a flight across Europe for $10 is indistinguishable from magic

Last week and most of the week before I was in Spain, Portugal and Italy giving speeches and visiting companies. Whenever I could I talked to people about "free". Here's what I've learned: people are confused by, and often suspicious of, that word and the trend towards the price of zero, I got the same questions again and again:

1. So nobody's going to make any money?
2. Does any of this go beyond simply paying for things with advertising?
3. You don't mean actually free, do you?
4. This is just online, right?
5. Is this some sort of trick?

The answers, in short form, are these:

What Free Is--And Is Not.

1) You can make loads of money by giving things away. The key is who you're making money from. Google's products are almost all free to the consumer, but Google makes billions from the advertisers who pay to reach those consumers.This is just the application of the century-old media model--"free-to-air" TV and radio, and newspapers subsidized by advertising to a fraction of their real cost--to any industry that can be turned into a digital product or service.

Think of these markets not as a two-way relationship between buyers and sellers, but a three-way relationship where the third party can be drawn in by something free that creates the product to be sold  (in the case of advertising, this "product" is the fabled "eyeballs" that advertisers buy).

2) Okay, so you get that--advertising can make things free. But that's just part of the much bigger opportunity in redefining markets so that you can give away one thing to sell another. Take flying. As Kevin Kelly notes, not long ago airlines scoffed at the notion that you could give away airlines seats. Then RyanAir, EasyJet and, at latest count, nearly 30 other European low-cost carriers lowered the cost of a seat to as little as five pounds ($10). Yes, five pounds.

How? By redefining what business they're in. They're not selling seats, they're selling transportation. They sell hotel and rental car reservations to passengers. They sell tourists to the smaller cities the carriers serve (the payment is in the form of the huge discounts they get on landing fees). They sell cargo shipment to the companies that put packages in the hold (which is why the low-cost carriers tend to charge extra for baggage). They even make money off the food and drink they sell on board.

3) Is there really such a thing as a free lunch? Actually, there sometimes is. Craigslist really is free. Wikipedia really is free. Nobody is "monetizing your attention". It's all thanks to a combination of the falling technology costs of Moore's Law with the Gift Economy. There really are no strings attached.

Other times, there are strings attached. Advertising clutters your page. You're pitched upgrades. Limits are imposed. You're upsold to different products or locked into something very much not free. The difference is this latter category used to be the only category of free. Now it must compete with really free. And the newer category is growing fast.

4) Yes, this is felt mostly on web, which is essentially built on free (a joke of the bubble era was there were only two numbers online: zero and infinity; sobriety has only eliminated the second), but it starting to also have influence offline. What the web's near-zero marginal costs encourage is for other industries to turn as many of their jobs as possible into software, so they can benefit from digital efficiencies, which gives them more flexibility over pricing. That's part of the reason why Ryanair and its kin can charge so little for airline seats: virtually all their sales and customer support are done through their website.

And when bands in Brazil let street venders freely copy and sell their CDs so as to promote their concerts, this is taking advantage of the near-zero marginal costs of pirate distribution, a streetcorner network of people nearly as efficient as a Cisco route. 

5) Finally, is this a trick? Well, yes, sometimes it is. But not a deceit, just an appeal to psychology. "Free" has a power to entice. It grabs the attention, and no more so than when it really does appear to involve some sort of magic. And let me tell you, a flight across Europe for five pounds is indistinguishable from magic. Not quite free, but close enough to fire the imagination. What else could cost almost nothing?

Comments

[James Gardner]

Now there is an eye opening post, especially the point you make about the three way relationship in free markets vs the two way one in traditional ones.

In banking, my industry, we have had these three way relationships for some time, but I'd never considered them in the context of "free" before.

It is a trend that is significant for us, and one that we will be watching closely. And, probably, worrying about at night.

[John Richardson]

I am a journalist working for for icis.com - a publisher which provides commodity price assessments, a wire service, a magazine, training and conferences to the big, and many people think bad, chemicals industry.

In my blog - http://www.icis.com/blogs/asian%2Dchemical%2Dconnections/ - I suggest putting your theory on the validity of Wikis to the test in commodity price forecasting and supply and demand estimates.

You can't eat lunch without cannabilizing yourself, to quote a retired board member from Dow Chemical.

If we don't provide free solutions that could undermine our business, somebody else might. What we therefore need to do is experiment with these solutions and if they work, hand them out free if necessary while finding other ways of monetizing the content (for example, as you suggest, the Google model of advertizing revenue).

Otherwise, in five years' time, or perhaps even less, we may no longer have a business.

[Henrik Moltke]

I recommend anyone interested in this topic to watch the (free) documentary Good Copy Bad Copy which I am one of three directors of.

RE: "And when bands in Brazil let street venders freely copy and sell their CDs so as to promote their concerts, this is taking advantage of the near-zero marginal costs of pirate distribution, a streetcorner network of people nearly as efficient as a Cisco route".

This is exactly what we show with the Tecno Brega culture (and Nollywood film industry. Similar business models are emerging all over the world in poor areas, as Ronaldo Lemos points out. I hope you look more in to this, Chris.

