FREE: the cocktail party version

When you're writing a book you need to have your elevator pitch down or "What's the book about?" will become the most dreaded four words you can hear (followed closely by "how's it going?").

Obviously the one-sentence version of the answer should be something close to the book's subtitle. But I haven't nailed that one down yet, so these days I just say "The economics of zero dollars and zero cents" and hope for the best. Some people glaze over and move on at that point, but for those who stop, intrigued, and ask me to explain, here's what I say:

We all know free--it's a trick that marketers use. But free is changing. When you think about it, there are two economies, one of atoms and one of bits. In the atoms economy, which is to say most of the stuff around us, things tend to get more expensive over time. But in the bits economy, which is the online world, things get cheaper. The atoms economy is inflationary, while the bits economy is deflationary.

The 20th Century was primarily an atoms economy. The 21st Century will be equally a bits economy. This book is about the differences between 20th Century free and 21st Century free--free moving from a marketing trick to a new economic model.

Anything free in the atoms economy must be paid for by something else, which is why so much traditional free feels like bait and switch--it's you paying, one way or another. But free in the bits economy can be really free, with money often taken out of the equation altogether. People are rightly suspicious of free in the atoms economy, and rightly trusting of free in the bits economy. Intuitively, they understand the difference between the two, and why free works so well online.

Today the online world is a country-sized economy built of free. The most interesting business models are in finding ways to make money around free. Sooner or later every company is going to have to figure out how to use free or compete with free, one way or another. My book is about how to do that.

Comments

[Sebastien]

Chris, I am not sure I understand the "bits" and "atoms" part. Maybe it's just a barrier language as I am French (although living in California). I get the general idea of your pitch to people asking you what's your book about but I really don't get the bits and atoms thing.

Would you please educate me?

Thank you

[Chris Anderson]

Atoms==physical stuff, which tend to have non-zero marginal costs.
Bits==digital stuff, which tend to have near-zero marginal costs.

It's a reference to the construction Nicholas Negroponte used in the classic Being Digital.

[Michael Sippey]

question / pushing / fisking on the penultimate sentence: "Sooner or later every company is going to have to figure out how to use free or compete with free, one way or another."

really? every company? if consumers are suspicious of free atoms, but not of free bits, i think it would be important to push on sectors / companies where "free" really isn't thought of... what does free have to do with viking selling high end gas ranges, for example? this is trending towards click & mortar strategy stuff here, but is there a complementary "free" bits strategy to their paid atoms products?

[Chris Anderson]

@Michael: sure, you can add a dash of free to anything. For example, free shipping on Viking ranges:
http://shopping.yahoo.com/s:BBQ%20Grills:4168-Brand=Viking%20Range%20Corporation:4492-Sales%20&%20Deals=Free%20Shipping

[Mukund Mohan]

The amazing part is the transformation of things that were "atom" centric to things that are now "bits" centric. I dont disagree with your notion that things will get more bits centric, but the real problem in the 21st century I believe will be there are other items that were free (water, air, etc) that will start looking more like expensive atoms than bits.

I am starting to see it everywhere in India.

[Ted Murphy]

I think that you have a useful distinction in atoms vs bits. But I do not think that the bit economy will be based on free. I think that it will be based on an exchange of some kind. Many of those exchanges do not involve money at this point, fair enough. But to characterize such exchanges as free is just wrong.

Our legal system here in the US, for example, certainly does not limit value received to money. I'm not a lawyer, though. Maybe I should be saying simply, "I don't think you mean what you think you mean."

[Chris Anderson]

@Ted: Please see the previous post. The forth form of free is the non-monetary economy. We use the usual definition of free here, which is "free of charge".

[Carl]

This is an interesting idea but I think it misses a fundamental point, IMHO. There are not TWO economies, but THREE: bits, atoms, and people.

You are, as ever, spot on about bits: the marginal costs of (re)production approach zero, and traditional economics no longer apply.

You are IMHO slightly wrong about atoms: in most material businesses, marginal costs go down over time, and so do prices. Cars, air travel, you name it: mass production and process efficiencies push costs down. A TV costs the same in dollars that it did 40 years ago despite being vastly superior and despite (monetary) inflation. This is the lesson of 19th century industrialization and 20th century mass production.

