02-26

2008-02-27T03:37:24Z

I am so happy to find that there is a sensible mind in the web 2.0 blogsphere. I have been making my own small efforts with a post and some others and at commenting areas here and there including Wired, Kevin Kelly, etc.

We need more rational thinking before this becomes another bubble. You don’t need a sophisticated analysis, though we may end up needing help from serious economists if this free theory keeps growing. The truth is that somebody should pay to make ‘free’ exist. Or to put it the other way around, you (the free provider) should make money somewhere. Otherwise you cannot keep going. Chris Anderson does mention this, but I got the impression (I may be wrong) that he was not emphasizing it.

Some people seem to think the marginal cost of Gmail is zero. Wrong, as Alex wrote. It is just very low. When they add up, it can add up into huge sum. And ‘marginal’ in the marginal costs are relative. For the short term, it would mean increasing your capacity just a bit. But on a more macro level, it can mean an entrance or exit of a company. I used to do the analysis, when I was a strategy consultant. If you offer only a free product, can you sustain? No. The ultimate marginal costs will get you some day even if your short-term marginal cost is indeed zero (well, I doubt), the costs of being in the business at all. What are they? That’s called your living expenses, how small the size of staff at your free company is, not to mention your dream of better house, better education of your kids, more travels, etc. when you started. I agree that free is a good model, but let's not confuse ourself that these marketing and business models did change the fundamental economics of all. We are not a god who creats something from nothing.

Comment from Hank Horkoff on 2008-02-26

2008-02-27T03:38:52Z

A key point for me in Anderson's article is how technology is increasingly blurring industry boundaries. Just as 'Free' can be used by aspiring monopolists, it can also be a tactical strategy against them (witness Google's office suite vs. Microsoft Office). It just depends on how broadly one defines one's market. A fascinating time for strategists!

Comment from Blogmann on 2008-02-26

2008-02-27T04:08:51Z

While free can be harmful by creating barriers, freeconomics can also lead to great innovation. For sites like Workpost.com, offering a free service helps drive people to change their tendencies and accomplish things in new ways. Workpost provides a place for people to post work and contractors who are interested/available can follow-up on the potential job. Instead of picking up the yellow pages or searching a directory, consumers become more efficient by posting to find interested contractors without having to weed through unavailable service providers.
There is a growing misconception that web advertising is becoming less effective, when one could argue it's just not being done right. The key is not just offering a link on the side of the page, but instead offering a meaningful and relevant message of interest to the page viewer. If the targeting is done correctly, web advertising can be lucrative for the website and useful for the advertiser.

Comment from Don Jones on 2008-02-26

2008-02-27T04:41:12Z

It makes me think of an offline example:

Walmart coming into a town and all the local businesses would fear getting blown out of the water by prices they couldn't match. The ones that survived offered things that WM couldn't - personalized service, quality selection, etc. Essentially a niche strategy.

It may be that certain types of online businesses will be more amenable to the free model - especially ones that have a relatively low startup cost and can rely on network effects to generate page views for ad-supported revenues. These types of businesses I think are primarily communication-facilitating businesses - social networking and all the variants that are coming from them.

Comment from GDawson on 2008-02-26

2008-02-27T05:29:49Z

this word free

this word free
worries me
too many people use it too freely
we should charge a fee for using free
that would really make me happy

Comment from Robert Levy on 2008-02-26

2008-02-27T06:53:13Z

Whatever the merits of their argument, I think the Google example doesn't really support their case. While it is true that Google forced Yahoo! to dissolve their annoying limits on space, it is also true that Gmail was a much superior email reader than Yahoo! Mail. Yahoo! Mail at the time had a pretty awkward interface, and while they eventually caught up with Google, making their own Ajax web mail, Google's is still to this day much better. Users might have left Yahoo! for Google on the space issue alone, but Google also offered a drastically better experience as far as online mail goes, so it's hard to make the claim that the only advantage Google had was mu$cle. I think their big money gave them a timing advantage, but the ground truth was that Google was making smarter and more interesting things, and still is, which makes them unique as far as big corporations go, as I normally would feel a need to stick the word "evil" in there somewhere.

