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2/26/2008
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The New Economy of Free (What It Will Cost You)

We all know -- or had at least one grandparent tell us -- you don't get something for nothing. But technological advances and new distribution models mean that you can get some stuff for not that much. Oh, and you might want to think about how you can apply that concept to generating revenue for your smaller business.

We all know -- or had at least one grandparent tell us -- you don't get something for nothing. But technological advances and new distribution models mean that you can get some stuff for not that much. Oh, and you might want to think about how you can apply that concept to generating revenue for your smaller business.Wired editor in chief Chris Anderson writes all about the new "freeconomics" in the magazine's latest issue (which not too surprisingly is being offered in print form free to early subscribers).

Writes Anderson: "Once a marketing gimmick, free has emerged as a full-fledged economy. Offering free music proved successful for Radiohead, Trent Reznor of Nine Inch Nails, and a swarm of other bands on MySpace that grasped the audience-building merits of zero. The fastest-growing parts of the gaming industry are ad-supported casual games online and free-to-try massively multiplayer online games. Virtually everything Google does is free to consumers, from Gmail to Picasa to GOOG-411. The rise of "freeconomics" is being driven by the underlying technologies that power the Web. Just as Moore's law dictates that a unit of processing power halves in price every 18 months, the price of bandwidth and storage is dropping even faster. Which is to say, the trend lines that determine the cost of doing business online all point the same way: to zero."

Before every IT guy who just slaved over this year's budget breaks out in hysterical, verging on insane, laughter, Anderson continues:

"But tell that to the poor CIO who just shelled out six figures to buy another rack of servers. Technology sure doesn't feel free when you're buying it by the gross. Yet if you look at it from the other side of the fat pipe, the economics change. That expensive bank of hard drives (fixed costs) can serve tens of thousands of users (marginal costs). The Web is all about scale, finding ways to attract the most users for centralized resources, spreading those costs over larger and larger audiences as the technology gets more and more capable. It's not about the cost of the equipment in the racks at the data center; it's about what that equipment can do. And every year, like some sort of magic clockwork, it does more and more for less and less, bringing the marginal costs of technology in the units that we individuals consume closer to zero."

Smaller businesses can use this concept of free (or almost free) on either side of the equation. As Anderson notes: "It's now clear that practically everything Web technology touches starts down the path to gratis, at least as far as we consumers are concerned. Storage now joins bandwidth (YouTube: free) and processing power (Google: free) in the race to the bottom. Basic economics tells us that in a competitive market, price falls to the marginal cost. There's never been a more competitive market than the Internet, and every day the marginal cost of digital information comes closer to nothing."

Of course, there are lots of free tools -- from virtualization to open source apps -- that smaller businesses should be taking advantage of.

But smaller businesses can also flip the model on its head. There are ways, as this list demonstrates, for smaller businesses to generate revenue online with free content. As the list's author Fred Wilson notes, "Think of all the various ways that an audience that is paying attention to your service can be paid for by companies and people who want some of that attention."

Of course, we all know nothing is really free. As CNET blogger Andy Smith writes: "Free cell phones--but you have to pay hefty monthly fees to use them. Video game consoles at well below cost--but you have to buy expensive video games to use them. Free coffee makers for businesses--but you have to buy coffee packets to make them work. King Gillette started the trend in the 1900s by giving away razors so people would buy disposable blades. It still works--with the cost of many tech products falling fast, businesses realize that more money can be made tricking consumers into thinking they're getting something for nothing."

Smaller businesses aren't being tricked  nor are their customers. Ultimately, everyone is trying to make, or save, a buck and getting or offering something for free might be the way to get there.

As Techdirt writes: "There's no "tricking" at all, but some people have trouble accepting that notion when it comes to "free." Perhaps it is for the best, though. Chris knows a lot more about selling books and influencing people than I do -- and if he can influence a lot more folks to recognize that "free" isn't a bad thing, then that's going to help push a lot of businesses forward."

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