Free is not a business model - Anthill Online

Free is not a business model

How to build your own media empire… on a budget [CHEAT SHEET]
nathan chan cover
Do you really need deep pockets to build your own media empire? Not according to FoundrMag editor Nathan Chan.   CLICK HERE >>
Free is not a business model

Listen to the post

Firstly – I’ll start by saying I think Chris Anderson is an incredibly clever guy. I thought his book ‘The Long Tail’ was and is the future of business.

But when it comes to ‘free’ he has got it wrong this time. As has Seth Godin and all the other ‘free’ converts.

As Malcolm Gladwell correctly points out, they are forgetting many of the fundamentals in business, by getting caught up in the stale newspaper argument, which in the new digital economy is easy, soft and will disappear.

The irony of this ‘newspaper’ argument is certainly lost in the broader economy. The non-digital economies are a lot bigger than newspapers and other beleaguered digital industries.

So why is ‘Free’ not a business model?

Quite simply, any business without a revenue-generation model won’t exist over time. We only need look at the dot-com bust of the late 1990s to see this reality.

It’s also much too easy to get caught up in the success of Google and others who ‘started free’ to build demand.

But many of the subsequent ‘Free’ offers – like YouTube, Facebook, MySpace, Flickr – are considered successful for the owners only because they sold to a business with a large chequebook – not because the business itself was financially successful.

The Google business model is not too dissimilar to that of Network TV – generate eyeballs, sell advertising. Nothing new here.

The real question in the so-called ‘Freeconomy‘ is how many businesses can be supported by the advertising sales model? Why the idea of ‘Free’ is being touted as new is beyond me.

Here’s what ‘Free’ really is: it’s part of the marketing mix.

It’s the 4th P: Promotion.

It always has been and always will be.

Anything a company gives away for free is a promotional tool to sell something. If these businesses who use the so called ‘free model’ fail to sell something, there are only two options for them as time passes:

  1. Go broke and run out of cash
  2. Get bought by large company who values what they have created, albeit ‘non-financial’

Whether it be Proctor & Gamble giving free shampoo in letter boxes in 1957 or Google giving free search and maps in 2009, it’s part of the mix to attract potential customers, who will be converted into ongoing revenue. It isn’t free.

Free is not a business model. Moreover, it’s sampling and promotion for associated revenue-generating activities. So to call it the future of business as ‘free’ is absolute folly.

Sure Anderson can argue that digital stuff is becoming so cheap it may as well be free – as per the transistor example he uses. But the thing that really costs money is building demand and infrastructure – the kind of stuff that’s really expensive.

The other point to consider is that just because some things that previously cost money (i.e. newspapers) are now available free online, doesn’t mean everything is heading down the free path.

Rather, it means that certain industries are dying – not that ‘paying’ will be a thing of the past. In fact, there are just as many examples of items that were once free and are now being charged for: education, toll roads, water, seeds.

The advice I’m giving here is simple.

No business can survive without revenue. Free, isn’t free, but a promotional expense, the fourth ‘P’. If your industry is getting flooded with free, it’s on its deathbed – look elsewhere. Industries die all the time when the revenue dries up, just like those trying to cope with the current digital conversion. Don’t assume you can build something awesome and give it away, relying on your ability to sell it (the business) or something associated later. Chances are you’ll run out of money before that.

The future of business isn’t free, and the idea isn’t new. It’s part of a complex marketing mix. And if you want to own a start-up to thrive, my advice is simple: have a price that isn’t all zeros.

Stephen Sammartino escaped his cubicle after 10 years marketing global brands. He has now founded two start-ups, recently launching Rentoid.com – the place to rent anything.

Photo: royblumenthal

Turn documents into data

Improve productivity and reduce costs with data capture software that can automatically and accurately convert forms and documents into business ready data. For a limited time purchase or rent an eligible Konica Minolta A3 MFP and receive a $500* voucher to get you started. *Ts and Cs apply  Discover how you can start saving now. Click here.

7 comments
Kevin Cox
Kevin Cox

Andersons genius comes from finding and promoting a good name for an idea. Read "Made to Stick" by Chip and Dan Heath - who also found a good name.

James Tuckerman
James Tuckerman

No change of stance. Once the cross-subsidy model infects an industry, it must change or die! Whahahahahahaaaa... gasp. People once paid for email software. Then ISPs began offering email software as the 'promotion'. Then Hotmail appeared, offering free email (no ISP strings attached) but with greater storage capacity as the upgrade - 'freemium model.' Then Google appeared and offered free storage (massive amounts of free storage) in return for ad placements - the 'cross-subsidy model'. This is happening in every industry (from music to magazines). Fortunately for magazines, we've been operating under a cross-subsidy model for years (Do you really think a magazine can be produced and sold for only $8.95 per unit?). Same models. New mediums.

