Sometimes Free Really Means Free

from the yes-there-are-free-lunches dept

"Free" seems like a simple enough concept. As we've explained in the past, there's a huge number of successful business models that involve giving away free stuff. But Adam Thierer points out that some people are still horribly confused about the nature of "free" business models. Alex Iskold claims that the "free" stuff given away by Google and other companies is an illusion. He notes that when a company offers us free stuff, it often come with a price attached: you get a free lunch, but you have to listen to an annoying timeshare sales pitch. What Iskold fails to appreciate is the difference between scarce physical goods and non-scarce information goods. It's true that if a company is giving a physical product away for free, they're probably going to try to sell you something as part of the deal. But that's because the physical product costs them money, and they'd go out of business if they gave away too many. Information goods are totally different. Once you've created a new information product, you can give away an unlimited number of copies without affecting your bottom line. And so you can afford to design your business model in a much more generous fashion. MySQL, for example, built a billion-dollar business by giving away millions of copies of its software in order to attract a few thousand companies willing to pay for its service and support offerings. Those millions of free copies of MySQL really are free.

Iskold also seems confused about the difference between monopolies and competition. He claims that Google's decision to give its word processor and spreadsheet application away is "monopolistic" and a "dangerous poker game" that's only possible because Google has a huge pile of cash. This is ridiculous on a couple of different levels. In the first place, it's absurd to think that Google's cash pile gives it an unfair advantage over Microsoft, which has one of the largest cash piles in the history of the world. Second, there are numerous other competitors in the online word processing space, such as Zoho, who don't have Google's large piles of cash, yet still give away online word processors for free. In fact, Google's own word processor actually came from a tiny startup, Writely, who had very little money, but was still giving away the product for free. Third, there's no inherent reason why word processors can't be free. You can make an unlimited number of copies of it just like any other software product. Microsoft has only retained the ability to charge hundreds of dollars for Office because they haven't had enough competition. Now that competition is increasing, the price of office software is likely to fall toward its marginal cost of zero, and companies will need to find more creative ways to turn a profit from it. Cutting prices (including cutting them to zero) in order to increase market share is the opposite of monopolistic. Consumers benefited from Microsoft's decision to give away Internet Explorer in the 1990s, and they benefit from Google's decision to give away Google Docs today.

Filed Under: business models, economics, free, scarce goods
Companies: google


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  • identicon
    Anonymous Coward, 17 Jan 2008 @ 12:54pm

    Free is free when you look at anything. Consider it advertising or marketing. Good advertising or marketing shouldn't be considered a cost, because it builds incremental revenue. You don't spend a dollar on marketing, you gain 2 in profit.

    The problem the studio faces is that their customers get the product for free while remaining unable to collect on the benefit of concerts, merchandise etc. Free will cause one of two things to happen to the studio, they either go out of business or they control even more what artists do. Will future record deals include concerts, T Shirts and everything else that goes along with it? Will it include corporate sponsorship?

    I think it could actually become worse for new artists that have even more control placed over them by the studios.

    reply to this | link to this | view in chronology ]

    • identicon
      DittoBox, 17 Jan 2008 @ 1:39pm

      Re:

      That's great! Studios were needed in the days when it was technologically unfeasible to record, publish and distribute your own album. Now it isn't anymore. Hooray for the little guy!

      This is what technology does, and if you're not going to mold your business models around it then you can disappear when the market fades. I could care less. That's what unadulterated free markets are. Not the litigation (RIAA extortion), the lobbying and legislation (RIAA/MPAA paying off congress critter). Your product or service should stand on its own in a market.

      Like many others have said: if litigation, legislation or coercion is the last bastion of hope for your business model, it's already dead.

      reply to this | link to this | view in chronology ]

  • identicon
    David Sternlight, 17 Jan 2008 @ 1:03pm

    Monopoly

    That Ford has a monopoly on Ford cars doesn't make it a monopoly in restraint of trade. There are plenty of alternatives and vigorous competition.

