Assumptions of “Free”

Continuing my thoughts from my previous post  Review: “Free: the Future of a Radical Price” …

Free: The Future of a Radical Price tackles a variety of challenging concepts that have perplexed very smart economists and entrepreneurs for sometime. The arguments made to justify Free and hail it as the future model, in a very broad sense, of online economics could easily be labeled ambitious or optimistic. While I find the argument for Free compelling it’s important to challenge the concept of the new “Atoms vs. Bytes” paradigm that Chris Anderson is so eager to laud.

In addition to being an author Chris Anderson is the editor of Wired magazine.  As editor of Wired Chris has a front row seat to witness and monitor business and technology trends like few other people. Immersed in that world it’s perhaps easy to get sucked into the enthusiasm behind it. It wasn’t that long ago in the late 1990’s when Wired released their Wired 40 Index, 40 companies that would define the new economic paradigm brought about by the Internet. The Wired Index made for an entertaining read and perhaps for a few a semi-profitable investment portfolio, but if you look back on who was in the Wired Index your eyes will surely open wide.

AIG, Enron, AOL, Yahoo, Sun Microsystems, Disney, Cisco, Sony, etc. Of the original 40,  6 were acquired, 3 went bankrupt / bailed out by the government and overall the remaining to this date are still down -17% as of the beginning of July 2009. The companies that did the best… Monsanto and Nucor both up 376% and 300% respectively.  Most to my knowledge have relied on patented products and patent portfolios to grow or ride out hard times.

While Chris may not have been behind the Wired Index upon its launch, its an important example of ambitious vision not matching long-term economic realities. Even Chris’ widely acclaimed book discussing the Long Tail principle has not been successfully employed by many firms after the release of the book. The Long Tail concept on a smaller scale has the potential to hold true for certain industries, but it hasn’t manifested itself as a pillar to every online business. Free, as with the Long Tail, details some very interesting history and modern application of a business tactic. The jury is still out whether employing cross-subsidies, the less glamorous but core focus of free, will turn out to be the magic key to make online businesses as widely profitable as traditional brick and mortar stores have been in the past.

Employing Free, rather the use of cross-subsidies or Feemium models and so on, is likely to help more than a few creative business people, but its not a magic bullet. Chris Anderson aptly crafts an argument for free, but is tied to a few assumptions that make me question whether it does or will live up to the hype:

Piracy is Unstoppable
It might surprise many but when I was in college I was a pirate. Personal computers were just coming into their own and software was being developed as a product for the first time. “Clickthrough” licensing had yet to be established as a mainstream tactic and truly practical applications were installed off 400KB floppy discs. Piracy then was as much a balance of exploration as it was a form of education. Sure some applications were pirated to say you could or to learn how anti-piracy technology was being developed, but in the end the value was seen in learning how to stay ahead of the curve to stay knowledgeable and marketable.

Ironic that 20 years later I write about intellectual property and the protection of copyrights, but my situation is a perfect example of how piracy exhibits a lifecycle. What is new and can be done for the sake of doing transforms to a more practical purpose. While I agree with Chris Anderson that piracy is inevitable I’m not on board with the concept that it is unstoppable. Do I believe there will be a day that piracy does not happen? No, but I do believe that as people pass through different stages of life the amount they pirate changes. I also am a firm believer that as new technologies become mainstream and common interest in piracy wanes. Levels of piracy vary depending on various demographic factors and the maturation of the product lifecycle of what is being pirated. In the past 30 years we’ve seen a surge and decline in the piracy of various product types including Software, Video, Music and now Photography. The cycle of piracy (piracycle perhaps) varies unto itself based on the product, availability/type of distribution technologies, and intellectual property (IP) laws. While not one of these highlighted industries has exhibited the exact same piracyle duration, they have followed similar stages. Businesses and laws will continue to adjust based on each industries piracycle. Perhaps on some level Piracy will remain and thus be unstoppable but it will continue to be managed and accepted as a part of business and perhaps even as Chris notes a strategic means of adoption. That being said unstoppable does not mean unmanageable, nor does it preclude Free being the end price point for products in the industries mentioned.

