Mike Masnick followed on TechDirt with an insightful post in which he attributes some of Gladwell's confusion to the way that Anderson wrote the book. Masnick says that the book does not provide enough details on the mechanics and applications of Free. (I haven't read the book, so I can't comment on that.) Fred Wilson joined the conversation with a sharply delivered post on Freemium and Freeconomics. He gives examples of the kinds of Free that actually work.

So, as Albert Wenger wrote recently, there is "continuous confusion about free."

This is because the topic is broad, and everyone is taking a different angle. In this post, we will break down Free into three separate classes: the kind that actually works, another that struggles, and the last that can be dangerous.

Freemium: When Free Really Works

Fred Wilson nails it on the head when he identifies the two instances when Free actually works. The first instance is the service or software that offers a free trial and then converts users into paying customers. There are different flavors of this approach, the most popular being, give the basic version for free and charge for the advanced version.

An early example of this model was online email, where you got a certain amount of storage for free and had to pay for more (see more about this, though, in the section on when Free is dangerous). Other examples in this category include project management software, like 37signals, and online photo collections, like Flickr.

The second instance that Wilson identifies is the consumer service that manages to build a massive audience. Citing Facebook as an example, Wilson says, "Free gets you to a place where you can ask to get paid." He argues that because Facebook has managed to amass such a valuable asset, it is able to monetize in any number of ways. Citing Business Insider, he lists Facebook's revenue:

• $125 million from brand ads,
• $150 million from its ad deal with Microsoft,
• $75 million from virtual goods,
• $200 million from self-service ads.

Interesting that all but one revenue source here (the virtual goods) is advertising. The only thing that consumers of this Free service were willing to pay for was a supplemental service in the form of virtual goods.

In any case, the main point is that, given a truly massive audience, monetization opportunities present themselves, at the very least in the form of advertising.

Old Media: When Free Cries

It is ironic that the very thing that makes large consumer services successful also makes old media cry. Online advertising does not seem able to deliver the kind of revenue that old-fashioned subscription services did. The culprit? A drastic drop in the cost of publishing, and complete destruction of barriers to entry. Even at the turn of the century, publishing was a closed game. Today, anyone can be a publisher, thanks to the read/write Web (no pun intended).

What really angered Gladwell was Anderson's verdict on journalists. Gladwell writes:

"It is not entirely clear what distinction is being marked between 'paying people to get other people to write' and paying people to write. If you can afford to pay someone to get other people to write, why can't you pay people to write? It would be nice to know, as well, just how a business goes about reorganizing itself around getting people to work for 'non-monetary rewards.' Does he mean that the New York Times should be staffed by volunteers, like Meals on Wheels?"

While this question is valid, it misses the point. It does not matter whether journalism should be free or not. The issue is that those old media profit margins are nowhere to be found anymore. And so the money dissipates, the way that the big VC money from the '90s can no longer be deployed in tech.

To answer Gladwell's question, journalists will still get paid, but they will get paid to work at smaller outfits, like ReadWriteWeb.

Free, abundant content and more nimble, agile news sources from the blogosphere and Twitter are striking a deadly blow to old media. Old media cries because it can't figure out how exactly to remain the way it was. Ultimately, it can't.

Monopoly: When Free Bites

Most of the discussion around Free focuses on the freemium model and media. When we wrote about Free earlier, we focused on a different side of it: how Free can be dangerous.

The problem is that large companies can exploit Free in a way that is essentially monopolistic. A large company could enter a brand new market to undermine competition. Consider Google Docs, a completely free consumer product that serves no ads and competes with Microsoft Office. A subtler example is Gmail, which does display ads (even if they don't attract many clicks) and has limited storage, but the limit is so high (2.5 GB) that the product is essentially free.

Free can also be used to kill off competition and create a barrier to entry. IBM was the main player behind the open-source project called Eclipse, a platform for building software applications. Seemingly innocent and even good for the world, the initiative managed to kill off all of the small and mid-sized players in the market within five years. In doing so, it killed innovation and became the de facto tool for building Java applications.

When I spoke about the danger of Free during a recent summit on Freeconomics, I brought up a point that did not seem to resonate with the audience. I wondered, what are the moral implications of Free, and what specific impact does Free have on children? For example, what is it like to grow up in a world in which most software is Free? Does Free create a sense of entitlement? Does it lead people to wonder why they should pay for anything at all? Where do we draw the line on what should and should not be free? These questions are not simple and are certainly far from being answered.

Conclusion

Clearly, Free and Freeconomics are broad and complex topics. No single post could begin to address all of the issues involved. Anderson's book is timely and important. While we need to be careful, Free is also inevitable. Not only is it our future, it is already our present. So we need to understand what it is and what impact it has on the Internet, our lives, and our children.

The debate that is unfolding around Free is fascinating to follow and even more fascinating to participate in. So join the conversation with your posts, comments, and tweets!

"[...] 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."

bee image: bbum

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