Chris Anderson of “Long Tail” fame has done it again with his latest book, “Free”. I reviewed his NetGain talk earlier in this blog, so I won’t go through all the basics again. His concept is that, in a highly competitive online market, price falls to the marginal cost of adding a new user, which is close to zero.
He distinguishes between three different models of “free”: the cross-subsidy (basically a come-on, like the free sample or the loss leader), the two-sided market (one customer subsidizes the other, e.g., advertisers subsidizing magazine readers), and the “freemium” model (upgrade users from a free version to a more capable version of your product, or a range of ancillary experiences).
His historical preamble is both amusing and informative, explaining the origins of common phrases such as "free lunch" and "jumping on the bandwagon." There are sidebars containing detailed examples of companies that play in the free space to a non-trivial extent. His comments on the dilemma currently facing the media industry are unsparing and incisive.
"Free" is a good read, being both very clear and non-redundant. Anderson has had a long and successful career in quality publishing, as well as being a well-known blogger. For my money, he is up there with Nicholas Carr and Malcolm Gladwell as a really insightful writer on technology, business and social trends. At about 250 pages, this is a book you can read in a small number of sittings, and then refer back to, as needed.
His message can be summarized as follows: a version of your current digital assets will one day be abundantly available free of charge, so you have to keep moving up the value chain. Furthermore, it often makes sense to give away some part of your asset base to some part of your potential market to gain attention, reputation and good will. You can then successfully monetize other, higher value, opportunities arising from all this buzz, possibly by charging just a fraction of your users.
He cites many interesting examples, e.g., Skype giving away computer-to-computer calls, but charging for computer-to-phone calls, Second Life giving away virtual tourism but charging for virtual land, etc. My main problem is that they are mostly drawn from the mass-market, consumer space, not the professional space.
Even in the consumer space, experiments with free are ambiguous. For example, local newspapers have had a mixed experience with free, as Anderson acknowledges. There is the whole issue of how readers (and more to the point advertisers) value free publications, especially those that were once sold at a price. He also acknowledges that free has a habit of turning billion dollar businesses (classified ads in newspapers) into million dollar businesses (like Craigslist). Scale seems to be everything, as well as getting your sums right.
Perhaps the most interesting passages for me concerned Google: its vast economies of scale; its use of free for various purposes (goodwill, data gathering, ad delivery); and the concern of execs like Eric Schmidt that publishing companies may suffer to an extent that they are no longer able to generate quality content to be searched. Not every aspect of the Internet economy is a zero-sum game, and Google probably knows that the sooner the media industry finds new business models to maintain its creative output the better for all concerned.
The book ends with a handy guide to the rules, tactics and business models that seem to work in the free economy. Appropriately enough, free versions of the book are available, e.g., in an abridged form as an audiobook. (For a while, an advanced copy was also free on the Web as a pdf.)