Free: The Future of a Radical Price

Based on reviews here and comments across the blogosphere, Chris Anderson's "Free" is nothing if it isn't controversial. Which I find amusing, but not surprising, considering the rough-and-tumble, Wild West culture of the Internet and Internet business models - a culture where ideas trump dollars - at least in technology-rich Silicon Valley. So in this environment, while accusations of plagiarism are justifiably not taken lightly, the alleged plagiarism (of Wikipedia?), if true, were neither relevant nor distracting to me in what I found an entertaining, informative, and sometimes provocative treatise on the business of giving stuff away.

In building his case, Anderson lays a foundation that stretches all the way back to 3000BC and the first mathematical concepts of "zero", to the origins of the "free lunch", to the cultural underpinning of piracy in the Far East. The author liberally spices his points with several encapsulated examples from the "free" economy: free music, free cars, and even free air travel. To familiar services that are both free and widely accepted (broadcast television, radio...), several current online and real world businesses and business models are compared. One of the more fascinating concepts was the philosophical difference between "free" and "not free", not only from the obvious perspective of implied value, but also in the much more subtle thought process of determining if any payment - even payment of only cents - is worth the intellectual effort and implied time commitment and implied risks of making the transaction. That is, the determinant is often not simply the price, but the implied commitment of a purchase, no matter how small.

Anderson writes in the light, hip, highly understandable style one would expect from Wired magazine's editor-in-chief. The result is a book that should have broad appeal to an audience much wider audience than economists or Internet start-up junkies (who, in fact may be disappointed in the dearth of charts, graphs, supply and demand curves, and not a single mention of "guns and butter"). So "Free" may not help get you that PhD in web-based economics, nor will it walk you through a step-by-step guide to becoming the next Internet billionaire. But if you are looking for an insightful and illuminating business book, a pleasant way to spend a few down hours, or a great source of interesting facts and anecdotes to pick up the pace in this season of mostly boring holiday parties, "Free" is a highly recommended, um, "purchase."

Below are key excerpts from the book that I found particularly insightful:

1- "The "free" part of freemium is simple, but the "premium" part is tricky. Every company and industry is different, and each business must figure out what its customers will pay for even as it uses Free to attract them in the first place. Although the book includes hundreds of examples of how successful firms found premiums to go with their frees, there are countless others. There is no silver bullet, no universal freemium model that can offer salvation to all. Making Free work is hard, which is why it's sometimes so scary."

2- "Those who understand the new Free will command tomorrow's markets and disrupt today's—indeed, they're already doing it. This book is about them and what they're teaching us. It is about the past and future of a radical price."

3- "Today the most interesting business models are in finding ways to make money around Free. Sooner or later every company is going to have to figure out how to use Free or compete with Free, one way or another. This book is about how to do that."

4- "Cross-subsidies can work in several different ways: Paid products subsidizing free products...Paying later subsidizing free now...Paying people subsidizing free people."

5- "Most transactions have an upside and a downside, but when something is FREE! we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered a as immensely more valuable than it really is. Why? I think it's because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There's no visible possibility of loss when we choose a FREE! item (it's free). But suppose we choose the item that's not free. Uh-oh, now there's a risk of having made a poor decision—^the possibility of loss. And so, given the choice, we for what is free."

6- "The lesson from Harris's experience is that in a digital marketplace, Free is almost always a choice. If you don't offer it explicitly, others will typically find a way to introduce it themselves. When the marginal cost of reproduction is zero, the barriers to Free are mostly psychological fear of breaking the law, a sense of fairness, an individual's calculation on the value of his or her time, perhaps a habit of paying or ignorance that a free version can be obtained. Sooner or later, most producers in the digital realm will find themselves competing with Free. Harris understood that and figured out how to do it better. With his survey, he looked into the mind of the of the pirate and saw a paying customer looking for a reason to come out."

7- "Commodity information (everybody gets the same version) /ants to be free. Customized information (you get something unique and meaningful to you) wants to be expensive."

8- "It's easy to see e why this is scary for the industries that are losing their pricing power. "De-monetization" is traumatic for those affected. But pull back and you can see that the value is not so much lost as redistributed in ways that aren't always measured in dollars and cents."

9- "In 1971, at the dawning of the Information Age, the social scientist Herbert Simon wrote: In an information-rich world, the wealth of information meat a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention."