    Just so with Google. The issue the original author is worried about is not monopoly, but predatory pricing. Proving that involves many factors, intent, and is quite complex. That something is free isn't enough.

    reply to this | link to this | view in chronology ]

  • identicon
    Straif, 17 Jan 2008 @ 1:05pm

    The costs of free

    While the development costs for a product like Google Docs is the same if there is one user or millions, there are real costs associated with running a free online service like that. All the bandwidth, the servers, the disk space, and the real estate to house the servers (whether it is at Google's extensive server rooms, or a little bit of rack space at an ISP) isn't cheap, and the more users you have, the higher the total costs.

    Google, like many other online services, considers those expenses to be worthwhile, because of advertising revenue or even exposure and goodwill that enhances the profits from other products.

    Also, I can't say that this was the case for Writely, but it isn't uncommon for small startups with a free web application to have the business model of "give away a free service, pay the bills, and hope to get the big VC dollars or be purchased outright by Google or a similar company."

    reply to this | link to this | view in chronology ]

  • identicon
    Peter, 17 Jan 2008 @ 1:21pm

    Writely's free product isn't a good example

    Writely may not be the best example, since they were a start-up company that eventually got acquired, which met their need for cash. Zoho is a much better example, since it has a successful current business model selling enhanced versions of their services and support on top of the free products.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 17 Jan 2008 @ 1:28pm

    Careful...

    You said:

    "Consumers benefited from Microsoft's decision to give away Internet Explorer in the 1990s"

    Maybe in the whole you are correct, but they "gave it away" by bundling it with Windows only. There was no choice to get it for free without the pre-condition that Windows had been bought.

    Unlike Google Docs which I can use with any ISP, on any platform, with any browser. That is free.

    reply to this | link to this | view in chronology ]

    • identicon
      angry dude, 17 Jan 2008 @ 1:39pm

      Re: Careful...

      "Consumers benefited from Microsoft's decision to give away Internet Explorer in the 1990s"

      Ha-Ha-Ha-Ha-Ha...............

      The MShit "giveaway" of IE in 90s had the only purpose of killing Netscape

      reply to this | link to this | view in chronology ]

      • identicon
        Anonymous Coward, 17 Jan 2008 @ 2:04pm

        Re: Re: Careful...

        So, only one party can benefit. Typical of you. Yes, MS made IE a free product for one reason and one reason only. And it is unfortunate that the browser market stagnated for so many years because of it.

        But you miss the other consequence, which benefitted consumers thusly: no longer is it expected that one should purchase a web browser. Free software has become more common (and I mean freeware, not "pirated" software)

        Or would you prefer to pay money for Internet Explorer, or Firefox, or Konqueror, or Safari, or Opera, or Camino...

        reply to this | link to this | view in chronology ]

      • identicon
        4-80-sicks, 17 Jan 2008 @ 2:17pm

        Re: Re: Careful...

        Addendum:
        Intended consequence or not, that's what happened.

        It's what Techdirt might call competition driving the market price towards its marginal cost, and the way it benefits consumers. Or changing a business model to adapt to market forces.

        Give away a web browser, to capture more market share, to sell an operating system.
        Much the way Apple uses a free product (iTunes) to sell hardware (iPods), which also exposes people to their design, which gets them thinking about using their operating system which requires their proprietary hardware...pretty smart of them.

        reply to this | link to this | view in chronology ]

    • identicon
      Tim Lee, 17 Jan 2008 @ 1:44pm

      Re: Careful...

      Huh? I used Internet Explorer on my Mac for several years in the 1990s...

      reply to this | link to this | view in chronology ]

      • icon
        chris (profile), 17 Jan 2008 @ 2:21pm

        Re: Re: Careful...

        Huh? I used Internet Explorer on my Mac for several years in the 1990s...

        yeah, but apple shipped IE for the mac because microsoft thretened to cancel office for the mac in 1997 if they shipped netscape by default.

        monopolies are bad mmmmkay.

        reply to this | link to this | view in chronology ]

      • identicon
        Anonymous Coward, 17 Jan 2008 @ 3:23pm

        Re: Re: Careful...

        ie was only included on mac for free because MS owns a large share of apple. It was still in there best interests to kill of netscape

        reply to this | link to this | view in chronology ]

        • identicon
          4-80-sicks, 17 Jan 2008 @ 7:34pm

          Re: Re: Re: Careful...

