FREECONOMICS: In the new economy, 'free becomes inevitable'

The Globe and Mail ^ | May 5, 2008 | JENNIFER WELLS

[USFRIENDINVICTORIA]

If "free" is what you want - and who doesn't? - "free" is what you're going to get.

So says Chris Anderson, editor-in chief of Wired magazine and, according to Time magazine, one of the world's Top 100 influencers.

Speaking to The Globe and Mail from his office in San Francisco, the author of The Long Tail, who pseudonymously curates Wikipedia entries in his spare time, explains how "free" has emerged as the new economic model.

Let's start with the term "freeconomics." What is it and how do you define it?

It's a little bit cheeky, I know. It's a rip-off, of course, of Steven Levitt. It's a bit of a joke. ... There are three kinds of free in the world. There's the model that's 100 years old and that's, you know, razors and blades, cross subsidies. You get the razor for free and you pay for the blades. Today we see that in everything. You get your cellphone for free but you pay for the minutes ... that's the old model of free. Then there's the model that emerged in the sort of middle of the 20th century. This is the media model ... where the consumer doesn't pay but a third party - in this case, the advertiser - pays for access to the consumer. ... What's happened online is that the media model has been extended to all sorts of things that aren't traditional media, with Google being the best example ... anything you can subsidize with advertising becomes a third-party pay, so that it's free to the consumer. But there's a third form of free, which is the fascinating one that's really just now coming of age ... where really nobody pays ... One of the unique things about Internet economics is that, unlike traditional economics, where the raw materials and the labour and the power is not zero, online all the inputs - the bandwidth, the storage, the processing - are all super cheap and getting cheaper every year. We've never seen an economy like this.

So just to be clear, what you're really saying is the foundation of this new model lies in bandwidth, storage, processing power, all on their way to being, to use your term, too cheap to meter or too cheap to matter economically.

Precisely. And then you revert to classic economics. You learn this in the first week of economics, but you never really pay attention to it ... In a competitive market the price falls to the marginal cost. ... You never think of the marginal cost falling to zero because, in most markets, it doesn't fall to zero, but online the marginal cost - that is, the cost to serve a web page or a software [application] - to a consumer is falling to zero. Today it may be one cent. Tomorrow it will be a tenth of a cent. The next day it may be a hundredth of a cent. ...

The marginal cost falls to zero so the price falls to zero.

This isn't really a matter of choice or a matter of innovation. It's sort of like the laws of physics.

So free becomes inevitable then?

Free becomes inevitable ... The question is not, could it be free. The question is, how soon must it become free, because if we don't make it free somebody else will.

Money has to change hands somewhere along the line, does it not? The content has to be monetized?

It does not, it does not. ... There is a world out there that doesn't involve money at all. Wikipedia is an encyclopedia where no money changes hands. The blogosphere is largely a publishing media enterprise where no money changes hands. ... If you're a business and you're in the encyclopedia business, you're competing with Wikipedia and it's not because Wikipedia has some business model you can emulate. Wikipedia has no business model. They've just demonetized the industry. There it is.

Are you saying that any industry that can be digitalized can necessarily be demonetized?

When I say demonetized there are two aspects. One is demonetized from a consumer perspective. In other words, you don't pay. The other is demonetized in that no one makes any money anywhere. It will depend from industry to industry. In the case of encyclopedias, we're probably going to demonetize that industry. ... There are other industries where you're not demonetizing it. What you're doing is saying web mail is free to consumers now. The really, really active web mail users who want special features ... really almost become price insensitive - they're wedded to full functionality web mail. In that case, you can charge that 1 per cent, or 0.1 per cent, quite a lot of money.

This is the so-called "freemium"?

This is the freemium model. It's the inversion of the typical free sample. In the free samples, we think of perfume or little bits of muffin from Starbucks. ... You give away 1 per cent to sell 99 per cent. ... The nice thing about digital services is because the underlying product doesn't cost anything, you can give away 99 per cent to sell 1 per cent. Today you see more and more businesses built around freemium. That's the Flickrs, the web mails. Because the underlying product is so cheap to offer, you can subsidize the 99 per cent with the 1 per cent.

