Defending Free

by on July 1, 2009 · 28 comments

There’s been a lot of criticism lately of Chris Anderson’s Free. Malcolm Gladwell didn’t like it. Matt Yglesias had a sharp and critical response, and here at TLF Cord offered a strongly negative take on the book.

I haven’t read Free myself yet, but I think I know Anderson’s argument well enough to know the critics aren’t really engaging it. Two really important points seem to be getting missed.

First, when Anderson says “eventually the force of economic gravity will win,” he means eventually. So citing YouTube—a site that’s been in business for barely four years—doesn’t prove anything. Lots of Internet startups lost money for four years and then went on to make a killing.

Moreover, it seems to me that none of Anderson’s critics really address the heart of this argument. In any other competitive market, we know that competition pushes prices down toward their marginal cost. The PC industry, for example, is famous for its razor-thin margins. Given that the marginal cost of content is zero, basic economics would seem to tell us that—at least in highly competitive sectors like mainstream news—competition is going to push prices down to zero and keep them there.

Second, a lot of criticism seems to miss that “free” business models aren’t just about giving stuff away and hoping a miracle occurs. They’re about using free stuff to sell complementary goods. Obviously if YouTube just gives away a lot of free videos, as Matt suggests, that’s not going to make them any money. But their business model is to give away free videos and sell ads. This is a perfectly plausible business model that will almost certainly become viable in the next few years. YouTube’s primary costs are servers and bandwidth, both of which continue to fall in price at a prodigious rate. Advertising revenues have fallen somewhat in the last few months, but there’s every reason to expect them to pick up again when the recession is over. Therefore, the lines will cross in the not-too-distant future, and YouTube will become at least moderately profitable.

It’s important to note that Matt is absolutely right that these businesses may only be moderately profitable. As he says, this is precisely the point of free markets—forcing companies to compete against one another means better deals for us and lower profits for them. So if Anderson claims that “free-based” business models are going to be wildly profitable, he’s probably wrong. Many free-based business models will only be modestly profitable. But they’re not going to keep losing money forever.

Finally, Gladwell, Yglesias, and Blomquist all seem to miss the point about transaction costs: charging small amounts of money is expensive. It costs more than 10 cents to charge someone 10 cents. As a consequence, if the equilibrium price of your product is less than 10 cents, it’s stupid to charge for it because all the revenues will go to the credit card company. I think this is actually more important than the psychological effects Matt talks about. It’s not just that customers have an irrationally strong attachment to the concept of free. It’s that below a certain point the overhead involved in charging for stuff is too high to be worth the trouble.

What’s especially weird about these arguments is that we’re surrounded by examples of Anderson’s thesis. The overwhelming majority of news and commentary on the web is available for free. Online services like search and email are free, and many of them are extremely profitable. Red Hat and MySQL (before it got bought by Sun) built extremely successful businesses around free software. For that matter, let’s forget the Internet and computers entirely. The 20th century radio and television industries, and parts of the newspaper industry, were built on “free”-based business models. It’s obviously true that companies can earn profits while giving away content. And basic economics tells us that we should expect companies that give their content away for free to gradually push out companies that don’t. So why is Anderson getting so much flack for pointing out an obvious and inescapable trend?

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  • http://www.cordblomquist.com cordblomquist

    Tim, good points, but I'm still critical of the book and dubious of Anderson’s authority on the subject. Certainly I do think that many, if not most, information companies will be giving things away for free in some capacity.

    But I disagree when you say “we should expect companies that give their content away for free to gradually push out companies that don’t.” I disagree because though price is a big factor in consumer choices, it’s not the only factor. This doesn't necessarily mean a future filled with micro-payments, but it could mean a future where—just like today—people pay a handful of moderate monthly or yearly subscription charges.

    Though you’re right that the marginal cost of each copy of a piece of information is next-to-zero, the cost of creating the original is, in many instances, a large chunk of change. Certainly there are companies that will be able to offer those services for free through placing them against ads or bundling the free with the paid, but one can imagine some services that simply won’t be able to pay for the initial creation of information through this model. If consumers still value these services, they’ll pay for them.

    I’m dubious of any book that tries to predict the future of a market economy—especially those that make such a broad and sweeping claim. Combine that doubt with Anderson’s copy and paste foibles as well as his own lack of appreciation for his premise when it comes to Wired.com, and I think my criticism of the book is justified.

  • http://techliberation.com/author/berinszoka/ Berin Szoka

    Since Tim has now started a separate thread on this topic, I'm posting this comment in both threads.

    It seems me that Chris Anderson's strongest argument for the business case of “Free!” is that giving away content or a service can attract an audience. The critical question then becomes: How valuable is that audience? How successfully can those eyeballs “be monetized”? This, in a nutshell, is why I've become such a broken record about defending smarter online advertising: The more money publishers can make off selling adds, the more viable “Free!” will be. The central point being missed in the debate about behavioral targeting is not just that it will increase ad revenues generally, but that it's likely to increase ad revenues the most for publishers whose content/service currently has little value in pure contextual advertising, where ads can be targeted only based on the keywords associated with a particular page or site. Thus, the publisher of a site about East Asian politics will get very little for his content, since few advertisers are likely to want to bid on keywords like “North Korea,” “DMZ” or “ASEAN.” By contrast, if that publisher could work with an ad network that lets advertisers target ads on that site to each visitor based on their likely interests (as determined by creating an anonymous profile through their tracking their browsing behavior across other sites in the ad network), that publisher will be able to compete directly for more highly valued advertising.

