Everything For Free! Well, Not Quite

Posted by John Sviokla on March 14, 2008 10:37 AM

Chris Anderson, editor of Wired, has a new book coming out called Free! -- how the new economy is headed toward no-cost products and services. He notes that music is almost free, all the services of Google you get for nothing, and product category after product category is getting cheaper all the time. He extrapolates to the idea that Free! is the new strategic mantra.

Anderson is part right. All those industries where information is the product are changing their business models -- or growing weaker and weaker. Just look at the long, painful descent of The New York Times. Its ad revenue and influence have been eroding for over a decade and show Anderson’s concept at work. However, some firms will be immune to this revolution and will even prosper despite of it.

How can we figure out which will win? By knowing which things can be gobbled up in information and easily replicated and which cannot. At its core, the digital revolution began in 1936 when Alan Turing theorized that it was possible to specify a Universal Turing Machine, a logical machine capable of replicating any other logical process. Almost all computers today are Turing Machines and these devices are growing more robust, powerful, and cheap. I think of it as an expanding Turing Reality Bubble (e.g. those realities that can be describe in a computer). It is a complement to the physical reality bubble that physics says we are living inside right now.

Who cares? Well, anything that can be described digitally has very low marginal costs. Why can Google give away so much software? Why are Microsoft’s margins so unbelievable? Because the marginal costs of production are trivial. When your entire product or service can be described digitally, you are in grave danger of having the price of your product go to zero, unless you have strategic control of the industry. This is why music companies, newspapers, and publishers are seeing their value model completely upended. There will still be models that work, such as advertising-funded content. Google may morph into an advertising-driven on-demand media company. Think of a TV network, but user-directed. There is about $1.3 trillion in our $13 trillion U.S. economy chasing demand, and this vast flow of funds will subsidize the media Chris Anderson talks about.

The limit comes when the “last step” is biological or physical. It may continue to be very expensive. Healthcare is a huge example. Heart surgeries, in-vitro fertilization, and chemotherapy are getting more expensive, not less. Even if we adjust for the tremendous inefficiencies and anti-competitive issue in healthcare, the “intervention premium” for new therapies, even those discovered and enhanced digitally, will always be there and seems to be increasing on a relative and absolute scale. The Turing Reality is not enough. A stent needs to go into your vein, and that costs something.

So, where is your business? In danger of what Free! can do to it? Or ready to prosper because of it?

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Comments

I don't think free is as big a "danger" as the author of this article proposes. Chris Anderson is saying that with the price of information going ever downward to free, we have a grand opportunity on our hands. We can first admit it, then plan for it, then capitalize on it, whether or not our particular business is an information business or not. The recorded music industry can be our icon as how not to go about it.

I believe that every business is partially information and partially material. In my business, computer consulting, there is a tremendous amount of information that we are paid for, but yet our consultants fly to be on-site with clients, therefore there is still a big part of our sales approach that requires people to materially be "butts in seats" from a client perspective.

Likewise, with a manufacturer, a product is, of course, a material object, but the instruction manuals, user forums and marketing approaches are all information, and it makes good sense to offer as much of that as possible for free.

Thanks for posting this article. I think it starts a great conversation. I look forward to reading Anderson's book when it comes out.

- Posted by Daryl Kulak
March 14, 2008 12:56 PM

Web has finally made customers kings and companies their servants.
FREE is just one corner of this new phenomenon. And free is not a threat. In some businesses products will be given out for free, but if you understand the fundamental laws of giving you can still make profit.

You have to think backwards.
Three easy questions:
1) How do you want to change the thinking or behavior of your customers?
2) What are their needs?
3) What do you have to give them that combine their need and your goals?

I think understanding giving is the key to a successful strategy.

- Posted by Miikka Leinonen
March 15, 2008 7:42 AM

Dear Miikka,

I agree that Free is an essential tool in many industries -- and has been used to good effect in consumer packaged goods, and other areas. The challenge is to understand for which businesses free is a radically change and for which is it a small change.

In terms of customers being king -- I was always a believer that customers were in charge. There is just more competition in many industries than there used to be so it feels new!

All best,

- Posted by john sviokla
March 17, 2008 8:31 AM

My business can prosper from FREE. It is not the media that builds a brand, it is the messaging conveyed by the media that builds the brand, and in that arena I still hold a proprietary edge over advertising agencies and Madison Avenue. The faster a company can disseminate a message over the internet and new media devices, the faster companies learn that better ideas can sell more product for less money - and why would an advertising agency want you to do that? Test your advertising agency's message at the speed of free. That's what I think free is good for. Like an aspirin, if your sales headache does not materially improve in about 20 minutes, your business needs some stronger medicine.

- Posted by Martin Calle
March 18, 2008 7:45 PM

Price for accessing information is dropping every day. Time is becoming costlier. The risk of spending too much time scanning through clutter of information to find the useful most is increasing. Not only volume of information available is making it difficult, also the authenticity and validation of what is free information is a question mark. Hence we certainly pay the price, if not in $ , 'in time'. Specific information providers charge their fee.

There is a difference between information and knowledge. We live in a world of patents. At one end we have a free zone, at the other end you have patented information and patented products that sell at a premium. Not only healthcare, education too is getting more expensive every day. The consumer may save on travel, yet spend more on hotels. One needs to identify the outcome and destination of free economy, and be at the other endt to serve his product at a price. The Free concept is increasing consumerism and restlessness, reducing time for one's inner journey towards peace, resulting into increasing incidences of diseases like diabetes and heart attacks. Addressing such outcomes cost big.

Business is wating for a day when advertising would become free !!

- Posted by AK Handa
March 20, 2008 12:53 AM