The Economics of Free
One of the most interesting and unique economic phenomenon to emerge over the last 10 years is the impact of technology in creating products that are free to the consumer. Chris Anderson writes about this in his book entitled “Free”. The most unique aspect of this business model is that it generates tremendous profits for those who know how to use it correctly.
Typically, the advent of a “free” product or service is a sample that is intended to give consumers a taste that entices them to pay for the products in the future. In truth, there is no such thing as free since somebody must pay for everything. However, the rapid acceleration of technology has enabled a business model centered around offering products, services, and content that is free to the end consumer.
Let’s begin by examining the impact of technology as it relates to delivering content and services. Moores Law postulates that the number of transistors on an integrated circuit doubles every 18 months. Practically speaking, this means that the cost per unit of computing power effectively drops in half every 18 months. This means that the cost of providing a product or service to an individual customer rapidly drops to very near zero. Thus, companies who have already built out a technology infrastructure can provide products and services at a very nominal cost. The thing that enables this model is the freedom from content containers such as books, DVD’s, phones, tablets, or some other device for holding or storing content.
By specializing in software based technology products, companies can capture all of the cost advantages offered by Moore’s Law without being constrained by the cost of containers for their content. The pioneer and preeminent leader in this business model shift has been Google. The Google business model is based on a dramatic paradigm shift relative to the traditional economy. Instead of creating a product to sell to the customer, Google creates products that the customers have free access to and then charges advertisers for access to their customer base. This model is very similar to traditional television, but offers the ability for advertisers to narrow down their customer base much more finely than is available through the broad-brush of television advertisement.
The result of this model has been a dramatic increase in the amount of “free” software, services, and tools available in the online marketplace. By giving away access to this wealth of content, Google attracts many people to their network of sites. Their innovative adwords pay-per-click service auctions off the right to reach niche markets to the highest bidder per click. An adjacent business model that has spawned from this paradigm that is quickly challenging the traditional model of using copyright protection to restrict content distribution.
In the world of copy protected content, a new product (such as a book or DVD) is released, marketed heavily, and quickly goes into decline as it is supplanted by something even more new. This model relies on capturing lots of value very quickly to offset marketing costs and generate profit before the shelf life expires and it becomes forgotten.
In contrast to this is the free content model that is based on gradually building popularity and awareness over time. If the product is very good, it can achieve spectacular success since free content is much more likely to go “viral” and have many people view and recommend it, which brings in more viewers and more recommendations. In this model, you capture value not by marketing to customers in hopes that they will buy, but by attracting customers to you because of superior content and capturing value through relationships with advertisers and affiliates that pay a commission for access to customers who have been pre-qualified by accessing your content.
This paradigm shift is fueling the current generation of thought on web marketing. The incredible power of search engines to drive traffic for websites has created an entire industry around search engine optimization. However, the most powerful strategy for search efficiency is to create high quality content since search engines exist to bring customers the best content in the most straightforward manner possible. The opportunity for web marketers comes from creating outstanding content that is appropriately optimized for search visibility to draw customers to your website, then sell access to that population of customers to advertisers and affiliates.
In the end, this phenomenon of ‘free’ is continuing to shape the online marketplace and is expected to produce the infrastructure for even more new business models to emerge in the future. It represents a new paradigm that will pose tremendous problems to people and companies entrenched in the status quo and great opportunities to those who understand and leverage this new business model.