Posted by: nickgerlich | March 12, 2008

Free Ride

One of the greatest rock songs of all time is Edgar Winter Group’s Free Ride. It is just as good today as it was in the mid-1970s, its infectious hooks sinking deep within the brains of unwitting listeners. An ear worm that is hard to pluck out. An immensely hummable tune that evokes feelings of good times.

Cash RegisterAnd apparently, according to Chris Anderson, it is the tune of the future for e-commerce.

In the March 2008 issue of Wired Magazine, Anderson goes on record as saying that $0.00 is the future of business on the web. Author of The Long Tail and Editor-in-Chief of Wired, Anderson is pre-hyping his 2009 book, Free.

Although I really doubt he’ll be giving the book away. We’ll all have to buy it the old fashioned way.

Still, Anderson makes valid points that predict the end of the cash register for many sites. And in an economy that has featured falling prices on many products over the last 25-30 years (computers, televisions, anything-and-everything-techno, and even the price of gas in current dollars), it’s an idea that makes sense.

Kinda.

Anderson argues there really can be a free lunch (Sorry, Milton Friedman. Those caskets are narrow, aren’t they?). It’s free, Anderson says, as long as someone else is paying. While I defer to Friedman, Anderson is correct, though, in pointing toward a freebie future. But someone will pay the piper, and in true capitalistic fashion, that ultimately means you and me in the long run.

But until the piper catches up to us, there’s a lot of free eating going on. Think: Google. Practically everything they offer is free. And let us not forget Yahoo, who last year began offering unlimited email storage (Google offers a “paltry” 6GB or so).

And what about all the social networking sites? They give it all away, and yet somehow manage to attract buyers with fat checkbooks. It’s an interesting business model, but it appears to be working.

The irony is that it’s really not a new idea. Once again, the internet pays homage to old-school marketing gimmicks. Give people something, but put a hook on it. It’s the classic captive-audience method, in which you give the razor away, knowing full well those poor saps can’t use it unless they buy some blades. The model has been used over and over for well nigh 100 years.

But things are a little different online, because there are no blades to buy at MySpace. Their razor works great by itself. So how can a company continue to give things away and yet make money?

Easy. Give away the things that cost little or nothing to produce (like web storage), and charge for the rest. Or, as many sites have discovered, adopt a “Freemium” model, in which there is the basic free service, but also a premium service that costs some bucks. Flickr and various other photo sites do just this, as does LibraryThing.com.

The other obvious revenue model is advertising, which is the engine that fuels Google’s meteoric growth. Their $500+ stock price would not exist were there not some revenue coming in somewhere, and this is how Google does it.

And so it seems everyone and their brother is trying to figure out how to make millions by giving stuff away. Last fall Radiohead tried it with their pay-as-much-as-you-want album; only about 20% of downloaders actually paid anything, and most paid very little. But when you’re talking about digital downloads, there’s not a whole lot of overhead…just the band’s creative time and the cost of recording and mastering an album.

I like the idea of free. And nearly everyone else does, too. But the economics major in me says that Friedman was indeed right, and someone must still pay for this feeding frenzy. In the end, we all pay for the advertising activities of marketers. And we all know that companies cannot continue to give everything away for ever, without at least some revenue stream.

But for now, the idea has relevance. I just hope Anderson can find a way give that new book away. To do anything less would be just a tad hypocritical. Come on, Chris: Take us by the hand, and lead us into the promised land.

Dr “Free For All” Gerlich

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