Everyone loves to get stuff for free. We line up to get a free drink, we sign up for free checking accounts,
and we're happy to get a free gift with the purchase of our next car. We love free stuff, even though we all know
and understand that free is an illusion. After that free drink, we pay for the next three. The bank is making money by investing what we put in that checking account. The car dealer can afford to give away a small gift because the profit on the car
is large. But none of this seems to bother us - free things still have a certain allure. But is the concept of free taking us down a dangerous road?
Marketers long ago figured out the attractiveness of free. For decades companies have been playing tricks using free to lure naive customers. But recently, our obsession with free has given rise to a new phenomenon - where the customer is never asked to pay. How? Because the business makes their money on advertising. Marketers are happy to pay for access to customers, who in turn love not having to pay. So the web plays the glorious role of middle man.
Are we heading into dangerous territory? The paths that we are taking lead to confused customers at best; and monopolistic practices at worst. A culture where consumers think that increasingly more and more services should be free is not healthy.
Most online consumer services today are free. That is, people pay nothing to use them
and the services make money via advertising. The logic is that the more people who use the service,
the more page views they generate and the more ads they are shown - so the happier the advertisers.
On the surface this makes sense. After all, newspaper advertising has generally worked this way as well. Well, not quite. Top-shelf papers like New York Times, are not free - you need to pay to get them.
The classic newspaper business is both a subscription service and advertising supported. Subscriptions provide a solid base, and grow if the publication is interesting. Ads are then sold door-to-door by a salesperson with a with a fat rolodex and phenomenal commissions.
But this classic model is no more. In the brave new world, subscription fees are gone and the salespeople are replaced by CPM advertising engines. The problem is, things are just not that simple. When the economy is bad (think 2008), then advertising is the first to be cut. Now if your sole revenue source is advertising, then your revenue gets hit hard. The traditional subscriber base, which helps companies navigate through the economic downturns, is just not there, because it is no longer cool to charge people for the service.
The second problem is, of course, Google. The whole beauty of online advertising is that it is trackable - ROI is easily measured. Google's pay-per-click model (CPC) is far superior to the traditional impressions based (CPM) model. But how many other companies can mimic that? Can the New York Times sell CPC advertising? That remains to be seen. And Facebook is yet to prove itself in that game as well. Getting people to click on ads is still a rocket science on the web.
While it is not clear that a lot of businesses in an economy can be supported only by advertising, we already know
that free can be a powerful weapon in the hands of big companies. Consider this recent example:
IBM used free to practically destroy the Java software tools market. One day, someone at IBM was likely sitting
around and thinking about how to sell more of the company's Blade servers. In a single eureka moment he figured out that by giving away
the integrated development environment (IDE), IBM could kill its competition, open all doors, and sell its most expensive product.
Eclipse and the surrounding set of tools for debugging, testing and profiling Java code are not great. But they are good enough because they are free. Companies could no longer justify paying for products from, for example, Borland and as a result, IBM's strategy worked beautifully. All of this was executed over the course of just a few years, under the mantra of open source, so practically no one could see IBM's ploy. The sad consequence of IBM's victory is a lack of innovation in the software tools space. After all, who wants to compete with free?
Of course, IBM is not the only big company that discovered the power of free. The king of the web, Google
has been expanding its sphere of influence using exactly the same strategy. In a stroke of brilliance, Google made their web's best search algorithm free to consumers, by supporting their search engine with advertising. Elegant and fair, we all get access
to the world's information for free. Thanks!
The next move, is slightly less elegant, but still legitimate - GMail. Google wanted us to have better and simpler email. The solution was to deliver it with advertising. It is strange to see ads next to our email, but we learned to ignore them just so that we can use the software. Fine.
But the next move - Google Office - is unfair. In its endless quest to organize the world's information, Google is also looking to kill off its archrival Microsoft. Just like Microsoft is going after search, Google is after one of Microsoft's juiciest markets - Office. And to play, Google is giving it away for free. Well, almost. For consumers, Google's online office software is free, and for businesses, they have made the software so cheap that it is practically free (Google can't make enterprise tools completely free because companies would freak out).
The point is that Google can afford to give away everything for free because of its success with search. This is being done openly now and it is just plain wrong. It is a dangerous poker game, where Google can raise stakes because it has a huge pile of cash. What happened to fair competition and not being evil? This is an evil way to break into the market. Of course, we all prefer the light Google Docs to Microsoft's heavy desktop software. This is not the point. The issue is that this kind of free is absurd. If Google wanted to break into eCommerce, it could afford to put Amazon out of the book business by giving away free books. How would we react to that?
Sadly, a lot of people would probably see free books from Google as a great thing. After all, as a society, we now expect information to be free, so it wouldn't be a leap to have free books as well. This is a misleading point of view, but it
is spreading. We are raising a generation of kids who do not want to pay monthly subscriptions for anything. Give me
stuff for free and stick some advertising on it.
This is also dangerous for another reason. Teens are growing up with not only a sense of expectation of free, but sense of entitlement to free. Of course my social network is free! But why? The phone is not free, television is not free, clothing, food, house - everything else is not free. Is this not a paradox?
Just a few decades ago, people had low expectations and worked hard to make living. They did not know free and never expected it. Now, the opposite trend is happening, with free becoming expected online. Will the new generation, the one that expects something for nothing, work as hard to maintain the high standards of living that we created?