Tim CInel
Tim CInel

This is funny - I was just reading an old issue with "FREE - the new business model" on the front cover. I guess Anthill has changed stance? To an extent I agree that businesses relying on advertising alone are going to find it harder (see Facebook, YouTube) But Freemium seems like a great model - look at 37signals. They released Ruby on Rails and offer free versions of most of their products. RememberTheMilk, FlickR other examples of successful freemium businesses. Freedom isn't free...

James Tuckerman
James Tuckerman

What Michael is describing is called the 'cross-subsidy' model. I see it as distinct from a 'promotion'. The rise in discussions around 'free' largely relates to new applications of this model or extensions of this model due to the falling costs of digital. One of the points Anderson makes is that as digital becomes closer and closer to free (as products/services start to near their marginal cost), manufacturers and service providers will need to find new ways to subsidize the cost of development. This is different to a 'promotion' (for example, the free information on this site is not a promotion, unless treated in its loosest definition - as a promotion to get you here to sell your attention to advertising agencies). Rather, one area of the business is subsidizing the other. Some more interesting examples might include... A free car wash that makes you complete market research surveys A free airline that offers gambling services A cinema that makes its money only from popcorn and coke Is the car-wash a promotion? Is the airline a promotion? Is the film a promotion? I guess it depends on how loosely we define the term. But coming from publishing, a complicated web of cross-subsidies that makes our books sometimes look like spaghetti, I prefer to see the world as 'cross-subsidies'. Call it semantics. But it makes more sense to me than viewing an entire revenue model as a promotion.

Michael Stone
Michael Stone

Nothing is black and white and different industries and companies have relied on varying degrees of the 'free' business model for a long time now. To emphasis you point that 'free' isn't new, each of these 'traditional' media types sit at different points in the continuum. 1. Television/Radop: Free to consumer, fully funded by advertising. 2. Newspaper: Relatively small cost to consumer, partially funded by advertising/classifieds. 3. Movies: Higher cost to consumer (vs newspaper), partially funded by product placements and in cinema advertising. 4. Books: Fully funded by consumer, no advertising. The two biggest questions that come out of this article are: 1. What are the consumer's expectations in terms of paying for the service and percieved value? The problem with venture capital is that it has allows too many internet business to offer 'free' services which destroys the consumer's willingness to pay irrespective of question 2. 2. Which is, how valuable do advertisers see the particular business/vertical/industry as a channel to market? TV still manages to dominate advertising spend despite being fundamentally unmeasureable (vs web or mobile) and in the words of Seth Godin, only works by 'interrupting' the consumer's entertainment.

John Allsopp
John Allsopp

ummm, I'm not paying to read this. So, it's, like, free. OK, so I think most of the criticism of Anderson's latest riff is at cross purposes to his argument. There are many business models other than advertising that support "free" stuff. Anderson is probably far more focussed on "freemium" than advertising, for instance, as a business model. http://www.longtail.com/the_long_tail/2008/09/the-three-kinds.html Why what Anderson has to say is worth considering, and why I'd argue it aint the same old same old, is that he, like Kevin Kelly in "Better Than Free" http://www.kk.org/thetechnium/archives/2008/01/better_than_fre.php is asking what are the implications for an economy when one of its central things of value, ideas and their digital expression through writing, music, cinema, software and more, are infinitely reproducible for effectively no cost. This really isn't the same economic reality as shampoo samples of the 1950s. I happen to be a big fan of Gladwell, and not so much of Anderson, or Godin, but in this instance, I think Gladwell either misses the general point of Anderson's argument, or is riffing on his own take of the whole issue. Anderson's work is not unique in its insight by any means, but he is considering issues that will not go away. john (BTW, I've considerable experience of this as an author, software developer, publisher and conference organizer, in all of which guises I've found giving stuff away a very effective part of successful business)

Geoff McDonald
Geoff McDonald

Hey Stephen, is this just semantics? Yeah, it's a new part of a business model. And, sure, it's a continuation of an age-old promotional strategy. When does one become the other? Geoff

Trackbacks

  1. [...] you’re still on the toilet, the debate continues. This was written by admin. Posted on Tuesday, July 14, 2009, at 5:02 am. Filed under Interesting [...]