Free Does Not Mean No Business Model

from the repeat-after-me... dept

As we get ready for The Free Summit, I was thinking about some of the recent posts here on Techdirt, and realizing a really common fallacy that seems to destroy all debates around "free." It's the implicit assumption that "free" means no business model. We saw it with law professor Justin Hughes' defense of copyright in The Economist debate over copyright, where he states:
What we have now is a mixed economy for expression in which some expression is produced under a patronage model (foundation grants, universities), some expression is produced under the open source model (Linux, blogs), and some expression is produced under a profit/incentive model of copyright.
And we see it when David Simon goes to Congress and says:
It costs money to do the finest kind of journalism. And how anyone can believe that the industry can fund that kind of expense by giving its product away online to aggregators and bloggers is a source of endless fascination to me. A freshman marketing major at any community college can tell you that if you don't have a product for which you can charge people, you don't actually have a product.
Both of those statements are based on the implicit assumption that "free" means "non-profit" or "not a business." Yet, nothing is further from the truth. Free has always been a part of many business models, and when most supporters of "free" are talking about isn't that content creation and journalism go to an "all amateur/all non-profit" model. No one is saying that at all. We're saying that they need to learn to embrace other business models rather than rely on copyright as a kind of crutch.

When you've been relying on that crutch for so long, you forget that you have two legs of your own and can make do without the crutch. We're seeing it all the time, with content based business models that don't rely on copyright which have been shown to be more successful than the old copyright crutch business models. There are lots of ways to make money that involve "free" as a part of the business model.

So, from now on, whenever you see someone arguing against free, and implicitly assuming that "free" means there is no business model, correct them. Let them know that they're arguing against a total strawman. No one says the professional class of content creators or journalists is about to go away. We're saying that they'll earn their money in a different way, and it won't rely on charging directly for their content, but on other goods that their content makes much more valuable.

Filed Under: business models, free

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  1. icon
    Mike (profile), 10 May 2009 @ 6:07pm

    Re: Re: Re: Re: Re: Re: Re: Re: Unaddressed Assumption

    Actually, I have studied economics and your assumption would be wrong. And frankly, I'm placing a little more faith in the professors I studied under than yourself.

    Either your professors were wrong (unlikely) or you heard them (or interpreted them) incorrectly. The intersection of supply and demand is the same thing as marginal cost. This isn't an opinion. It's not even up for discussion. They're the same thing.

    Marginal cost does not necessarily equal the intersection of supply and demand. While marginal cost can be a factor affecting supply it is not always so, and that is why it is not equated to price. This most often happens in the case of artificial scarcity (such as may be created by lack of competition).

    Um. Again, you seem to have interpreted whatever economics you learned incorrectly. The scenario you are setting up is a non-perfectly competitive market. In any such market, it may be true that price will not equal marginal cost and (again, this is redundant) price may not equal the intersection of supply and demand.

    The idea that price = marginal cost can be easily disproven. As an example, take a unit for which the marginal cost is $10 and supply and demand supports a price of $100.

    You are talking about a non-perfectly competitive market. Otherwise the intersection of supply and demand would equal the marginal cost.

    The point that we are making is that as a market tends towards a competitive market, price will tend towards marginal cost, and price will tend towards the intersection of supply and demand which (yes, despite your denial) is the same exact thing.

    In fact, the marginal cost can tend to zero, so long as supply and demand remain unchanged, and the price will remain the same.

    Nope. Only if the supply is artificially restricted. Which is a non-perfectly competitive market.

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