Then get more stuff for free

Construction manager Kimball Diamond often works thousands of miles from his Burlingame, Calif., office. So he didn't mind paying $19.95 a month for a service that let him remotely control his office computer over the Internet.

But Diamond likes it even better when he can get the same service for free. So when he heard about LogMeIn from 3am Labs Inc. in Woburn, he decided to check it out -- and fell in love.

Although the price tag is zero, Diamond is going to pay for LogMeIn anyhow. "They have limited the utility of their free version," he said. So Diamond will pay $12.95 a month for the full-featured version.

There are millions of Diamonds out there -- Internet users who have gone from window-shoppers to paying customers after sampling from an endless banquet of free software. It began with the Internet bubble of the late 1990s, when new companies, green with inexperience and flush with venture cash, tantalized consumers with free Internet access, free long-distance phone calls, even free computers. Skeptics warned that the giveaway had to end someday; the collapse of the Internet economy in 2000 vindicated them.

Almost. For while many of the freebies were phased out, the free software keeps on coming. Lots is written by hobbyists who never intend to make a dime. But some of the best comes from businesses hoping to profit from the giveaway. There's free remote control software, Web browsers, firewalls, music players, word processors, pop-up blockers, antivirus scanners, games, and more.

For all its folly, the Internet boom taught software entrepreneurs how to build their businesses by giving product away.

"I think a lot of it was the beautifully organic experimentation that was taking place over the Internet. Folks thought some of this would work, but they didn't know how," said Marshall Van Alstyne, an associate professor at Boston University School of Management. Along with Geoffrey Parker, a professor of operations management at Tulane University, Van Alstyne has made a study of how Internet giveaways work -- or fail.

In 1999, an Internet company called Free-PC began giving away thousands of personal computers, crammed with advertisements that would flash on the screen at odd moments.

"That's just a ridiculous business strategy," said Van Alstyne. Indeed, Free-PC is long gone, a victim of what economists call "high marginal cost." That's the cost of making one more unit of your product. Even cheap computers have a high marginal cost -- hundreds of dollars apiece. The built-in ads couldn't provide enough revenue to make the business work.

But the marginal cost of a computer program is virtually zero. It might cost $100,000 to create the program, but "once you've developed it," said Van Alstyne, "you can give it away to a million people."

Why give it away at all? Sometimes as a matter of principle. That's the idea behind "open source" code, the product of a worldwide movement to provide low-cost, easily-modified software. Open source programs include the raw computer code in which they were written, enabling skilled users to add improvements to the software. The popular Mozilla Internet browser is an example of high-quality open source software, produced by a nonprofit foundation.

But corporations can benefit by adopting open source principles. That's what happened with OpenOffice, an office software suite that includes a word processor, spreadsheet, and presentation graphics program. Internet users have downloaded 31 million copies of OpenOffice, which has been favorably compared to Microsoft Corp.'s market-leading Office program.

OpenOffice began life as StarOffice, a German software title that was acquired by Sun Microsystems Inc. "Sun decided to stop paying one of their fiercest competitors for an office suite," said Sam Hiser, a former volunteer with the OpenOffice project.

But given Microsoft's dominance in office software, how could StarOffice gain a foothold? "You have to make it free if you want to get people to start using it," Hiser said. Sun released the basic code for StarOffice as open source software, so that anyone can use it for free. Meanwhile, Sun continues to sell a fancier version of the product under the Star-Office brand.

Because Sun opened up the source code, users of OpenOffice can add improvements to the product, which Sun can incorporate into its own commercial version. Besides, users who pay zero for OpenOffice may someday be willing to pay $75.95 for Star-Office, instead of $350 for Microsoft Office.

Software giveaways can also help to create a market when none exists. Consider firewalls, the programs that help protect computers from intruders. Network security analysts know all about them, but until recently, most consumers didn't know a firewall from a waterfall.

So when Zone Labs Inc., a division of Checkpoint Software Technologies Ltd. in San Francisco, began selling its Zone Alarm consumer firewalls, it launched a free home version. Internet users then tried it; the technology press gave the software good reviews and hailed its consumer-friendly features. Suddenly, ordinary people were learning about firewalls and beginning to buy them.

"Some huge percentage of our sales and a large percentage of our notoriety and trust are developed on our free version," said Frederick Felman, Zone Labs' vice president of marketing. "Almost any article that mentions Internet security mentions us, because we have a free product."

Today, about 30 million users run Zone Alarm products, many of them paying to upgrade to full-featured versions.

In many cases, products are free because Internet companies are targeting what Van Alstyne calls "two-sided" markets. These companies make products that are only useful if they're used both by consumers and by businesses.

For example, RealNetworks Inc. developed software for broadcasting music over the Internet. The RealAudio system requires broadcasters to use server software to pump out the digital tunes, while listeners need a client program to play back the music. "Each side of the market needs the other side," said Van Alstyne. "How do you get the market to take off? The answer is, you subsidize one side of the market with free goods."

RealNetworks worked out deals with a handful of media companies such as the ABC Radio Network and National Public Radio to get their audio content on the Internet. Then the company began giving away the client software, called RealPlayer. "It's a great way to get people to try," said Greg Chiemingo, a RealNetworks spokesman. And once millions of listeners had downloaded RealPlayers, the company found it much easier to sell its server software to broadcasters.

Still, RealNetworks is losing money. It blames "unfair" competition from Microsoft, which has developed a rival Internet broadcasting technology.

But RealNetworks' woes only reaffirm the power of giveaways. After all, Microsoft gives away its own rival media player with every copy of its Windows operating system.

And Microsoft provides its media server software at no extra charge in every copy of its high-end Windows Server 2003. In fact, there are now so many good free programs online that a PC owner need never buy a single piece of software. "There is always going to be a segment of the audience that is going to say, 'I don't need to pay for it,' " said Chiemingo.

But given the low cost of distributing software, firms can profit even if only a few downloaders become paying customers. That makes it a gamble worth taking.

Hiawatha Bray can be reached at bray@globe.com.