How $0.00 is the Past of Business
Rick Webb
Co-founder, COO : New York
topics: Brands, User Experience, Measurement and Analytics, Media Planning, and Barbarian
filed under: Entrepreneurship and Internet Culture
http://tbg.cm/fOl5jd
I’ve been meaning to comment on Chris Anderson’s recent headline article in Wired about “Free” and “Why $0.00 is the Future of Business.” I don’t know much about the ethics and traditions of magazine publishing, so I suppose I’ll just say I think it’s a little weird that an editor in chief can make a cover article out of his own new book in his magazine, especially when shit’s going on in his industry like the Microsoft/Google stuff, but… whatever. I was a huge fan of the long tail theory, and I’ve seen him speak on it (on behalf of Ogilvy at their excellent annual tech conference for clients), and I think it really pinned down something that I had been wrestling with years. The long tail made sense – common sense – but it phrased it in a way that offered a new insight and helped in explaining something that economics and business theory hadn’t really gotten around to enunciating.
This whole “Free” business, however, painfully, embarrassingly misses that mark. I had hoped for some key new insight in the article that would make it deserving of the hype. What I found was worse – not only was there nothing new, it was a painful distortion of what actually goes on in business.
I admit I have been slow to get around to reading the article, and slower still to write this post. I’ve been absurdly busy at work, for starters, and I headed to SXSW a few weeks ago, which killed a week where I usually spend a good chunk of time reading and writing. Then I wanted to wait until the new Barbarian site was up and running, because I felt this belonged there more than on one of my personal blogs. But the real reason it’s taken so long to write this is because I’ve spent several weeks compiling a list from my own life of all the ways Chris was wrong, so very wrong.
A good typical blog post on an article would often have a summary of the article and explain the author’s point of view. I’m hella lazy, and the link’s right up there if you want to read the article. And this is one of those big “watershed” articles, or trying to be anyhow, so I think I can assume that anyone who cares has already read the article. But in case you haven’t, the big point is that stuff will be free. Because other stuff will pay for it. Yeah, you knew that, right? Yeah, we did too.
I am not trying to willfully distort the article, but the “new angle” seems to be that this is all “being driven by the underlying technologies that power the web,” and it’s true, there is some interesting stuff going on in cloud computing and what Google’s doing with Gmail and advertising and blah blah blah, but we all know that. Interesting, yes, but not particularly new.
The weird thing is, then, that Anderson also peppers his article with a bunch of compelling, extreme examples. I think the point he is trying to make is that something NEW is going on, that it’s expanding beyond the web, and wow, look at all these wacky new things that are ALSO free – the examples include webmail, air travel, CDs, DVRs, directory assistance, movies in theaters, subway rides, and game consoles. Why these are really such a stretch and show any change in market forces is completely lost on me – I already get free webmail (gmail), air travel (Delta Sky Miles), directory assistance (um, since I was like 12 years old), and movies in theaters (god knows how many dumb free movie pass programs). It’s really not such a stretch to see how the rest might come about.
Re-scanning through the article, I think this is the passage most representative of the thrust of the piece:
The result is that we now have not one but two trends driving the spread of free business models across the economy. The first is the extension of King Gillette’s cross-subsidy to more and more industries. Technology is giving companies greater flexibility in how broadly they can define their markets, allowing them more freedom to give away products or services to one set of customers while selling to another set. Ryanair, for instance, has disrupted its industry by defining itself more as a full-service travel agency than a seller of airline seats (see “How Can Air Travel Be Free?”).
The second trend is simply that anything that touches digital networks quickly feels the effect of falling costs. There’s nothing new about technology’s deflationary force, but what is new is the speed at which industries of all sorts are becoming digital businesses and thus able to exploit those economics. When Google turned advertising into a software application, a classic services business formerly based on human economics (things get more expensive each year) switched to software economics (things get cheaper). So, too, for everything from banking to gambling. The moment a company’s primary expenses become things based in silicon, free becomes not just an option but the inevitable destination.
The bolded part (emphasis added), I think, is where the article begins to fail. The word choice, I think, is intentionally vague. The phrase “everything from x to y” can mean “a wide array” (but not everything), or “everything.”
Logically, I would assume Anderson’s smart enough to not actually mean everything. Except nowhere in his article does he actually make any exceptions.
Rather than do due dilliegnece and search for exceptions to the rule, and explain them (which I will helpfully do for him in a second), he goes into some interesting but peripheral discussions about the history of bandwidth and computing power, and the mental perception differences between “cheap,” and “free.” Both very interesting subjects – and I, for one, after another trip to SXSW cannot begin to fathom the depth of passion humans posess for the concept of “free alcohol.” It never ceases to amaze me how people will put up with the most inhumane conditions, cooped up in a fenced in pen in 80 degree weather for a free beer when there is beer for a buck fitty next door with nice couches and air conditioning.
