Mark Cuban Remains Confused About Free

from the wait,-what?!? dept

Last week, in writing my review of Chris Anderson’s new book, Free, I noted that Mark Cuban’s initial critique of it was quite misguided, in that he made the quick (and flat-out incorrect) assumption that the story of “free” means that “everything is free,” and thus it ignores costs. That’s simply not true, and thus represents a big strawman that ignores the actual point of the book (though, to be fair to Cuban, it’s a very common strawman found in many of the arguments against the book). Cuban has now taken a second shot at critiquing free, and I’d argue it’s at least more interesting on a first pass, pointing out: when you succeed with Free, you are going to die by Free. That sounds like a worthwhile read, though I find it hard to believe. Here’s the meat of Cuban’s argument:

Lets look at the rule that eventually KILLS all freemium based content plays:

There will always be a company that replaces you. At some point your BlackSwan competitor will appear and they will kick your ass. Their product will be better or more interesting or just better marketed than yours, and it also will be free. They will be Facebook to your Myspace, or Myspace to your Friendster or Google to your Yahoo. You get the point. Someone out there with a better idea will raise a bunch of money, give it away for free, build scale and charge less to reach the audience. Or will be differentiated enough, and important enough to the audience to maybe even charge more. Who knows. But they will kick your ass and you will be in trouble.

I don’t think anyone denies any of that. Except… here’s the main problem that kills Cuban’s point: this applies to any company, whether it uses free or not. What he describes is not unique to free. It’s the story any company faces, and we’re seeing how the companies that have “embraced” free have acted as that sort of “black swan” competitor to the companies that haven’t. Look at what is happening in the recording industry or the newspaper industry, where they’re struggling to understand new models.

Cuban tries to suggest that this is something special about the “free” space, but I can’t fathom why it’s any different than any company:

Its not that they can?t make money offering free. They can , have and will. The problem is that they know that its literally impossible to be the king of the mountain forever. But that won?t stop them from trying. And that is exactly what will kill them.

“Free” is just a price. If the cost of your product is $3 and someone figures out how to build a competitor for $1 (or free!) then you face the same problem. In fact, I’d argue you’re better positioned to adjust if you understand the basic concepts behind free (which Cuban either doesn’t, or he’s bluffing for some odd reason), because it suggests you know what parts of the business to leverage as a resource, and which to charge for. So, I’m confused. What about what Cuban says is specific to “free” business models and why can’t those who embrace “free” adapt if he seems to believe that others can?

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Comments on “Mark Cuban Remains Confused About Free”

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43 Comments
fogbugzd says:

Where is Adam Smith when we need him

Isn’t competition at the heart of the assumptions of a free market economy? If someone figures out how to do something better and more efficiently, then they should replace the existing king of the hill.

The problem we have in the economy is that this is NOT happening enough. Instead of healthy competition, we get big companies who feel entitled to get big and then stop innovating or improving in ways that are important to the customer. We have too many industries where the idea of “free market” means the company has the freedom to raise its prices and cut services whenever it wants.

Vake (user link) says:

Mark Cuban doesn't understand business

People make the mistake of thinking that because Cuban was an entrepreneur, and now a billionaire, he must understand business and capitalism. Nothing could be further from the truth. Broadcast.com was a one-time venture that Cuban suckered Yahoo into buying for an exorbitant price- look how well that’s working for them now.

Patrick (profile) says:

The problem with free.

The problem with free is that there is little monetary reason to stay with a vendor. If it doesn’t cost me anything to use gmail, and a better service comes along, then I’ll just up and move. However, if I’m paying 5 bucks a month, setup on a monthly autopay, the psychology of the switch becomes great. Free verses almost free will result in a win for the almost free.

Brian (profile) says:

Re: The problem with free.

You set up a straw man and failed to knock it down. I’m impressed, I really am.

If I’m using a free service like GMail and something better comes along (HMail or whatever) and it is also free then I may switch if the benefit is there. The inertia against is, of course, having to move all my contacts learn a new service etc.

If, in this example, HMail costs me $5 a month then the fee is added to the inertia against switching.

Even if you flip that scenario back to your example your point still doesn’t hold. If FMail costs $5 a month and I’m using it, and GMail comes along which is free and has more features, the $5 a month savings becomes a force FOR switching (not against). Don’t believe me? How many people still have AOL addresses these days? Alright now forget everyone over 50. How many now?