The bottom line is there is no free lunch. When you go on vacation and see a sign that says Free Lunch you know that the timeshare sales pitch is going to accompany it. The free on the web is not free either. We are receiving the services in exchange for our time and attention, in exchange for the opportunity to be advertised to.
Yet, there is a lot complexity surrounding the issue. From the effectiveness of advertising to monopolistic market plays, free is making a lot of people nervous. The libraries are free because we pay taxes, but Microsoft Office is not free and probably should not be free.
Do you see this as an issue? This is an interesting topic and we would love to see the debate here on ReadWriteWeb! Sound off in the comments below.
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I was just thinking about starting a new experiment to see how much things can be done on the web that we traditionally consider as desktop applications. Also an earlier article on lifehacker about free web hosting and the growth of web 2.0 that allowe... Read More
snapshot: A debate is going on; Does the word “free” hurting? is it driving consumerism towards anything wrong? ============================= Mr. Alex, recently posted an article on RWW with title “The Danger of Free” statin... Read More
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Even governments get in on it. There was recently an interview on NPR's "Fresh Air" with David Johnston, authr of "Free Lunch." The book is still on my reading list, but it certainly sounds like it follows the same thread of thought (albeit in politics).
Posted by: Brian Dailey | January 16, 2008 5:42 AMIf I didn't know better Alex, I would think you had been reading my blog. I have been saying this for some months now. I even used the books example too.
It is this same free mentality that is troubling the music industry now by the way and whilst we all hail the imminent death of the music labels, we should be wary of the precedent it sets.
Posted by: IdeaTagger | January 16, 2008 6:08 AMYes I love free software, but few are as good or successful as Emacs, Linux (without the desktop, I mean).
Posted by: thinlight | January 16, 2008 6:19 AMSorry, don't buy it.
The reason why we can offer web services for free is because the costs to build those sites tends to be nothing.
Then, why sould you have a barrier to entry if you don't need it? That's just plain stupid, because if it's possible someone else is gonna do it anyway.
Posted by: Alexander Marktl | January 16, 2008 6:32 AMagreed, there is no free lunch. though. "free" is associated with web, software, download, etc. See on http://www.quintura.com/?request=free&searchvia=1&page=1
Posted by: Yakov | January 16, 2008 6:32 AMI agree to some extent, although I am not sure that Google is evil for providing some much needed competition to Microsoft who is making a lot of money from products that still contain far to many bugs despite a hefty price tag. And Microsoft totally ignores all user input when it comes to bugs in their programs, even when they are well known for years in the blogosphere...
Ok, so back to the problems with free. The example with TV is quite wrong, I believe for many years nobody paid for TV, it was very much like the internet supported by advertising. (Could be different in various countries though).
Perhaps the same development will arise on the internet? That you would be willing to pay for content and services that are free from advertising? Or, like HBO-style, has higher quality than the rest?
Business models will change over time. What has happened with many of the industries over the last couple of decades is that they have created way to large overhead costs (read music industry) and not worked to lower the prices or deliver their products in the way customers want them.
The music industry is still kind of hanging on to black-and-white and increasing their prices while everyone has bought color tv:s. And then they are wondering why nobody wants to pay for it...
Posted by: SD | January 16, 2008 6:34 AMBut the next move - Google Office - is unfair. In its endless quest to organize the world's information, Google is also looking to kill off its archrival Microsoft.
What are you talking about? Google isn't trying to "kill them off". They are trying to *compete* with them in a market their prices are much to high in.
99% of the people who need to use office software don't need anything more than what google docs has. 70% of people don't even *use* any feature that is only in MSOfice and not in google docs. That's like going after Sun for producing star office or all the free software people for producing OpenOffice.Org. A diversity of options is *normal*. Its the "One Office Suite, Just One" that is strange.
All of that aside Microsoft *deserves to lose their office monopoly*. They have *intentionally* used their office monopoly to influence the OS market (Internal MS Devs have always said a Linux port would take months if they were allowed to do it, especially after the antitrust judge ordered that). They fight open standards all the time, tooth and nail, to keep their office monopoly, because they understand without it, many corporations would drop their OS and Office suite without a thought, as paying $300 per computer for software you can have for free is not good business.
The incremental cost of 1 copy of software is generally $0. Yet Microsoft has *huge* development teams and charges $145 for the cheapest version that is missing most of the useful features. Why *shouldn't* an office suite free? Why *should* it cost money?
Posted by: Michael | January 16, 2008 6:35 AMBrilliant. Though controversial.
Posted by: Sasha Kovaliov | January 16, 2008 6:42 AMVery well written article and to the point. I would like to publish it in our News section on our website. www.workconnexions.com
Posted by: Leo | January 16, 2008 6:45 AMThe world changes and so do business models. Every company wants to see a positive ROI. If that means 'free' for the consumer, they are confident to get their revenue elsewhere. They'll be creative. And consumers will adapt as well. If much is free, they'll for instance want to pay for extra quality or add-ons to 'stand out of crowd'. What worries more, is the consequence for our planet's resources and the piling of waste when consuming is free. And also, it illustrates the wealth gap in different parts of the world. I can get more and more stuff for free when people in other nations are still struggling for food. Weird.
Posted by: Arne | January 16, 2008 6:48 AMI think it is good as it is. I still prefer to use my copy of Office 2000 (which I bought quite a few years ago), over OpenOffice.org or Google Docs. The user experience is just better. But I like there are free alternatives, and maybe I'll use Google Docs in the future, when they improve further.
Posted by: quirkyalone | January 16, 2008 6:54 AMBreathtakingly naive!