I’ve got no argument with either of these discursions in the article, save that they only serve to explain why things are free, but do nothing to point out when they DON’T apply, and how SOME things aren’t free.
Thus, I’m left to assume that when he says “everything from banking to gambling,” he really does mean everything. Later in the article he says that the web represents “the extension of the media business models of all sorts,” and for a second you think he may have grounded himself in reality and he really does mean “often,” but not “all of the time,” except in the very next sentence says “This is not simply the notion that advertising will pay for everything.” Oh my god. NOT ONLY his he DEFINITELY saying that it applies to everything, he’s saying there’s even MORE. The more turns out to be that you’ll also be able to cross sell to people other services when you give them something free.
This is where, on my comfy JetBlue flight back from SXSW to Boston, I kind of lost it with the article. Everything will be free. Um, okay, so you can sell them something else because the main thing is free. Um, but then those things aren’t free, right? Right? WTF?
Am I being willfully difficult? Am I clouding the article? I am honestly not trying to be. Read it yourself. Ask if I’m missing the point. I can’t find anywhere where these conflicts are dealt with.
Next, he closes with the different models of free. We know all of these:
- “Freemium” – free standard version and a – um, not free – paid premium version: the Livejournal (well, up until this week) model.
- “Advertising” – duh. new? interesting? no, but… true. Given. Point taken.
- “Cross subsidies” – One free product entices you to, um, PAY, for another.
- “Zero Marginal Cost” – Online music, etc.
- “Labor Exchange” – Digg, Free porn for Captchas, etc. Okay cool. Yes. Except working for something really isn’t free, is it?
- “Gift Economy” – Open source, user generated, wikipedia. Ummm… Okay. Yeah… I think this is basically all driving to my main point, so let’s move on…
The end of this article, the big conclusion, is really where I completely lost respect for it. It’s best to quote it verbatim for fairness:
Enabled by the miracle of abundance, digital economics has turned traditional economics upside down. Read your college textbook and it’s likely to define economics as “the social science of choice under scarcity.” The entire field is built on studying trade-offs and how they’re made. Milton Friedman himself reminded us time and time again that “there’s no such thing as a free lunch.
“But 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. Second, in the digital realm, as we’ve seen, the main feedstocks of the information economy — storage, processing power, and bandwidth — are getting cheaper by the day. Two of the main scarcity functions of traditional economics — the marginal costs of manufacturing and distribution — are rushing headlong to zip. It’s as if the restaurant suddenly didn’t have to pay any food or labor costs for that lunch.
This is so completely galling I almost stopped reading. Not only is it a massive disservice to one of the most influential economists of all time, it is bordering on moronic in its perverting of a “death and taxes”-level rule of life. I find it almost impossible to believe that Anderson is as clueless as he is pretending about the meaning of this well-known phrase. Does he really believe that MILTON FREAKIN FRIEDMAN didn’t know that “a free lunch doesn’t necessarily mean the food is being given away or that you’ll pay for it later?” Dude, that was the VERY POINT of the phrase (which Friedman did not coin, but popularized, along with Robert A Heinlein).
The analogy is so painfully wrong. Yes, it could be as if suddenly the restaurant didn’t have to pay for any food or labor costs. BUT SOMEONE DID. Someone grew that food, that “free labor” is paying with their hours, and that restaurant is still paying rent.
This perversion of an age old trusism (along with the embarrasing coining of the term “freeconomics” earlier in the article: a massive disservice to Levit and Dubner) pretty much eviscerates any point Anderson was trying to make.
Redux
Now, I don’t disagree that a lot of shit is becoming “free” to the end consumer. But is it really “free?” No. Is “everything” free? No. Is something interesting going on with technology and advertising that is bringing “free” to more industries and products? Abso-freakin-lootely. That’s why I’m in the business I’m in. Is it going to come to everything? No. Is that as exciting of a cover story? Probably not.
Anderson would have been much more helpful if he had pointed out the areas where other factors are keeping things from becoming free, and delving into them. But since he didn’t, here, I will.
I spent the last few weeks going through my free (ha) Mail.app folders (hence the delay in writing this) to get a record of things that I have paid for lately. That was like shooting fish in a barrel – thousands of dollars of books, CDs, furniture, etc. But I’ll give Anderson some credit, because he did say that things are “trending” that way. And he’s got a point. It’s very possible that one day all my books and CDs WILL be “free” (or at least costless to me). So I’m confining my search here to things I don’t think ever will become free, for reasons that I’ll outline at the end. Booze is out too for this reason, as SXSW has taught us once again.