You’re confusing automated payment systems as a way to retain customers with the desire to move to bigger and better things. I agree that having an automatic withdrawal of funds for a service makes you less likely to cancel, but I disagree that it also adds against the will do move to a new (free) service that’s also better.

ChrisB (profile) says:

Re: Re: The problem with free.

The real danger with free is that people don’t put a “value” to something that “cost” them nothing. If you put a TV on Kijiji and say it is free, people will assume something is wrong with it. If you put a small cost, say $20, you will get much more interest. People tend to think free = low quality.

Anonymous Coward says:

Cuban is spot on

Most of you guys don’t realize this but because of the absolutely tiny cost to enter the market of digital anything (whether it’s digital distribution or crowdsourced/social apps), the second you “raise the price” of your service (by more ads, or freemium services), someone else will come in and do your freemium service and they’ll do it at a loss to get a market lead. Most of them will fail, and meanwhile, your freemium doesn’t pick up steam. That’s why virtually all the web startups fail miserably (look at the massive techcrunch deadpool) — someone else will just offer your freemium for free. And since there’s basically an infinite pool of VC funding this, new startups will constantly come along to die, blocking out your freemium.

There’s a reason why Youtube loses over a million a day, or why twitter is millions in the hole (with quarterly net losses), and why digg loses $5m a year, etc… All these web startups you know and love make no returns because they have to compete with everyone else who is touched by the allure of loss leading to gain market share.

But remember whose opinions you’re reading here. There’s Mark Cuban’s, one of the guys who was at the forefront of the web 1.0 boom/bust and made out with obscene amounts of money (he bought a basketball team so he could always have courtside seats). In the other corner, you have Mike Masnick, who writes 10+ blog entries a day bitching about everything everyone else is doing to actually make money, while explaining to artists how to make money without the RIAA on the side (to my knowledge, Masnick does not own any professional sports teams). Not only does Cuban have more experience on this exact issue (web startups), but he was damn successful too.

Brian (profile) says:

Re: Cuban is spot on

Mark? Is that you? Well “AC” you made the exact same point that Mark made without even coming close to refuting the point of this blog post.

Here… let me sum it up for you in a slightly more bite sized portion (maybe you can tweet it):

1. Just because your service is offered for free does not mean you shouldn’t try and make money from some other aspect.

2. The idea that someone will come along and do what you do better and put you out of business is not new, nor unique to free based business models.

Twitter and Facebook are good examples of businesses failing to monetize. However, Google is a big ol’ example against your point. And if you want to stick to your news aggregation example, I’m fairly certain Fark turns a profit by offering a “premium” membership over the top of the free one.

If you’re going to come in here and refute a point by saying Mark Cuban is the man, at least TRY and address the points made in the blog post.

Anonymous Coward says:

Re: Re: Cuban is spot on

Look at the failure rates of web startups and the ridiculous amount that are currently operating at net losses. The only profitable venture has really been Google, and this incredibly poor “success” average forces me to scratch my head and wonder how Masnick’s arguments hold any water.

Most of Masnick’s posts are “you should try and monetize in some other way” but there’s never any suggestion of what that “other way” is. He’ll promote selling the “scarce” but never suggests what that is or should be. Meanwhile, Cuban has had ridiculous success in flipping startups. You have still failed to show how Masnick’s opinion is more valid (it’s not backed up by facts), or that he is individually more qualified to render a valid opinion (it’s not backed up by experience).

And I don’t know why you guys have such an aversion to posting as AC here…. as if posting as “Brian” is any less anonymous.

+cuban says:

Re: Re: Re:2 Cuban is spot on

(posting under the “+cuban” moniker for this thread now)

Mike’s “not consulting” advice seems only to plug what the record labels already monetize with 360 deals — sell t-shirts, appearances, memorabilia, etc. But even the artists that he plugs on this very site are barely making a living wage after costs… and that’s the same boat most label artists are in. At that point, I don’t see how Mike’s “not consulting” advice is worth any price.

Anonymous Coward says:

Re: Re: Re:3 Cuban is spot on

+cuban – following anyone’s commentary as a specific directive on a business model is probably not the best practice, but I suppose that would be up to you to decide.