Expectation of Free
The argument that free is now the expected norm also strikes me as erroneous and at best partially correct. No where else in our economy is there the expectation of free as there is online. This expectation similarly to piracy has a cycle to it. On the user side of the equation which is the focus of Chris’ argument, older individuals have a higher tolerance for paying for goods whether online or off, while its referred to numerous times that younger generations “just expect content to be free”. This expectation too will adjust through an adoption cycle of priced products/services online, just as expectation in the past shifted for software that eventually came with a price tag. People can expect all they want, but the flip side of the equation… truly the other foot that will drop over time is that companies will begin to monetize the audiences they amass for their web properties.

The web has consistently shown a cycle of “land grabs”, a rush for companies to acquire an audience and to preserve that audience as best they can. In the 90’s the surge of capital thrust into upstart companies was the first wave. Sites like Hotmail were the first to harness viral marketing techniques quickly amassing millions of users and thus quickly cashed out for a quick profit selling to Microsoft. On the other end of the spectrum money flooded in to capitalize now household brands like Amazon allowing them to out maneuver and outlast their competition. In the realm of Web 2.0 a new form of “land grab” has begun with social media sites developing communities on the scale of 10’s and 100’s of millions of people.  This is alluded to ever so lightly in Free, but the view is that the “free” party will never end.

Yes I will concede that younger generations expect free sites, services and media because that is all they’ve known. As pointed out in the book Free really is a discussion of cross-subsidies and cross-subsidies will only take a public company so far. Eventually there will be increased pressure to more directly monetize established communities, and as much as people want free (don’t we all) it will diminish as demand for higher profits works through the financial system. Over the next 5 years we’ll see how the balance between Wall Street’s hunger for profits balances with the acceptance of paid services online. I think it is safe to say that Freemium and many of the existing cross-subsidy business models are not the end all in the evolution of online business. Societal expectations and demands from Wall Street will never remain constant and as such neither will the business models that support companies doing business online.

All Businesses / Industries are Created Equal
The arguments put forth in Free focus on success stories of very large companies such a Google and Netflix. This is addressed in the book, but the overall concept of cross-subsidies as discussed makes a broad stroke analysis that the dynamics for such an approach is universal.  Even with the distinction being made between markets of abundance and scarcity different industries have their own histories, trends, hot button issues and often regulations. Chris Anderson didn’t write the book to spell out solutions to every industry, but the book certainly lacks examples of where free likely would not make sense and as a result feeds an unrealistic “new paradigm” hype.

New Economic Paradigm – Atoms vs. Bytes
The case studies and arguments put forth in Free are excellent and are supported by the belief that the difference between atoms and byte based products, services & industries amounts to a new paradigm. While I understand where Chris Anderson is going with this point let’s be clear unless you live in another dimension everything we interact with is atom based. To claim digital files aren’t atom based is…. well ridiculous. It may make for a catchy phrase but all that has happened in the past 30 years is the transformation of form and means of transport of data that constitutes the media we consume. Whether a stone plaque, papyrus, news print or ferrites on a platter we live in a world of atoms.

Does the speed and ease by which we transmit and consume such information constitute a new economic paradigm? I don’t think so just as Web 1.0 business models didn’t constitute an economic paradigm shift in the 90’s and early 00’s. Economic principles remain relatively constant with few exceptions.  An argument for a technology or communications paradigm shift is one I can believe, but economics is another animal.  Chris’ arguments are excellent and challenge convention. Free as a means to lure people into some form of transaction strikes me as more of a ploy versus an Earth shaking shift to the economic landscape. Even by Chris’ description these ploys are nothing new, they’re merely executed in a creative & different fashion for a different type of product. The economics of Atoms & Bytes are the same, the tactics of how the snake oil is sold is what varies.

Next Up: The Marginal Cost of Creativity

Previously Discussed: Review: “Free: the Future of a Radical Price”

[tags]Chris Anderson,  Free,  Review,  Free: the Future of a Radical Price[/tags]