10- "There is nothing new about this—people have always been creating and contributing for free. We didn't call what they did "work" because it wasn't paid, but every time you give someone free advice or volunteer for something, you're doing something that in a different context could be somebody's job. Now the professionals and amateurs are suddenly in the same marketplace of attention, and these parallel worlds are now in competition. And there are a lot more amateurs than professionals."

11- "The idea that knockoffs can actually help the originals, especially ir the fashion business, isn't new. In economics, it's called the "piracy paradox," a term coined by law professors Kal Raustiala and Christopher Sprigman. The paradox stems from the basic dilemma that underpins the economics of fashion: Consumers have to like this year's designs, but also quickly become dissatisfied with them so they'll buy next year's design. Unlike technology, say, apparel companies can't argue that next year's models are functionally functionally better—they just look different. So they need some other reason to get consumers to lose their infatuation with this year's model. The solution: widespread copying that turns an exclusive design into a mass-market commodity. The designer mystique is destroyed by cheap ubiquity, and discriminating consumers have to go in search of something exclusive and new."

12- "The lesson from fiction is that we can't really imagine plenty properly. Our brains are wired for scarcity; we are focused on the things we have enough of, from time to money. That's what gives us our drive. If we get what we're seeking, we tend to quickly discount it and find a new scarcity to pursue. We are motivated by what we don't have. not what we do have."

Free is a well-written book by Chris Anderson, the editor of my favorite magazine, Wired. The style and tone of the book is much like the long articles in Wired magazine. If you like those long articles and are interested in pricing models of various businesses, you will like this book. If not, it may be too much detail. (Some have quibbled with his use of Wikipedia for research, to me, it fits in with his thesis that information wants to be free, and takes nothing from his work.)

Anderson's thesis is that "making money around free will be the future of business." In the digital world, marginal costs are near-zero, in contrast to the world of "atoms." As he states in his book, for many, especially the generation that has grown up with the internet, "the response is usually `And?' It seems self-evident to them." This was exactly my reaction. Nevertheless, the book was worth reading.

My favorite key points:

"Between 1980 and 1990, the world's population grew by more than 800 million. But by September 1990, without a single exception, the price of (various metals) had fallen, and in some cases had dropped through the floor." Great argument against all the commodity bulls.

The same "genius" that predicted commodity prices to go up also predicted famines of "unprecedented proportions." This looks ridiculous now, with the massive obesity epidemic. The author slyly notes this genius still received a MacArthur Foundation Genius Award. Great point about how so-called experts are awful at making accurate predictions.

"Simon complained that, for some reason he could never comprehend, people were inclined to believe the worst about anything and everything; they were immune to contrary evidence just as if they'd been medically vaccinated against the force of fact." I often wonder about this myself. In a slow economy, we read all the doomsayers saying, "we're in a big hole." Yet we always come out of it in time.

More data for the scarcity crowd: "Today basic necessities such as clothing can be made so cheaply as to be essentially disposable." The author explains that in 1900 a man's T-shirt cost about $1 wholesale. Today, that same T-shirt still costs about $1 wholesale, but $1 today is worth about 1/25th of what $1 was worth 100 years ago. Transistors are even more amazing: in 1961, they cost $10, 2 years later $5, and now 0.000015 cents each.

The author discusses what I have called "The Encarta Complex:" the decline of the encyclopedia industry by Microsoft CD-ROMs, and subsequent total destruction by Wikipedia. In 1991, the market was a $1.2 billion industry. In 1993, Microsoft launched the Encarta CD, and by 1996, the market had shrunk in half to $600 million. In 2009, the market was effectively zero, as Microsoft stopped selling Encarta altogether, as Wikipedia was free.

So is all of industry doomed to failure, as all prices approach zero? How do businesses compete with the inevitable downward pressure on prices? Anderson answers: "But the short form is that it's easy to compete with free: simply offer something better or at least different from the free version. There is a reason why office workers walk past the free coffee in the kitchen to go out and spend $4 for a venti latte at Starbucks - the Starbucks coffee tastes better."

Because the dinosaurs like newspapers and telecom companies don't recognize this reality, and don't want to change, Anderson concludes: "Your voice mail inbox is full" is the death rattle of an industry stuck with a scarcity model in a world of capacity abundance.

