Today’s hottest business model – FREE – Review of the book by Chris Anderson
Just finished reading “Free – The future of a radical price” by Chris Anderson. It was interesting reading and builds on many of the themes from Jeff Jarvis’ book “What would Google do?” that inspired me to start this blog earlier this year.
This book is well written and makes a strong case for free as a business model. The argument is that the web provides an easy low cost way to distribute information at a near zero marginal cost. Therefore it is much easier to make information available rather than try and protect it. Of course many will argue against this principle; noting that people’s time cost money and nobody (with some exceptions) works for free. However, reading between the lines I do believe that Chris Anderson recognizes that for FREE to work, money must be made somewhere. At a more strategic level, I think the main point of the book is that dramatic changes are happening in business models and to succeed – innovation in the way money is made is now a requirement.
Three FREE models are discussed.
- Direct Cross Subsidies – where products or services are effectively bundled with some provided for free and the others for a fee. In this model, usually you need the paid for product or service to get value from the free one. e. g. Cell phone is free, cost is to use it.
- Three party or “two sided” markets – a traditional model in which one class of participant subsidizes the other. This is standard way of receiving a good at the cost to advertisers. e.g. any advertising supported delivery of content such as TV or ad supported web sites.
- Freemium model – in which a basic service is free but there is a fee for a more sophisticated version. This is has evolved into a model where the base free service is good and quite usable for a large quantity of users and that a smaller set of users are willing to pay for a premium service. e.g. Skype where there is free computer to computer talk but it costs to call a phone.
This book provides a good history of using free to entice customers to move up the value chain. What is different in today’s world is that we now have services where a majority of the users will only use the free service and are subsidized by either a small group of specialty users or by advertising. While this may be the case – is this model really sustainable?
Chris Anderson suggests that this is something that you can’t fight. Trying to fight against free will ensure failure as a competitor will likely embrace it. This is where the discussion gets interesting. The challenge is to find new business models where something is free and new different ways of payment are discovered. The example is for consultants (since I am one – this is relevant) who provide free general information that results in paid individual consulting or speaking opportunities. Now of course, there may be a level of naiveté in this thinking. As consultants, one thing we always know is that any manhour not paid for is gone forever!! But what I do know is that things are constantly changing. As soon as you assume something new will work, it too is replaced by new thinking. Innovation is the new constant! What we have in this era of almost unlimited free information is a huge global exchange of ideas. And this has extreme value – the question then becomes how to find that value. Malcolm Gladwell has another interesting view in his review of this book. This shows the level of debate which I think will continue for some time. However while the debate is raging, more and more still seems to be available for free.
As an energy economist, I find the economic model fascinating. What is being said here is that in the area fed by the internet, there is abundance. And as we know, abundance means a low price as economics clearly points out that we value what is scarce. But as is also pointed out in the book, every time we create abundance we end up with scarcity somewhere else. So in this case, the abundance of information means that our time to absorb, understand and use this information is becoming scarce. Or as the example goes – some people have more time than money and others have more money than time. For the latter group, payment to save them time is valuable indeed!
The other issue is that sometimes abundance isn’t abundance. Externalities must be considered or we end up in the situation that we now find ourselves, warming the earth with green house gases because the true cost of the impact to society is not included. Abundance leads to waste and sometimes waste leads to societal damage elsewhere down the line.
But what is clear is that we have now moved to a state where certain things that we valued in the past; we are no longer prepared to pay for. Does this mean the end of these things? In fact no, they are shared freely because they are abundant. What it does mean is that we all need to think up new business models that make sense in the world of FREE.
