The future of ‘Free’
A controversial new book argues that businesses can flourish by giving things away. Does this make any sense?
SINCE TUESDAY, THE techno-literary blogosphere has been alight with the news that a forthcoming book by Chris Anderson, the editor-in-chief of Wired magazine and author of the best-selling book “The Long Tail,” contains extended passages copied, uncredited, from Wikipedia. As first reported on the website of the Virginia Quarterly Review, the book’s descriptions of edifying bits of arcana like the development of the concept of the “learning curve,” the history of Catholic usury laws, and the origin of the phrase “There’s no such thing as a free lunch” match up almost identically with corresponding entries in the free user-generated online encyclopedia.
Contested passages from other sources have also come to light: a New York-based blogger named Edward Champion has posted his own list. In most of those cases, Anderson cites his sources - among them a blog entry on “reversible business models” and a book by the technology writer Kevin Kelly - but doesn’t use quotation marks and only lightly paraphrases the passages, giving readers the mistaken impression that the language is Anderson’s own.
This is not the sort of buzz an author wants, but the irony of the episode is that if it had happened to someone else, or even happened to Anderson a bit earlier, he might well have used it as a case study in the book itself. Entitled “Free: The Future of a Radical Price,” it’s a primer on the changing rules of what Anderson sees as a vast and fast-growing zero-price economy - comprising everything from Wikipedia and Google, which doesn’t charge consumers for most of its products, to start-up Chinese record labels that make their money through sponsorships.
Driven by an explosion in computing capacity, the cost of doing business in the digital world - the cost, in particular, of providing each additional MP3 or Internet dating profile or e-book - is dropping to zero. And the prices consumers pay for all of those things, Anderson argues, is ineluctably following. While “free” in the 20th century was mostly a marketing gimmick, he says, in the 21st century charging nothing is destined to become a bedrock business principle.
In this new world, “You can make money giving things away. There really is a free lunch. Sometimes you get more than you pay for,” he writes.
There will, undoubtedly, continue to be debate over how serious Anderson’s copying transgressions were - he quickly admitted fault for the Wikipedia passages, blaming haste and carelessness, though not for the other borrowings, which he argues were fair game.
But the more important debate is going to be over the ideas in the book itself, over the future of free as a business model - and over Anderson’s contention that companies that want to survive will have to either figure out how to offer their wares for free or contend with competitors that do. “Free” is a business book, but the dynamics it describes are unsettling the social and cultural landscape, as well. For many people, music is now free, along with news, movies, video games, and the software to help with everyday tasks. In ways it was not before, it’s free today to look for jobs, apartments, friends, roommates, and even romance. For the time being at least, the forces of free are upsetting not only traditional business models, but long-held assumptions about what we have to pay for, and when and how. It’s a confusing time, and Anderson’s book offers a reassuring diagnosis and set of prescriptions.
Yet the reception among others who study the industries he looks at has been tepid. While the drive toward zero can certainly be discerned in certain corners of the economy, his critics allow, it’s far too soon to proclaim a revolution. Anderson has, they argue, taken a bundle of smart but not necessarily original insights and built them into a grand unified theorem that outpaces the facts. Even in a world of technologically enabled abundance, someone has to pick up the bill, and while some businesses will find ways to go gratis, plenty more will not.
“Overall I would say he’s pointing to a trend that is real, though also a trend that is by no means new,” says Kartik Hosanagar, an associate professor at the University of Pennsylvania’s Wharton School whose work Anderson draws on in the book. “This notion that the future is free for just about everything around us, or even the majority of things around us, is just an oversimplification.”
But whether right or not, Anderson’s timing couldn’t be better. “Free” arrives as whole swaths of the economy are having to contend with consumers finding ways - some illegal, many not - to go Free. The debate over Anderson’s ideas is a debate over whether that is ultimately sustainable, or whether we’ll look back on today as an unruly interregnum between ages of Paid.
In the world of the “thought leader,” Chris Anderson is A-list. His 2006 book “The Long Tail” was not only an international bestseller, but one whose title - like Malcolm Gladwell’s “The Tipping Point” and Thomas Friedman’s “The World is Flat” - lodged itself in the vernacular, a shorthand for a powerfully simple explanatory lens through which to see the world. As editor-in-chief of Wired, Anderson presides over a magazine dedicated to describing what the zeitgeist looks like in the rearview mirror. In articles, blog posts, and his often extraordinarily lucrative speaking engagements, he is a master of the provocative, empirically couched pronouncement.