You've used the word "subsidize," so therefore the 1 per cent has to exist in order for the 99 per cent to be subsidized.

In that particular instance. Or if it's advertising supported, then the advertisers have to exist to support the consumers. That model does still exist in terms of the advertising industry. Google, etc. ... Google is a very profitable company that makes billions by not charging consumers.

I guess I'm curious about what the future of that is.

What's the future of advertising? Is it possible for advertising to be free to the advertiser? Absolutely. I just think we won't call it advertising. ... I'm a geek, as you might have guessed. I have a lot of geeky interests. I subscribe to blogs of engineers about various topics of interest. Those engineers work for companies. Those blogs are about their companies' products. ... Is it advertising? It's certainly not described as advertising. It isn't paid for. It doesn't come from the marketing department, and yet it may have the effect of advertising in the sense that it communicates information about a product to an interested consumer.

I think what you've just described kind of frightens me a bit. The notion that something becomes so intellectually embedded that you don't necessarily know what it is you're getting in terms of advertising integrity or its obverse, editorial integrity.

You've now hit an issue that only comes up when I'm talking to media people. I'm a media person, so I have a lot of sympathy. This whole thing about Chinese walls and church and state and ad versus edit and editorial independence, this is something that the generation that has grown up on Google just doesn't care about.

You've written a new book on the concept of free. Is it finished? Does it have a subtitle?

It's not finished and it doesn't have a subtitle.

Will it be free?

Yeah, of course. How could it be otherwise?

Are there going to be ads embedded in the book?

Ah! So how is it going to be free? Let's start with the digital forms. So the audio book, that's an MP3. That's going to be free. There's the e-book. That's a digital file that's going to be free. There's the web book on the website, page per view, that's going to be ad supported and free. And then there's the physical form of the book. ... One that's going to be sponsored with ads and you get that for free. ... Then there will be the traditional form without ads for which we will charge you $24.95.

The ones with the ads: How is that physically going to appear to me?

Probably ads on the inside front cover and the inside back cover and a couple in the centre.

Will cars be free?

Cars will be free. There's a chapter in my book about a car company in Israel called Better Place, an electric car company. The car is free and you pay for the electricity.

At the end of the day, will everything be free?

I think a surprising number of things will be free in a version.

So that really does take us into the arena of a whole new economic model.

It's partly a new economic model and it's partly the psychology of free. It's partly recognizing that zero point zero has a special place in our psychology. It gets our attention.

[MrB]

but I still believe in incentives

Not sure that I understand your but. :)

Sowell is ALL ABOUT examining incentives. Incentives just ARE, and people act accordingly. For example, the welfare and illegitimacy rate connection. Welfare laws say "you'll get a check if there's no man to provide for your child" - so, whataya know? We get more illegitimate children because of the incentive.

[econjack]

There are dozens of similar stories about how Washington screws things up. Sowell does a beautiful job of showing the logic of those who exploit the “gaps in reasoning” that gov’t so often implements. Another good one. When Celeste was governor of Ohio, he was miffed that companies were leaving Ohio and moving either south or overseas. So he got a law passed that said any company closing its doors and moving elsewhere had to leave behind the equivalent of 6 months wages and benefits. Two months later Celeste is scratching his head wondering why no new businesses were forming in Ohio. Well, duh! To his credit, he recognized his mistake and took it off the books. Some politicians screw up (e.g., Al Sharpton, Teddy Kennedy) but refuse to admit they were wrong even thought they know that's the case. Idiots...

[NathanR]

I once had a free lunch. ;-)

To which I say TANSTAAFL;-)

You pay for a “free lunch” by all the beer you buy.

[untrained skeptic]

Not necessarily marxist/communist - just efficient impementation of supply and demand. So long as all payment is voluntary, it’s capitalism;...

Many countries have become Communist through popular revolt, not by having it imposed upon them by others. People choose Communism because the theory of it sounds appealing to a great many, even if in reality it doesn't come anywhere close to living up to those expectations.