Comment from nathan on 2008-02-27

2008-02-27T10:15:29Z

I've been doing the niche thing on the content side for seven years. It's a tiny market and used to be I could sell content. The barrier to entry to compete with me was competitors' ability to publish online. That came down with blogs. Suddenly I had a bunch of new competitors.

I went to free to compete but offered premium content for a fee. But I think people find it extremely difficult to differentiate between stuff that's worth paying for and stuff that is just put out to stay top of mind.

The free stuff we spew out daily is crap. It's worth what people pay for it. Yet, it seems people think it's worthwhile because they're using it and continue to "subscribe."

My challenge right now is trying to educate people about the value of premium without tipping them off that the free stuff isn't worth anything. I don't want them to unsubscribe after I tell them I haven't been telling them what they really should know.

Any advice?

Comment from Robert H. Hacker on 2008-02-27

2008-02-27T13:39:42Z

I think the argument has two weaknesses. First, free does not necessarily lead to a monopoly--a case in point free blogging services such as Blogger, Typepad, etc. The reason free does not necessarily lead to a monopoly is the second weakness in the argument. Free does not reduce innovation-case in point Mozilla.

Low marginal cost generally indicates low barriers to entry, as evidenced by the thousands of Web 2.o businesses. As long as barriers are low, new entrants with innovations will be a constant threat to market leaders and "monopolies".

Comment from mkam on 2008-02-27

2008-02-27T14:18:19Z

Yahoo had a good product? Have you ever used gmail and compared it to yahoo mail? I was one of those 'early adopters' who first had a yahoo account and immediately switched to gmail because it was superior in every way. That is not monopolistic that is understanding your customers and providing what they want. Yahoo should have taken a good look at what google was winning customers with and tried to beat them at innovating.

mkam

Comment from Dan on 2008-02-27

2008-02-27T14:51:08Z

I'm glad you posted this. Before the flurry of all of the freeconomics articles, I was just thinking about how the free aspect is not all its cracked up to be. People are getting fed up with obtrusive advertising, and advertisers aren't getting the click throughs they are looking for. I think you will probably get 2 emerging sectors - one of the free ad laden products, and the other of premium paid for services.

Comment from rmt on 2008-02-27

2008-02-27T14:56:56Z

A response article to this on http://burningthoughts.wordpress.com/2008/02/27/the-e-conomists-view-on-googles-developement/

The freeconomics attitude is not specifically new, especially not with user software. Most software that is introduced to the market ends up being “shareware” to attract customers with low/no introductory costs, but due to update costs (addons/licenses) that’s where the real costs are generated.
[...]

Comment from Mark Potter on 2008-02-27

2008-02-27T15:21:24Z

You have completely missed the point. Google did not come in offering a service for free with no plans to make money, which is what your initial analysis implies. They had the money to invest and a proven revenue stream from advertising and they offered a better product. The actual cost to the customer doesn't matter. If Google's mail product had been horrible, laden with banner ads, and so on then people wouldn't have used it no matter how free it happened to be. This is simple economics in a free market. The better product forced the market to change. And once again the cost of the product, free or not, didn't matter one single bit.

A few of the folks commenting also seem to miss the point as well. Let's just keep using GMail as an example. It is free for the end user but only in that they do not pay any money to Google. They have agreed to a cost and that cost is ads on their screen based on the content of their email. It is a cost whether monetary or not. Privacy is sacrificed as well as brain processing when the ads are viewed. These things could be quantified by someone better than I and an actual cost per user, on average, could be extracted.

Google's business model is advertising and they are good at it. They don't offer free products to the public for any other reason than they are able to place ads in the free product and make money. This is not a truly "free" situation.

There are many companies out there who disprove the ignorance in the following statement:
"If you offer only a free product, can you sustain? No."
This statement shows a complete ignorance of the market forces at work and the overall idea behind the different "free" economies. No-one is offering a truly free product and trying to make money. Google is offering to allow you store and read mail on their servers in exchange for some of your privacy and tailored advertising. This is not free. RedHat offers you a free operating system but you have to pay for support, media, and updates. And those are just two of the "free" economies out there. No-one attempts to "offer only a free product" but rather there are plenty of people who refuse to move beyond the idea that cost is measured in dollars.