This book pointed out that "Free" is here to stay. Much of his book discusses Moores Law, in which the cost of technology is cut in half every few years and even quicker at times. Technology can be depreciated at a more accelerated rate than before, down to zero in 18 months is a common occurrence. The marginal cost (cost of one more additional unit) of technology is virtually nothing.

Facebook gifts was a great simple example, (even though Facebook no longer supports the gifts themselves) Facebook would sell little tiny images (about the size of a dime) so that people could send their friends a gift or collect them on their own. They would also put out limited edition teddy bears, beer bottles, ect. A limited edition, of only 250,000, charging just one dollar a piece and pretty soon you are just printing money. Think about it... how much does it cost to copy and paste an object? Development costs, storage space, and site upkeep virtually nothing.

This same basic concept can be expanded on a larger scale. Development companies can offer free versions of its software for customers to try at virtually no cost to the company. Linux has a free open source operating system but if you have a problem with the system and did not purchase a support version then you are out of luck. The thing with free give a ways or complementary products is that I feel like it closely resembles a bait and switch wrapped up in a different package. Printing companies are virtually giving away their printers and copiers so that every time you need to get ink you have to purchase their product.

This book was a quick read and I really like the authors writing style. You find yourself skimming a little but that happens in almost every marketing book that I read. This could have easily stayed just an article in a news paper or magazine.

I have had this book awhile and, really kick myself for not reading it sooner. It is outstanding. Anderson is able to debunk all the chestnuts out there around free as well as spend the time to give you some history lessons on free. He also experimented with his own ideas on how to place the product out there for free using various methods he put forward. Very insightful stuff . I especially appreciated his 10 Rules of Free on pp 241 and the review of the range of conversion rates one can expect from freemium on pp 247. The key insight for me is his comment ( compressed and paraphrased by me) that:

Price will fall to the marginal cost (in the digital bits case, free) unless the provider has a monopoly and/or enjoys the network effect such as Microsoft (Office docs) and Facebook. This supports a winner takes all effect, driving competitors to very low numbers. Facebook can not charge for new members because it has value in the network = linking new people all the time. So they will generate revenue from scale - losing with 99 % of the users and making it from a small % of ad revenue. ( or perhaps - selling stock!)

I see that Guy Kawasaki and Tim Ferris both used ideas from Anderson in their recent promotions. Guy generated more "reputation" currency by offering free downloads of the Macintosh Way to people who "liked" his new book facebook page. Tim Ferris drove buys of the new 4 Hour Body , by offering a pdf of the 4 Hour Workweek to those who bought the new book. Tim drove his book to the top of Amazon very quickly = increased sales and reputation.

This is the best treatment of free and freemium out there. If you buy this very readible book, read and digest it. It contains numerous money making ideas. Do not treat it lightly! You can get the audiobook still free at Chris' blog (long tail) :

Chris Anderson's 2006 book The Long Tail will be remembered as one of the most influential tech policy books of the decade. It changed the way we talk about the digital marketplace and it instantly garnered a huge audience outside of the nerdy world of Internet policy. While Free: The Future of a Radical Price will forever live in the shadow of The Long Tail, it too is an important book and in many ways it is a much better one.

In The Long Tail, Anderson tried too hard to invent the latest business theory du jour, and in doing so he went much too far in proclaiming that, as the subtitle of the book argued, "the future of the business is selling less of more." That's just not true. While there's certainly a lot more action in the long tail than ever before since it is so much more accessible, that does not mean the entire future of business lies in "selling less of more." To the contrary, the fat head of the tail is just as profitable as ever.

Free certainly contains some of the flamboyance on display in The Long Tail, but Anderson has matured as a writer and is now far more willing to point out the limitations of his theories in a business sense. He does a splendid job in Free of creating a taxonomy of free-oriented business models to guide discussions about these issues. And he explains how "free" can be part of many different business models and strategies. His historical treatment of the issues is outstanding and includes many entertaining examples of how these "free" strategies have been used over time to offer innovative new goods and services.

The reason his book is important for Internet policy discussions is obvious: "free" is increasingly viewed as a threat to many existing companies, industry sectors, and traditional media business models. For example, battles about the future of journalism and search engine indexing of news sites are obviously tied up with battles over "free." And, it goes without saying that the traditional entertainment industry business models are increasingly challenged by "free" as many struggle to adapt to the new realities of the online world, in which "free" (primarily advertising-supported and "freemium" models) seems to be the only model with any legs.