Open an economics book and learn- goods will tend to be priced at their marginal costs.
The reason things are free on the web (and will remain so) is that their marginal cost is very, very close to zero.
Look at plentyofish.com. I understand the entire site is run by one guy out of his apartment. Incredibly low costs equals incredibly low prices- in this case FREE.
Free is not a problem, it is a great benefit to the economy. My software costs for my business are now zero and my hardware costs are minimal- we use all hosted apps like Google Docs. The money we save of software is available to invest in other machinery that improves our productivity.
Posted by: Tom Kelly | January 16, 2008 6:55 AMThe topic is controversial - as it was supposed to be, I guess. I don't think Alex is an enemy of free - after all RWW IS free :) But surely, if you think about how things may develop (especially with googles monopolistic position) - we will regret "free" in not so distant future.
However, I don't think, by economical judgement, that web services are free, ads set aside. Most services, like Google Apps for instance, have a paid version that is supposed to actually make money. The other example is Mozy with its free 2GB and paid unlimited. Another one - 37Signals where you get something for free, yet 90% of users pay anyway for more. The thing is, now free web services is wat test-drives are in a car business. (Smart) Developers give something for free and than charge for extras (like storage, security etc.). Those purely Ad-supported will not survive any crisis, and that will clear the scene a bit. Television may be free, and ad supported in general, but you need huge audience to pull it off - most web services won't make it.
I would rather say, that free is good in hands of many - like numerous garage developers trying to make some change and (only one of them) ending up being Youtube of tomorow. Free in just one hand (ie. google's) can be lethal to many businesses, but its nothing new. It was just called different yesterday - dumping.
Just like a good knife...
Posted by: Marcin Grodzicki | January 16, 2008 7:12 AMIt's interesting how some of us are afraid of this free concept. My personal opinion is that this is just another step into the our evolution as a society. And just how we today speak here about free services, probably in 10 or 20 years we'll speak about something else, having a similar effect on other businesses.
Posted by: sergiu | January 16, 2008 7:21 AMI'm for free services. Because without them, most of the jobs in this world would be much harder. Imagine Google would charge for search. Would we still be using search? Maybe 1% of us would, maybe even less. And would we still be so inventive and so innovative if we couldn't access so easily so much information? I guess not. Or could we learn new technologies (for example in programming) so fast, if we wouldn't have access to so much information just at a search distance? Well...no.
I agree that giving away for free affects a lot of businesses, but they have to adapt to this new environment. Do you think Microsoft didn't cause some businesses fail? But that's business, you'll always have to find ways to be ahead of your competitors.
I've written an article on my blog related to this, because it'd have been too long to post it as a comment. :)
Sergiu: very interesting point - the evolution of society, and specificaly, business models. I guess music industry will be the first one going through some drastic changes because of that. Maybe it can provide a case study for other businesses as well.
Posted by: Marcin Grodzicki | January 16, 2008 7:26 AMI completely disagree with the concept of this post (although extremely well written and well argued, by the way).
People with your point of view on the "free generation" seem to be stuck in the past, not willing to adopt to the new ways that the internet and other technology is beginning to offer us.
It seems you think that the increasing success of "free services" is going to completely eliminate the idea of people buying software and applications and paying for services, where as I don't see that happening.
It makes sense for websites with an increasingly large number of page views and unique visitors each day to offer the service for free and featuring advertisers, instead of charging the end users. And it works! So why not use it?
Microsoft Office is not going to go away because Google is offering a "free version." There are certain places some people do NOT want to see advertising, and while trying to concentrate is one of them. Camtasia Studio and SnagIT are not free, I willingly paid my fair share to utilize them.
My point is that "free" is not going to transfer into everything. We're still going to pay for software, just less of it. We're still going to pay for cell phone service, and, by 2009, we are ALL going to be paying for access to television channels (as picking up channels via an antenna will no longer work).
I'm sorry, but you are poorly mistaken. Free is not your enemy. Attempt to embrace the new age instead of revolting. You will only get resistance and fail in your goal of reverting everyone back to the old days.
Posted by: Erica DeWolf | January 16, 2008 7:28 AMThis is dead on. But it really speaks to a larger problem. Its about all IP. and the point is that *all* intellectual property (essentially anything that doesn't come in a box) is asymptotically approaching a value of ZERO. This is everything from software to patents, to music, to film. The fact is that marginal cost is becoming the only relevant factor in our culture for evaluating things.
The interesting thing about this is not just that it is happening, but that there is a new moral/ethical framework that is emerging that establishes the idea that theft of IP is OK, and that it is somehow wrong to protect your IP. Patent protectors are all "trolls". The music industry is "evil". Having a subscription wall is "stupid".
Interestingly, this really results in a kind of wealth redistribution from creators to consumers. This is, of course, incredibly troubling from an economic perspective because if we loose the economic incentive to create, huge pieces of the economy will go away. We are seeing this now with the music business. When this happens to film, the impact will be even worse. And on our current course it will happen. Certainly a huge part of the American GDP is in intellectualy property. Of course this is great for china, whose economy's IP component is small. They can get our goods for free, and we cant get their goods for free. Talk about trade deficit.
Trouble is indeed brewing.