          Just because it was in their best interest does not mean that it affected consumers badly. On one hand, yes, it did, because it killed the competition. On the other hand, the competition should have been better (to compete), and on the third hand, it was a case of Microsoft acting in self-interest but it still had a positive effect for consumers. The two are not always mutually exclusive.

          In response to the original comment, by the way, "Google Docs which I can use with any ISP, on any platform, with any browser. That is free." there is a difference between free and Free. IE is free. It doesn't cost any money! I think this AC wanted to distinguish that from Google Docs which gives him freedom by working on any platform, which is a different kind of free, although still not Free as it resides on Google's servers, so it can't really be modified by the user.

          reply to this | link to this | view in chronology ]

          • identicon
            angry dude, 17 Jan 2008 @ 8:34pm

            Re: Re: Re: Re: Careful...

            "the competition should have been better (to compete)..."

            Dude, have you ever tried to compete with MShit on Windoze desktop ?

            Well, Netscape tried it once and failed miserably

            Google was a lot smarter: forget desktop, let's do it on a server-side. Smart, very smart.
            No patents needed, no patent threats, just good old trade secrets...
            MShit is still licking its wounds having lost its best people to Google...

            The advice is this: never ever try to compete with the existing de-facto OS monopoly by introducing your competing products in their proprietory domain (desktop OS)
            The road is littered with corpses already: burst.com comes to mind, but the list is very long...

            Ah, well, as usual techdirt is clueless about real tech dirt

            reply to this | link to this | view in chronology ]

            • identicon
              4-80-sicks, 17 Jan 2008 @ 9:07pm

              Re: Re: Re: Re: Re: Careful...

              You are reading way, way too much into everything. You always do. Yeah, Netscape tried it once. I'm not saying they could have made it. The climate was different then. Although it didn't help that it started getting kind of crappy. But Firefox competes now, just fine. By being a better browser. Opera has small market share, but holds its own. I suppose you still think it's impossible, denying the existence of OpenOffice.org, VLC Media Player, Miranda IM, and so forth. They will probably never have majority market share, but lots of people use them. Enough for their respective developers to continue doing their thing.

              Never let it be said that I think Microsoft has the best business practices. But burst.com? Really? That's the best "corpse" you can come up with? They're still around. They sued successfully. You'd think (well obviously you wouldn't, but I'd think) they could do something with that $60 mil they got. And I don't see anything offered by Microsoft currently that does the same thing their service does, anyway.

              Ah, well, as usual angry dude misses the point.

              On a personal level: Why do you post/read here? Do you see yourself as some voice of reason? Perhaps you will show everyone the light and how Techdirt is wrong? Did they wrong you somehow? Your handle is accurate, I'll give you that. But why spend so much time on a website that makes you so angry? It's OK, you can tell me. I'll give you a hug.

              reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 17 Jan 2008 @ 2:01pm

    Hurray for the little guy? I am not sure this will actually help the little guy, in fact, I think it may actually make their lot in life even worse.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 17 Jan 2008 @ 2:29pm

    So who pays for the maintenance and continued development of these non-scarce information goods?

    I think the explaination of the free business model is off but overall agree with the point of your article...

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 17 Jan 2008 @ 3:51pm

      Re:

      So who pays for the maintenance and continued development of these non-scarce information goods?

      People who use related scarce goods (or services)? MySQL customers who require support? It's right there in the article. I hope you don't have to ask where Google gets the money for Google Docs. Or were you looking for a broader answer? It depends on how the provider decides to monetize things, there's no one right answer any more.

      reply to this | link to this | view in chronology ]

    • icon
      chris (profile), 18 Jan 2008 @ 8:45am

      Re:

      So who pays for the maintenance and continued development of these non-scarce information goods?

      the proceeds from the sales of scarce goods.

      when you give something away for free, people become interested in it. those interested parties become your target market for your scarce goods.

      also, it should be noted, if your non-scarce informational good is open source, your interested parties will help you maintain and support said product, further reducing the "cost" of producing your free product.

