I’m still mired in reading Chris Anderson’s latest book; “Free”.
I doubt I’ll finish it. 130+ pages in, I haven’t discovered anything
illuminating. In fact, I’d argue that by combining a number of very
different applications of free under one umbrella, Anderson does not
clarify free, but rather makes it more confusing. For example, a
business model that includes giving media access away for free to a
consumer so that an advertiser can pay to reach an audience is very
different than giving away a product to capture sales of a related
product. The first is a classic two-sided business model.
The latter is a classic complements business model; razor/razor blade.
These two business models are fundamentally different as is the
appliation and effect of free. Perhaps the only thing they have in
common is that someone gets something for free.
Neither is an obscure business model that the Internet has managed
to invent. And both are well studied by economists. As David Evans, a
scholar and consultant I admire, and co-author of The Catalyst Code – one of the finest books on two-sided business models – highlights in a recent blog post:
Most of the kinds of business models that Anderson talks
about have been around for centuries if not longer. Google’s search
business model isn’t fundamentally different than yellow pages. The
yellow page companies charged the advertisers and give the search
mechanism away for free. The only business model that Anderson points
to that is really new is open source.
Evans and his colleagues at Market Platform Dynamics get free,
particularly its application in two-sided businesses better than anyone
I’ve met. Not surprisingly, they work in sectors like payments and
media where free is a prominently used tool. Evans goes on to say:
The two-sided literature and other economic theories
emphasize that free is a special case and that it doesn’t necessarily
or always lead to a profitable business.
Yes, frictionless distribution enables more companies to give
something away for free in the hopes of getting someone to pay for
something else. But getting someone to pay for something is the hard
part and is largely ignored in “Free”. This is all too “if you build it
someone will pay” for me. For my part, I’d like to know what and when
someone is going to pay for before I start giving a component of my
offering away for free. Anything short of that is gambling.
Some smart entrepreneurs are fighting the urge to “go free” as well.
For a humorous look at making money on-line without giving something
away for free, check out this video of
David Heinemeier-Hanson presenting at Startup School ‘08. His
conclusion; don’t give what you do away for free; have a price!
While not all free is the same, free as a price has its place. But it is not an elixir for all.
(Cross-posted @ Non-Linear VC)