Free: The Future of a Radical Price

In his New York Times bestseller, The Long Tail, Wired magazine's editor in chief provided a glimpse of the business future that's already here. And now, in Free, he does it again.

As the cost of doing business online drops closer and closer to zero, giving things away is not just becoming an option — it's inevitable. But if the product is free, where's the revenue? In Free, Anderson breaks down the priceless economy into six broad categories, demonstrating how to make money in each:

• Freemium: Free Web software and services, and some content, to users of the basic version. (Think Flickr and the $25-a-year Flickr Pro.)
• Advertising: Free content, services, and software to an audience that advertisers will pay to reach.
• Cross-subsidies: Give away any product that entices customers to pay for something else. Example: It's a free second-gen Wii But only if you buy the deluxe version of Rock Band.
• Zero marginal cost: Anything that can be distributed without an appreciable cost to anyone, like online music.
• Labor exchange: Performing tasks to gain access to free sites and services.
• Gift economy: From Freecycle (free secondhand goods) to Wikipedia, money isn't the only motivator.

  In Free, Anderson uses the fundamentals of economics, a long view of the history of business, analysis of today's rapidly changing landscape, and fascinating predictions to create a book that, like The Long Tail, will be essential reading in the years to come.

  In hardcover, The Long Tail had lengthy runs on the New York Times, USA Today, Publishers Weekly, Book Sense, Wall Street Journal, San Francisco Chronicle, and Los Angeles Times bestseller lists, and has sold200,000 copies.

  Like The Long Tail, Free began as an article in Wired — in this case, as a controversial cover story. Anderson has also been discussing the book's progress on his widely read blog thelongtail.com.

  As editor in chief of Wired and author of The Long Tail, Chris Anderson is one of America's most sought-after commentators on tech trends.

"In the digital marketplace, the most effective price is no price at all, argues Anderson (The Long Tail). He illustrates how savvy businesses are raking it in with indirect routes from product to revenue with such models as cross-subsidies (giving away a DVR to sell cable service) and freemiums (offering Flickr for free while selling the superior FlickrPro to serious users). New media models have allowed successes like Obama's campaign 'billboards' on Xbox Live, Webkinz dolls and Radiohead's name-your-own-price experiment with its latest album. A generational and global shift is at play — those below 30 won't pay for information, knowing it will be available somewhere for free, and in China, piracy accounts for about 95% of music consumption — to the delight of artists and labels, who profit off free publicity through concerts and merchandising. Anderson provides a thorough overview of the history of pricing and commerce, the 'mental transaction costs' that differentiate zero and any other price into two entirely different markets, the psychology of digital piracy and the open-source war between Microsoft and Linux. As in Anderson's previous book, the thought-provoking material is matched by a delivery that is nothing short of scintillating. (July)" Publishers Weekly (Starred Review) (Copyright Reed Business Information, Inc.)

Odds are, you reached this review in one of two ways: by paying for a copy of today's print edition or by downloading it to a computer for free. It's the same text either way. So if you shelled out cash for a paper copy, do you feel you overpaid? If the story on your screen cost you nothing, do you worry that you should have paid something?

Your gut response may determine whether... Washington Post Book Review (read the entire Washington Post review) you agree with Chris Anderson, editor of Wired magazine, or Ellen Ruppel Shell, a Boston University professor. In "Free," Anderson suggests that consumers could find many things selling for less, or even for nothing, if companies only used the right business model. In "Cheap," Shell contends that the wrong model — a transnational capitalism that often puts producers and consumers thousands of miles apart — suckers us into paying unsustainably low prices, which in turn depresses our own wages.

Anderson can't resist indulging in some of his magazine's the-Internet-is-changing-everything exuberance when arguing that dropping the upfront price of an item to zero can make a company more money in the long run. But he presents solid evidence for that view. He begins with such historical examples as the 19th-century saloons that offered free lunches to anybody who bought a drink. The Internet era has simply made "freeconomics" easier. Computer processing power and memory have become ever cheaper, and start-ups can get going by leasing a share of third-party server facilities instead of deploying their own. These incremental advances can combine to make a product too cheap to meter or sell on an individual basis. (This segment represents the book's weakest portion, but not because of its logic: Charlottesville, Va., blogger Waldo Jaquith found that much of it, plus a few sentences elsewhere in the book, matched passages in Wikipedia and other sources. Anderson confessed to the mistake, blaming it on last-minute revisions, and pledged to fix it in digital editions of the book; a copy posted to Google Books has citations or revisions in these cases.)

So if the average consumer no longer pays, who does? "Free" outlines how a company can shuffle an item's cost from everyday customers to other parties such as advertisers or pickier users willing to pay for a premium version. These aren't hypothetical examples: Anderson demonstrates how such firms as a San Francisco developer of health-care software, a Pasadena, Calif., online stock broker and the developers of a popular role-playing game have profited from these strategies.