Posted by: Hank Williams | January 16, 2008 7:28 AMNice post..very informative!
nhick
Posted by: ITrush | January 16, 2008 7:33 AMhttp://www.itrush.com
These places are getting content for free, simply by offering a free place to put it. The economics and dynamics would change entirely if it was required of companies to pay individuals to provide that content, those widgets, those reviews, news and instructional materials. Lots of companies hoodwink people into paying for stuff they really don't need in the first place. We paid plenty of money for MSM and all we've ultimately gotten in return there is social engineering, mind control and chaos merchandising- not journalism! Clearly paying for things doesn't guarantee quality or ethics. It is time for a new model.
Posted by: Margaret | January 16, 2008 8:13 AMSimply, great post.
Posted by: Technicle | January 16, 2008 8:35 AMRWW really, really need to put a "PRINT POST" button. See TC's.
Posted by: Technicle | January 16, 2008 8:40 AMYour facts and your conclusion on Eclipse are completely wrong.
First, Eclipse was a product of the embedded systems (i.e.,. chips and techologies) guys at IBM, not some blade server marketing guy in the Systems division.
Second, how can any IDE, open source or not, improve sales of commodity blade servers? It can't.
Third, IDE evolution was moribund long, long before Eclipse came on the scene. That happened when Microsoft's Visual Basic blew up all the independent IDE vendors (Borland, Gupta, PowerBuilder, etc. etc. etc.) a decade before Eclipse ever arrived.
Finally, what makes Eclipse successful is the open architecture which allows ubiquitous plug-ins and allows the environment to be adapted for almost any purpose.
Posted by: Brent | January 16, 2008 9:04 AMHi Alex,
Welcome to the conversation! This is an extremely important debate and I'm so happy to have ReadWriteWeb weigh in on the matter.
For links to other prominent bloggers' and journalists' posts/articles exploring this issue visit:
No Such Thing as a Free Lunch
http://www.auditoriuma.com/blog/no-such-thing-as-a-free-lunch.html
A Burst Bubble is Just What Web 2.0 Needs
http://www.auditoriuma.com/blog/a-burst-bubble-is-just-what-web-20-needs.html
Time for a New Business Model on the Web
http://www.auditoriuma.com/blog/time-for-a-new-business-model-on-the-web.html
Tony Mars
Posted by: Tony Mars | January 16, 2008 9:13 AMFounder
auditoriumA.com
TV is still free. Cable TV may not be, but the good old over the air brand still is. The same goes for radio. Again, not digital/XM radio, but the original kind.
Posted by: John Kuhl | January 16, 2008 9:43 AMChris Anderson (The Long Tail), is doing a lot of thinking and writing about the concept of free and how it has affected other markets - you can see his blog here: http://www.thelongtail.com/.
Basically, one example of his thesis is that the rise of the computer industry was a result of semiconductor engineers creating an abundance of transistors/chips at lower cost. He agrees that pricing follows the marginal cost.
I run a niche venture capital database that has charged a subscription fee from day one, with no ads, and a free trial. There are plenty of people willing and able to pay for the service. There is no comparable service out there for free. Until the computers get much, much better at automating the process of getting very discrete information, or someone wants to sell ads which lowers the experience of the site, there will continue to be no service for free, at least in this niche.
I agree that the web is training users to expect things for free. As a result, those free services tend to be lower quality. Google may be going after the enterprise market, but they're doing it from the bottom end - even their own partner, IBM, has said point blank that they are not a threat in corporate search...
Posted by: Don Jones | January 16, 2008 9:50 AMI wonder if you would take your metaphor a little further. Look at our real world economics which is build on environmental exploitation. We have essential been getting a "free" ride as to the true cost of our economic system as the environment has sucked up most of our excesses and government subsidies(corporate and otherwise) have kept the price of food and fuel artificially low. However, as Global warming becomes harder to deny, and the effects of the sea of pollutants and plastics that invade every part of our environment including the high Arctic and breast milk the true cost of our way of doing business is much more apparent. So the "free" ride for software is only a reflection of something that has been going on for far longer and a great deal more insidiously.
Posted by: Niran Sabanathan | January 16, 2008 10:34 AMNot all quality papers require you to pay, at least, not in the UK. The Guardian is free (ad supported) - and it seems to be permanent. Others, like the New York Times are free for a few days, than a paid for archive.
However, I'd agree with you that nothing is really free, things are often ad supported, or paid for by someone (e.g. BBC via the UK TV licence)
However, I'm not sure how long it will last, as more and more people use ad-blocking software. In 5 years time, will we have the divide between paid for sites, and those that use ads (with ad-developers & anti-ad software fighting an on going battle)? I know that some sites already don't allow Firefox users to browse, in case they're using adblock ... but that's not the only way to stop ads!
As a site owner, how do you feel about users who block ads?
In terms of the cost of running a site, I make quite heavy use of an educational site (eduspaces), which was, until recently run by one set of people, and had (pretty discrete) ads. They couldn't make enough money to keep it going, so after a period of uncertainty it's been taken over by another organisation.
Posted by: Emmadw"Totally free" is like "No taxes".
Governments will take the money to run itself.
Companies will make the money to show profit.
Everything else is a game. Just like life is.
Eventually the customer will pay for the value he/she recieves.
At the moment, Google will need to pay someone to make him/her use their online office suite.
At some point, they may become compelling. At this point they are not.
Posted by: Joseph Pally | January 16, 2008 10:39 AMYou are confusing 'monopoly' with 'free'. Monopolies are almost always harmful to their customers, often precisely because they can raise their price at will. 'Free' services and free software don't have to drive payware out of business, no matter how many OSS zealots would like it to happen. If a free service did result in a monopoly, the government should take precisely the same steps it would against any other kind of monopoly.