Just because it's voluntary, doesn't mean it's capitalism.

...if you can get costs so low that you only need a tiny percentage of customers to pay, and giving stuff away for free to the rest will statistically maintain that tiny percentage who pay, it works.

Collaborative works, and funding them through the generosity of a relatively small percentage of the users, and by volunteer efforts does work. This web site on which we are posting is a good example of that. However, as you can see from the fund raising drives, it's not free even with a tremendous amount of volunteer effort to keep it running.

Anderson talks about web pages costing pennies or fractions of pennies to provide, and for a lot of content, the cost of hosting the data is the main expense. However, for a lot of other content, the production of that content costs far more than the trivial amount it costs to host.

Anderson talks about a third category where content is truly free, and gives Wikipedia as an example. Wikipedia isn't free, it's run on donations. It's another version of the someone else pays model, such as Google is. However, rather than being run for profit, it's a non-profit organization.

It's not effected as strictly by the same laws of capitalism, because people are willing to bend those laws at their own expense. Some do such things for the benefit of others, some do such things because they want to exert control over others. Soros and friends have created many, many non-profit groups in efforts to exert control over others.

Non-profits are not inherently good or bad, but can be used for either, but they do distort the market. Their costs are subsidized, and they can create a monopoly that destroys a competitive market if their reach becomes too extensive.

When you start believing the hype that making a profit is evil and all these things can be produced virtually for no cost, it's a suck in to the populism that is a close relative to Marxism.

There is no free lunch. Someone else might be willing to pick up the tab, but it always costs someone something.

[USFRIENDINVICTORIA]

“Collaborative works, and funding them through the generosity of a relatively small percentage of the users, and by volunteer efforts does work. This web site on which we are posting is a good example of that. However, as you can see from the fund raising drives, it's not free even with a tremendous amount of volunteer effort to keep it running.”

A very good example. I would say that the participants in this thread collaborated to produce an insightful critique of the article & analysis of the concept of “freeconomics” or “Economics 2.0”. All made possible by generous donors.

[fightinJAG]

Thanks.

But I think Eos just went out of business, like last week?

I was thinking it was a pretty good business model. Of course, something else could have been behind it folding.

[Omedalus]

And sure you can use Cygwin, but at the point where you're using Cygwin, what is it that you're losing by going to Linux?

True! :)

think about a program with a built in macro system. You might offer a visual macro builder where people can drag "Actions" into a sequence, and set timers, etc. But if you've used a system like this, you know that an 'expert user', can build a macro faster and more effectively through some arcane line by line syntax.

Heh, yes, of course command-line interfaces are more scriptable than those godawful visual macro builders. But by the time you're doing script or macro construction, you're acting as a developer for the system rather than a user of the system, and you've already shown that the system's original designers were unable to meet your needs.

Look at it this way. You write a script or build a macro... why? To make a common task quicker or simpler. You do it in order to make the system easier for you to use. It is always about usability, even on a personal level.

For example, let's say you often have to rotate the same set of log files. It's a helluva lot easier and simpler to type rotlog.sh than to go to each directory manually and move the files around one by one. It takes less keystrokes, it's easier for you to remember, it's great.

But wouldn't it have been easier if the system had come with rotlog.sh in the first place? :)

After all, in writing that script, you're no longer using the same system you bought (or downloaded). You're using an extension of that system, an extension you had to create yourself. It's a new control that the system didn't have before, like a new button that you add to your own VCR using Radio Shack parts or a new pedal you rig onto your car.

Wouldn't you prefer a system that came with such an extension already there? Wouldn't you pay more for such a system? After all, you pay either way - either in cash, or in the time and effort it takes you to write your log-rotating script.

Now, of course it would be unreasonable, if not outright impossible, for some anonymous Linux distro developer to foresee exactly where you will put your log files and include a "Jack Napier Log Rotator" option during installation. :) But if you were to use an all-Microsoft solution, then the Windows developers can make assumptions about where your logfiles will be and how often you will want to rotate them, and can provide you with a system that already has the necessary daemons pre-packaged.

