The Economics of Free

Pingree's Potato Patch
Studying the Economics of Detroit

Wired Magazine is running an excerpt from a new book by Chris Anderson called FREE, dealing with the dynamics of freely distributed goods and their impact on economic assumptions. This actually has some bearing on discussions I've had with some participants in the Center for Community Based Enterprise, so I plan to give it a detailed read.

UPDATE: Ok, I've read it, and I've got some thoughts. More...

My first response is that the article is a bit sloppy, throwing around terminology like "marginal costs" without full regard for their technical meaning, but obviously that's the typical reaction of a professional to popularizations of their area of expertise. Nevertheless, there are a few good observations to be found. The core of the article is the idea that the plummeting cost of distribution and reproduction of content, combined with the transition of increasing numbers of services from people to software has resulted in a massive shift of economic production into an environment where giving the product away is an economically feasible and potentially even optimal strategy. This idea has been floating around for a while, and he correctly links the underlying dynamic back to the old saw about Gillette giving away the razors so they can make money off selling the blades. However, the main value of the article is that it lays out a taxonomy of "free" that reflects differences between the business models surrounding giving things away:

  • "Freemium": Giving away a limited version of a product or service in order to draw in customers some fraction of whom will pay for an enhanced version, which ultimately more than covers the cost of the freebies.
  • Advertising: Giving away product in order to build a customer base which can then be monetized by advertising to those who desire the attention of those customers.
  • Cross-subsidies: The classic razor blade example: Giving away product in order to generate sales of support services or necessary peripherals for the free good.
  • Zero marginal cost: Giving away product because costs of production and distribution of additional copies is so low that there is no reason not to. This is often coupled with an indirect cross-subsidy effect, by drawing attention to other products which are not free.
  • Labor exchange: Giving away product in order to gather peripheral value generated through people receiving the goods. Typically the peripheral value takes the form of information, such as users ranking news stories, which serves an editorial function (as on Digg and Slashdot), or calls adding to a voice data library (with Google's free GOO-G411 free directory assistance system).
  • Gift economy: Giving away product as part of a community where this is done widely, which generates net value for all participants that is generally larger than any individual contribution.

The discussion within the C2BE is about possible structures for the organization, and more specifically the website. It seems to me that the Center could productively use the Freemium, Zero Marginal Cost and Labor Exchange angles in structuring the site. The fact that I can apply the taxonomy usefully to the needs of the organization strikes me as evidence that the article has some value. I'm likely to pick up the book when it comes out in 2009, though I'm curious why the publication date is so far in the future.

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