Marginal costs in many digital services are trending to zero. Why not run a service for free in that case? Consider marketing costs and even billing costs to run a subscription-based service. Does it make sense for GMail to invoice you say $1.25 a month, with the transaction and management costs that entails? Do you truly feel better paying for hosted email at $15/month?
If I want to run a business that only makes money out of advertising, that's my decision. You might be right and I might go out of business in a recession. Well that's my choice and my money. Am I not reading your post for free?
The rules have changed because a digital good does not automatically have to incur significant costs. That has never happened before. In some cases, free is not the answer. Music comes to mind, unless the artists agree to it. In some cases free is the answer. And in most cases, free and not-free will co-exist. 'You get what you pay for' is not dead yet.
Posted by: JLuc | January 16, 2008 10:42 AMWell, Microsoft offered the 'free' Internet Explorer as a way to kill Netscape and succeeded at it.
And so we knew that when we bought MS Office we were dumping IE to kill Netscape.
Good post.
Posted by: Jorge Diaz Tambley | January 16, 2008 11:09 AMI would have completely agreed with this article, were it not for the statement "Of course, we all prefer the light Google Docs to Microsoft's heavy desktop software." In your zeal to write a great article, you should not make blanket statements that cannot be applied to everyone. I know a lot of people that HATE Google Docs, myself included. I know that's kind of nit-picky, but otherwise, great article!
Posted by: Robert McLaws | January 16, 2008 11:22 AMMoney is still being made, so it's not free, it's "free".
Posted by: T | January 16, 2008 11:34 AMThe price of products and services in a competitive market at large scale will always approach their marginal cost. On the web, the marginal cost of adding another user to the database of users or showing a user a copy of a blog post is essentially zero (bandwidth cost is so negligible that I am treating it as zero). So, consumers are right to expect products and services on the web for free.
But, that says nothing for real-world products and services, which people are increasingly expecting for free too.
Posted by: Andrew Parker | January 16, 2008 11:36 AMThe free model is healthy. It's not killing anything, it is a turbine for innovation.
Posted by: xavierv | January 16, 2008 11:38 AMThe free model brings innovation
Someone said "the value of IP is going to zero." That is absolutely untrue. Revenue is coming from a different source, but just because the consumer isn't footing the bill, doesn't mean the value is now zero.
Little points like this make all the difference.
Posted by: Benjamin DiGregorio | January 16, 2008 12:33 PMI agree with much of what you've said (and post #17 nailed it even more succinctly.)
We're heading toward an eventual tipping point in the not too distant future where the incentive to create is going to rapidly diminish because there will be no economic incentive.
Posted by: RS | January 16, 2008 12:33 PM8 million plus are paying anywhere fom $9 to $14 per month to play World of Warcraft, people of all ages. How many millions "play" facebook, 58 million now? I say play becuase facebook is really just a game. However, it's a game that lets you aquire very little if anything (aquire in the context of owning digital assets in a way that WoW lets you...you dont own them....but, the digtal assets are earned carrots so to speak). As soon as Facebook figures out what digital assets people are willing to pay for (other than just Gifts) they may end up making some money.
Posted by: Marc | January 16, 2008 12:37 PMGood post.
You can read Olivier Bomsel, "Free! about digital economy" [fr]:
http://www.cerna.ensmp.fr/CVs/Docs/Ob-Gratuit.html
http://www.amazon.fr/Gratuit-Du-d%C3%A9ploiement-l%C3%A9conomie-num%C3%A9rique/dp/2070339572
And this one in english:
http://www.amazon.com/Olivier-Bomsel-Anne-Gaelle-Geffroy-Gilles/dp/B000TAQBHM/ref=sr_1_1?ie=UTF8&s=books&qid=1200517285&sr=8-1
Posted by: D.VDA | January 16, 2008 1:05 PMExcellent post, Alex! I'm as conflicted about this whole free business as you are.
On the one hand I reap huge benefits from free - from the abundance of excellent free software I use, to the abundance of free online content that I access every day. (The days of paying CompuServe $10 per hour to access their proprietary data have gone - and I am very thankful for that!)
And I also realize the huge opportunities generated by the fact that in an online world free also means "frictionless". Make a service free and you remove any "friction" or impediment to users accessing it - thereby letting you garner a large audience quickly. Charge people for access, and you're effectively *deterring* them from becoming a user.
Still, like you I'm not entirely comfortable with free, since it brings with it a bunch of negative consequences. There's 2 in particular that concern me a lot:
1) It's hard for people to make a living off of free. I'm a software developer. And although I love the abundance of free software out there, I have a love/hate relationship with it. Because the flip side of it is that it's gotten harder for me to make a living off of writing software when so much software is free. The days where I could become a successful "shareware entrepreneur" off of a product I wrote are fading away. And it's also become harder for me to find jobs at software companies, since so many of them are now competing with free products. And we don't just see this in the software industry now either. The journalism industry, for example - as well as a number of others - are all going through this growing pain.
2) It's turning into a world where it's OK to have advertising in our face ... all the time! And, frankly, I don't like it! I've always been a bit curmudgeonly about advertising. It's always bothered me that it's in my face so much. But now, with so many things becoming free, it's in my face even more - especially online. It seems that we as a culture have voted "for" advertising and "against" paying for things. But what if *I* as an individual don't want to vote that way?!?!? The answer, unfortunately is: tough luck! Even though in many cases I'd be happy to pay if it meant that I didn't see or hear advertising, increasingly I don't have that choice. And that's very frustrating!