Much like my top pick for 2008 book of the year, Jonathan Zittrain's The Future of the Net and How to Stop It, Chris Anderson's Free is the most important information technology book of the year because it is the one we will still be talking about the most a decade from now. However, unlike Zittrain's book and thesis, which I think will be largely discredited in another ten years, Anderson's book will likely be viewed as an important and lasting contribution to the field.

I rated Anderson's "Free" as "The 10 Most Important Info-Tech Policy Book of 2009" over at the Technology Liberation Front blog.

Chris Anderson's book Free: The Future of a Radical Price is a great book on how the progression of "free" items and information has changed the way we view business. Anderson points out to us that free is not a new concept and that our history is full of examples like the "free" Gillette razor blades to the "free" recipe book on the creativeness of Jell-O. According to Anderson, there are two types of people: people with time or people with money. The people with time tend to have less money and the people with money tend to have less time. Because of that, it's the people with money who are more than willing to pay for goods and services so the people with time can get it for "free." People with time can wait for a download or build things themselves, while people with money prefer the finished product. Anderson also points out that there are people who prefer, what he calls, the "atom" version of products (ex. you can download this entire book for free or pay for the hardcover). Psychologically, "free" is attractive because you can't go wrong with free because it's free. Anderson points to the argument of abundance versus scarcity. Traditionally, we tend to waste things that are abundant and conserve things that are scarce because that is how we are wired. But, with the information age and digital technology, things that were once considered scarce, are now abundant (Moore's Law). Overall, the book serves as a good assessment of how technology and "free" goods go hand in hand. Today's youth are desensitized to the conventional form of marketing so "free" offers a sample of a product that if it's acceptable, people will pay for the better product (ex. open source programs). The key is to give away things and use it as exposure while offering the better version as a paid service or product. For example, give away free music and if people like the product, they will go to the concerts/show and also buy the merchandising (which is the really money maker).

Luego de trabajar sobre la teoría de la cola larga, Chris Anderson se puso de cabeza a escribir sobre el precio radical: cero.

Aquí, Anderson estudia la psicología tras la palabra "gratuito" y analiza al menos cincuenta modelos que incorporan en su estrategia algún elemento sin costo (por lo menos para el usuario final).

Ejemplos claros y abundantes hay en los espacios digitales. Las empresas de Internet están llevando sus costos cada vez más cerca de cero en gran medida gracias a la baja sostenida de los precios en almacenamiento y ancho de banda. Esto genera un modelo de negocios 80/20 en el cual el 20% de usuarios que pagan por el servicio Premium subsidian al 80% restante que lo usa gratuitamente. Si bien ese sistema es uno de los más conocidos, Anderson muestra muchas variantes como las ventas cruzadas o los experimentos de "pon tú el precio".

Es importante destacar que si bien lo gratuito ha existido desde que tenemos memoria, las arenas digitales brindan muchas aristas para ser creativo y poder jugársela como lo ha hecho Radiohead o Nine Inch Nails quienes innovaron con el modelo "paga lo que quieras".

Esto se fomenta con una nueva generación de menores de 30 años quienes crecimos entendiendo el significado de "gratuito" y aplicamos la misma noción como consumidor y productor de información. De ahí también aparece el tema de la piratería, el cual en algunos países alcanza cifras escandalosas (95% de la música en China es pirateada) y producto de eso, varias personas han decidido potenciar aristas paralelas del negocio, como entregar la música gratis, pro cobrar por conciertos, apariciones en vivo o merchandising.

El libro es interesante puesto que no solo explica, ilustra e indaga en la historia, sino que esta plagado de casos prácticos en los cuales queda plasmado el poder de lo gratis, potenciado con un modelo de negocios que permite hacer dinero de otra forma.

Ahora espero con ansias el tercer libro de Anderson, en el cual habla sobre como la cola larga de los bits pasa a ser la cola larga de los átomos. En otras palabras, como podremos saltarnos a las fábricas y empezar a hacer elementos físicos desde nuestra casa. Absolutamente imperdible.