These are things I pay for. They are things I am happy to pay for. They are things I would pay for again. They are things that if there were a free version of them or a free competitor – and in many cases there is – I would still pay for them. I am happy with these transactions, and I feel they have been good for me.
- Omnigraffle/Omniplan + similar apps
- Livejournal permanent account
- Professional photography equipment
- My mac pro
- My firewire-enabled VHS VCR
- My Thorens audiophile turntable
- My 8-track cassette deck
- My Sony double cassette deck
- My M-Audio keyboard controller
- My Printer
- My Denon Mixer
- My vintage record collection
- My guitars
- My Wall Street Journal subscription
- My Salon.com subscription
- My Economist subscription
- My Advertising Age subscription
- My AdWeek subscription
- My Creativity magazine subscription
- My Wired subscription (HA. more on that in a sec)
- My Communication Arts subscription
- Apple iWork
- A Better Finder Renamer suite
- Carbon Copy Cloner
- Disk Warrior
- Data Rescue II
- Voodoo Pad
- Net News Wire
- SoftRaid
- VueScan
- Amazon Prime
- Speakeasy ISP
- My Cell Phone bill
- My iPhone
- Transmit.app
- My Rent
- My Groceries
- My Health Care
- My hard drives (8TB)
- MY Zipcar membership
- My prescription medication
- My travel
- Household items – washing mashines, doorbells, etc.
- Rare books
- Amazon digital downloads
- iTunes music purchases
- iTunes video purchases
- iTunes movie rentals
- Netflix
- Carbon Offsets
Okay, okay… I could go on and on. Let’s break these into some categories.
Traditional/The Fun-For-Economists
These are the things that have been traditionally paid for that could well, eventually, fall into the “Free” category – though I would contend that this could happen for reasons more akin to the “Gilette” theory of free, and advertising, than the technological trends that Anderson focuses on. But nonetheless, I think we could give him these. These are the ones, of these six categories, that could, potentially, go the way Anderson envisions. Rent, travel, health care, groceries, phone bills, internet access,. Economists think about these a lot, and I think would be giddy to see experiments in (think Netzero) because they can really sink their teeth into new data on externalities, etc. I should point out, however, that none of them (save for perhaps internet access and phone bills) seem very close to happening any time soon, nor do they really depend much on technology. My partner Benjamin and I have long been advocates for ad-sponsored health care, and though we’ve brought it up to some pretty high powered people through the years, I still don’t see it happening.
Artifacts, Talismans and Keepsakes
Though something like my Radiohead In Rainbows box set is involved in Anderson’s example around the Nine Inch Nails release, I think even Anderson would have to concede that most of these will never, ever be free. I doubt I’ll ever get a proper first edition of Lolita on the Olympia press, with the slip cover, and without any markover on the 99 francs label, VF+, for less than $10,000. I doubt anyone ever would have happily bought me a copy of the Factory Records FAC 2 double 7” with all four of the stickers. I doubt anyone’s going to just send me, free of charge, the missing volume 6 hardback ‘67 US repressing of The Yellow Journal (though if they do, I am happy to send them my paperback volume 6 ‘68 in return).
History, rarities, collections. These will never go away. And they are a niche market, so I don’t see anyone advertising around them. It’s interesting, too, because most collectors are pretty demographically-aligned, and of a decent income. You’d think there’d be more activity here. I believe there isn’t because of the low volume. What marketing you DO see to collectors is limited to places like Ebay, and that hasn’t managed to lower the costs yet.
The Moral Cleansers/Tip of the Hats
I buy my music on iTunes and Amazon still. I buy carbon offsets. Either of these may turn into a tax, or an industry-mandated surcharge (like the scary proposition Warner Music is currently floating), but so long as people have a desire to operate morally and reward those who create things they love, this will not go away. This is also why I have a Livejournal permanent account – because I believed in what they were doing and gave them money (back when they needed it). It’s why I have Netflix.
The Prosumer Necessities
Prosumers are a large and interesting group. Anderson touches on this, of course, with the free “basic” version and the paid premium version. But it’s worth noting – the premium versions aren’t becoming free. And I don’t see any trends in the hardware becoming free. Can I envision a scenario where I don’t need to own a Thorens turntable or a Royce phono preamp and I could just send all 3,000 of my LPs, 1,000 cassettes, hundreds of 8 tracks and hundreds of VHS tapes to a service (with free shipping, of course) who will them convert them, tag them, and clean up the audio and send them back to me for free? Thousands and thousands of hours of manual labor? Maybe in exchange for… what? an ad? Yes, I can envision that. Oh wait, no, no I can’t. That will never happen. I will need to own the equipment or pay someone to do it. Okay, I concede that Jon Whitney, a good friend and editor of the Brainwashed website did one time come over and borrow 20 or so of my VHS tapes to rip for a video night he was doing. But he only took 20, and the rest weren’t of his liking, and they are of my liking, and I’m still going to have to do it.