Taking into consideration Mike’s commentary as you go about constructing or applying your business model seems like a better application of the information provided in this blog.

And as for label artists, they are far worse off as most of their potential revenue streams are either filtered by the label or are already spoken for in order to pay obligations to the label. If, indeed as you say, they are in the same position financially as independent artists, then when all is said in done, being an independent artist seems to be better, in my opinion, because, at the very least, you’ve got more control over your financial decisions/health/etc.

Anonymous Coward says:

Re: Cuban is spot on

That’s why virtually all the web startups fail miserably (look at the massive techcrunch deadpool)

Hmm…this is interesting…instead of looking at the deadpool and pondering its enormity, though, maybe someone should pay attention to the ones that survived and understand how they did it. Did free or freemium or whatever work for them? and how?

Richard says:

Re: Cuban is spot on

“But remember whose opinions you’re reading here.”

So I should listen to rich “successful” people – just because they are rich and successful. Logically that means I should listen to people like Madoff and Stanford.

Some rich people are clever, some are lucky and some are criminals. All of them demonstrate a preference for looking after number one.

I prefer to listen to people who have made an impact on the world without personal gain. (Stallman, Berners-Lee, Torvalds).

Suzanne Lainson (profile) says:

It's all been done before

I covered Colorado tech and VC companies during from about 1998 to 2002. (And was working with Apple in 1993 when it was trying to figure out how to monetize the Internet.)

During the dotcom boom, the idea was eyeballs. Whichever company amassed the most users was assumed to have an advantage. Jared Polis, who started bluemountain.com, anticipated the crash and sold his company at the height of the valuation period, when companies were willing to pay a premium for eyeballs.

Most of those companies didn’t survive the crash.

I don’t see most of today’s “free” companies doing anything much different, so that is why I’m skeptical about the longevity of going after lots of users with “free.”

There’s that old saying, “We’re losing money on every sale, but we plan to make it up in volume.”

Giving something away for free isn’t a new concept: Free trial. Buy-one-get-one free. Buy the product and get a freebie. And so on. Companies have been operating in this field since the earliest days of commerce, so I’m not sure why we are bothering to talk about free as a lure. What’s left to discuss about it?

Suzanne Lainson (profile) says:

It's all been done before

I covered Colorado tech and VC companies during from about 1998 to 2002. (And was working with Apple in 1993 when it was trying to figure out how to monetize the Internet.)

During the dotcom boom, the idea was eyeballs. Whichever company amassed the most users was assumed to have an advantage. Jared Polis, who started bluemountain.com, anticipated the crash and sold his company at the height of the valuation period, when companies were willing to pay a premium for eyeballs.

Most of those companies didn’t survive the crash.

I don’t see most of today’s “free” companies doing anything much different, so that is why I’m skeptical about the longevity of going after lots of users with “free.”

There’s that old saying, “We’re losing money on every sale, but we plan to make it up in volume.”

Giving something away for free isn’t a new concept: Free trial. Buy-one-get-one free. Buy the product and get a freebie. And so on. Companies have been operating in this field since the earliest days of commerce, so I’m not sure why we are bothering to talk about free as a lure. What’s left to discuss about it?

Suzanne Lainson (profile) says:

Why people become skeptical

This has been the history of far too many Internet companies.

Company: We’ve started a company.
Observer: How are you going to make money?
Company: We don’t know yet, but look at how fast we are growing.
Observer: But the more you grow, the more money you are losing.
Company: But look at how much money we have raised.
Observer: You’re burning through it pretty fast.
Company: We can always go to an advertising-supported model.
Observer: You and everyone else.
Company: We’re worth a lot of money. We’re getting buyout offers. And we’ve raised more funds.

A lucky few become profitable. Most don’t and either sell out to a company with a history of profitability or they go under.

m3mnoch (profile) says:

better lucky than good

“better lucky than good” is really a fact of life. and that’s basically how i sum up cuban’s success. i’m sure he’s a just-fine business man because it does indeed take skill to capitalize on right-place-right-time opportunities, but just because he’s rich, doesn’t make him a “thought leader.”

he’s not really the type of person i’d take advice from.

however, take marc andreessen as the counter example. compare his wikipedia page with mark cuban’s. who do you think is good and who do you think is just lucky?

m3mnoch.

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