If You Live By Free, You Will Die By Free

Hugh Pickens writes "Internet entrepreneur Mark Cuban writes that the problem with companies who have built their business around Free is that the more success you have in delivering free, the more expensive it is to stay at the top. '"They will be Facebook to your Myspace, or Myspace to your Friendster or Google to your Yahoo," writes Cuban. "Someone out there with a better idea will raise a bunch of money, give it away for free, build scale and charge less to reach the audience."' Cuban says that even Google, who lives and dies by free, knows that 'at some point your Black Swan competitor will appear and they will kick your ass' and that is exactly why Google invests in everything and anything they possibly can that they believe can create another business they can depend on in the future searching for the 'next big Google thing.' Cuban says that for any company that lives by Free, their best choice is to run the company as profitably as possible, focusing only on those things that generate revenue and put cash in the bank. '"When you succeed with Free, you are going to die by Free. Your best bet is to recognize where you are in your company's lifecycle and maximize your profits rather than try to extend your stay at the top," writes Cuban. "Like every company in the free space, your lifecycle has come to its conclusion. Don't fight it. Admit it. Profit from it."'"

Comments

This Is Madness

[eldavojohn]

Someone out there with a better idea ...

You mean I have to compete against innovation?!

... will raise a bunch of money, give it away for free, build scale and charge less to reach the audience ...

And my competitors can undercut me?!

This is madness! I demand protection against people trying to steal my customers with a better service/product and lower prices! Oh well, thank god I'm too big of a player for the government to let me go under.

Be warned fellow citizens, in my lifetime I have seen market after market reach the endstate of an American capitalism: protected stagnation.

Re:This Is Madness

[sys.stdout.write]

Indeed! My favorite part was:

run the company as profitably as possible, focusing only on those things that generate revenue and put cash in the bank

Companies should focus on making money?! Outrageous!

Re:This Is Madness

[hedwards]

I think you're being overly optimistic. We don't protect stagnation we protect and encourage failure. The US government tinkers in the economy more than most other free nations do, and it's almost always in the form of bailouts, protecting failing enterprises, insuring markets without demanding regulator authority. It's been going on for several decades and it's led us from one bubble to the next, and it won't stop for at least one more boom bust cycle.

What he's really complaining about is that there's a competitor that's out there forcing the price he can get to roughly approximate the marginal cost of production. Which is shocking for somebody that presumably believes in capitalism. Shocking because a competitive market pushes prices to just above the marginal cost of output.

OSS is a good example in software, credit unions in banking and hopefully a set of large scale co-op health insurers in the insurance industry. Corporations hate them because they have to compete on both price and quality. If there really were nothing to it they wouldn't be trying so hard to kill it.

Re:This Is Madness

[wjousts]

And my competitors can undercut me?!

Actually, if your services are free to the customer, in order to undercut you your competitors will have to pay his customers for using his service.

Actually, the mistake you are making is thinking that you are the customer from companies like Google or Facebook. You are not, you are the product. The advertisers are the customers.

Live free, die hard

[AKAImBatman]

"Like every company [*deleted*], your lifecycle has come to its conclusion. Don't fight it. Admit it. Profit from it."

Fixed that for you. No business survives beyond their normal lifetime in the market. This is particularly true of technology companies which are forced to constantly reinvent themselves or become obsolete. While companies who sell a product can sometimes extend that product out a bit longer thanks to support contracts and BS marketing techniques, this is not sustainable.

What you end up with is the slow death spiral that was the hallmark of companies like SGI, SCO, and Novell. These companies followed the same business model for too long, slowly bled marketshare, and eventually reinvented themselves at the last minute, made a deal with the devil, or went out in a blaze of glory.

The lesson is simple: No matter how much of a cash cow your current product line is, you need to be investing in the R&D to compete in the next generation of products. Otherwise your competitors will get there first and make you ancient history.

Google

[hobbit]

Google doesn't live by free. It lives by selling advertising.

Isn't this true of almost all businesses?

[Palestrina]

Whether you are selling automobiles or donuts, there is going to be competition, and you are only as good as your last quarterly earnings report. In any case, competition and barriers to entry has more to do with the nature of the technology and lock-in and lock-out factors like propriety interfaces and patents than it is concerned with the business model. Maybe the point is just that with a free model, you have less room for error in your strategy?

STFU, Cuban.

[Anonymous Coward]

You got lucky because Yahoo was dumb and made you a billionaire at the height of the dotcom bubble. There are no remnants of the service you founded anywhere on the Internet. You are the equivalent of a lottery winner and have zero credibility.

You are a stupid fratboy who got rich thanks to an ill-timed power grab by an unwise corporation, not a respected voice whom anyone cares about. Please enjoy your "broadcast.com" (lol) windfall in private and stop talking in the presence of others who might report your idiocy. Thank you.

Re:STFU, Cuban.

[OrangeTide]

AC is right. Cuban's success is at least partially due to serendipity, I would argue that is mostly due to that.

It's not envy that people hate on Mark Cuban. Because many of us respect people who built up their fortunes, even if we hate the things they do. Examples would be Larry Ellison, Steve Jobs, Bill Gates, Warren Buffet, George Soros, etc.

That said, Mark must have some skill in the negotiation room to have sold his company. The ability to market your business to another business is a pretty unique skill. But if he did that trick today he would be in the same position as many of my friends who have done that. Have enough money in the bank to support themselves for a couple years until they sell their next start-up.

Winning it big on one shot is not as impressive as consistent success to me.

Which country do you live in?

[Colin Smith]

ixed that for you. No business survives beyond their normal lifetime in the market.

Well. that's clearly not the case.

Goldman Sachs, Bank of America, JP Morgan etc etc etc. If you have a friend in the government, you can get them to tax the people to guarantee your profits.

 

If anything, he's got it backwards

[Zigurd]

As others have pointed out, free online services are no more susceptible to a Black Swan Competitor, or even an ordinary competitor, than any other business. If there is a distinction, it is likely to be that free Web services are especially governed by first mover advantage and category domination such that they are less in danger from Black Swans than, say, a trucking company or a chain of coffee shops.

Read more of his blog, good sir

[orthancstone]

Companies should focus on making money?! Outrageous!

I know what you quoted seems like an asinine statement, but if you knew the full context you'd understand the point.

Cuban's been ranting extra hard this year on YouTube, labeling it as an eventual giant bust because the model will eventually fail without profit. He's saying that people, being so used to FREE content, will feel outraged by the concept of being charged to distributed their mundane crap videos online. Thus someone will come along with a better model and replace it (he's right, it is the nature of the Internet, and only the green people who have only been surfing it for a few years now fail to realize this...they don't have the years of knowledge that accompanies seeing sites/concepts being formed and replaced by the next greatest thing).

He's lashing out against these "free" practices because they are extremely difficult to break out of. Once you offer the free content to the people, they demand it stay free. You say "Companies should focus on making money?! Outrageous!" and he's responding, "How will they make it if they don't base their model on that in the first place?"

Re:Crazy old witch

[mcgrew]

Yup. And scientists gave us nuclear bombs

Which proves that they know what they're talking about, unlike economists. If economics, sociology, etc were anything at all like physics, there would be no poverty or hunger.

Wall Street is just a big corrupt casino. You don't invest in stocks, you gamble on them.