    In essence, advertising would thus be democratized because what would become economically valuable is getting the eyeballs, not having content that is directly related to valuable products and services (say, digital cameras). Put another way, this would empower consumers to “vote with their clicks”: Revenue would more closely match the choices of consumers as to where to spend their time and attention.

  • http://www.techliberation.com Adam Thierer

    Well, unlike Cord and Tim, I typically prefer to reserve judgment on a book until I've actually had a chance to read the entire thing! Anyway, I think both of my blogging colleagues make some very good points in their respective essays and I'll have more to say about the book after I finish it up next week.

    But one quick point… I think Cord is on to something when he notes above how he is “dubious of any book that tries to predict the future of a market economy — especially those that make such a broad and sweeping claim.” I have much enjoyed and often praised Chris Anderson's past work but I have also been critical of him when he goes a bit off-the-rails with pollyannish proclamations about how the Long Tail is “the future of all business” (the subtitle of his first book) or that “Free” is “the future of business” (the subtitled of his recent Wired magazine story).

    Perhaps Anderson is using those tag lines to help him sell books or copies of his magazine (yes, sell them!!), but such sweeping rhetoric and claims are simply not supported by the facts. The idea that there is more money to be had in the Long Tail is simply rubbish and flatly contradicted by the continuing evidence that power laws dominate all media and communications sectors with a vengeance. The big money remains firmly in the “fat head” of the tail, not the long portion of it.

    That being said, what is really important not to overlook is how amazing it is that the Long Tail is accessible and monetize-able at all! That is a truly wonderful and unprecedented development, and one that Chris Anderson has rightly made us aware of in his work. But then Chris completely blew it and (I suspect in an effort to make his publisher happy and sell more books) he decided to say something as completely silly as the Long Tail is “the future of all business.” No, sorry Chris, it just isn't. It is an increasingly important part of business, but not the totality of it. And now he's telling us that “$0.00 is the future of business.” Memo to Chris Anderson… Stop making such sweeping claims in book and article titles and you will encounter less criticism like that put forward by Cord and others online who have come after you!

    Anyway, I discussed more of this in an old essay here comparing the rhetoric of techno-pessimists and techno-optimists. In a nutshell, anyone (on either side of the optimist-pessimist spectrum) who makes sweeping claims about the Internet or something being the “future of everything” or, by contrast, the downfall of (fill in the blank) is setting themselves up for a strong rebuke since the facts will almost certainly not be on their side. The truth is typically somewhere in between the extreme claims. This is why I have counseled “pragmatic Internet optimism” in matters such as these.

  • http://www.cs.princeton.edu/~tblee Tim Lee

    I’m dubious of any book that tries to predict the future of a market economy

    Definitely. To the extent Anderson is saying that everything will be free, that's clearly silly. Some stuff will be free, and other stuff consumers will pay for. But I think it's important not to underestimate the force of “economic gravity.” Everything won't become free right away, but economic forces are steadiliy pushing us in that direction.

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  • MikeRT

    You should be careful about using Red Hat as a success story because a lot of their work was done for them by other parties. It's doubtful that they would have ever gotten anywhere if they had to do most of the work themselves.

  • http://www.cs.princeton.edu/~tblee Tim Lee

    Would you care to elaborate?

  • MikeRT

    Certainly. Red Hat has invested a lot of its own money, but it's doubtful that on their business model they could have built everything up themselves. A very significant portion of the Red Hat distribution is software that they did not write.

    MySQL is a much better example because they did, in fact, build everything themselves, but part of that was enabled by the fact that MySQL was not originally open source until version 3.X or so (I know it was dual-licensed at 4.0). Even now, MySQL doesn't accept code contributions from outsiders unless they are willing to sign over the rights to them.

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  • http://www.facebook.com/profile.php?id=3403987 facebook-3403987

    Seems to me like the issue splits on content versus services. Content providers (musicians, writers, etc) are going to have to find ways of making money without selling their content. Malcolm Gladwell himself makes bank speaking, most big musicians generate more money touring rather than through records, etc.

    Services, on the other hand, don't have as great a track record when they're free, hence the freemium model which pushes people to upgrade. While you can technically use it for free, the company stays solvent by finding buyers for its services in the end.

    Methinks I should read the book before commenting any further (ha).

  • Bill Goodwin

    Silly facebook connect…

  • http://www.cs.princeton.edu/~tblee Tim Lee

    I don't understand how that makes them any less of a success story. The free software movement is built on the premise of people building on each others' work–Red Hat is simply participating in that process.

    Indeed, free software isn't really that unique in this respect. All culture builds on the culture that came before it. Red Hat is just more efficient–and transparent–about it than most.

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  • http://bennett.com/blog Richard Bennett

    “Free!” businesses generally operate by selling other people's work in ways that minimize transaction costs. This is how Google search works – they have a system that automatically summarizes other people's writing and then wraps it up with ads that are sold in large blocks to big buyers. The number of transactions – ad buyer accounts – is very, very small compared to the number of articles the Google sytem reads and summarizes. It's good old fashioned economy of scale leavened with a sprinkling of theft.

  • http://noemptywallets.blogspot.com/ Mike

    I have some comments related to this about the future of newspapers here:
    http://noemptywallets.blogspot.com/2009/07/futu

  • http://noemptywallets.blogspot.com/ Mike

    I have some comments related to this about the future of newspapers here:
    http://noemptywallets.blogspot.com/2009/07/futu

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