Anderson takes a while to acknowledge the risk of collateral damage but doesn't neglect it in a chapter bluntly titled "De-Monetization." It spells out how the collective benefits of a newly free service — say, people better informed by Wikipedia — can be hard to account for in a balance sheet. But here, Anderson ignores how product giveaways can remove customers from product-design choices. When a cable company offers a "free" digital video recorder, it dictates that box's features.

So what should a company, such as (ahem) a newspaper, do when the market price for its output nears zero? Anderson advises it to "find the adjacent scarcity": a related good or service that can't be easily duplicated. He cites, among other examples, Chinese singers who make their money from touring, sponsorships, ringtones and personal appearances.

At the end, Anderson eases up on his evangelism, allowing that, in some cases, the old-fashioned free-sample approach employed by any half-decent bakery may suffice. "Free may be the best price, but it can't be the only one," he finishes, as if to reassure readers that he's not one of those wild-haired Web evangelists after all. Indeed, a good chunk of what he advocates has nothing to do with giving products away and everything to do with shifting costs to interested parties who have better reasons to pay. But "Cost-Shifted" doesn't make for as catchy a title as "Free."

His arguments, however, hold together better than Shell's. It's not that she's advancing an implausible point. But Shell aims to indict American retail in general, and not just today's big-box discounters.

The author draws a line from the pioneering 19th-century merchant John Wanamaker (note that two sentences on him echo text in a Wikipedia entry) to Wal-Mart, describing that prices, quality and employee wages seem to drop in each generation of retailer. Shell ties this evolution to such broader issues as the distorting effect of agricultural subsidies (though distortions caused by subsidized highways go unaddressed) and the grim state of safety and health standards overseas.

The best insights in "Cheap" come when it unpacks the psychology of pricing. In some cases, Shell explains, too deep a discount makes customers suspicious — as she learned when her old SUV wouldn't sell until she raised its price. You can learn a fair amount here about the games retailers play. But the writing gets in the way. It's often overwrought (a discussion of environmental and political problems caused by shrimp overfarming concludes, "It was almost as if the shrimp itself was taking revenge for being diminished to the status of a cheap commodity") and sometimes snobbish (she allows that discount clothing may exhibit "technically" high quality, but only at the cost of such finer virtues as "drape, feel, and design").

The occasional dubious blanket assertion doesn't further Shell's argument either. She declares that pre-discount retailers habitually offered "customers precisely what they wanted," while today "corporations are essentially penalized for innovation." (Ever hear of Apple or Google?) Shell goes overboard again when attacking her chosen villains. Her critique of Ikea incorrectly says the Swedish retailer doesn't offer home delivery (it does) and exiles itself to Sprawlville (so much for its Brooklyn stores). Later, a comparison of Wegman's and Whole Foods waves aside the former grocer's apparent allergy to big-city locations, then praises Wegman's high ranking on Fortune magazine's best-places-to-work list but doesn't mention Whole Foods' repeat appearances in the same survey.

"Cheap" makes only sketchy policy suggestions, leaving it to consumers to combat the trends Shell decries. But with just Wegman's and Costco getting a thumbs-up after 200-plus pages of invective against the retail-industrial complex, busy shoppers may respond to this book's exhortation to vote with their wallets by asking, "How, exactly?" Anderson, by contrast, provides useful insights into both the market forces he describes and what to do about them. That's a public service — especially considering that he's posted his book as a free download in several different formats on his own blog (thelongtail.com). And so "Free" is a better deal than "Cheap."

Rob Pegoraro writes the Fast Forward column and blogs about consumer technology for The Washington Post.

Reviewed by Rob Pegoraro, Washington Post Book World (Copyright 2006 Washington Post Book World Service/Washington Post Writers Group)
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Following his "New York Times" bestseller, "The Long Tail, Free" is another look at the radical new way business is done. . . . [It] shows a new economic model that goes way beyond the old concepts of free with purchase' or loss leaders'.--Will Baillett.

The New York Times bestselling author heralds the future of business in Free.

In his revolutionary bestseller, The Long Tail, Chris Anderson demonstrated how the online marketplace creates niche markets, allowing products and consumers to connect in a way that has never been possible before. Now, in Free, he makes the compelling case that in many instances businesses can profit more from giving things away than they can by charging for them. Far more than a promotional gimmick, Free is a business strategy that may well be essential to a company's survival.

The costs associated with the growing online economy are trending toward zero at an incredible rate. Never in the course of human history have the primary inputs to an industrial economy fallen in price so fast and for so long. Just think that in 1961, a single transistor cost $10; now Intel's latest chip has two billion transistors and sells for $300 (or 0.000015 cents per transistor--effectively too cheap to price). The traditional economics of scarcity just don't apply to bandwidth, processing power, and hard-drive storage.

Yet this is just one engine behind the new Free, a reality that goes beyond a marketing gimmick or a cross-subsidy. Anderson also points to the growth of the reputation economy; explains different models for unleashing the power of Free; and shows how to compete when your competitors are giving away what you're trying to sell.

In Free, Chris Anderson explores this radical idea for the new global economy and demonstrates how this revolutionary price can be harnessed for the benefit of consumers and businesses alike.