Free: The Future of a Radical Price by Chris Anderson

Information wants to be free (because of the new ease of copying and reshaping and casual distribution), AND information wants to be expensive (it's the prime economic event in an information age)... and technology is constantly making the tension worse. If you cling blindly to the expensive part of the paradox, you miss all the action going on in the free part. The pressure of the paradox forces information to explore incessantly. Smart marketers and inventors quietly follow-and I might add, so do smart computer security people. —Stewart Brand

Chris Anderson is the editor of Wired magazine and his previous book, The Long Tail, reveals how businesses are still making money on products that we had all thought were effectively worthless. Virtual bookstores have a limitless storage space so they make more money on their total incidental sales than on the minority of popular books sold in brick and mortar stores.

His latest book, Free: The Future of a Radical Price, tackles the larger question of how businesses make money in a market where much of the content is becoming so cheap that its cost is free to the consumer. To prove the point, here is a synopsis I yanked off of Amazon... for free:

Anderson's business models for Free:

1. Direct Cross-subsidies: give away one thing to sell another (such as giving away cell phones to sell the air time).

2. Three-party markets: sell to one type of customer to subsidize another (give away content to sell information about the customer)

3. Freemium: give away a basic product or service subsidized by a small subset of customers willing to pay for a premium version (give away web content, sell print version—the model used for this book, which lists for 26.99 but is available for free download in an abridged audio book format)

4. Non monetary markets: anything given away with no expectation of payment (reputation-based websites such as Facebook—but also incorporates pure gift economies and piracy).

Why does Free matter now? Anderson quotes an old argument that "Information wants to be free" (both in price and distribution) and gives it a technical basis by examining the price of bits over time as they have trended toward zero. In fact, says Anderson, when prices get so close to zero, businesses would be better served to stop trying to measure it and recognize that Free may be the only model that sells. I'm no economist, so I'm not sure he proves his argument with any scientific rigor, but it does make for an interesting debate starter. I will say that I'm surprised he didn't touch on Apple's business model of giving away iTunes freely while selling the iPod at a premium price compared to other MP3 players because the added value of the simplicity and ubiquity of iTunes justifies the expense.

As you might expect from this focus on bits, much of Anderson's argument applies primarily to the online digital economy, and not to the brick and morter or manufacturing sector (atoms are recalcitrant material bits that do have costs for creating and moving that won't ever reach zero), although he does suggest that even manufactured products are under the same pressure toward Free. Scattered throughout the book are sidebars illustrating examples of products and companies that price their products at zero and explaining how the business model is profitable.

The discussion of reputation-based websites like Facebook and Amazon product reviews was quite interesting. He reports on attempts to calculate a dollar value for Facebook friends and relationships (Using the Burger King Whopper as the medium of exchange—really!); while the results are certainly more SWAG than Burger King swagger, the concept is broader and more meaningful than my brief description makes it sound.

For example, he touches briefly on the motivation behind folks, like myself, who spend considerable time writing blogs or reviewing products for Amazon. Is it a pure gift exchange? Well, not quite, for Amazon Vines members, who can select from a limited set of pre-publication review copies of books at no charge. In my nine months in the program I have received and reviewed about 40 books, with an estimated value (if I assume $25 per book with shipping) of about $1,000. Review copies, of course, are often incomplete (without pictures, indexes, or final hardback covers) so they are worth less than a final sales copy, and had I been paying I would not have bought all these books. I average at least 30 minutes per review (not including the time to read the books, and I read them all cover to cover), which would suggest I am being "compensated" about $50 per hour for my reviewing time. However, over the last three years I have reviewed a total of over 700 products (mostly books, some DVDs and CDs) without compensation, so that my wage drops to under $3 per hour. Clearly, this is not a profitable business model for me.

For Amazon, on the other hand, this is a very profitable business model—as of August 10, 2009, for an investment of near zero (most of the $1,000 worth of books they have sent me are review copies that cost Amazon nothing) Amazon has purchased over 700 helpful votes. If 5% of those turn into purchase, that's 35 books sold for a net marketing cost very near zero dollars per sale. Multiply 35 sales times the tens of thousands of buyers who contribute Amazon reviews, and Amazon is doing a masterful job turning Free into profit.

From my perspective, as Anderson says:

"In short, doing things we like without pay often makes us happier than the work we do for a salary. You still have to eat, but . . . There is more to life than that.

Free is not a magic bullet. Giving away what you do will not make you rich by itself. You have to think creatively about how to convert the reputation and attention you can get from Free into cash." Link.

This article is part of a series called The Filmmaker's Roadmap to Free. You may read the entire articles by clicking here, or the other articles here:
The Filmmaker's Roadmap to Free: An Introduction