FREE

Last week, Chris Anderson visited Bristol to talk about his new book, Free. I bought a pre-publication copy and what follows is my summary of the book.

This is not a review - for that, go here. For Malcolm Gladwell's slating of Free, go here

My opinion is that this is an important book because of its subject but does only half its job. It belies its journalistic origins and its argument runs out of coherence. The last forty of the 240 pages feel disjointed. This is what it says..

C21st Free different from C20th Free.

Latter about giving away products as short-term promotional gimmicks - Jell-O recipe books, Gillette razors - to encourage sales of underlying product - jelly, razor blades.

C21st Free - consequence of two laws - Moore's law in processing, storage & bandwidth; 1883 French mathematician Joseph Bertrand came up with Bertrand's Competition Law - In a competitive market, price falls to the marginal cost. Online where information is a commodity and goods and services can be easily copied, this law plays out to ultimate extent.

Moore's Law coined for processing. Also applies to storage & bandwidth. And it's processing which develops the slowest. Gordon Moore didn't coin the law. It was the work of Caltech professor Carver Mead.

"Never in the course of human history have the primary inputs to an industrial economy fallen in price so fast and for so long. This is the engine behind the new Free, the one that goes beyond a marketing gimmick or a cross-subsidy. In a world where prices always seem to go up, the cost of anything built on these three technologies will always go down. And keep going down, until it is as close to zero as possible."

Just as the computer industry took decades to understand the implications of Moore's Law, it will take decades more to understand the compounded consequences of Internet's connecting processing to bandwidth and storage. In that period, Anderson claims, the technologist's job not to figure out what technology is good for. It is to make technology so cheap, easy to use and ubiquitous that anybody can use it. We, the users, will figure out what to do with it because each of us is different. That seems to contradict his quote from Paul Graham - "Build something people want."

Stewart Brand

"on the one hand information wants to be expensive, because it's so valuable. The right informatin in the right place just changes your life. Oon the other hand, information wants to be free, because the cost of gettingit out is getting lower and lower all the time, So have these two fighting against each other."

Anderson claims this is the most important sentence of internet economy - it establishes economic link between technology and ideas. Moore's Law about physical machinery - but information is weightless commodity on which that machinery acts.

In the short term, the result of Free is destruction of traditional structures -

• Jeff Zucker, head of NBC Universal, said TV industry is terrified of "trading analog dollars for digital pennies."
• Craigslist has taken $30bn out of stock valuation of newspapers.
• Encyclopedia Britannica. When Encarta came along, it made $100million but shrank the market by $600million. Wikipedia means that in 2009 Microsoft killed Encarta.

Ultimately, Free is disruptive but leaves behind more efficient markets.

Paradoxes of Free most visible in music.

• In China, 95% of music is pirated. China Mobile reported a billion dollars of music revenue. MAnd In US, music revenues fell 15% 2008 and bottom nowhere in sight. Yet more bands making more music than ever before
• 2008 iTunes added 4million tracks, the equivalent of 400,000 albums.

Free & Advertising

Nature of advertising different online.

Old broadcast model - annoy 90% of audience not interested in your product to reach the 10% who might be.

Google model - use software to show the ad to people only for whom it's relevant

The six reasons for the end of paid content

1. Supply & Demand - supply has mushroomed but demand has not. Millions of Facebook pages all created with no expectation of pay
2. Loss of physical form - as content moved from atoms to bits, it became intangible even abstract
3. Ease of Access - easier to download content than it is to find it and buy it in stores
4. Shift to ad-supported content - habits set on Web carry over into daily life. If content is free online, why shouldn't it be free elsewhere?
5. Computer industry wants content to be free - Apple makes money selling iPods, not music files.
6. Generation Free - under30s have digital economics hard-wired in.

Gaming a petri dish for Free, and the industry to watch for innovative new business models. Some of the business models thrown up by the gaming industry:-

• selling virtual assets - World Of Warcraft gold
• subscriptions - club penguin
• advertising - in game advertising
• real estate - second life
• merchandise - webkinz

Why does Google default to free? Because it's the biggest way to reach the biggest possible audience and achieve mass adoption

This is Eric Schmidt's "Max Strategy". The result is a corporation that makes more profit than all airlines and car companies combined.

Companies lose money with most people and make it back with a relative few. By adopting the max strategy, they get to a point where that relative few is thousands or millions of people. That's the case if they are the market leader. And if they're not? "making money around Free when you don't have millions of users (and sometimes when you do) is a matter of creative thinking and constant experimentation."

The internet business model pioneered by e.g. Google had four steps:

1. Have great idea
2. Raise funds to bring it to market, ideally for free to reach largest possible audience
3. If it proves popular, raise more funds to scale it up
4. Repeat until you get bought by a bigger company

now 2 to 4 are no longer available, web startups have to do the unthinkable - come up with a business model that brings in money while they're still young.

The principle of a niche premium offering on top of the free material is called freemium, a phrase Anderson attributes to NYC VC Fred Wilson - paid version of free service. Wilson denies coining the phrase.

Anderson's own experience with open source software/hardware suggests model is

1. build community around free info and advice on particular topic
2. with community's help, design some products that people want and return favour by making those products free in raw form
3. let those with more money than time/skill/risk tolerance pay for more polished version of those products
4. do it again and again, building 40% profit margin into the products to pay the bills

VC Josh Kopelmann First Round Capital - the penny gap - the biggest gap in any venture is that between a service that is free and one that costs a penny. Free forsakes direct revenues but grants possiblity of mass sampling. A free product can go viral, paid can't. Zero is one market, anything else is another.

The Ten Principles Of Abundance Thinking

1. if it's digital, sooner or later they're going to be free
2. atoms wuld like to be free but they're not so pushy about it
3. you can't stop Free
4. you can make money from Free
5. Redefine your market
6. Round down
7. sooner or later you will compete with Free
8. Embrace waste
9. Free makes other things more valuable
10. manage for abundance not scarcity