Posted by: DAR | January 16, 2008 1:58 PMNot sure what the answer is. Perhaps these are all just growing pains that we as a culture will eventually have to adjust to. Or perhaps the pendulum will eventually start to swing back the other way, towards paying. But for right now, despite all its many benefits, "free" is definitely causing a lot of people and companies a good deal of pain.
Funnily enough I wrote a similar article on my blog a few weeks back on exactly this.
http://workingtech.blogspot.com/2008/01/curse-of-free.html
The short term problem I see is the big operators in the "freesphere" such as Google have really been beneficiaries of the free and easy capital markets of the last six years; cashed up investors have been subsidising these free services.
How this these business models will survive in the current investment climate is going to be interesting to say the least.
I agree with Alex about the sense of entitlement to free services, but to single out teens is unfair; it's across the entire economy.
Increasingly consumers and small business expect everything web related to be free. That mentality is spreading across all technology sectors.
Tom Kelly's comment above at number 12 is instructive of the mentality of the free lunch. He believes that because the marginal cost is close to zero, these services have no value.
What he misses is that goods and services aren't priced on their marginal cost, but on what the market is prepared to pay for that product.
In Tom's case, he's prepared to pay exactly zero for applications that help his business.
This raises the question of how much he values his business.
More importantly though, is the question of how the providers of those free services pay their bills to provide Tom's free applications.
I'm not singling Tom here, his view and values are shared by ten, if not hundreds, of millions of others.
I'm not saying free apps are wrong, but like Alex I just can't see where this business model is sustainable in the long term.
Posted by: Paul Wallbank | January 16, 2008 2:02 PMInteresting post. I've thought this for a long time. Google is turning into a bigger beast than Microsoft ever DREAMED of becoming. But because they're giving away services for free, they're met with thunderous applause. Hilarious.
Posted by: chris | January 16, 2008 4:01 PMSorry to disagree on some points.
First, there are free lunches. A lot of them. If you don't believe in this, you've never worked in the extractive industry.
Second, business models are trumped by economic models and this model is age-old, used by mankind before anyone thought about making money... because there wasn't any money!
Third, how about using "costless" instead of "free"? The word is ambiguous and there's a much more important discussion on freedom and where it is going these days. Without freedom to decide about price, "free" as in costless may become a moot point.
Fourth, frankly... the world is changing and it was changing already when Microsoft decided to sell a cheap (as in "almost free") OS to go with the first IBM PCs. IMHO, Microsoft Office was already paid its value many times; newer "features" cost a lot to develop (technical reasons explain this) and their value is so low that it costs a lot of additional money to convince users to accept them. The mere proliferation of alternative highly capable equivalent suites is a signal that this particular product is on its way to turn into a commodity the same way ascii editors became one .
Fifth, and last, there will always be a value proposal in offering some convenience or service which might make a priced product more attractive than a nonpaid one. People don't make their own wines, bottled water is an increasing business etc. But, yes, software is a special business -- just perhaps like kites -- I can buy a professional one, but nothing beats making one with my son.
PS: Everything I said is obvious and old, but it must be repeated now and then, it seems... I still hear people repeating "What is the model? What is the model?" from time to time. Will they ever learn to think out of the box? Or is this one of those things only the ones in a new generation are able to grasp?
Posted by: Anonymous | January 16, 2008 4:04 PMFor the record, there isn't more 'free' stuff now than there used to be. It's just differently distributed. Twenty years ago I travelled around Canada on $7 a day. It wasn't very much even then. Because I'd bought a Greyhound ticket I got free access to the Calgary Stampede. On the streets every day there was a free pancake breakfast. For dinner there was 'buy one get one free' pizza. Unsurprisingly, Canada did not go bankrupt by giving itself away. 'Free' is, was, and always will be a useable strategy for all concerned. On the west coast I learned about the potlatch ceremonies of the Haida people and realised that the gift economy is a perfectly viable economy. The more you give, the greater you are; the greater you are, the more you can give. This is more or less how people have always organised their economies. The abberation is the recent and short-lived 'pay-for-everything-in-cash-upfront' economy. Until recently Microsoft was making sure there wasn't much 'free' in consumer software. Their operating system came with almost no 'free' software. It was effectively an operating system that, out of the box, didn't operate anything much. If Microsoft knew anything about 'the economy of the gift', it certainly wasn't showing. The less it gave, the greater it was. Looking back, this is obviously weird. How come we didn't notice? Anyway, all this is now changing. Anyone who says there's no such thing as a free lunch obviously doesn't get out very much, but equally nor do those who say there's no such thing as reciprocity. Economies are all about exchange, and this can include obligation, trust, inclusion, prestige and risk, as well as good old money. Although the Microsoft strategy can be said to have 'worked' in the sense that it has made a few people very rich indeed, it's interesting to see what some of them are doing with (a portion of) that excess wealth: they're giving it away. The more you give, the greater you are...
Posted by: Roguish | January 16, 2008 5:42 PMBy the way, your prestige has now increased marginally by allowing me to publish my thoughts to lots of people for free. When I was travelling around Canada twenty years ago, that would have been an impossible dream. Thanks.
What you're missing is SUBSTITUTION EFFECTS.
Basically, if you're a new entrant that wants to enjoy the benefits of the subscription business model:
* find out what people are ALREADY PAYING for
* be like Ralph Nader and figure out HOW THEY'RE GETTING RIPPED OFF
* provide the same thing at a discount
Most Web 2.0 companies are lightweight on the operations stuff. That's why they can't think to disrupt companies like Blockbuster (Netflix), Tower Records (eMusic), ACT! (SalesForce) etc. They don't do anything with warehouses, or "atoms" in the old Negroponte bits/atoms framework. They think atoms are dirty.
