Chris Anderson is editor-in-chief of Wired, which has won a National Magazine Award under his tenure. He wrote an article in the magazine entitled "The Long Tail", which he later turned into a book called "The Long Tail: Why the Future of Business Is Selling Less of More" (2006). In this blog post, I will be reviewing his latest book, "Free: the Future of Radical Pricing", which has generated much discussion and critique.
I am a 2nd year law student. I studied computer science before coming to law school. Naturally, as is the case with many other computer geeks, I am a true fan of open source software. The evolution of Linux and Firefox to what they are nowadays fascinates me. Obviously they would not have been what they are today, had it not been for the good will of the contributors, who voluntarily provided their codes.
As much as I adore open source software, it never occurred to me, that it may be rational to provide everything for free. To me it seemed that the open source software are what they are because there is a paid counterpart, which fuels the competition. I always wonder how far Linux would have gone, had Microsoft provided Windows Operating System and its source code for free? To me it seemed that a combination of free and paid counterparts would best foster creativity and innovation. This is, of course, slightly different than the Freemium business model, where the basic version of the software is provided for free and you have to pay to get the professional or advanced version, since both basic and professional version are provided by the same business. All this is said to give you an idea of my mindset when I started reading the book.
The book gives a history overview of successful businesses revolving around free products and services (such as Google). According to Anderson, it is possible to make lots of money and yet charge nothing if there is a free unlimited shelf space, which would accommodate an infinite number of choices. The Internet, by providing this infinite space, creates a highly competitive market. Thus, it has revolutionized the economy. To Anderson, free is not yet another option, it is the ultimate endpoint; he argues that it is possible to give away things and services for free because as technology advances production costs approach zero.
To Anderson the 20th century's economy is different than the 21st. The former, as Anderson states, is the "atoms economy" where things get more expensive over time and the latter is "bits economy", which refers to the online world where things get cheaper as time passes.
The first few chapters of the book, points out what most of us know already, about the ways you can make profit from free goods or services: giving away free samples, the Freemium business model, providing something for free in order to sell another thing, or by having a third party pay your costs. An example of the last form is what the publishing industry does. According to Anderson, the industry can make profit by providing free online newspapers/magazines because the advertisement pays more than the cost of production and online distribution of papers. Although, arguably, as Malcolm Gladwell points out this business strategy may not be quite profitable. For instance, James Moorney, the publisher of the Dallas Morning News stated that in order to license the content of his newspaper to the Kindle, Amazon's electronic reader, Amazon asked for 70% of the subscription revenue and the right to republish the intellectual property content to any portable device. In such a case, that the provider of the electronic reader would earn more than the provider of the expensive content.
Anderson also considers consumer psychology when choosing products. According to him, the cognitive load of having to process information affects what you choose to buy. Due to our laziness, we tend to choose things that require least thinking. Thus as Anderson argues, people will choose the free available option since when something is free you don't have to ask yourself "is this thing really worth the price?" To me it seems that Anderson fails to also include that you will choose the free option when there is a paid counterpart. However, in a scenario where everything is free then the question "is this thing worth the price?" is replaced by "is this thing worth my time?" Thus, the free economy Anderson proposes may now revolve around something else like reputation - businesses with better reputations will continue to make money and the new businesses with no reputation at all will, arguably, suffer unless they are providing something significantly better. This may be discouraging to many and thus may hinder both innovation and creativity. After all, as Anderson points out, at the end of the day there are bills to pay.
However, to Anderson, economy revolving around attention and reputation does not seem to be a threat to new businesses. He argues that, in such an economy, people will continue to provide services for free because being creative and giving away things for free makes them happy, sometimes even happier than their paid jobs.
Anderson also talks about how Internet, by allowing cheap distribution of information has revolutionized the economy. By considering Google's business model, Anderson proposes that any 21st century business should follow Google's strategy, e.g. hand out many things for free and get paid for a few. According to Anderson, Google owes its success to combination of mass distribution of free services and paid advertisement, where advertisers create customized ads matching keywords and content and bid for the most prominent positions.
Anderson has been criticized for his reliance on Google's business strategy. According to critics Google provides an example "why free does not work"; Google's YouTube is a total money loser and Google has yet to explain how its new operating system is to generate profit. To me it seems too early to decide whether Google's strategy has been a total failure or success. Although I believe, in general, Google's success depends on the amount of free information available on the web, since more available data means better search results and more places to put advertisements, which, arguably, leads to more money from the advertisements. Although, video monetization is different from adding advertisements beside search results since, arguably, advertisers would want to be associated with popular videos. Thus more videos do not necessarily mean more money.
Furthermore, Mark Cuban, the billionaire owner of the Dallas Mavericks, argues that continuing to focus on free is a big mistake that growing internet companies make. "When you succeed with Free, you are going to die by Free," writes Cuban.
To further support his statement that we are moving towards the free economy, Anderson considers the media industry - how radio and television provide free or cheaper content to consumers by charging for advertisements. He points to the success of the gaming industry and Radiohead in providing certain content for free in the online world. He also considers free online books and states that as long as people want to read the books in the physical form, or "atom forms" as he calls it, they will continue to pay for it. However, I wonder how long people would continue to want to read physical books?! It is hard to compete with free, after all.
Anderson provides six reasons (borrowed from the entertainment lawyer Jonathan Handel) for the evolution to a free economy:
- Supply and demand: Due to Internet, supply is much greater than demand.
- Loss of physical form: It does not feel like stealing when you are stealing something intangible.
- Ease of access: Downloading something is easier than going to the store and buying the thing.
- The shift to ad-supported content: when things are free online what should be free in real life?
- The tech industry wants content to be free: Free content means you have to buy more products to host that content - e.g. Apple wants music to be free so sell more iPods.
- Generation Free: To the younger generation copyright seems irrelevant.
Anderson also talks about piracy in China's market. To him, it seems impossible to fight piracy. Thus, he proposes to embrace it. He argues that piracy can be beneficial to the music industry because through piracy more people will be exposed to an artist's works, and the artist can in turn make profit through personal appearances, product endorsement, concert tours, and/or charging for cell phone ring tones. Furthermore, he argues that piracy can be good for any business. According to him the fake goods that are sold in China, increase Chinese exposure to Western brands and fashion and thus in turn when people have the money to buy the real thing, they will buy it because the real thing has better quality.
Although Anderson states that free is the ultimate end point, he does say that he favours a variation of the Freemium business model because it can accommodate varying psychologies of a range of consumers. For instance, according to him, you may not have time to download music, yet you may have enough money to buy the music and you would prefer buying it.
Overall the book was an interesting read although repetitive at times and a bit one sided; throughout the book, Anderson tried to show that free will be the future because this business model worked in the past. To me, this argument does not have much merit. There are too many variables that need to be considered, each of which could contribute to the success of the free business model, and we cannot simply assume that they remain constant over time (parameters such as, economical status/situation, consumer's financial status, consumer's psychology, existence of paid counterparts, etc.). Although Anderson does not assume that these variables remain constant, he did not address the effect of their change.
Cory Doctorow, science fiction author and co-editor of the blog Boing Boing, also has posted a review stating: "to discuss "free" without taking note of the ways in which it both challenges and reinforces non-market ways of living just as much as it does for market-driven ones is to only tell half the story".