It is also true that in an economic boom a product that is completely free to consumers can be supported by advertising dollars. Google proves this and with the current, albeit small, economic downturn we will see what they do in a weaker market. Oh wait we already did see that when the dot com bubble went bust and Google came out none the worse for wear and at that offering, IIRC, only a free product.

The article is nothing more than an ignorant commentary based on the idea that cost is only measured in money and lacks even a basic understanding of economics. In a free market the price of an infinite good will always approach zero no matter what anyone wants it to do. That's a simple fact of economics. Digital goods are infinite goods and the price is approaching zero in many cases. It is time for the industries producing them to figure out how to monetize free products or face collapse. This does not make "free" an evil thing. Facts, in and of themselves, cannot be evil or good.

I will also point out, as my last point, that the author completely ignored the free economy that disproves this whole rant. See: Linux from Novell, RedHat, etc.

Comment from Monk on 2008-02-27

2008-02-27T15:37:34Z

Well... to maintain this blog, you have to pay for the hosting, the domain registrar and, most importantly, for the time of the persons who writes the articles.

Misteriously, the content of this blog may be accessed for FREE, so, how is this possible???

Oh... ah... maybe, the ads on the right side of this page pays the bills!!! - and people are writing for free... so, that's the mysterious business model!!!

Now, seriously: many blog sites are dumping the news market, by giving news and comments for free. This is forcing media companies to gradually open your contents, and seek for other revenue ways.

Is that good? is that fair? - I think it is a fact.

Comment from DAR on 2008-02-27

2008-02-27T15:40:21Z

Great post, Alex! I agree strongly with your premise - there's negative consequences to free as well as positive ones.

It's very interesting - we in the digital world (e.g., software developers) have been learning to come to terms with free (e.g., open source software) and how to compete with it for many years now. But increasingly, *all* businesses are being forced to learn how to compete with free - and it's causing huge upheaval in the business world as a result. It'll be interesting to see what the remaining landscape looks like once everyone finally adapts to competing with free.

One other point I want to make (and which I mentioned on a previous post of yours):

Frankly, I'm really not happy at all about this move towards "everything is supported by advertising". TV advertising has annoyed me for years. And so has the trend towards putting ads everywhere in the physical world (i.e., behind home plate at baseball games, over urinals in bars, etc.). Perhaps I'm in the minority, but I'm increasingly feeling like I'd prefer to pay to *not* see advertising!

Comment from Gleb on 2008-02-27

2008-02-27T16:09:37Z

I'm sorry, but the arguments do not make sense.

First of all, don't mix monopolistic tactic and new markets, it is plain wrong. You might want to talk about cost focus (and I would suggest differentiation focus for GMail) here, but clearly there's nothing wrong about it. On the contrary, you benefit greatly, don't you?

DVDR example is even worse. If the remote is sooooooo bad, why is noone introducing the ultimate better version and win the market? There are examples of companies doing just that (go Steve!).

And hey, are you actually trying to imply that the actual airline staying in business is forgetting something? Really? Why don't hey just go out of business, everyone likes to pay obsene amounts of money for flights (oh, wait, I don't!).

There are different sides of the 'Free', but the ones mentioned are just plain wrong examples of nonexisting problems.

Comment from Alex Iskold on 2008-02-27

2008-02-27T16:22:19Z

@Gleb

GMail: Of course users benefit, but thats not the point. The point is that entering a market with a completely free product is not fair.

DVR: How can you switch? You are using Comcast as a provider. Unless you are tech savvy you are stuck.

Airline: They just started, they have not been in business for long time. There is a difference between obscene and free. FYI JetBlue started with the same premise and now have to increase prices because of the fuel cost and other growing expenses.

Comment from Brent Noorda on 2008-02-27

2008-02-27T18:05:07Z

When free is used to stifle competition, it is a bad thing (called “dumping” and illegal in most industries, but still allowed in software). But when free is truly recognizing that marginal costs are close to zero, it is just economics, and often results in non-superior software that we put up with because it’s free.

Those costs are not zero, however, but only very close to zero. Suppose, for example, that each email or search is costing Google or Yahoo 0.001 cents. I’d be happy to pay that, if it were hassle-free to make that payment. In fact, if I could get a service that was twice as good, I’d be happy to double my payment to 0.002 cents per email. But there is no such way to make such micro-payments without incurring comparatively enormous expenses and hassles.

