Monday, May 19, 2008

Business feature: the power of free

On how 'freeconomics' will come to define the digital economy and quite possibly beyond. At least according to Wired's Chris Anderson

A feature written for the Financial Post in mid-May:

At the feverish height of speculation over what nuclear energy could do for electricity generation in the mid-1950s, Lewis Strauss, the chairman of the U.S. Atomic Energy Commission famously proclaimed that it would become "too cheap to meter."

That never materialized of course, but it's an effective example that author and Wired magazine editor-in-chief Chris Anderson often uses to explain the power of "free," a concept that he says will come to define the new digital economy, and is the natural title of the book he is writing.

"If you think about electricity - which is not free though we thought it might be in the '50s - it's an input into every aspect of the economy. It's one of the costs of doing business, and if you take that cost and set it to zero you would do business differently. So as a thought experiment, what if nuclear power had made electricity too cheap to meter?" he asks.

The answer: "You'd have an electronic economy."

The cost of everything electricity touched (which would become everything) would be several orders of magnitude cheaper than they are now, Mr. Anderson says.

Worried about rising food prices? Virtually free electricity would have solved that long ago. "One trickle down implication would be say, desalination of water," he says. "If freshwater is free, than agricultural products become next to free."

But where the promise of nuclear-generated electricity failed, digital technologies are succeeding, Mr. Anderson, one of Time's top 100 influencers, says.

"There are three technologies in the digital age as ubiquitous as electricity that are becoming too cheap to meter, and that is bandwidth, storage and processing."

The revolution of this digital trinity has been moving at a clip that sees the costs to house, compute and move data on the Web halved every 18 months, Mr. Anderson says.

As an example, transistors (processing) used to cost tens of dollars each only a few decades ago. Intel's latest quad-pro chips use transistors valued at 0.00001 cents - ostensibly free to the consumer.

"This has never happened in history before," he says. "So you open up this new world - and it's probably literally like the New World."

What this Web-based world enables is an economic model where a myriad of products and services, at least to consumers, cost $0.00, or close enough to zero to make the expense irrelevant.

This is the root message contained in Free, set to be released sometime in 2009, and the one Mr. Anderson brought with him to Toronto this week where he was invited to speak at the Interactive Marketing Conference.

"Free doesn't mean that you don't make money," he reassures during a brief interview before his speech on Thursday. "Free means that you don't charge the consumer."

Driven by those underlying technologies, "freeconomics" means Yahoo! Mail can offer unlimited storage capacity for no cost at all to users. It means a product like the Wall Street Journal may only need 1% of its online readers to subscribe to its premium stuff in order to subsidize giving away most of its content for nothing while still making a profit.

The list grows daily.

Not surprisingly, Free was borne in part from The Long Tail, Mr. Anderson's breakthrough book in 2006 that revealed the power of digital technology to create micro-markets out of the sheer cheapness to do so.

"The long tail is basically this explosion of niches which happened because distribution became free - we got infinite shelf space. The only way shelf space can become infinite is if it doesn't cost anything."

Think of that rare music gem discovered amid the immense databases of iTunes, or was downloaded for free somewhere else.

"It was when I thought about the economics of when distribution is free and you can be indiscriminate about what you offered that realized how powerful free could be," Mr. Anderson says. "I looked around me, and said the Internet economy is based on free - Google doesn't show up on your credit card bill and neither do most other Web companies."

Mr. Anderson envisions this Web-based model moving quite comfortably into the physical world too, though.

In his March cover story in Wired, he posited that everything from movies, to urban transit could become free, either through cross-subsidization - free movie, expensive popcorn; conventional third-party pays - the Google model where advertisers pay to get noticed; even labour-exchange - where consumers produce value through a free product which a company can then turn around and sell.

Mr. Anderson explains: "I think free will come to every industry in its own way. For example, there's a company that I'm writing about in the book that makes electric cars and they give away the car and they sell the electricity."

Digitally, the march toward a free-based business model is inevitable, Mr. Anderson says.

"Once upon a time you had to pay for a travel agent, now you don't (see expedia.ca), et cetera. Industry by industry there's somebody using free as a way to differentiate and gain marketshare."

There are numerous paths Mr. Anderson says can be taken in the new world of "freeconomics," but each orbits the same principle.

"In each case, someone will invoke that powerful word 'free.' "

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