What you lose is a certain degree of freedom in where you put your logs. What you gain is the convenience of not having to write the log-rotator script yourself. If the restriction of that freedom is not worth the benefit of that convenience, or if the log-rotating script is trivial for you to write, or if you feel that the value of the pride you earn by doing it yourself would be greater than the cost of the expended effort, then it's rational to prefer a Linux system (for the specific task of log rotation, anyway :) ). But those factors aren't true for everybody - certainly not when you take the full range of things that people expect their computers to be able to do - and so for most people a Windows or Mac computer makes the most sense, with nice big pretty buttons for all their favorite tasks.

[USFRIENDINVICTORIA]

I guess it wasn’t the best business model.

Still, it does seem that airlines have reached the limits of cross-subsidizing economy class at the expense of first-class.

[fightinJAG]

I had trouble figuring out the reason for the fold. That said, a bunch of airlines recently went under and said it was all because of fuel prices.

If it’s true that one First Class ticket can make a flight profitable, it seems that a all-premium class flight with great amenities would be a very successful business model.

Many people will pay more to get more-—and for convenience.

I guess the point is that the model may make it in a different set of economic circumstances.

[jack_napier]

I have to admit; I think I prefer OS X to Windows or Linux at this point...

[USFRIENDINVICTORIA]

Oil prices might have been the problem, considering that it was a new venture.

Another possibility is that they couldn’t fly often enough to fit passengers’ schedule requirements.

[USFRIENDINVICTORIA]

What do you guys think of the Asus EEE PC, with the Linux OS? I've been thinking of buying one with the new 9” screens; because it's ultra-portable, cheap, and would make a good wi-fi appliance for traveling.

Windows XP is available as an option. From what I've read, Microsoft is only charging the manufacturer $40.00 for the OEM installation. That's not a large premium over the “free” Linux version — so, the question is whether the advantages of the Linux OS outweigh the disadvantages.

I think this is an example of where competition from the “free” software caused Microsoft to lower its prices. Also, Microsoft had intended to stop supporting XP; but, they've made an exception for the new class of ultra-portable PCs, such as the EEE. It seems that they were worried about Linux opening up another front & outflanking them in an emerging market.

The EEE PCs come loaded with “free” software — such as the Open Office suite from Sun Microsystems. I have Open Office on a U3 drive & have used it occasionally. There wasn't much of a learning curve involved, and it's at least as good a product as Microsoft's Office (for my purposes, at least).

I tend to stay away from “free” software, because I just want the stuff to work. However, Open Office is very impressive & it costs hundreds of dollars less than the Microsoft solution — which would almost double the cost of an EEE PC. It's the only thing that made using a U3 drive practicable (for me).

Obviously, Open Office wasn't “free” to develop. It seems that Sun is giving it away out of spite for Microsoft. Regardless, from a consumer point of view, it's a bargain; and it has made me think seriously about using a “free” OS, such as Linux.

[jack_napier]

I would wipe the EEE PC (sexy devil it is!) and put Xubuntu on there (A lightweight Ubuntu derivative). A machine like that is going to be more responsive if you put a ‘lightweight’ operating system on there. Like I’ve said, Ubuntu works just out of the box for me. Go ahead and download it and boot your existing PC off of it. You can play around with it without installing it. See for yourself.

[Omedalus]

because it's ultra-portable, cheap, and would make a good wi-fi appliance for traveling.

If your desired use case is a machine that's ideal for traveling, then you'll be interested in the drivers and configuration software for the computer's WiFi card. The driver is the piece of software that allows your computer to control its own WiFi components (you, the user, almost never directly interact with the driver). The configuration application is a piece of software that you, as a user, can use to select which WiFi network to join - for example, if you have both a Tully's HotSpot and a Starbucks HotSpot to choose from, you'd use the configuration app to tell your computer to join the Starbucks network.

Unfortunately, you have no good options to choose from here.

