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


    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:

    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.

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