by kevin, on September 20th, 2009
Everyone is familiar with the expression – there’s no such thing as a free lunch. In his new book Free: The Future of a Radical Price, Wired Magazine Editor-in-Chief Chris Anderson asserts that the free lunch is a great example of a cross-subsidy. “One way or another the food must be paid for, if not by you directly then by someone else in whose interest it is to give you free food,” states Mr. Anderson. Today there are two economies operating simultaneously – one based on atoms and one based on bits. And the concept of free operates differently in each. According to the book, “anything free in the atoms economy must be paid for by something else, which is why so much traditional free feels like bait and switch – it’s you paying, one way or another. But free in the bits economy can be really free, with money often taken out of the equation altogether.”
Just twenty years ago, if you were to look at the top 100 on Fortune’s annual list of the top 500 companies, you would find that they all extracted something from the earth or converted that material into something physical. Today, less than one third mine or manufacture. Value has been moving from atoms to bits. The other two thirds of the list traffic in ideas. As Free points out, “the highest profit margins are usually found where gray matter has been added to things.” A flattened earth and global production has converted manufacturing to commodity. Law of supply and demand insists that scarcity drives prices up, while abundance drives prices down.
The surprising, and seemingly contradictory, message is that there is tremendous money to be made with free. How in the world does that work? Because abundant information wants to be free, while scarce information wants to be expensive. According to Mr. Anderson, “ideas are the ultimate abundance commodity, which propagates at zero marginal cost.” Information with low marginal cost for replication or distribution should be free, and are increasingly becoming so. Information with high marginal cost should be expensive, and is. Google is a good example of this principle. They offer the public a host of free services – Gmail, Google Docs, Google Maps, Google Earth, Google Search, and many many more. All of those have a very low distribution cost for Google, so they can afford to give them away. However, an enormous audience using all of those also helps Google collect valuable data about how the public uses the internet. That information is the real gem, and is where they really make money. Some might say that the free services are just paid for by advertisers. But with Google, advertisers aren’t just buying eyeballs in the same way Madison Avenue has in the past, they’re buying specific targeted information about the behavior of potential customers. That information is scarce. So scarce that only Google has it. And the only way they can collect it is by enticing people with free.
Throughout the history of industrialization, every major advance has been propelled by the reduced cost of some key component. And that transition has always been created by someone applying ideas or creativity to the problem at hand.
Free is packed with great ideas, lists of business model ideas based on free, and excellent examples for illustration. I can’t speak to how well this book follows Mr. Anderson’s previous one – The Long Tail – but Free stands well on it’s own. It’ll have to rethinking your industry and figuring out how to leverage free. I know that’s what I’m doing. But what does this have to do with sustainability? I believe the application of concepts based on free within the existing industrialized framework can be incredibly disruptive to that existing system. Entrenched legacy corporations, especially those that began in an atoms dominated economy, aren’t able to apply free as easily as new start-ups. An emerging sustainability centered economy can benefit those who can move toward free first and add value through the application of great ideas. This is a topic I’ll continue to cover.
By the way, I read the book for free. It’s available in a number of different forms at no cost. I read it on my Amazon Kindle.