Good Copy Bad Copy would never have made it as far and gotten as much attention as it has if we hadn´t given it away for free, online, and used "piracy" to our advantage.

[Chris Anderson]

Henrik,

Absolutely. I was in Sao Paolo with Ronaldo Lemos two weeks ago, reporting on just that. It will definitely be in the book.

[marek]

A flight across Europe for five pounds is indistinguishable from magic. Not quite free, but close enough to fire the imagination. What else could cost almost nothing?

I wonder whether almost free is psychologically more compelling than actually free in this kind of example. Something which is completely free must mean that somebody is up to something - prompting questions 1, 3 and 5. But if it's just very cheap, then it's just a bargain, to be snapped up by canny shoppers who can then congratulate themselves on how much they have got for so little - and none of the five questions arises at all. The fact that the underlying economics may be close to indistinguishable is neither here nor there.

And of course all those European cheap flights aren't just paid for by commissions on hotels and car hire. There's a lot of price discrimination going on too. Tomorrow's morning flight from Krakow to London by Ryanair, to take a completely random example, is showing as £120.

[Maria C.]

Interesting post. Don Dodge wrote a blog post about the concept of the freemium model (free because you're pushing an upgrade) in the SaaS world (which you mention here). This model relies on the long tail because the conversion rate from free to paid is in the 2-4% range. Don's post: http://dondodge.typepad.com/the_next_big_thing/2007/05/freemium_free_t.html

[Chris Anderson]

Maria,

Thanks for the link to Dan's post, which I hadn't seen. Great stuff!

Chris

[Alexander van Elsas]

Chris, nice one. I have been taking a stand against the current web 2.0 free but ad-based model because in many cases the business model doesn't provide real user value, making it a terrible business model. It often leads to walled gardens, network value thinking instead of user centric thinking. Facebook is probably the best example of a nice service with a flawed ads business model. But you have provided some good examples where "free" does work. But in all cases it is because the model essentially focuses on providing user value. That is, and remains to be, the best business model to be used. I think we need to get out of the free ad-based business model in order to get to a user centric web. That is in my opinion the next step.

[Tony]

Chris -

I love this idea about free. For me the most important thing is going beyond the advertising revenue stream. Sure, Google makes a lot of money on ads, but not everyone can. And not many people understand how to do ads well.

You should check out Zecco.com, which is revolutionizing the way people invest by offering zero commission trades side by side with a community where people can open up and share their portfolios, trades, and performance. Like you said, it's redefining a market and finding other ways to make money off a service that is now free. In this case, it's margin interest and options trading.

I can't wait until your book comes out. Do you have another blog where you talk about these ideas more?

[Chris Anderson]

Tony,

Thanks for the good suggestion. I'm going to be doing the open research and discussion on FREE here, so don't change the channel ;-)

Chris

[chris h]

Chris- Can't find any single article to cite right now but I know you're familiar with Larry Lessig's copyright reform work and it often involved the free speech vs. free beer question (which it sounds like a variant of what you're hearing pushback on right now).

He said it was always a difficult nuance to describe but if anybody could explain it concisely and powerfully, it'd be Lessig. Might be worth picking his brain on how to best address this question since it sounds like this is going to be a major part of the book; no reason to re-invent the wheel on the best way to communicate the free or freemium model idea if Larry's already done significant work in that area. Hope this helps and I always enjoy the blog. Thanks.

[Soeren Algreen-Ussing]

Physical products will always command some payment, and development/quality assurance/testing product quality/guarantees will eventually be added to this, ..

Only thing is, these direct costs can be moved around, sponsored, distributed, so as to increase short-term sales//market entry,..

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Sincerely,

Soeren eS. Algreen-Ussing . SoftSoftInvest.Com

[Irene]

Coupons are almost free. If the product is one I would buy anyway, then the face discount can be helpful. My local supermarket gives the coupon discount even when they have a sale or store discount. The cost, aside from using up my expensive color ink in my printer, can be annoyingly long surveys. Often the product oriented survey segues into unrelated surveys for which I assume the companies involved are paid. They represent research. The WORST cost of coupons is the 200 daily spam emails which result. I use a separate email address for responding to "free" offers and coupons so I can deal with the spam on my own schedule. I don't bother often with coupons because I avoid processed foods, but I like them for beauty and health products. I like the idea of trading a little time (for the survey) for a discount. The Green Stamp or boxtops schemes were/are good. Too bad the people who have the least money benefit the least from free or bargain offers.

[Teri Orlando]

Hey, Ryan Air ROCKS!! My sis and I flew to Germany last year, then Rome, Venice, etc... We flew around Europe with Ryan Air. Yea, you don't get a lot of bang for your buck, but the fare was dirt cheap!!

ROCK ON RYAN AIR - WE LOVE YOU!! Thanks for giving people like us the opportunity to see different places without bending us over!!

Peace,

Teri

[COMPIKNEWS]

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[kabin]

thanks...
Kabin
Konteyner

[Deals Hunt]

Thanks for the good suggestion!! i think direct costs can be moved around, sponsored, distributed, so as to increase short-term sales-market entry,

[matériel informatique]

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