Some business sell things and the price is ’free’ and they try to make money from other offers around the free thing. I think if you want to be in business, and stay in business, charge people cash, make profit, and be able to STAY in business and improve.
Malcolm Gladwell reviews Chris Anderson’s book “Free: The Future of a Radical Price”. For years people have been saying the price of things on the Internet and in the digital age will be free. But much of the economics don’t work. I’m using Gladwell’s very good review to make a couple of points.
CD music should have used digital music as a promotion, pirated or not, and have started in 1996, as they do to some extent now, and make money off the shows. Music still doesn’t do the rest of what they could – sell ‘tonight’s show’ to the audience as they leave, and every other night’s show to every audience member as they walk out, too, and also sell me each Van Halen album I want, with David Lee Roth’s vocals cut out of a custom remastered digital rerecording so I just get the music without DLR, or sell customers who want to be Eddie, the tracks with just Eddie’s work and none of the other 64 tracks on Jump.
Back to so-called Free…In the 50s it was said power in the future, today, would get to be too cheap to meter. But if you check that thinking, if the price of coal-generated-power went to zero, the price-drop would only be 20% – that’s because of the expense of power distribution – across the grid.
One of Chris Anderson’s examples in this book is YouTube, but Credit Suisse estimates that YouTube’s bandwidth costs in 2009 will be $360M and that YouTube will pay $260M for licensed content from movie and television producers. Sort of belies the ‘throm up any crap you want’ model. YouTube could loose $500M this year on 75B downloads. According to Gladwell, if YouTube were a bank that would make them eligible for TARP funds.
Anderson makes the case the Free, he capitalizes it (Free) in the book, and says there are four strands of argument:
1 Technical – digital infrastructure is effectively free (I say that’s only true in relative terms when you get to very very large numbers) and not so with YouTube, but stay with me.
2 Psychological – consumers love free – duh, but do you really want all the masses or just some good customers?
3 Procedural – free means no judgment – that means management can just throw ‘it all’ up on the web, but they also don’t have to worry about quality or their judgment and I’d argue they have dropped their responsibility and are just hoping for some adult to take care of problems later. They also rely on most of the world to not go after them full bore with a copyright legal action. Anyway…
4 Commercial – it is possible to make money with offers around the loss-leader of ‘free’ such as AdSense making tons for Google, with Search and Gmail free
What Gladwell doesn’t say, but I think Anderson should admit, is the price of things can get very low, but the real price is not free because we live in a physical world. Let me explain. People say that in the future designer drugs will be cheap based on our custom DNA analysis. But when making drugs, in relative teerms, the lab work is not that expensive. It’s the hundreds of millions of dollars for the clinical trials that cost big bucks. The plant when the drug is made is stunningly expensive to make and build and run and the power lines and grid all around a nation is where the power and where the huge costs live. Genzyme spent $500M developing the drug Myozyme, which is intended for a condition, Pompe disease, hitting 1 in 40,000 births worldwide and fewer than ten thousand people. Pompe destroys the heart and other muscles. Brutal bastard of a disease. But the price of the drug is $300k per year – not exactly heading for cheap.
What we should realize is that sometimes, free works. Sometimes.
When the economics work out, some of the digital models offer us free things.
But even in the digital world, some of the best businesses do the shocking thing of offering digital services for cash and making money, and staying in business.
As the newspaper business crashes, the WSJ charges for subscriptions online and makes $100M a year. 37 Signals charges cash for online software, try Highrise or Basecamp or the others. Blizzard is making $100M a month. The iPhone may start giving away phones as it makes more from downloaded software in the iPhone Store, but then we all realize that would not be some revolution but rather the razor and blade model, otherwise known as the printer and cartridge model, all established decades ago.
Though some business can sell things for ‘free’, I think if you want to be in business, charge people cash, make profit, and be able to STAY in business.
Weddle
–
Richard Weddle
Director of Innovation Programs
USC Stevens Institute for Innovation
University of Southern California
Los Angeles, CA 90089-2561
m: 213-393-6368
richard.weddle@gmail.com
rweddle@usc.edu