Is the web’s ‘free’ ride over?

A new book says ‘free’ is the future. Critics say that’s just crazy.

Is the web’s ‘free’ ride over?The release of Chris Anderson’s latest book Free will likely go down in the annals of publishing as a book launch from hell. It began when Anderson, the editor of Wired magazine and author of the bestseller The Long Tail, was accused of plagiarizing passages from Wikipedia in his much-anticipated book. Anderson apologized, explaining it was a mix-up that would be corrected. But that was only a minor hiccup compared to when the actual reviews started rolling in.

In Free, Anderson argues that in the digital age, the cost of distributing goods and services is being pushed ever closer to zero, and therefore most things will, in some form, eventually be offered for nothing. Already, he notes, the proliferation of free services online has created what Anderson estimates to be a $300-billion “country-sized economy.” It’s a provocative theory—and it was immediately and ruthlessly attacked by a horde of respected thinkers and writers. Malcolm Gladwell, author of The Tipping Point and Blink, wrote the harshest review so far in The New Yorker, suggesting that Anderson is thinking like a classic “technological utopian,” and his theory has little grounding in reality. Mark Cuban, the billionaire owner of the Dallas Mavericks, also railed against the idea, writing in his blog that the creed of “Free” will ruin companies that fail to focus on making money. “The problem with companies who have built their business around Free is that it is far from free to remain successful.”

Also at When ‘free’ becomes really expensive In the age of digital culture, it is not just access to art that has been democratized, but its production as well

Such an attack might have humbled some writers, but Anderson is taking the negative reviews in stride. In an interview, he says the criticism wasn’t just anticipated, “but in some ways invited.” He also says that his critics haven’t just misunderstood Free, most of them probably haven’t read the book. He may be right, but there’s a more likely explanation for the backlash: Anderson has spectacularly bad timing. With the economy sinking fast, serious questions are being asked about the sustainability of the free Internet economy. Newspapers that opted to give all their content away online are going bankrupt, YouTube is burning through cash to the tune of hundreds of millions a year, and online networking sites such as MySpace are bruised and struggling. The irony is that almost as soon as Anderson’s book hit the shelves trumpeting the new Free economy, the real economy seemed to rise up to respond that, in fact, the free ride is over.

In his book, Anderson holds up Google to counter this, and writes about how the search engine giant uses its ad revenue to offer dozens of products such as email, instant messaging, browsers and mapping applications that are all “really free—no trick.” Google can do this, he argues, because the costs of offering these services to an individual are marginal on the Web, which is ruled by “the economics of bits, not atoms.” As he notes, this new reality has hit many industries like a wrecking ball. Look at what’s happened to travel agents, stockbrokers and long-distance phone carriers. All have been replaced in part by free services, funded by advertising or some form of cross-subsidy. He theorizes that “sooner or later, every company is going to have to figure out how to use Free or compete with Free, one way or another.” Google’s announcement that it will soon launch a free operating system for netbooks (quickly followed by Microsoft’s decision to launch a free Web-based version of Microsoft Office) only served as an exclamation point on his pronouncement.

Critics, however, respond that Google is fast becoming an example of why Free doesn’t work. After all, the company has yet to explain how its new operating system will make money. And there has been plenty of speculation that Google’s YouTube video website is already a massive money loser. A Credit Suisse report estimates it will lose nearly half a billion dollars this year. The problem is, while digital bits are indeed free, the costs of storing and showing each video are very real. Bandwidth charges alone amount to more than $350 million a year, said the report. And supporting it all with ads has proven next to impossible—the content is mostly amateur video with an unhealthy dose of illegally posted, copyrighted material. As Gladwell pithily noted, YouTube is so far in the red that if it were a bank, it would be eligible for TARP funds.

Anderson quickly shot back that critics are too quick to judge, and that Google has a plan to make money. “Which do you think is more likely, that Google knows what it’s doing or that Malcolm was looking for an example to undermine a thesis that threatens his profession?” he asks. “Trust me, Google knows what it’s doing.”

