Like it or not, businesses are in a race to use giveaways as a path to profits, says Wired editor-in-chief Chris Anderson
Free: The Future of a Radical Price
By Chris Anderson
Hyperion — 274 pp. — $26.99
In business, "free" tends to be a dirty word. There's no profit in free stuff. Free samples can draw people into your bakery or get them to try the latest energy drink, but they're money losers today that may or may not bring in paying customers tomorrow. Free music is blamed for ruining the record industry. Free news on the Web is being fingered for the newspaper industry's decline.
But Chris Anderson says it's time for a rethink. In his provocative book Free: The Future of a Radical Price, the editor-in-chief of Wired argues that the concept of Free is evolving in important, if subtle, ways. It's no longer just kids in Silicon Valley who are figuring out how to build businesses around giving stuff away. The idea of Free is infiltrating nearly every industry, and business leaders who ignore the shift risk getting blindsided. "People are making lots of money charging nothing," he writes. "Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00. How did this happen and where is it going?"
It happened, says Anderson, because of the economy's evolution: The stuff we value increasingly comes in the form of bits rather than atoms. Think software and movies vs. plastic and steel. And bits cost virtually nothing to copy and distribute. It may make all the sense in the world for businesses to give away lots of bits so they can charge for something related—say, services, advertising, or premium features. The Linux community distributes its operating system for free, but companies such as Red Hat (RHT) and IBM (IBM) make healthy profits customizing and supporting it. Google (GOOG) lets anyone search for free but makes billions from advertisers.
Free doesn't stop with the tech world, though. As Anderson explains, the strategy of giving stuff away is spilling over into all sorts of businesses. Webkinz are popular, in large part, because children can go online and play with digital versions of their plush toys. The online experience is free; the stuffed animals cost money.
In the music industry, Radiohead showed one way to make money in pirate-infested waters. The band let fans download its album In Rainbows for whatever they thought it was worth. Lots of people paid zilch. But the average sale price was $6, and the downloads made the band more money than any of its previous records. Fans then went on to buy 100,000 copies of a deluxe boxed set for $80, and the tour that followed was Radiohead's biggest money-maker ever.
Anderson's book is strongest in tying together the various threads of Free. He wades into the world of online games, where Free is a common strategy for building audiences. Often, everyone can play for free—and then buy virtual goods and special powers. And he delves into the concept's long history. One early example: the campaign that made Jell-O a staple in the American home. No one knew how to use the product in the early 20th century, so Genesee Pure Food had salesmen give away recipe books door to door—which sent housewives to stores to buy the product.
Anderson boils these anecdotes down to principles he says businesses need to come to grips with. One is that if something is digital, it's eventually going to be free. Another is that you can't stop this with anti-piracy laws or encryption. Perhaps most unsettling is his belief that all businesses will compete with Free sooner or later. "Whether through cross-subsidies or software, somebody in your business is going to find a way to give away what you charge for," he writes.
An extreme perspective? Perhaps. At times the book seems to stretch the evidence for Free. Take Anderson's assertion that the Free economy is "as big as a good-sized country." It turns out a big chunk of what he includes is old-fashioned media, where radio, TV, and print outfits give away products so they can reap ad revenue. Yes, these companies use free products, but the strategy is hardly new.
Anderson is convincing about the importance of Free, but he doesn't ignore the havoc it can cause. He details examples of market mayhem in music and books. And he looks at the sorry state of the newspaper business and its undoing by craigslist, the classified ad site that lets people post most ads for free. The site is blamed for draining $30 billion from newspaper companies' valuations, while craigslist took in an estimated $40 million in 2007 from job postings and other paid listings.
The math may look harsh. But all those billions aren't simply lost, Anderson argues. Thanks to craigslist, he says, people get better classified service at no cost. It's an example businesses everywhere would do well to take to heart. "Free is disruptive, to be sure," he writes, "but it tends to leave more efficient markets in its wake."
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Tainted by Plagiarism?
Days ahead of the July 7 publication of Chris Anderson's Free, Waldo Jaquith wrote on the Web site of the Virginia Quarterly Review that he had found nearly a dozen passages from the book "reproduced nearly verbatim from uncredited sources." The plagiarism allegation rocketed around the Internet. Anderson quickly offered a mea culpa, saying he had used Wikipedia for a number of passages and that attributions had been dropped because of an editing mixup. His defenders applauded the apology and his decision to correct digital versions of the book. But that hasn't silenced his critics.
For Jaquith's story and a discussion, go to bx.businessweek.com/business-strategy
Meet the author: To watch a video interview of Chris Anderson by Assistant Managing
Editor Peter Elstrom, go to http://www.businessweek.com/go/09/free.