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

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

[USFRIENDINVICTORIA]

There are some interesting ideas in here, from the guy that wrote "The Long Tail".

The point about marginal cost pricing is a bit simplistic (it ignores the "time preference of money", and risk premiums) -- but, otherwise I think it's pretty good "futurism".

I don't know whether or not we'll ever have a "free" car -- but, a lot of existing business models are going to be destroyed. Also, I don't consider anything with embedded advertising to be "free" -- it takes up my time, and (potentially) alters my brain.

[ClearCase_guy]

Interesting ideas here. The only thing that bothers me is the likely take-away by the Democrats:

"Your email is free, right? Everything should be free! That's why I will nationalize the healthcare industry! It's just a logical extension!"

[econjack]

This is pure BS. If you choose to give away an electronic book, it's still not free. Your time had an opportunity cost associated with it. Wikipedia is not free. They must pay for and maintain their servers, staff, etc. even though they may not bill the consumer directly, someone must pay. And they will only pay if there is some form of return down the road, no matter how indirect that road is. The consumer must pay, if for no other reason than for the hardware and power to even use the Internet.

I agree with marginal cost pricing, but one is hard-pressed to give me an example of a zero marginal cost for anything. If you are putting something on the web, its marginal cost is never zero. You cannot even have a presence on the web at zero marginal cost.

This might be fun to think about and debate but it is simply wrong.

[Omedalus]

I don't know whether or not we'll ever have a "free" car

Sure you will, and it will run just as smoothly as your Linux desktop! Of course, you'll have to distill your own gasoline, to make sure that it matches the unique chemical formula optimal for your particular construction of cylinder and spark plug, but hey, that's cool - it shows how leet you are! Sure, it takes time to keep your free car properly configured and patched with the latest safety and security devices, but hey, you weren't planning on spending time doing anything productive with your car, like, you know, drive it somewhere, were you?

[Omedalus]

Fallacy.

The guy makes some wishful statements, but his error comes from his primary assumption. It's right here:

There are three kinds of free in the world. [...] 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

That statement is false. Somebody always provides the materials, labor, or time to produce any good or service. Just because it sometimes happens to be the same guy that created the good or service doesn't mean the process of creating it didn't cost him anything. "On the house" does not mean "nobody pays".

[winner3000]

Marginal pricing is a long-term phenomenon that happens after the original entrepreneur has made “above-average” profits for a period of time, before that profit is competed away. That service will not be profitable anymore, but you can bet that the entrepreneur will then invent some add-on product that will make some more “above-average” profit, and the cycle continues. Nobody will stay in business for too long if they make no money above marginal cost, simply because of the opportunity cost of their time employed in a more profitable endeavor.

[chrisser]

What I think would be interesting would be the ability to pay to not be the recipient of advertising.

For example, I like NCIS on CBS. Its about the only show I watch regularly now that The Unit is pretty much gone. 1/3 of the hour I spend watching it is commercials for products I don’t or won’t buy. I’d pay a small fee to be able to see the show(s) I like without advertising - and its probably more than what CBS gets in ad revenue when they divide it across the number of viewers.

Likewise, I’d subscribe to some web sites that are currently free if I could see them without ads.

[USFRIENDINVICTORIA]

You’re right — there is no “zero marginal cost”. I mentioned the “time preference of money” (AKA “interest”, or “dividends”) and risk — I should have added opportunity costs.

Still, the notion of 1% of users of a premium service cross-subsidizing the ordinary service for the other 99% of us does seem to be happening already. So long as the 1% (or whatever) is paying for the opportunity costs, interest, risk, etc. — then it would actually be a sound business model.

You’ve prompted me to think of another problem — the huge threshold effect between a “free” service and the paid premium service. In practice, there will probably have to be tiers of “premium” service — like there is with cable or satellite TV — which would result in a larger percentage of people paying something (just like the “good ole’ days”) and the 1% paying a lot more.

[ShadowAce]

Windows is mandated (currently) here at work. I spend a full 50% of my time fighting the OS in order to get my work done. Give me Linux and I will get my work down in a LOT less time with a lot less effort.

[ShadowAce]

There are three kinds of free in the world.

No, there's no such thing as free. Someone always pays. Whether it is the consumer, a third-party advertiser, or the provider, a payment of some sort is occurring. It could be in cash, time, effort, or resources.

Nothing is ever free.

[bert]

.....Nothing is ever free......

That idiot singing about pirate clothes tells us credit reports are free.

[USFRIENDINVICTORIA]

Maybe we'll have free “Wiki-health care”.

You start with posting a video on You-Doc, and thousands of volunteer GPs collaborate on a diagnosis and prescription.

If surgery is prescribed; you hook yourself up to your handy household medical robot (paid for by drug company advertising) & volunteer “surgeons” manipulate the controls over the Internet. Just like volunteer encyclopedia authors create Wikipedia entries.

Voilà — free health care!

/just kidding — I hope

[USFRIENDINVICTORIA]

“Sure you will, and it will run just as smoothly as your Linux desktop!”

I'm grateful that the car I did pay for runs better than my Windoze desktop.

[Omedalus]

Give me Linux and I will get my work down in a LOT less time with a lot less effort.