The Long Tail/Subcultural
Which brings us to the next category – slightly different than prosumer, and slightly different from the artifacts and talismans, which is…. BAH DUH DUM… THE LONG TAIL. Why did Jon Whitney not take the other 80 videotapes? Because he had no interest in digitizing acoustic performances from the early 90’s of Sebadoh on Canadian Television Stations. I offer you the example of Red Turns To, an obscure, 1-single Factory Records band from the mid 80’s – unremarkable except for the fact that that one song RULES. It’s great. I love it. It took me a year to find a copy of the whole 12” I’m fascinated with this band. I have this whole theory that it’s secretly members of New Order, but you know what? Google them. You can’t figure it out. Even their barebones Wikipedia page is a candidate for deletion based on notability guidelines (Boy they will surely be sorry if they delete that and then I discover that they WERE New Order, but I digress). The information is not on the web. Go to Limewire. Go to Bearshare. Crap, I don’t even use file sharing networks anymore, I don’t know what’s hip, but I do know that Red Turns To is not on them. Do you know how I know this? Because about two years ago I posted one of the three songs to a “song of the day” type blog. When people Google Red Turns To – and it does happen, I’m not the only fan. They find that song. And then they email me asking me for the other two tracks from the single, because they can’t find them anywhere. And they offer to pay.
THEY OFFER TO PAY. Because they want it. And it’s obscure. And they can’t find it elsewhere. And these guys aren’t even that obscure – they put out a great 12” single on a very successful label, that’s so famous it’s had multiple movies made about it. They could well be members of other famous bands. There are bands from the 90’s – the 90’s! not even that long ago! That I am still searching for releases by and will pay in a second if I ever have the opportunity.
My tastes in this example are obscure, but we all have obscure tastes in something. The irony here, of course, is that Anderson recognizes this himself. He wrote a whole book about it. And it was really good.
The Non-Reimbursed Business Expenses/Furthering Your Career/Industry Trades
This one’s almost cheating, but I don’t think so. I think it’s a unique category. It’s unique enough for the IRS to recognize it, so I think it’s fair game. This is the stuff 99% of is paid for by businesses but occasionally we don’t expense or our one company doesn’t pay for this one type of thing but many others do, and the “we’ll pay top dollar for.” A small category? Sure. But a category. Work pays for many of my subscriptions, but not all of them. I pay for the ones listed above. Then there’s conferences, memberships, etc. When work doesn’t pay, I do. This is admittedly almost a business type thing, and Anderson is admittedly consumer focused. But, then again, I’m paying for those above, and I’m willing to bet others are too. Why will these never be free? I think it’s a combination of the other stuff. First off, the Economist, and its sister company, The Economist Intelligence Unit* pays for operatives in every country in the world to provide hands-on analytic data, news, economic analysis, etc. People who need that kind of information for their work will pay for it, whether work does or not. I work in advertising. It’s inconceivable that I wouldn’t need AdAge. And I will pay for it. And I have to, because the data needed in these things is a) expensive to obtain, and b) not of sufficient mainstream value that advertisers can get an ROI buy subsidizing it. Think of this as a mix between business -focused and long tail.
Okay, I’m scraping the bottom of the barrel here. I’ll stop.
I don’t deny more stuff is becoming free. But not everything. And there’s really nothing that new going on here. Is it worth a discussion? Absolutely. Is it endlessly fascinating what we end up getting for free as advertising pays? Totally. Is the cloud making it easier for tech companies to offer ancillary stuff for free? Definitely. Will everything be free in the end? No. Maybe it’s just that everything is fair game, and yes, we all know that EVERYTHING can’t be free, but each thing of everything COULD be free? No, I don’t think so.
And if I wrote that article, would it have made the cover of Wired?
We have a common debate internally at the Barbarian Group about Webapps. There are certain people in the company that think every app will move to the Web and be free. I always laugh. We finally settled the argument in a way that I think is similar here – many apps will have webapp versions. Many will be free. Many will not. People will have choices, and free and Web-enabled will often be options in those choices. Sometimes they will not (I often use 3D Studio Max as an example here).
So it is with everything else: lots of stuff will be “free” to the consumer (though, with respect to Friedman, not truly free). Lots won’t. Ever. And this has been true forever. There is nothing new here.
* Full Disclosure: The Economist is a client of The Barbarian Group
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