Business modelschris andersonfree

Freeconomics – maybe people will start paying for things

By March 31, 2009 19 Comments

The folks at Chinwag were kind enough to ask me to chair a panel on the topic of freeconomics last night.  I’ve written extensively about ‘free’ as a business model extensively before, but to recap the argument for free is that more and more goods are being delivered digitally, the marginal cost of delivering a digital good is $0 (or pretty close to it), and that in a competitive market over time the price of goods trends towards the marginal cost of distribution.  Hence digital goods should be free to consume and companies will have to make money from advertising or by selling related goods – e.g. bands give away their music for free and make money from gigs and t-shirts.

The counter argument is that the only reason we have gotten used to getting stuff for free on the web is because VCs and large corporates have subsidised those services in a rush for market share, and that for most companies you can’t make enough money from advertising, or the other areas to make the free business model work – so it is unsustainable and we will all have to get used to paying again.

For the most interesting/surprising thing to come out of the discussion was a much greater degree of willingness to start paying for services than I had expected.  A lot of that was couched in terms of ‘if there was no free alternative I would pay’ which of course begs a very large question, but it will be intertesting to see what happens when people are actually asked to start paying, because I think they will be.  Subsidies from VCs and large corporates are drying up, if they haven’t run out already, and despite the fears of what it might do to their businesses I expect many companies to start experiementing with charging more aggressively.

The other takeaway that I hadn’t considered fully is that for many services in reality the marginal cost of delivery is not zero.  This was made most forcefully by panelist Alan Patrick, but also by panelist Bruce Daisely of YouTube who made the point that the worlds favourite video service now accounts for 10% of total bandwidth consumption – which I’m sure costs Google a lot of money.  This point knocks a sizeable whole in the ‘free’ argument, although ‘free’ fans would argue that these costs are going down all the time.