All “Free” is NOT created equal

I’m still mired in reading Chris Anderson’s latest book; “Free”. I doubt I’ll finish it. 130+ pages in, I havn’t discovered anything illuminating. In fact, I’d argue that by combining a number of very different applications of free under one umbrella, Anderson does not clarify free, but rather makes it more confusing. For example, a business model that includes giving media access away for free to a consumer so that an advertiser can pay to reach an audience is very different than giving away a product to capture sales of a related product. The first is a classic two-sided business model. The latter is a classic complements business model; razor/razor blade. These two business models are fundamentally different as is the appliation and effect of free. Perhaps the only thing they have in common is that someone gets something for free.

Neither is an obscure business model that the Internet has managed to invent. And both are well studied by economists. As David Evans, a scholar and consultant I admire, and co-author of The Catalyst Code – one of the finest books on two-sided business models – highlights in a recent blog post:

Most of the kinds of business models that Anderson talks about have been around for centuries if not longer. Google’s search business model isn’t fundamentally different than yellow pages. The yellow page companies charged the advertisers and give the search mechanism away for free. The only business model that Anderson points to that is really new is open source.

Evans and his colleagues at Market Platform Dynamics get free, particularly its application in two-sided businesses better than anyone I’ve met. Not surprisingly, they work in sectors like payments and media where free is a prominently used tool. Evans goes on to say:

The two-sided literature and other economic theories emphasize that free is a special case and that it doesn’t necessarily or always lead to a profitable business.

Yes, frictionless distribution enables more companies to give something away for free in the hopes of getting someone to pay for something else. But getting someone to pay for something is the hard part and is largely ignored in “Free”. This is all too “if you build it someone will pay” for me. For my part, I’d like to know what and when someone is going to pay for before I start giving a component of my offering away for free. Anything short of that is gambling.

Some smart entrepreneurs are fighting the urge to “go free” as well. For a humorous look at making money on-line without giving something away for free, check out this video of David Heinemeier-Hanson presenting at Startup School ’08. His conclusion; don’t give what you do away for free; have a price!

While all free is not equal, free as a price has its place. But it is not an elixir for all.

Derek Pilling is a Managing Director at Meritage Funds, a growth equity firm. Derek invests in technology-enabled services businesses in the Internet Infrastructure, Cloud Computing, Digital Media and SaaS sectors.Derek lives in Denver with his wife and his three children. In his spare time, Derek enjoys coaching youth soccer, skiing, hiking, spinning and hopping on his rowing machine in the morning.

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  • http://twitter.com/toms Tom Limongello

    David Heinemeier knows free quite well, like using South Park’s underpants gnomes’ 3 steps to profit conceit.

    I’ve read both catalyst code and free and both seem to be afraid of the very simple concept of service in their explanation of business models. Neither does a good job of clearing up the discussion because they want to sound cool. It’s fun to talk about free, and it sounds complicated when you come up with complex ‘double sided’ business strategies, but really all I see from most of their examples is a recount of players who are looking at a market and editing business models to change who gets served.

    Of course, I’ll use the gell-o (sp. mine) model that Chris Anderson uses to start off his book. In that case giving away cookbooks with free recipes is a way of serving the consumer, by offering up a mnemonic for getting the brand name jell-o to the friendly neighborhood grocer. If you break down this example Anderson is really saying that trade spend (sales focus, marketing materials etc.) went primarily to the grocer, rather than to the consumer. The pre-kraft makers of jell-o (geneesee?) were just using judo tactics, moving the priority to where the scarcity is. Chris Anderson does talk about shifting priorities, but I agree with you using Free is not always the clearest way to do so, it’s just the most controversial.

    I think that both books should have been free and they should have a web service that teaches you how to use their ‘new’ business tactics such that you can apply them to your business using statistical scenario planning software.

    • http://www.derekpilling.com Derek Pilling

      Massive profits Tom. Massive profits.

      Finally gave up on “Free” by the way. Just couldn’t get past point where Anderson claims that Google can’t be extracting monopoly rents because it gives so much away for free; GMail, Google Reader, etc. Totally misses the point that the rents are on the advertiser side; yes, it is two-sided. He goes on to claim that the fact Google uses an auction system for advertising also means it can’t be monopolistic. Actually, an auction is one of the most efficient ways to extract monopoly rents.

  • http://twitter.com/toms Tom Limongello

    Gladwell couldn’t deal with the imprecision either it seems:

    http://www.newyorker.com/arts/critics/books/2009/07/06/090706crbo_books_gladwell

Derek Pilling

About Derek

I'm a Managing Director with Meritage Funds, a growth equity investment firm based in Denver, CO. I've been working with growth stage businesses my entire career. When I'm not working, I ski, spin, coach youth sports and spend time with my beautiful wife and three kids.

I blog because the process helps me crystalize how I frame the world. I want to hear what you think. Please comment.

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