Large Neuron Collider

Wouldn’t it be nice if everything was free? Free travel, free food, free iPhones?. In a much acclaimed piece Wired’s editor in chief Chris “The Long Tail” Anderson brings forward this utopia of the free (as in free beer) economy to be coming soon (Free! Why $0.00 Is the Future of Business). Anderson is already so thrilled by this idea that he has promised to publish his next book on the topic.

According to the article falling costs of production will make products free of charge. He bases his theory on some single example products that cost $0.00 to consume, such as The New York Times Online, Radiohead’s and NIN’s latest records, online casual games and everything Google is doing. Although I usually like Andersons writing a lot, I think he is wrong.

1. $0.00 does not equal free.

Just because something is offered with the price tag $ 0.00, it does not mean that it is free. The opposite is true. You are actually paying something that is much more valuable than money: Your attention and your privacy.

The privacy and attention cost of free products.

You do not have to empty your purse to obtain a free product, but you are directing your attention towards that product. Companies are turning your attention into money. Either by selling your attention to advertisers or by using it to sell you a product at a later stage. And because your attention is really scarce and valuable you might not notice that you are paying much more for a “free” product than the product would cost if you paid it in money. By not using your credit card to access a free web service you often agree to trade in your digital traits and your privacy.

2. “free” is always cross-subsidized by other non-free products

Anderson’s example of Ryan Air is completely failing at explaining why falling production costs of a product finally make a product free. It is true, Ryan Air has disrupted the air travel industry by offering much cheaper flights. But Ryan Air is doing it by cutting on costs by selling the tickets over internet and cross subsidizing, i.e. by charging extra for every service such as priority boarding, additional baggage, food and advertising and hotel fees.

But just because something gets cheaper It does not mean that it finally has to go free. In fact as long as it costs money to buy an airplane, to hire staff, to obtain kerosine, flying won’t be free. Maybe inflight advertising will one day become so valuable that the whole money price tag can be converted into an attention payment, but also this would be opposite of free (compare above argument). So by using Ryan Air as evidence for the thesis, the article actually only explains a nice marketing gimmick.

An other variation of the “freeconomy” is the Freemium model. The basic product is free, but users have to pay for the premium version (Flickr basic and the $25 Flickr Pro). A small minority of users pay for the bulk of people that consume the product for free. Obviously this business model is not very sustainable. Because it is highly inefficient. If you pay for something that is produceable at a tiny fraction of the price you are paying, you might abandon it really fast if a much cheaper competitor with a comparable offer enters the stage.

The weakest part of the article is when it tries the disprove-the-Milton-Friedman-favorite-”there’s-no-such-thing-as-a-free-lunch”-stunt (although I highly welcome this kind of endeavor):

“Friedman was wrong in two ways. First, a free lunch doesn’t necessarily mean the food is being given away or that you’ll pay for it later — it could just mean someone else is picking up the tab.”

Unfortunately that “someone else” is not picking up the tab because of charity reasons. She is only doing it to get the money back from you later, by selling an even more expensive product to you, overpriced by at least the cost of the product you have gotten for free.

Giving something away for free not selling advertising or cross-subsidizing it with a complementing product only works if you discount the loss with a future revenue.

For example NIN or Radiohead. They have given away their latest albums for free via download (even though they had huge costs of production). But because they can reach a much bigger audience by providing their music for free, they have a much bigger potential audience to sell future concert tickets, album special editions, t-shirts or merchandise flame-throwers to.

Giving something away for free in that sense is always a cross-subsidized business. Also when the subsidies are realized at a later point in time. Letting people download your album for free compares to an advertising campaign. It worked well for NIN and Radiohead because they got a lot of media coverage for it and it earned them a lot of attention revenue. But for other bands this is not going to work as well anymore, because NIN and Radiohead had the first mover advantage. Media coverage of free downloadable albums will decrease as soon as it gets normal to give it away for free, and this in turn decreases the value of putting your album online for free.

The cost for digital technology might half every 18 months and become at one point so cheap that it does not matter anymore. Just because a transistor nowadays only costs 0.0000001 cents, computer power is not free. The demand for more computing power raises as fast as the costs decreases. Additionally, to produce a product or a service, there is always other production factors involved such as labour, capital, and knowledge. Those factors do not tend towards zero.

I agree with Anderson that the success of free products is because of the huge psychological gap between “almost zero” and “zero”. But this marketing trick helps you only to attract a huge customer base fast. At the end of the day you have to turn this attention into revenue unless you are the salvation army, it has always been like that and won’t change in the future.

To summarize. As long as people need more than bytes to live, $0.00 won’t be any more future than it is present and past. With every product you get for free you pay a product that is overpriced.

Off course, Anderson is smart enough to be aware of these arguments – he even mentions them in his article. But he does not want them to destroy his catchy headline (and his future book bestseller:-))