It isn't "disruptive innovation" until it actually DISRUPTS something. Web 2.0 startups should take aim at existing streams of spending, and figure out a way to deliver the same service cheaper via subscription. Then maybe do some willingness-to-pay research.
As for us, we're going after THE ENTERPRISE WIKI. Going to build up a base of free consumer users first, and hoping that adsense + our deep UGContext will win us extra Googlepoints. Wish us luck!!! :)
- Srini Kumar
Posted by: srini | January 16, 2008 10:45 PMCEO
MetaNotes.com
This has got to be one of the most naive and ignorant articles I've ever read on this topic.
It's called competition. The way one company makes more money than another in the same field is by adding value to their product. Added value is the same whether the product/service is $0 or $1000.
Your comment about Google wiping out Amazon by giving away free books is particularly shocking. There's already a place where you can get books for free. It's called the library. Amazon provides more value though: they have an easily searchable database, they ship books to your home, they suggest books which you might like based on your current selections, etc, and that's why Amazon makes money.
Posted by: daniel | January 17, 2008 1:30 PMWeb advertising is still mostly banners. And banners are descendant of tv and newspaper ads. Advertising industry just hasn't understood yet how the web works. When they get it banners will disappear. That's why ad-based revenue models are dangerous.
I'm publishing a free book on this subject in a month.
Posted by: Miikka Leinonen | January 17, 2008 2:19 PMwww.strategyofgiving.com
"Will the new generation, the one that expects something for nothing, work as hard to maintain the high standards of living that we created?"
I liked this sentence the most.
Posted by: Boris C. | January 17, 2008 3:10 PMFabulous!
You can compete with free. You just need to add more value to what is being given away for free. Examples:
Posted by: Nick | January 17, 2008 3:36 PM-bottled water competes with free water from the tap
-book stores compete with the library (as noted by 45)
-enterprise SaaS competes with open source
-music sales and satellite radio compete with music on the radio
-cable and satellite TV compete with free over-the-air TV
-LexisNexis and Westlaw compete with Google and Wikipedia
-print newspapers compete with online news sources
-club stores with membership fees like Costco compete with supermarkets
>>Will the new generation, the one that expects something for nothing, >>work as hard to maintain the high standards of living that we >>created?"
>I liked this sentence the most.
>Fabulous!
Oh, please. Get off your high horses. I'm 43 and it looks to me like the next generations are going to be dealing with a whole lot of expensive entitlement programs that have been set up for my generation, and the one before. Don't believe me? Look up budgetary actuarial projections for most Western countries on the cost of aging generations, combined with increasing life expectancy and retirement ages that are going to be political suicide to raise.
Blaming the Gen-X and Gen-Ys is el-lamo.
Posted by: JLuc | January 17, 2008 11:15 PMhttp://karnedge.blogspot.com/2008/01/bad-google-no-freebies.html
My rebuttal.
Posted by: Karn Edge | January 18, 2008 7:41 PMHey Alex,
Thought-provoking post; thank you. You're right that something is wrong, but you're wrong about "Free" being a problem. What's wrong is that people aren't getting nearly enough value for the attention data/service barter. Tech companies are reaping huge profits on this aggregated bad deal.
Ergo the rise of "Free" is a market correction: the price we're getting paid for our data is now inching closer and closer to what it should be.
You claim that these services are designed to destroy the alternatives. But these services are not being introduced to destroy anyone. If that happens it's a side-effect. Google could care less about MS. They just know that office apps have high utility, they are relatively easy to write and host, and it's a good way to sweeten the attention/service barter for the consumer. Killing Office would be a (probably happy) side-effect. Google knows that they're in a golden age of high profits and no competition; they are working to forestall the inevitable with products like Docs, leveraging a huge market base to reduce the marginal cost of development.
You claim that there's a risk that the service will be provided until competition is eliminated, and then it will be withheld. Nope, that's wrong. The value of our data is still much higher than the cost of providing these services, and will continue to be for the foreseeable future. A company that did this would loose market share, fast. And there are plenty of companies just waiting for Google (or anyone else) to make a stupid mistake like that.
Free services *can* go away: people might stop using it; the service turns out to be more costly than expected; the provider undergoes a fundamental shift in business model. But that's normal.
Thanks again for the post; it inspired me to put some thoughts together on the subject that have been swirling around for some time.
-- Josh
Posted by: Josh Rehman | January 20, 2008 1:06 AMI use free services because I can't afford the paid ones.
Posted by: Carlos | January 20, 2008 5:10 PMGreat Post !!
and insightful comments.
I had this debate with one of my friends, where I argue that advertising model is completely "producer" biased, totally inefficient model, evil to some extent and in the end levies more cost to the "paying consumers" who bear the burden of "freeloaders".
That discussion can be found here:
Posted by: Gubbi | January 20, 2008 8:07 PMhttp://blogs.vinuth.com/the-holy-trail/2006/05/breaking-free-of-empires.html
Google Docs is NOT free for enterprizes - it is priced low and why not? It is actually micrsoft which sells its software quite expensive.
As someone has pointed out above - the marginal cost of software is very low - nearly zero.
For years Microsoft (being a monopoly) in spite of knowing the fact that additional copies of a software don't cost it much, kept the prices of its software the same (rather increasing) even as more and more copies were sold. Result is a skewed impression among users that "software is expensive".
