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.

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

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  1. icon
    Mike (profile), 17 Jan 2008 @ 7:31pm


    Here is Alex Iskold's original post (why didn't you link to it?)

    Because we made a mistake. I've now added it. Sorry about that.

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