If you go with Windows, you'll have drivers that partially work - meaning that sometimes your WiFi connection will simply stop working (or fail to start working in the first place) for no reason. You'll have to periodically check the Asus EEE PC website to look for news about driver fixes - if you're lucky, your computer will pull hotfixes automatically as they become available. As for configuration software, you'll have some application that will do insane things for you automatically and outside your control - for example, deciding arbitrarily that you want to join the Tully's HotSpot right when you're in the middle of a file transfer on the Starbucks network.

If you go with Linux, you'll also have drivers that only partially work - only this time, instead of hotfixes, you'll be given the drivers' source code and told, "See! It's all right there! If you encounter a problem you can fix it yourself! Isn't it wonderful?" Of course, you'll have access to a vast community of open-source developers that each will be coming up with their own fixes to various problems, all of which are mutually contradictory and most of which have egregious side-effects (i.e. introducing new problems to your system, like crashing your computer whenever you come into range of a new hotspot). As for the configuration application, don't worry, it won't do silly automatic things like the Windows one does. Instead, it will give you total manual control over every aspect of your wireless transmission characteristics, such as your desired ESSID string, number of retry packets, fragmentation threshold, carrier bit-rate, and so on. You will primarily interact with this application using a command-line interface using an arcane language of dash-delimited flags and text-specified options; the system will have a GUI interface as well, but the GUI will just show a list of check-boxes and text entry fields that correspond to what you would type on the command-line anyway, and serves as nothing more than a graphical wrapper for the command line utility.

If I sound cynical, it could be because I've been in this industry for a while. :)

Long story short? I'd go with the Microsoft option if I were you. It's not that it necessarily works better, it's just that it tends to suck more predictable ways, and in ways that most people find a little bit less aggravating. The most important reason for this difference is an allocation of blame. When your Microsoft system doesn't work right, and you paid big bucks for it, you can always be angry at those jerks in Redmond. When your free Linux / OpenOffice system doesn't work right, you have nobody to blame but yourself.

[USFRIENDINVICTORIA]

The EEE PC comes with Xandros Linux (with some customization by Assus); or the XP. I thought that the big advantage of the Xandros (beside the small price difference) was that it was lightweight. The original EEE PC only had 2 gb of flash memory & a slow CPU, so a Windows OS would just have turned it into a brick (well, more like a tile, considering its size).

Now, you're telling me that even Linux comes in different weights. The learning curve is starting to look pretty steep again.

I might try installing Ubantu an old P3 computer that I made the mistake of loading up with XP. It has been excruciatingly slow ever since & I've been considering reformatting it, & starting over with a lighter-weight OS, & using the computer for backup, or guests.

Part of what intrigues me about the EEE PC is the Linux. I thought that it would be a relatively risk-free way to experiment with Linux — so, I was never seriously considering the XP option.

Anyhow thanks for the "free" advice (your latest contribution the the freeconomy).

[USFRIENDINVICTORIA]

I was busy typing my #55 when you posted.

You could give Stephan King a run for his money — that’s one scary scenario. (And I say that as someone who was the DOS guru at work for years.)

At this stage of my life, I just want my computer to be an appliance — I plug it in, turn it on, and it works. I would only use the EEE for email, and a bit of surfing, when away from my desktop. I was hoping that would be a plug & play situation.

BTW, I can see where the OS could cause big problems for me — but, Open Office has been great. Then again, I don’t do anything tricky, like program macros; so there may be problems that I’m not aware of.

[jack_napier]

Now, you're telling me that even Linux comes in different weights. The learning curve is starting to look pretty steep again.It's not that bad. But seriously, it's not that hard to use. Just boot off the disc and you'll load up into a fully usable operating system. Play around with it; it's easy to use.

[Omedalus]

There’s always Apple, you know. God help me for saying this, but I believe a Mac is probably the best thing out there right now. In fact, I bet if you really wanted to you can even load Mac OS X onto those little Asus buggers, now that OS X runs on Intel hardware - but Apple’s hardware is pretty damn sleek in and of its own right.