The new book is no exception. It grew out of the research and thinking he did for “The Long Tail,” and like the earlier book, it argues that the Internet revolution is upending what we thought were basic realities of commerce.
But while “The Long Tail” focused on variety and availability - arguing that the nearly infinite shelf space of the Internet was allowing companies to make money on niche offerings (the “long tail” of the demand curve) that would have been hopelessly unprofitable in a purely brick-and-mortar era - “Free” looks at cost. The same forces that he saw freeing us from the tyranny of the blockbuster are also freeing us, he argues, from the tyranny of paying anything at all.
The idea of giving away goods to make money goes back at least to the original “free lunch” - Anderson, in one of the passages lifted from Wikipedia, dates this to 19th-century New Orleans, where saloons offered free meals to entice people to come in and buy drinks. If one counts advertising-based business models, as Anderson does, “free” is something that anyone who has ever watched broadcast television or visited a newspaper website is familiar with.
Anderson, however, argues that today’s Internet is driving free models into realms where they never before made sense. More and more of the things that we once consumed as physical objects (CDs, newspapers, videos, books) are now digital ones, and services once provided by paid professionals can now be done by software. With processing power, storage capacity, and bandwidth all exponentially expanding, the marginal costs of these goods and services are dropping fast.
“I am absolutely confident, and this is based not on wishful thinking but on watching the economic forces of the past few years, that we are in a deflationary economy where prices will continue to fall, and that zero will become the starting price in most industries as they become digital,” Anderson says.
As he sees it, the forces at work are psychological as well as technological. As the cost gets close to zero the temptation to cut it all the way grows overwhelming - free, it turns out, is something consumers don’t so much think about as lust after. Anderson describes a study performed by the psychologist Dan Ariely, a professor at Duke, that showed our powerful bias for free. In the study people were given the choice between buying fancy Lindt truffles and Hershey’s Kisses. When the truffles were 15 cents and the kisses 1 cent, people chose the former, but when the truffles were 14 cents and the kisses were free, people chose the latter, even though the price differential was the same. “Zero is an emotional hot button - a source of irrational excitement,” Ariely writes.
The venture capitalist Josh Kopelman has dubbed this the “penny gap,” and it explains the difficulty that business plans based on so-called “micropayments” have had; there’s a big difference in people’s minds between paying nothing and paying even a cent.
The results, Anderson argues, are already plain to see: “A decade ago my stockbroker was a person, my tax accountant was a person, my travel agent was a person, now they’re software and they’re all free.”
Luckily, Anderson believes, those same technological upheavals offer a way forward for the stockbrokers and tax accountants and travel agents of the world - not to mention the journalists and musicians and moviemakers. Free, he argues, can be the basis of some very powerful business models.
Advertising is one, and in that realm Google is Anderson’s paragon: users pay nothing for most Google services, and the company makes tens of billions of dollars a year, the vast majority of its revenue, on ads - advertisers pay to reach the company’s vast user base, and, thanks to Google’s AdSense algorithm, they pay for the right to advertise beside search engine query results or Gmail messages that suggest a particular interest in whatever it is they’re selling.
Direct cross-subsidies are another approach. Anderson points out that companies like
But the model that most excites Anderson is “freemium.” In freemium, a basic version of a good or service is provided gratis, while a premium version is offered for a price. Online services like the photo site Flickr and the instant-messaging platform Trillian work on this model, and the iPhone “app store” is full of programs offered on this basis. Even the consulting firm McKinsey, Anderson argues, provides a version of this, publishing a free management journal while charging top-shelf rates to its corporate clients for tailored, time-intensive advice.
The advantage of freemium, Anderson argues, is that in a digital world, the cost of widely disseminating the free stuff is low enough that you don’t actually need that large a percentage of premium clients to make it work. Indeed, in general, Anderson sees the mind-boggling scale of the Internet as central to its ability to sustain free institutions, especially totally free ones like Wikipedia, which survives on the altruistic efforts of a minuscule proportion of its planet-wide set of users.
But where Anderson sees a new dawn of free, his critics see something far less dramatic.
