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Beware of Freeconomics - ReadWriteWeb

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The argument that it cost Google nothing to develop and offer GMail is wrong. Likely it costs millions of dollars each year. The fact of the matter is that GMail was offered for free mostly because Google could afford it. This is a standard monopolistic tactic used to enter a new market - drive the price down (in this case to $0) and kill off the competition. Yahoo! was actually first to market and had a perfectly good product with a fair model: they offered a basic product for free and a premium product with more storage for a price. But when Google made its move, Yahoo! could not compete.

Highlighted by joel

the rise of free - a marketing strategy where digital products are given away

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However in this post we look at two issues that make this new economic model rather worrisome: monopolistic markets and complex transactions.

Highlighted by doobii

with costs of digital products rapidly dropping, it is best to give them away for free

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ensures customer commitment, because people would much rather get stuff for free than pay

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the trend was apparent, so Yahoo! had no choice but to add more storage and make it all free to stay competitive.

Highlighted by caweldude

The argument that it cost Google nothing to develop and offer GMail is wrong. Likely it costs millions of dollars each year.

Highlighted by theleftfielder

GMail was offered for free mostly because Google could afford it.

Highlighted by theleftfielder

monopolistic tactic used to enter a new market - drive the price down (in this case to $0) and kill off the competition.

Highlighted by theleftfielder

The fact of the matter is that GMail was offered for free mostly because Google could afford it. This is a standard monopolistic tactic used to enter a new market - drive the price down (in this case to $0) and kill off the competition.

Highlighted by caweldude

something given away for free in order to get the customer to pay for service - and the cost is recovered over time

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This is a case of something given away for free in order to get the customer to pay for service - and the cost is recovered over time.

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Sooner, rather than later, free might deliver a punch on quality

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If it's free, then why do we need to fix bugs? It's free - so this is good enough.

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Perhaps the biggest worry of free are startups.

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Not that long ago the concept of better and cheaper allowed startups to make the bet. But now that cheaper has been replaced with free, that axis is shut out.

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Perhaps the biggest worry of free are startups. To begin with, how do you compete with free? Suppose someone has a great idea for improving web mail. Entering the market is really difficult. A lot of inertia is now behind Google and in the new world of freeconomics, you can no longer compete on price. Not that long ago the concept of better and cheaper allowed startups to make the bet. But now that cheaper has been replaced with free, that axis is shut out.

Highlighted by joel

on 2008-02-29 by joel

Entrepreneurs just try to invent new communication ways.

How do you fund a startup that a priori can not charge the user?

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One might argue that we're now living in an ads-only monetization world, which of course we are, but things are not that simple.

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If the monetization is difficult and financial upside is unclear, entrepreneurs will think twice about jumping into the game.

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If the monetization is difficult and financial upside is unclear, entrepreneurs will think twice about jumping into the game.

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We are in an economic downturn and suddenly companies do not want to spend money on advertising

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So your business is immediately impacted, even though the demand for your product has not diminished.

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European airline that charges people only $20 for the ride. The rest of the money they make up on meals, drinks, priority boarding, credit card handling, advertising revenue, etc. This sounds incredibly complex for both the business and the customer.

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The Flickr free, which Fred Wilson calls freemium, is the model where the basic version is free and the premium one costs money. This model is very different from the GMail model where the entire product, with full features, is completely free.

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freemium, is the model where the basic version is free and the premium one costs money

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The downside of freeconomics is a monopolistic market, with barriers to entry, and little incentive to innovate. In addition the middle-man and transactional complexities are the other side effects of this new economic trend.

Highlighted by joel

Likewise, Flickr/Yahoo gives away free image space to attract 1) a huge community to which they can market stuff, 2) a massive volume of page views (i.e. ad revenue) based on user-generated content, and 3) a fantastic pool of tagged images that Yahoo can serve as search results.

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In this freeconomics world, startups still have a chance because startup costs are rock-bottom low. However, it is not enough to build a "killer app". They have to build a "killer honey pot" that uniquely attracts workers/customers that generate the content that both attracts page view "honey" and (virally) more workers/customers.

Is this bad or complex? Not really, just a different skillset. In this "honey pot" world, effective social architecture is more important than sheer quantity of application features. You don't charge (or charge much) for the "application." Instead, you harvest value out of the content/attention of your worker-bee customers.

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It is unbalanced not to mention things like Google Apps and Google Search. Google follows the freemium model on many of its products: Google Apps is competing directly with Zoho. The google search appliance has many large corporate competitors. I am sure there are others. In this day and age, a free product can compete by being better. Larger companies will buy the user base, and shoulder the cost of "free." Witness Google's acquisition of YouTube for $2 billion; even though it already had Google Video, which was just as free. This is how it's done.

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One of the biggest problems that I have with the "free" argument, which you've mentioned in your article, is the whole idea of marginal costs of zero, or virtually zero. Generally speaking (and I can't think of a good counter-example), the only way that you get to such low costs is through significant capital investment and mass production so that, over time, fixed costs are distributed over a huge volume of product.

Anything that's mass produced, or mass distributed, still requires a rather large up front investment. That takes deep pockets, which many smaller companies don't have. You've indicated this above in your comments about Gmail overpowering Yahoo Mail (although Hotmail is still around...?)

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