HOWEVER the cost of atoms doesn't go down nearly as fast as the cost of bits, so by comparison atoms look increasingly expensive.

Thirdly, there is the economics of people: Business models where people are inherent to the value proposition (at least, for the immediate future). Musical performance, for example. The "care" part of healthcare. Education, especially higher education. Research. Skilled people scale even less well than material products. The costs of employing people for these jobs tends to stay the same over time (or rise), even as the Atoms and Bits that complement their tasks get cheaper, making the People costs an ever larger fraction of the total. Observers often complain that healthcare and college education costs consistently outpace inflation. Of course: it is because they are People businesses, so naturally their costs are going to rise relative to either Atoms or Bits.

This "Three Economies" model helps to understand the dislocations going on in some industries. Music is a great example. Before the 20th C it was essentially a People business: you paid to see people perform. Recording turned it into a People Plus Atoms business, and by the 1980s it was overwhelmingly Atoms: top bands often lost money touring, but did it to promote the sale of recordings. Then along comes the digital era, and now we are in the midst of a transition to a People Plus Bits business, where Pay For Performance once again dominates and recordings promote the performance rather than vice versa -- while backward-looking execs desperately cling to the People Plus Bits model.

[Eric Dewhirst]

Chris thanks for this post - it is exactly the kind of analogy that helps get the point across.

Initially I was strongly against your whole Free position and thought you were out to lunch. Then as I read more I realized that what you were saying was truly a profound shift in the way I should look at my online business model. You were right and I was wrong - so much so that I convinced my business partner and our investors that we needed to go 100% free. Ever since we went 100% free things changed dramatically. Of course our members were happy not to have to pay, but more importantly we could focus on providing exactly what our members wanted because there was no need to make sure they were paying us. When you are trying to make sure you get paid you make decisions that "box in" your members to make sure they don't leave without paying. That mentality harms the user experience and in turn makes your offering harder to use and less effective. Of course if you are selling atoms you need to get paid before you ship - but if you are moving electrons you need to focus on making sure they can flow as easily as possible.

There is a knee jerk reaction to something for nothing and you are right again it is a difference between atoms and electrons.

I really appreciate the fact that you share your ideas and in turn let the electrons fly!

Cheers - Eric
Co-founder - www.pickuppal.com

[Suleman]

I can't wait for this book to come out.

-Suleman

[mike w liu]

I am interesting in your opinion. Hope I can get your book soon. Mike from shenzhen, china.

[terry garrett]

Chris I think you have said this, but I'll state it a bit differently to satisfy my own interpretation of what you're proposing.
Bits economy changes the dynamics of atoms economy, it doesn't replace it.
The shared attributes of both are resources.
Time, knowledge, physical assets and capital are the shared resources.
There are no free resources.
Therefore, neither bits nor atoms can be cost-free.
The value of all resources is determined by utility to a consumer and productivity of a producer. Even in a scenario where the two are overlapped, the value equation still prevails.
You're suggesting a rearrangement of the 'molecular' structure of the one main economy which now consists of bits and atoms with a fast rising influence of bits.
The bits contribution to the equation is that it dismantles the concentration of wealth and capital formation from the incumbent players.
The other side of that of course is that it creates the potential to concentrate wealth with new players who dominate the new alchemy of bits and atoms for capital formation.
Capital formation is the key purpose of economic activity. Until I can buy my house, car, food from bits, I will be subject to the laws of capital formation that is dominated by an atoms economy. Bits dramatically change the equation of how capital is formed and how the resources are allocated and measured.
I've studied the news media-advertising sector and can say that the dismantling first began in 1955 with proliferation of the telephone and television. The second stage has been accelerated by data and computerization. These are now well-known facts.
The work you're doing is invaluable to define the dynamics of the new economy.
I have now just contributed, ahem, at my cost, time, knowledge, physical assets and capital to your endeavor to write a book for which you presumably will derive income.
The utility to me as an economic output is yet unclear at best, and not measurable at least.
Check out Dan Ariely's Predictably Irrational for insight into the psychology of free.

[Nelson]

What would Milton Friedman say about those Free's?

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