Back to Free, The Future of a Radical Price, the book by Chris Anderson.  I heard Chris speaking with Terry Gross on NPR (Listen) and it was so intriguing I listened twice and started reading the book, which, of course, is free.  His idea/observation is that free can be a profitable business model and the first new business model based on the internet.  And the model is this:  making lots of money charging nothing. 

Free is not new as a business marketing strategy.  It’s long been known that giving away one thing free can create demand for something people are willing to pay for.  But in this internet kind of free, 99% is given away and a tiny majority pays for everyone else.

One example Chris cites is the Wall Street Journal.  Their website is free and is full of useful information.  But the archives and more specific data are only available to those who pay for it.  Google is another example.  Google’s services are available almost completely for free and yet the company is making a huge profit.  How is this possible?

There are some standard economic principles that play into this equation:

  • In economics 101, you learn that the entire supply and demand cycle is based on having to make choices in the face of scarcity.  Not in the freeconomy.  Free is driven by abundance.  Abundance of what?
  • Bits, digital goods.  Moore’s law says that the digital world gets cheaper, 50% each year.  (Actually, Moore was talking about transistors, but his basic axiom has become applicable to the digital world.)
  • Marginal cost – unlike atoms, which are inflationary, based on the scarcity principle, bits get cheaper and cheaper until the marginal cost of producing products digitally becomes zero.  Take this blog for instance.  Does it cost me anything more to have 10,000 people read it than 1 person?
  • Barriers to entry – when marginal cost is zero, standard barriers to entry into a market are virtually zero.  Not that long ago, a writer would have either had to self-publish at considerable cost or spend many, many hours submitting manuscripts.  Now, publish on-line, for free.

So, with marginal cost of production down to zero, anything that becomes digital will become free, or available in a free version.

What does this mean for us as business people?  If your product can be digitalized and you don’t make it free, someone else will.  As Anderson says, either you’re giving it away for free or you’re competing with free.

One of my regular readers commented on the Neptune in Aquarius trends.  Some excerpts:

My work (commercial art, illustration) has been seriously affected by the internet, both positively and negatively. Over the past decade or so the computer has allowed me to reach clients all over the world, has introduced me to markets I couldn’t have even imagined, and has streamlined the research I do in preparing my graphics.

On the other hand, competition has gotten more and more fierce, availability and quality of “stock art” has gotten progressively better, and my asking prices are being driven down by this culture of “free.” In the arts, which is the area I know about, the internet has created a situation where “professionals” and “amateurs” can compete on almost-level ground. For example, there was recently a Superbowl ad done for free by an amateur. These usually cost hundreds of thousands of dollars and the sponsoring company in this case basically got the work for free. So we who have been considered professionals in the arts are suddenly threatened by throngs of amateurs, do-it-yourselfers who have access to technology that enables them to make a fine looking product that in the old days only a pro could produce.

So what’s an old pro to do? As you mentioned in your last post, we’ve got to find a way to distinguish ourselves beyond just craft. We have to have better ideas, or a better ability to address the real needs of our clients, or … I don’t quite know what. That’s the problem!

The downside of free.   Have you experienced the downside of Neptune in Aquarius?  Let us know in the comments section below.

More on Free, tomorrow.