It is not just the cost of software services, as those cost approaches zero, that is pushing us towards free; it is the cost of making and collecting payments, which remains far above zero. When the cost of paying for software is no longer a barrier, then the economics will change, incentive to innovate will be restored, and we’ll benefit with better services.

Comment from jprlk on 2008-02-27

2008-02-27T20:45:50Z

way to sensationalize! it's great how anyone with an opinion can write stuff on the internet, and if you have half a brain, write it well enough for it to make front page of a fairly respectable site. but you never asked yourself if you *should* write this article. you do nothing but play on heartrings with emotional language, back up your 'facts' with things like: "Likely it costs millions of dollars each year." nice research and fact-checking! "The fact of the matter is that GMail was offered for free mostly because Google could afford it." you don't know why google offered it for free. you're guessing. i am now going to go write a wonderful article full of unverified or researched facts on Alex Iskold. you can do it, so can i.

Comment from Alex Iskold on 2008-02-27

2008-02-27T20:56:48Z

@jprlk

If anyone is emotional here it is you. Where are your counter facts. What GMail costs nothing? Servers that run it, people that support it, dev team that codes it, support, etc. is that all magically free?

And why is anything offered for free? Because whoever offers it can afford it. You can have everything free. Why do not you work for free?

And I am looking forward to your insightful write up on me.

Comment from free_baby_free on 2008-02-27

2008-02-28T03:15:32Z

How do you compete with free? How about develop a product that is better than the current offering, something that consumers want and are willing to pay for.

As for the Yahoo!-GMail comparison, I was a Yahoo user for a good few years but GMail was better in enough ways - user interface and space to name just two - that I made the switch and I haven't looked back since (I still have my Yahoo! account and check it from time to time but it's still a painful experience compared to using GMail).

"This sounds incredibly complex for both the business and the customer." - I don't understand this statement. If the process is complex for the customer and creates customer dissatisfaction, the customers will stop buying it. As for being complex for the business, I don't see this a being and in issue if the appropriate systems are in place.

"It's not fair" - shame would all the businesses that can't innovate like a hug?

Comment from Fred on 2008-02-28

2008-02-28T17:48:47Z

There are more holes in your argument than in the swiss cheese I had for lunch, but let's take a few. If in fact Yahoo! had "a perfectly good product with a fair model" then they had nothing to worry about. In fact, they had an adequate product with a model that worked for some. Google came along with a better product and a model that was more acceptable to many users. In the end, the market preferred Google's ad-supported business model (Gmail's not free, it just doesn't require a cash payment) to Yahoo's ad-and-cash business model. That doesn't make free bad or Google bad, it just means the market has made a decision. The same decision, frankly, that the market generally makes when a premium service is commoditized. Are you really arguing that the Netscape business model was better for the consumer than the Mozilla one is?

You really need to get over the "you can't compete with free" canard. You most definitely can compete with free. What you can't do is offer the same product at a premium that someone else offers for less (or for free). Anyone with a modern PC has free basic photo and video editing tools, but Adobe still seems to be able to sell a range of competing products. Windows includes basic disk maintenance tools, but software companies still sell shrinkwrapped products that do the same thing. The same is true for many of the other non-core functions of an OS. You don't have to look very far to find other examples of competing with free. Bottled water companies compete with the city water supply. Amazon competes with the public library. That you can't compete with free is no more true than that local shops can't compete with Walmart. You may have to change, and you may not win, but you can compete.

Finally, the DVR is a bad example of free on both ends. Mine wasn't free in any sense. I don't own it, and I can only use it if I pay a monthly fee to Comcast. It's cheaper than buying a TiVo, but it's not free. On the flip side, the remote is not really a very good example of what's bad about not-free-but-cheaper. Comcast's STB remotes are generally not great - my DirecTV boxes were also free, but their remotes were clearly superior. It's not a failure of free, it's a failure of Comcast (or more specifically Universal Electronics, which manufactures the remote). It's really quite simple to use a different remote - not cheap, but simple. I use a Harmony remote with my Comcast DVR, which is superior in every way, but there are other, cheaper alternatives.

Free is not inherently bad or inherently good. It's a business model that competes with other business models. A product's not going to win just because it's free, but it shouldn't be condemned because it doesn't cost anything, either.

