Ethos Perspectives
The Free Economy
Introduction
Chris Anderson, editor-in-chief of Wired magazine and the author of The Long Tail (Hyperion, 2006) puts forth in his newest book, Free: the Future of a Radical Price (Hyperion, 2009), 1 a provocative and seemingly counter-intuitive argument: that not only is there money to be made by giving away things for free, but it is, increasingly, the only way by which some firms can survive competition.
This month’s Ethos Perspectives examines the debate surrounding Anderson’s hypothesis, and the broader implications of Free (i.e., the practice of not charging customers) on business and society.
The Psychological Potential of Free Unleashed by Technology
Free things have a unique psychological appeal. This is due to a common cognitive bias which venture capitalist Josh Koppelman has termed the "Penny Gap", where it is much more difficult to convince consumers to pay a cent for a product that was previously free, than it is to convince them to pay a cent more for a product that was not.
As a result, as Wharton professor Karthik Hosanagar notes, "the demand you get at a price of zero is many times higher than the demand you get at a very low price". 2 It is instructive that no paid service has gone 'viral' to the extent that free services have.
Free is made possible by the falling cost of processing, storage and bandwidth. It is becoming increasingly cheaper to produce, duplicate and distribute products "made of ideas, rather than stuff" 3 — in other words, digital information, such as software, online platforms, music or news. Not charging users is now a possibility, as the marginal cost of supplying each user is so minute.
Indeed, firms that do charge their customers are at risk of losing them to competitors who go Free and exploit the Penny Gap. In the words of Anderson, "the moment a company's primary expenses become things based in silicon, Free becomes not just an option but the inevitable destination". 4
If the future of business is Free, then traditional business models may have to be discarded, and alternative models found.
Four Forms of Free
If firms can no longer charge, how then do they make money? Anderson notes three broad key approaches that firms can take, as well as a fourth, non-commercial category of Free.
Cross-Subsidies
This is an old business model, where a product is given away Free in order to create demand for another, often complementary, product. It is also known as the Razor and Blades model, after its pioneer, King Gillette, who gave away free razors in order to create demand for its safety blades.
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