PEACE OUT

Le seul reproche que l'on pourrait faire ... c'est que le livre n'est pas gratuit ! (il l'est sur certaine site de eBiiks, mais inaccessible en Europe ...)

Après la "Longue traîne" on attendait l'analyse du Gratuit par Chris Anderson, le rédacteur en chef de WIRED, la revue la plus avant-gardiste des USA. Et l'on est pas déçu ...

Si les modèles économiques gratuits ne datent pas d'hier (il nous rappelle Jell-O et Gillette) l'internet les remet sur le devant de la scène. Loin des effets de mode, des critiques à l'emporte-pièce, Chris Anderson nous propose des réflexions intelligentes que des acteurs démontrent par les faits, à commencer par Google !

Car il suffit d'analyser quelques succès et échecs récents pour comprendre que cela n'a rien de farfelu. Et comme internet ouvre grand les portes de l'innovation, les modèles trop fermés sont condamnés à s'adapter et trouver de nouvelles ressources. La clé n'étant pas, cependant, de tout baser sur la publicité ...

A lire et à méditer ...

The marketing bullies wont like this book, because it tells them that they have to give things away for free. But, they're missing the point: there is method to the madness. A great, inspirational, easy read. Only catch: he doesn't quite practice what he preaches. The again, I've read his work online (for free) for years. So here is a way for me to repay his efforts. ;-)

Das Internet hat die Geschäftsmodelle der Musikindustrie und der Medienwirtschaft auf den Kopf gestellt, die Bücher- und Filmbranche befindet sich noch im Umbruch. Wer mit Journalismus oder Software sein Geld verdient, muss sich umstellen. Chris Anderson beschäftigt sich in diesem Buch mit der Frage, mit welchen Waren und Dienstleistungen in Zukunft Geld verdient wird. Er bringt dazu brillante Einsichten und Vorschläge.

Der Autor argumentiert, dass durch den schnellen Informationsaustausch im Internet seit der Jahrtausendwende ein Überfluss an Daten entstanden ist. Der Wettbewerbsvorsprung früherer Zeiten schrumpft auf ein Minimum, alles wird nachgebaut, abgeschrieben, kopiert. Andererseits ergeben sich ganz neue Möglichkeiten zum Großverdiener. Physische Produkte und persönliche Dienstleistungen haben nach wie vor einen Wert, aber nur, wenn sie der weltweiten Konkurrenz standhalten. Wer sich darauf einstellt, kann gewinnen.

Anderson bringt als Beispiel Musiker in der Volksrepublik China, deren CDs ohne Erlaubnis von den Kunden vervielfältigt werden. Statt rumzujammern, was sie eh nicht ändern können, nutzen die Stars diesen Effekt, um ihre Popularität zu steigern und leben stattdessen von Live-Konzerten und Fanatikern. Das geht auch. Wie Linux und Wikipedia zeigen, ist es sogar möglich, aus komplett kostenlosen Inhalten ein Geschäft zu machen.

Große Konzerne leben auch von der Verbreitung unbezahlter Dienstleistungen. So konnte sich Microsoft etablieren, weil Kunden deren professionelle Office-Software für den privaten Gebrauch kopierten, auch in manchen Ländern waren die unautorisiertem Kopien vorherrschend. Indem so ein Standard geschaffen wurde, konnte Microsoft bei den zahlungsfähigen Kunden abkassieren. Auch Webbrowser und Suchmaschinen werden ohne Bezahlung genutzt. Apple verschenkt neuerdings Betriebssysteme und Office-Software und lebt von Verkauf der Hardware.

In seinem eigenen Unternehmen, das Anderson in seinem Nachfolgebuch "Makers" beschreibt, verkauft der Autor sogenannte Open Source Hardware, d.h. Geräte mitsamt Bauplänen, die jeder nachbauen darf. Trotzdem oder gerade deswegen ein gutes Geschäft mit über hundert Mitarbeitern.

Fazit: Wer in einer Branche arbeitet, die vom Internet umgewälzt wird, und das sind mittlerweile fast alle, ist gut beraten, mit Hilfe dieses Buchs das Geschäftsmodell in Frage zu stellen und zu aktualisieren.

A must read to understand the concept of free. In depth research by the author!

This book was recommended to me by a mentor, specifically to consider sharing thought leadership material via social media. I found it really interesting and full of great examples