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Free – Page 1 FREE The Future of a Radical Price CHRIS ANDERSON CHRIS ANDERSON is the editor-in-chief of Wired magazine. He was previously the U.S. business editor for The Economist where he launched their coverage of the emergence of the Internet. Mr. Anderson also worked at the journals Nature and Science. He is the author of The Long Tail. Mr. Anderson is a graduate of George Washington University (in physics) and the University of California (in quantum mechanics and science journalism) and has conducted research projects at the Los Alamos National Laboratory. SUMMARIES.COM is a concentrated business information service. Every week, subscribers are e-mailed a concise summary of a different business book. Each summary is about 8 pages long and contains the stripped-down essential ideas from the entire book in a time-saving format. By investing less than one hour per week in these summaries, subscribers gain a working knowledge of the top business titles. Subscriptions are available on a monthly or yearly basis. Further information is available at www.summaries.com. Free – Page 1 MAIN IDEA At one time, giving away free stuff was an attention 1. The history of free – and why it has such power ........................ Pages2-3 grabbing sales gimmick. That’s now changed The word “free” can mean lots of different things but these all boil down to variations of the dramatically. In today’s business environment, same thing: shifting the cost of a product or service from person to person, between now companies can profit more by giving things away and the future or into nonmonetary markets and back out again. There are four basic than they can by charging for them. Notably this business models by which things can be made available for free: isn’t just a digital economy phenomena. It applies right across the global economy. In more and more Four basic 1 Direct cross-subsidies 3 Freemium industries, abundance thinking is becoming a far business models more powerful engine for commerce than scarcity of Free 2 Three-party markets 4 Non-monetary markets thinking ever has been. Free is becoming a business strategy which might just end up being 2. How digital electronics has revolutionized free ......................... Pages4-5 essential for any company to survive. The obvious reason most products are not free is because their production costs are not The online economy’s costs continue to go down zero – it costs money to make things and that cost must be met. Digital markets are an dramatically. This has created the unique situation exception to the rule. For almost all digital products, the marginal cost of reproduction is where the primary inputs of the entire industrial zero. Therefore, sooner or later, it is almost inevitable producers in the digital realm will economy are falling faster today than at any other find themselves competing against products which are free. Accepting this fact, the smart time in recorded history. To take a case in point in thing to do is to try and figure out how to use a zero price point profitably yourself and get 1960, a single transistor sold for $10. Today, when there first. you buy Intel’s latest microprocessor chip, you’re in effect purchasing two billion transistors for $300 – 3. Freeconomics – how and why free works and what it does ..................Pages6-8 which works out to around 0.000015 cents a Economists have known for hundreds of years one fact: “In a competitive marketplace, transistor. These and other similar cost decreases price always falls to the marginal cost.” This was of academic interest only until everyone are generating a tremendous reduction in costs for joined hands to build the world’s first truly competitive marketplace – the Internet. In this, all three of the basic building blocks of online the most competitive marketplace the world has ever seen, free is not just an option. commerce – processing power, bandwidth and Rather, free is the inevitable endpoint which is generated by the forces of economic hard-drive storage. gravity. You will be far better off acknowledgingthis reality and becoming one of the first in “At the beginning of the twentieth century, Free your industry to figure out how to build a business model based around free that still fueled a consumer revolution that defined the next makes you money. This will take creative thinking and ongoing experimentation to get hundred years. The rise of Madison Avenue and right but by being an early-mover in finding ways to exploit free, you can position yourself the arrival of the supermarket made consumer advantageously. That head start just may be enough to give you a sustainable psychology a science and Free the tool of choice. competitive advantage. Free-to-air radio and television united a nation and Above all, swap scarcity thinking for abundance thinking – because sooner or later, that’s created the mass market. Free was the rallying cry where every industry is heading. of the modern marketer and the consumer never failed to respond. Now, at the beginning of the Scarcity Abundance twenty-first century, we’re inventing a new form of Free, and this one will define the next era just as You have to get permission Rules Anything goes profoundly. Today, the most interesting business models are in finding ways to make money around “We know what’s best” Social Model “You know what’s best” Free. Sooner or later, every company is going to have to figure out how to use Free or compete with Business model Profit Plan Figure it out as we go Free, one way or another.” – Chris Anderson Top-down Decision Process Bottom-up Command and control Management Out of control Free – Page 2 The history of free – and The concept of free has had a notable impact on the n There is also a parallel dynamic in play between time 1. why it has such power publishing industry. Many community newspapers, for and money. When you have no money, you’re example, start out as standard subscription-based prepared to do more things for yourself so you’ll entities and then find they can increase their circulation happily take a free product and fiddle with it. But when The word “free” can mean lots of different things but by dropping their cover price and becoming free. That you do have money, then it becomes far easier to pay these all boil down to variations of the same thing: bump in circulation, in turn, makes the newspapers for a finished product which is more expensive than shifting the cost of a product or service from person to more valuable to potential advertisers. Often, the the free version. person, between now and the future or into increase in advertising revenue is then more than As a result, all kinds of business models have been nonmonetary markets and back out again. There are enough to offset the loss of revenue from newsstand developed as ways to make money from stuff that’s free. four basic business models by which things can be sales or subscriptions. Some of these are well established and form the basis of made available for free: Similarly, it’s not unusual for a glossy magazine to have the four basic business models set out on the next page. a number of different price points: Other business models also arise which are hybrid Four basic business models of Free n A stripped-down version on the Web which is mixes of the four generic business models. accessible for free. Take, for example, the concept of open source 1 Direct cross-subsidies n Issues which sell at the newsstand for say $4.95 each hardware. A company called Arduino exists to develop – of which half the revenue goes to the newsstand and sell environment sensors which can be used for 2 Three-party markets and half to the publisher. home automation or interactive devices. The company’s business model is: 3 Freemium n Yearly subscriptions for $10 – which is generally less than the cost of printing and distribution but the 1. Arduino makes all its information freely available 4 Non-monetary markets money paid by advertisers is sufficient to make this over the Internet – plans, printed circuit board files, profitable overall. software and instructions on how to make everything. A community grows up around this These various price points illustrate the fact all kinds of information. “Free can mean many things, and that meaning has dynamics can come into play when considering giving changed over the years. It raises suspicions, yet has the something away for free. On the one hand, if you charge 2. People start helping each other to build things using power to grab attention like almost nothing else. It is nothing, you’ll get more attention and your circulation the plans and hopefully to come up with design almost never as simple as it seems, yet it is the most figures will soar. However, if you can demonstrate improvements. Everyone is encouraged to tinker natural transaction of all.” people care enough about your stuff to actually pay for it, and share their new ideas. – Chris Anderson then your value to potential advertisers soars. You can 3. For those who don’t want the hassle or risk of charge advertisers more because you’ve proven that building themselves, Arduino sells polished versions The phrase “there’s no such thing as a free lunch” refers your subscribers care enough about your material to of its products which are guaranteed to work. The to a tradition of seventeenth-century saloons in New reach into their wallets and pay for it.

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