Or, much greater time and effort, but it'll be a lot more satisfying to you because then at least you'll be functioning under the belief that every quirk or shortcoming is some logical result of your own configuration choices. :)

In any case, if it works for you, all the more power to ya. Just realize that you're part of a very small minority that actually know what they're doing. (Or at least part of a minority that thinks they know what they're doing. :) ) Think about the time, effort, and frustration a person faces when using Linux, and put a dollar value on it. Think also about the perk of getting to solve puzzles by using an intellectually engaging OS, as well as the ego boost of getting to feel superior to all those inferior Windows lusers - and put a dollar value on those positives. These dollar values will be radically different for different people.

My dad, for example, would find his time and effort extremely valuable and the perk of intellectual engagement when trying to accomplish routine daily tasks to be really no perk at all, and would perceive Linux as having extremely negative value. On the other hand, my former college roommate doesn't value his time, and gets a major high out of thinking of himself as superior to less technically-minded people, so Linux has huge positive value for him.

As for me, both Linux and Windows waste considerable amounts of my time, but Windows tends to waste it in less frustrating ways - if I can't get Windows to do something, it's because Windows can't do it, not because I failed to be clever enough to put an ampersand in some line of some script run by some daemon somewhere. And I know I'm superior to everyone and don't need to use a leet OS to prove it. :)

[USFRIENDINVICTORIA]

IMHO, your analysis is right on.

Marginal pricing most often comes into play when a business is declining, or on the verge of bankruptcy. It also factors big in the mining, and oil & gas industries. When deciding whether to begin production, the developers have to consider the long-run average cost — with a good profit margin factored in. Once all the capital costs become sunk costs — future decisions about whether or not to continue production pivot around the marginal costs of production, compared to marginal revenue.

Clearly, Anderson is playing to the Starbucks and cocktail party crowd. He has a knack for making dry as dust economics sound quite cool — but, in so doing, he does oversimplify. You could quote Anderson at a coctail party & be considered trendy -- if you go deeper, eyes begin to glaze over.

[USFRIENDINVICTORIA]

“Nothing is ever free.”

I once had a free lunch. ;-)

Do you consider Linux to be “free”? (Referencing your tag line.)

[live+let_live]

The number 1 rule of the Universe: There is no free lunch.

What the author really means is no apparent cost to the consumer.

If I have a great idea for a story. I might tell it for free around the campfire. But if I go to the trouble of typing it up and proofreading it and putting it on the web, I want to get paid. Paid from somebody, I don’t really care who.

Anybody remember Nuclear power so cheap electricity it will be free? Didn’t happen that way. It never does.

Cheap, yes. Free to the consumer, maybe. Nobody gets paid? Never.

[USFRIENDINVICTORIA]

“What I think would be interesting would be the ability to pay to not be the recipient of advertising.”

I feel the same way.

I like to rent serialized TV series on DVD — 24, Lost, The Wire, Sopranos, etc. It's great to be able to see them without interruption — or without the extremely annoying and distracting little promos at the bottom, or credits that are superimposed on the first 15 minutes of the show.

I also record programs, so that I can fast-forward through commercials. This isn't exactly “free” — because of the cost of the recorder, and my time setting it up, etc. Also, it doesn't get rid of the promos, etc. that are embedded in the program.

I've read somewhere that the value of all TV advertising works out to about $300/household/year. That would be a very reasonable price to pay to be ad-free. Unfortunately, a lot of people wouldn't pay — so we're stuck with the advertising. Now that there is no practical limit to the number of channels, perhaps networks could offer premium (viewer-pay) channels with the same programming, at the same time, as the regular “free” advertising-funded channels.

[econjack]

Standard economic analysis embeds what is called a “normal rate of return” in the cost. This is usually understood to be the long run cost of capital (e.g., historically around 3.2% in the US). Any return above that, where price is above average total cost, is called an “economic rent”. It's called that because the return is “over and above what is necessary to keep those resources in their current use”. It is those economic rents that disappear in competitive industries. However, even if those economic rents go to zero because of competition, the resources may stay in their current use if there are no other alternatives that yield economic rents.

To say the Internet is free, however, is absurd. When Al Gore said he “invented” the Internet, what he really means is that he created the tax that appears on your phone bill ever month. Clearly, it is not free.

[jack_napier]

Give me Linux and I will get my work down in a LOT less time with a lot less effort.

Or, much greater time and effort, but it'll be a lot more satisfying to you because then at least you'll be functioning under the belief that every quirk or shortcoming is some logical result of your own configuration choices. :)

I'm sorry, this is wrong...first off, distros like Ubuntu are incredibly simple to install. For most people doing web browsing, emailing, document writing; this is enough. For those of us doing certain other things, once you have acquired that 'domain' knowledge (AKA, investing in learning it), the speed at which you can do things goes up. Say that there's a log file where we need to find application errors. It's large; perhaps 70MB. What do Windows users do? Open the file and then hit Ctrl-F to search it. What does a Linux user do? Grep. One is much faster than the other.

Simple fact of the matter is this: Go learn HCI and they will tell you every time that command languages are the most powerful interfaces, but the learning curve is often too steep.
Just to top it off, the statement if I can't get Windows to do something, it's because Windows can't do it, is patently false. There are many things which Windows can do that are obscure. If this were not true, then it would not be so easy to hide malware information in the "Registry"! There are a plethora of sites dedicated to hacks of the Registry, the vast majority of which are certainly non-obvious.