The Economics of Free

Wired's editor-in-chief Chris Anderson is working on a new book, to be published next year, about the idea of "free" in the old and new economies. Wired is running a long excerpt from the book and some sidebars about the economics of giving away, e.g., CDs and directory assistance. Techdirt has a few quibbles about Anderson's ideas — mostly areas in which he may be shading the argument to sell more books — but mostly buys that the equations of economics continue to work when zeros are plugged in in judicious places.

Comments

Public Mindshare

[DTemp]

Just like the /. article today about Microsoft saying that several ad impressions work together to persuade a consumer to part with some of his money, this Wired article points to the same phenomena. Someone selling a product will spend money on marketing... he can buy ads on radio or TV or the web, he can get posters and go around stapling them to telephone poles, or he can give out freebies of his product so the potential purchaser can experience the product for himself. All of the above will work together to try to get consumers to buy. Just marketing...

I really don't see the big statement he is trying to make.

Re:Public Mindshare

[TubeSteak]

I didn't bother reading past the first page.

But until recently, practically everything "free" was really just the result of what economists would call a cross-subsidy: You'd get one thing free if you bought another, or you'd get a product free only if you paid for a service.

Over the past decade, however, a different sort of free has emerged. The new model is based not on cross-subsidies -- the shifting of costs from one product to another -- but on the fact that the cost of products themselves is falling fast. It's as if the price of steel had dropped so close to zero that King Gillette could give away both razor and blade, and make his money on something else entirely. (Shaving cream?) First, he uses two definitions of a cross subsidy. With the 2nd definition being much broader than the first.
Second, how the fuck is Gillette making money off shaving cream not a cross-subsidy?

2 paragraphs later, he has this to say:

Once a marketing gimmick, free has emerged as a full-fledged economy. Offering free music proved successful for Radiohead, Trent Reznor of Nine Inch Nails, and a swarm of other bands on MySpace that grasped the audience-building merits of zero. The fastest-growing parts of the gaming industry are ad-supported casual games online and free-to-try massively multiplayer online games. Virtually everything Google does is free to consumers, from Gmail to Picasa to GOOG-411. ::Sigh::
Those are all cross-subsidies.
Bands* are trying to drive sales of CDs, merchandise & concert tickets.
Ad-supported gaming... the advertisers are subsidising it. My instincts say "not free"
free-to-try MMOG. "to try" being the operative words. the "try" is subsidized full cost customers.
Google... see ad-supported gaming. We pay for it by looking at advertising & hopefully making a purchase.

If "free to consumers" is TFA's definition of free... I guess I have to disagree. Costs are being lowered & shifted around, but they are still there, someone is still paying and I'm still looking at advertisements.

*NiN actually is a good example of free, they've literally given away the raw audiomixes for most of their Year Zero album.

Re:Public Mindshare

[theophilosophilus]

::Sigh:: Those are all cross-subsidies. Mod parent up.
Open Source is another example of (dare I say it) not free. It takes labor to create and maintain. The difference is that, to some extent, the consumer is putting in the labor. The consumer becomes the vendor.

In fact open source doesn't obliterate economic theory, it exemplifies it. Software exhibits economics of scale, the bigger you are the cheaper it is to produce. Traditional companies have to make significant investments to make a good product. Open source makes considerable investments, but the cost is/ can be distributed by its cooperative nature. Actually, in this regard OSS is more economically efficient because it reduces reinvention of the wheel. Further, OSS is the natural result of market forces (Adam Smith's invisible hand) because the barriers to entry into software reduce the number of traditional companies, which results in monopolies and oligopolies. The noncompetitive tendency of the market, coupled with the barriers to entry, produce companies that loose their capacity for innovation once they dominate. Lack of competition produces a market opportunity FOR competition. However, monopolists tend to use their best efforts to protect their position. This situation calls for a new model. The solution to market failure is the path of least resistance - the most efficient. A cooperative effort distributes costs and reduces duplicated efforts. In the case of OSS, the new model is lean enough to compete in spite of the anti-competitive efforts of monopolists.

Solutions to market failure come naturally if they are available, an itch needs to be scratched and someone does.

Despite all the pretense

[dorpus]

Silicon Valley has and continues to derive the vast majority of its income from intellectual property protections for its software. I pointed this out on Techdirt, so the commenters there hemmed and hawed with their red herring arguments about how Microsoft does not make money from software written 14 years ago. Regardless, Microsoft (which is no longer a Silicon Valley firm, I know) would make no money today if XP and Vista were free. Intel would make no money if anybody could just copy Intel chips. If they were free, nobody would bother with Linux. Where are the linux billionaires? Nor would biotech companies make any money if anybody could just copy their inventions. Sun, AIX, etc. all made fortunes in their time from selling proprietary flavors of Unix. SAS and SPSS are the industry standards for statistical computing, and they are proprietary, intellectually protected, for-profit firms.

What would Steve do?

[Justabit]

I love my iPhone, but it did'nt come for free. In fact it cost alot. iTunes is free but you have to have a computer to run it. To get my phone unlocked so it would work in Australia cost money. But I still prefere it over a free equally as good phone on a big contract. Alot of things that are 'free' actually cost you money in the long run. I think in the near future there will be an anti free backlash of people paying the big sum up front and foregoing all the greif of continuing cost. I can also see certain manufacturers catering for them by actually creating products to last and be well designed for their job. But of course making money is where businesses put all their efforts to. So you will have to spend money to forgo continuing cost or in other words, It will cost alot (but still be cheaper) to not get things for free which actually are not really free....um, yeah.

Re:Free as in beer?

[Flambergius]

You're not better than people who don't care to learn about computers; you just have different interests.

This statement needs a bit of clarification before I can argue with it. As it would be too slow to ask for clarification I'm going to assume the following:
  - stuff the people don't care to learn is stuff like intermediate and advanced levels of configuration, programming, CLI and the like, but also set theory, theory of data, theory of communication etc.
  - the better you are referring to is not ethical, but mainly economical, societal and utilitarian.

First off, I would want to agree with you that people do need to make decisions about what to learn. Even though you will spread that learning throughout your whole life there's just too much stuff to know. However, it a dangerous self-deception to think that you can ignore computers and not have negative consequences to yourself in terms of your economic prospects, your fitness to society and your personal happiness.

It is really hard say what level of knowledge with computer should be considered a citizen skill(*), but it is more than basic OS usage and knowledge of specific applications. I think people should be able to command their computers. To this logic and set theory are most important, although any specific formalism unimportant and those used by experts of the particular fields are probably counterproductive. A working knowledge of a general command language is probably a must, although you may be able to get by with GUIs. A general command language is of course also a programming language, but don't let that fool you. Programming (i.e. building computational systems) isn't part of the operational ability to command a computer.

For better or worse, computer skills aren't just another technical skill that might be fun to have. Computers are the foundations of our current and future prosperity. They are the means of production and communication of our societies. Computer knowledge is power. Computers can't be just a purview of engineers.

(*) A skill nearly every citizen has or is expected to acquire. I know this is a very Finnish concept, but I'm not ashamed of that. :-)

Re:Well..

[Crudely_Indecent]

I run a couple of photo gallery websites (for free) which allow users to upload their pictures (for free) and print them through a partner printing service (for fee) of which I receive a percentage.

I have yet another site that hosts some 20+ million pages that are all available for free, monetized by Google ads.

Yet another site that I'm responsible for was built for free, because of their tremendous pagerank and my option to include my backlink in the site template, theoretically raising my pagerank (eventually)

Free has worked well for me. Most users don't object, or even question "free."

I can't say that I'm well fed, but that's due to a poor diet.