Comment from Alex Iskold on 2008-02-28

2008-02-28T17:55:59Z

@fred

You are missing the point.

Advanced products are being offered for free here as a technique to enter the market. Are you telling me that Google docs are not competing with office? Is this a "basic" product or a play to undercut one of the MSFT revenue streams?

And regarding cheese. I would be careful with that because cholesterol is known to clutter initially clear minds...

Comment from Marcos on 2008-02-29

2008-02-29T12:39:59Z

Google mail also offers paid extra storage:
10 GB ($20.00 USD )
40 GB ($75.00 USD )
150 GB ($250.00 USD )
400 GB ($500.00 USD )

Source:
https://www.google.com/accounts/PurchaseStorage

Comment from Shane on 2008-02-29

2008-02-29T21:02:28Z

Funny how I am reading this post and as my eye glances over to the right side their is a whole slew of ads begging for my attention. My guess is those ads are funding this very website.

So I'm not sure where google has gone wrong. In fact I think Google is smarter than the average bear. They are brilliant!

They make money, & make their customers happy.

LAst I checked Google was setting standards and pretty much making everything they put out better. Yahoo had a product, and Google came along and made that same product BETTER and not only that it was FREE. It makes me think that Yahoo was cheating, because as I look at my FREE Yahoo account that I also ahve I see "ads" running along the side jsut as I do with my Gmail account. So the only REAL difference is, Gmail is BETTER, and Friendlier to the world.

Comment from Frank Huber on 2008-03-03

2008-03-03T10:32:51Z

Chris Anderson was wrong. Why? He used some single cases for his freenomics "theory". The fact that Alex has found out some flaws in Chris Andersons thinking brings me to the question: Will he have to rewrite his book which is not even published yet? In my opinion: Yes. Chris should go back to economic theory and present a systematic analysis of the situation. In markets shaped by fixed cost degression on the production side and network externalities on the sales side monopolistic structures are a natural outcome. Web experts therefore are talking about "natural leaders" - and companies like Google, eBay, Amazon do only build brilliant products, but they hire brilliant minds like Hal Varian, Axel Ockenfels or Andreas Weigend. To learn what it needs to be a natural leader. From a european perspective this is very interesting - because nobody seems to question monopolies - as long as they are owned by US companies. In my opinion, the lessons learnt from this free discussion are that "free" fosters a monopolistic market structure (which derails competition and innovation - please refer to the Microsoft case) and which is the source of some very large companies that can afford any free strategie - even cut-throat competition. My advice to young entrepreneurs: become a monopolist yourself or stay put of the way of the giants. Search a safe niche and develop your own creative business model.

Comment from Mr Dorfl on 2008-03-07

2008-03-07T10:59:36Z

You may beware of freeconomics, but don't doubt it: It's good for you.

Alex's points are just misunderstandings about economy, most importantly on who is supposed to benefit from a market economy. Hint: It's not the companies.

http://theopensociety.wordpress.com/2008/03/06/freeconomics-is-like-any-market-good-for-you/

Comment from Ilango on 2008-03-18

2008-03-18T12:46:21Z

Yes, I agree.

In this line we have a open source softwares for the software development.
If all the users wish to use only open source softwares for their products............Then there will be no oracle, microsoft and other companies...

What is going to be the world economy if these companies are not generating revenue?

Comment from bill dakelski on 2008-03-18

2008-03-18T18:06:57Z

"What seems to be forgotten is one of the lessons large companies have already learned: you should sell bundles for one price. People want all inclusive, not all excluded."

Wrong... Consumers don't want all inclusive. The problem is when companies sell "all excluded" they do it in a cagey way trying to make it difficult to understand. Think how much better it would be if we could buy exactly what we want instead of a package of confusing and unneeded stuff. e.g. I have never subscribed to cable TV because although, I would like to have a couple of channels i.e. discovery etc. and I would be willing to pay for it, I don't want to pay the ridiculous amount they want for all the crap that you get with a package, 90% of which is worthless. Likewise, you can no longer buy most things in bulk, if you want a ounce of something you must buy a gallon and let the rest sit on a shelf until it leaks and causes an environmental hazard. The reason things are sold in bundles, packages, is because it increases the amount sold, no benefit to the consumer.