“Reports of the death of price are greatly exaggerated,” says Z. John Zhang, a Wharton marketing professor.
For one thing, skeptics point out, some of the best-known Web companies that have embraced free are not, in fact, making any money. For every Google there is a Facebook or a Twitter, two companies Anderson discusses approvingly in the book. And while search engines like Google lend themselves particularly well to free models, others, like social networking sites, simply may not. So far, advertising on social networks has been a bust. Advertisers shy away from unpredictable user-generated content, and Facebook users revolted when the company tried to use personal information to target ads.
Bo Peabody, a venture capitalist and the founder of an early social networking site called Tripod, has since soured on the idea that they can make money. People won’t pay for any social-networking services, he believes, and ads don’t work. “Social networking is the most useful thing on the Web, but I don’t think it’s a particularly good business,” he says.
At the same time, while the explosion in computing power, storage, and connectivity has unquestionably cut marginal costs, some costs are proving more stubborn than others. Much of today’s online business involves people ordering things like shoes and books and microwave ovens, and those can never truly be free. And even online storage has its costs - Facebook has been struggling to find and pay for enough server space to fit all the information its voraciously networking users are uploading every day - it’s a problem that, for the foreseeable future, will grow worse, not better, as the network grows.
But much of the criticism ultimately focuses as much on Anderson’s presentation as his arguments. Duncan Watts, a network theorist and a principal research scientist at
“He’s taking perfectly reasonable and in themselves interesting and valid observations and expanding them into a grand theory, but it turns out that the grand theory can’t sustain itself,” Watts says. “To the extent that what he’s saying is true it’s not new and to the extent that it’s new it’s not true.”
It is, as he sees, a sort of MO for Anderson, as applicable to “The Long Tail” and to articles he has written for Wired with titles like “The End of Theory,” as the new book. Researchers studying “long tails” in online video and music markets, for example, have found them to be a far smaller part of the total markets than what Anderson describes.
“It kind of bothers me that the tone of the discussion around these sorts of problems is so careless, so dominated by ‘How do you get an appealing soundbite and sell a bunch of books?’ ” Watts says, “So that anybody who says anything kind of moderately considered seems boring.”
Anderson, for his part, admits that he often has to “live down” the breathless subtitles of his books and articles. But he staunchly defends his work in “The Long Tail” - “None of the research in the book has been questioned, not one single bit of data” - and he insists that in “Free” he’s describing a phenomenon that is both new and revolutionary. What he’s doing is not cheerleading, he says, but something more like sketching out the laws of a Newtonian technological and economic physics.
“I’m not telling the apple to drop, it just drops,” he says. “I’m explaining how it might drop, how fast it drops, what to do if drops on your head.”
David Weinberger, one of the co-authors of “The Cluetrain Manifesto: The End of Business as Usual,” a 1999 book that foreshadowed some of the arguments in “Free,” defends Anderson as a necessary intellectual agitator. “Will [Free] sweep away all attempts to charge for recorded media? It doesn’t have to for his thesis to be largely right and largely important,” Weinberger says. “I take the role of the book as to throw a big idea at us and to throw it at us in the strongest form possible.”
Anderson is quick to point out that the transition he envisions will be a disruptive one, and nowhere moreso than in the news media, the business that he. as Wired editor, is in. Notably, the book devotes relatively few pages to discussing the industry. There is a description of a few innovative advertising tactics, a mention of the Wall Street Journal’s online freemium strategy and an account of how a Portuguese newspaper gave away a free 60-piece silverware set, one piece per issue, to entice newsstand buyers. Late in the book Anderson imagines a future of militia-like newsgathering, with teams of amateurs organized, trained, and mobilized by the dwindled ranks of professional journalists.
In conversation, Anderson readily admits that the future of news is cloudy to him. And in that he is in good company. But he remains relentlessly upbeat about what lies ahead. More than anything else, the rise of Free has, he says, buoyed him with what it has shown about human nature. The story as he sees it is not simply that people are taking things for free, but giving it, whether it’s blog posts or free songs or lines of Linux code or Wikipedia entries.
“I’m a hardcore market fundamentalist, and here I am, awkwardly nodding my head to a lot of what Karl Marx said,” he reflects. “I’m an optimist, I always have been.”
Drake Bennett is the staff writer for Ideas. E-mail drbennett@globe.com. 