What Google is doing is correcting this part - and as so many above have said - this is a transitional phase. When the cost of getting an advert on the website (to pay for access to it) will become higher than the cost to run it - websites will start charging people for it. But that day is still far as more than half of humanity is yet to come online!
Posted by: Nikhil Kulkarni | January 21, 2008 1:42 AM#24 - over the air TV is not free, and that's part of the point of Alex's post. Commercial TV and radio is advertising subsidised, apart from a small amount of public service broadcasting. In itself, that has secondary consequences like self-censorship. The problem is that consumer 'hate adverts' while also wanting free television (as proven by the fact that ad-free subscription channels are a niche, premium market. Who generally speaking can also charge highly for the limited ad spots they do run between programs).
>The price of products and services in a competitive market at large scale will always >approach their marginal cost. On the web, the marginal cost of adding another user to >the database of users or showing a user a copy of a blog post is essentially zero >(bandwidth cost is so negligible that I am treating it as zero).
In which case, I would refuse, point blank, to invest in your business, unless you can also show me that the profit per user exceeds the cost per user. Let's say the marginal cost (for media storage) is 1c per user per year. And let's say you have 10 million users. If you get 2c of revenue per user that's $100,000 - but if you're revenue is fixed, that's a cost of $100,000.
And as anyone trying to move large amounts of audio or video knows, bandwidth does cost. Not forgetting that the networks are waking up to the fact that they're 'paying' for the pipes your business is using. (This is mostly a lie - the end customer will always be charged for any investment in the pipes. They'd just like a cut of services because they have failed to invent any people want. But there's another point in 'free' - the customer is actually paying for you to deliver, but then they always have, and it's cheaper than physical delivery).
Then we get onto the wider question - we (as in developers) all want open APIs, which means the ability to bypass ad-driven revenue. Which seems to be the only model that works en-masse. (Subscription services seeming to be as niche as HBO). And while some of you may disagree, that will eventually lead to stagnation. I can already think of at least one free API (provided by the British Post Office) that was removed because it was basically too popular (thus costing to host at no gain to the business). It will not be the last.
The same arguments were used for 'free' in the first bubble. Lots of companies disappeared, unable to find a magic way to transform page hits into power bills. Of course servers and hosting and bandwidth are cheaper now, but if you have a fundamentally bad business, all that lets you do is get bigger before you collapse - it's like putting more memory in when the real problem is a memory leak in the software.
One final point - economic theory also suggests that a point is reached when investors and companies will pull out of a market (usually after oversupply drives price below costs). Depending on the scale of the market, there is a minimum percentage profit that companies will bear - there is no point struggling to make $4000 a year on $4 billion sales.
Posted by: JulesLt | January 21, 2008 5:02 PMOk, at the top you say that the foundation for income in the newspaper business is subscription fees, this shows how little you know about the newspaper business. Subscription fees cover the printing costs, that's it. The rest of the cash come from advertising which is a big business. Just because they ask you to pay $1.25 for the Globe and Mail doesn't mean that's their primary source of income. Where did you get that idea?
Posted by: BlackWidower | January 27, 2008 9:18 AM"Free" in today's world almost never means free. Think about it: we have to pay to eat, pay to sleep... essentially we even have to pay to breathe. What's free about that?
Posted by: Tony | January 27, 2008 9:04 PMIt's easy to call evil whatever we don't agree with. Unfair business, in my opinion, involves operations that could not have been done by the competitor; i think using your power over something to sell something else is unfair.
Posted by: Rudy Rigot | January 28, 2008 2:39 AMMicrosoft could have made their software free long ago; they chose not to.
Having read this entire post, all one can say, as a songwriter who made a few bucks here and there,is that the music industry (as we knew it) has gone. The 2million + bands on myspace will just stay there.(They're a good listen if you have the time!) And the overhyped and overpaid movie industry
Posted by: steve hogan | January 28, 2008 5:33 AMwill go the same way, especially now that people download
new movies for free into their living rooms.(I saw this done at a friend's home. I don't watch movies anymore!!)The future of movies is watching things like cats on skateboards on youtube! The world economy is going down the tubes,so this is not the time to think of Google or Microsoft.
Look for food to feed your family. Hide tins in the woods!1
Good Luck
well firstly a nice post and goodly crafted.
next, the point is, among of the audience; who you want to get affected by your this post?
1) general people (customers) = do you want to educate them to start buying instead of looking free? (would you like to pay for feeddemon? free of cost daily feed reader.) OR,
2) you want the big businesses to stop using "Free" in their marketing & sales practices? = why are you offering me this article for free? why din't you ask me to pay to read this article (by paid a/c i mean)? OR,
i guess "free" won't go anywhere. it will always exist in promotions. its just a business practices and their is nothing wrong in when you are into business. you have borrowed money from investors and you are responsible for creating profit for investors.
i guess this is simply a marketing techniques and the only way to fight with it is to educate your customers about why you are not free. convince them and they will buy.
afterall everyone want to keep money, either by saving (consumer by going with free) or corporates (by selling free to attract earnings).
would love to hear others here too on what i mentioned. am i wrong?
Posted by: Aryan | January 28, 2008 9:17 AMBrilliant article and anyone's guess as to where this "free" crusade will lead. My guess is that the answer can best be found in the examples of other great societies where they eventually self destruct.
Posted by: Ernest Herr | February 9, 2008 7:37 AM