Anderson touches on a valid point here. The media is indeed feeling threatened by Free. Newspapers especially, as they jumped on the Free bandwagon right at the start, giving all of their content away online—a tactic that has thoroughly undermined the business of selling newspapers. But lately, there are signs that the industry is fighting back. Some, like the Wall Street Journal, have started to put up pay walls limiting access to content. The publisher of the Wall Street Journal, Les Hinton, called Google a digital vampire that’s sucking the blood from the newspaper business. Other big names outside the industry have entered the debate too. The influential U.S. Court of Appeals judge Richard Posner caused a stir when he wrote that copyright law should be expanded so that people can’t link to stories without a newspaper’s permission. He made this argument on his blog, but it left many wondering what would happen if the Free debate eventually lands in court.

It’s safe to assume that a few years ago, when Anderson first started writing Free, his book’s thesis would have been eagerly embraced. Companies like Facebook were exploding in popularity, adding millions of users with their free services and prompting valuations in the billions of dollars. Bands like Radiohead were giving away albums for free online—experiments that were hailed as the future of the business. Start-ups could launch a free service, build a following and sell themselves to eager investors, all without making a dime. All of this was fuelled by a generation that had been raised at the Internet trough, where users could take what they wanted without ever having to reach for their wallets.

But since then it has become clear that there was a hitch: profit had taken a back seat. “The problem of saying ‘Free is the future’ is that it oversimplifies something that is much more complex,” says Kartik Hosanagar, a professor who studies Internet commerce at the University of Pennsylvania, and whose work, ironically, is cited in Free. “Firms, at the end of the day, have to make money, and there has to be a sound business model.” Part of the reason such business fundamentals were glossed over is that the growth happened at a time “when speculative money was flooding in and many people confused this capital injection with real sustainable income,” notes Alan Patrick, one of the founders of the U.K. Web consultancy Broadsight. But things are changing now. In the current economic climate, cash flow and financing are critical, and potential suitors want proof that a site can make money before they’ll invest.

The music industry has already proven that Free can be fleeting. Many people still illegally download music for free, but the industry is slowly wresting back control of distribution channels with sites like iTunes. The wild west of the Internet is also starting to feel the weight of the law. The owners of the free file-sharing site Pirate Bay were recently given a year-long prison sentence for copyright violations, and the site is now relaunching as a pay site. Even long-established advertising-supported free services, such as broadcast television, are finding that Free is not such a great model when times are tough.

Free, it turns out, only works as a starting point. The marginal cost of launching a business on the Internet means that anyone with a good idea can quickly build an audience. But sooner or later, a business needs some kind of dependable revenue. “Free gets you to a place where you can ask to get paid,” explains Fred Wilson, a New York venture capitalist, on his blog, Anderson’s idea of a Free economy is, on the other hand, an “economic version of a perpetual motion machine,” says Broadsight’s Patrick.

The big mistake that growing Internet companies make is continuing to focus on Free rather than trying to run their companies profitably, argues Cuban. That inevitably leads to trouble when someone with a better idea comes along and interest fades. That’s what’s happening to MySpace, which is now struggling to compete with Facebook. “When you succeed with Free, you are going to die by Free,” writes Cuban.

Now Anderson is maintaining that his own take on Free is actually a bit less controversial than the title of his book suggests. He readily points out the limitations of Free. “That everything should be free is idiotic,” he says. Free is a very powerful and motivating price for consumers, but it can’t be the only price, he argues. What Anderson says he is most excited about these days is the idea of the “freemium,” in which there’s a free version of a service for most people, and a paid, premium version that will appeal to a small group of people. This is already popular online with photo sharing sites such as Flickr, and Apple’s iPhone applications.

Of course, luring potential paying customers with free offers is hardly a new idea. It’s a time-tested marketing practice that has been used on the Internet for 10 years, and was well established long before the Internet was conceived of, says Hosanagar. As Anderson himself outlines in Free, the early owners of Jell-O had salesman give away free recipe books to homes to raise awareness about this new food product. So while Free is no doubt having a profound impact in the age of the Internet, the basic economics don’t seem to have changed much at all.

If the economy continues to unwind, many feel that companies—even the biggest, like Google—will have to abandon the practice of giving their products away gratis, or gradually go bust. If that happens, Anderson will be proven wrong—but you can’t accuse him of not practising what he preaches. For now, at least, as long as you download it on the Internet, his book is indeed absolutely free.

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