The FREE Economy Debate: Battle of the Gurus

Free, the book by Chris AndersonChris Anderson’s new book, Free, is out.  And now the debate over business models such as “freemium” and marketing techniques involving free giveaways, has reached a temporary tsunami.

Anderson’s book FREE: The Future of a Radical Price, is about how you can make money by charging ZERO. He writes:

“People are making lots of money charging nothing. Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00. How did this happen and where is it going? That’s the central question of this book.”

The premise of the book is that you can give certain things away — charge $0.00 for them — and still make a profit. How? You just charge for other things “around” what you’ve given away.

Take for instance, a book. Anderson gives the example of how an author could write a book and give it away for free, and in so doing develop a larger readership. Then the author could earn from giving lectures about the book, teaching, consulting and other services.

For anyone who’s been in business for a while, this will sound familiar. “Loss leaders” and free giveaways are time-tested approaches to marketing. What MBA student hasn’t read about the Gillette strategy of giving away the razor (more or less) and charging for the razor blades? Anderson even covers it in the book. For small business owners, “free” is nothing new.

Anderson, however, makes it sound like the free of today is something radically new. In fact, he even calls it that in the book. He refers to Twentieth Century Free and distinguishes that from the “new” Twenty-First Century Free. What’s different?

Well if you buy Anderson’s view, what’s different is that the cost of producing and distributing digital goods and services has dropped to near zero. He writes:

“The new form of Free is not a trick, a gimmick to shift money from one pocket to another. Instead it’s driven by an extraordinary new ability to lower the cost of goods and services to close to zero. While the last century’s Free was a powerful marketing method, this century’s Free is an entirely new economic model.”

Hmmm, why does this sound to me similar to the “New Economy” mantra of the DotCom days? Turns out, we didn’t have a new economy after all, as many a failed Dotcom entrepreneur discovered. Once the bubble burst, and we were no longer trading on stock market hype, entrepreneurs were faced with the realities of bringing enough money in the door to pay employees’ salaries and the electricity bill. Projections of future earnings didn’t amount to an ant hill if you didn’t have a sustainable business model in the long run, and cash flow in the short run.

Close to Zero? You be the Judge.

Malcolm Gladwell, in a devastatingly reasoned review of Anderson’s book, eviscerates Anderson’s thinking. Gladwell, himself the author of Tipping Point, uses logic to break down the examples given by Anderson, especially around the idea that digital technology costs are “close to zero.” For instance, he notes that Anderson’s own examples do not support his idea of a new economic model:

“The only problem is that in the middle of laying out what he sees as the new business model of the digital age Anderson is forced to admit that one of his main case studies, YouTube, ‘has so far failed to make any money for Google.'”

Gladwell goes on to point out that even if the cost of bandwidth is “close enough to free to round down” as Anderson asserts, YouTube’s bandwidth costs are still projected by Credit Suisse to be $360 Million in 2009, based on 75 billion downloads by consumers.  Hardly zero.

Gladwell also points out that Anderson, when claiming that costs have been reduced to close-to-zero, is only looking at part of the picture… that he is forgetting to count all costs. For instance, one of the examples used by Anderson goes something like this: What if nuclear power had been put in place instead of coal? Then the cost of your electricity would be almost free.” As Gladwell points out, there’s much more cost to running a utility business than the underlying raw material. There’s huge cost in building and running power plants and in distributing the electricity — costs that are ignored.

On top of that, it seems to me that the examples in the book work best as they relate to digital content businesses and Web businesses. They are not nearly as persuasive when you apply them to other types of businesses, especially those involving hard goods or labor-intensive services.

And then there’s Anderson’s own ambivalence. I’ve read the book completely online. It’s free over at Scribd, but only for a limited time and only, apparently, in the United States. You can’t download it as a PDF. As many others have commented, that leads you to suspect that Anderson is not as convinced of the money-making power of “free” as the book suggests.

Still, “Free” is Valuable

Nonetheless, the book is an easy enjoyable read that has detailed examples to get you thinking of ways to satisfy today’s customer’s desire for “free” and still make money. For instance:

  • He includes a list of 50 business models built upon “free”.
  • He also does a good job of analyzing the “freemium” model and gives good insights into how to make that work.
  • There are some valuable insights on the power of a free price tag, as opposed to charging even a penny.
  • There are numerous examples of real businesses you can draw on for ideas.
  • Perhaps the most valuable part of the book is its emphasis on how giving something away for “free” captures attention of prospective customers. That’s a huge principle in today’s marketing, because we’re all fighting for attention. In order to be able to market, we need to first get someone’s attention, and free is how to do that. That’s especially true when it comes to content producers, such as authors and musicians, and those with web-based products and services.

Don’t Get Distracted

However, it would have been better if these insights had not been pronounced a “new economic model.” Because as an economic model it runs up against reality.  The consumer’s desire for something for free only can go as far as a business’s ability to make a profit and stay in business. Once the two sides come into conflict, something has to give.

If you buy into this “new economic model” idea too completely, you could end up going down the wrong path in your business.

You may forget to focus enough on doing what businesses should do: make money and thrive. Look aggressively at incorporating free into your marketing strategy, yes. Just never forget that there’s cost involved in running a business, even if it’s your time. And at the end of the day, employees expect their paychecks. Landlords expect their rent. Capturing attention is only valuable if you can capitalize on it in your business, to make money.

As Mark Cuban says — he being no fan of the concept of “free”:

“If you are an entrepreneur and looking at starting a company, its VERY easy to put off the hard part. Which is generating sales for your company and making a profit.”

Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.