      in the mysql case, the free mysql product creates a whole market for mysql "stuff": professional services and support, books and other training materials, specialty hardware, plugins or addons, and community or trade materials like events, tshirts, posters, or magazines.

      all of this "stuff" could be sold directly, or leveraged in another fashion for revenue.

      in the case of services, support, or physical goods, the business model is simple: mysql being free adds tremendous value to the stuff we sell, and people want our stuff because they love mysql. sure, since the product is free other people can service, support, and make physical goods for mysql as well and there is nothing wrong with that, since being the inventor is a significant means of differentiating your products and services from your competitors.

      once you build a large community around your product, you can leverage that as well: trade shows, blogs and support forums with advertising, even speaking engagements. again, others can get in on the act, and that's fine, because you are the originator and that sets you well apart from the competition.

      the business model for free is well documented in the open source community which you can read about here:

      http://www.opensource.org/advocacy/case_for_business.php

      1. Support Sellers (otherwise known as "Give Away the Recipe, Open A Restaurant"): In this model, you (effectively) give away the software product, but sell distribution, branding, and after-sale service. This is what (for example) Red Hat does.

      2. Loss Leader: In this model, you give away open-source as a loss-leader and market positioner for closed software. This is what Netscape is doing.

      3. Widget Frosting: In this model, a hardware company (for which software is a necessary adjunct but strictly a cost rather than profit center) goes open-source in order to get better drivers and interface tools cheaper. Silicon Graphics, for example, supports and ships Samba.

      4. Accessorizing: Selling accessories – books, compatible hardware, complete systems with open-source software pre-installed. It's easy to trivialize this (open-source T-shirts, coffee mugs, Linux penguin dolls) but at least the books and hardware underly some clear successes: O'Reilly Associates, SSC, and VA Research are among them.

      reply to this | link to this | view in chronology ]

  • icon
    Nick (profile), 17 Jan 2008 @ 3:24pm

    Here is Alex Iskold's original post (why didn't you link to it?)
    http://www.readwriteweb.com/archives/the_danger_of_free.php

    reply to this | link to this | view in chronology ]

  • identicon
    ehrichweiss, 17 Jan 2008 @ 3:57pm

    you need to do some fact checking...

    "Microsoft, which has one of the largest cash piles in the history of the world."

    Not true by a long shot. There are tons and tons of corporations that have lots more cash laying around than Microsoft. Just look at some of the oil companies and you'll see that they post yearly profits that are to the tune of about 6 or more percent of Microsoft's *total assets* easily and have lots more than that just laying around. As I recall there are several oil companies that have assets in the trillions. They're just owned by many people, not simply a handful so they, individually, aren't as rich as Bill.

    reply to this | link to this | view in chronology ]

    • identicon
      Tim Lee, 17 Jan 2008 @ 6:38pm

      Re: you need to do some fact checking...

      Got a link? Microsoft has $30 billion on hand and had as much as $60 billion within the last few years.

      reply to this | link to this | view in chronology ]

      • identicon
        4-80-sicks, 17 Jan 2008 @ 7:16pm

        Re: Re: you need to do some fact checking...

        Microsoft doesn't even make the top 50, in terms of annual revenue. They are, however, in the top five for total net worth (still beaten out by ExxonMobil). But I don't know what that means or matters or what exactly ehrichweiss' point was, except to be a troublesome troll. The line in the article was that Microsoft has far more money than Google does, and oil companies having more money than Microsoft does doesn't make that not true.

        reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 17 Jan 2008 @ 6:16pm

    Free is as free does

    Baen.com has been giving away SF books for free on their site, while selling others, they ain't complainin, other than the occasional server crash of their discussion board.

    Now me, wanting to find something to read the HTML/RTF/MobileBook/etc. books and listen to MP3's at the same time on a device smaller than a laptop, me, I AM hurting.

    reply to this | link to this | view in chronology ]

  • identicon
    Eid3tic, 17 Jan 2008 @ 7:26pm

    9 Words

    There is no such thing as a free lunch.

    reply to this | link to this | view in chronology ]


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