Free: The Future of a Radical Price by Chris Anderson

Free (Hyperion, 2009) continues the line of thought Chris Anderson developed in The Long Tail. As in his previous book, Anderson approaches digital markets from an economic perspective. While his language isn’t always crystal-clear (don’t read his book before bed), his reasoning is sound and informed.

In the digital era, technological advancement has driven the costs of the inputs of production—primarily bandwidth, processing power, and storage space—down to virtually zero. The challenges this presents are primarily psychological: we need to stop thinking in terms scarcity and start thinking in terms of abundance.

Like Clay Shirky does in Cognitive Surplus, Anderson analyzes nonmonetary economies (but with more statistical data). In the Internet era, the primary currencies are attention and reputation: since consumers have only limited time, producers must compete for it. Twenty-first century business models will focus not on simply delivering a service but adding value for customers (see also Daniel Pink’s A Whole New Mind).

This applies not only to media companies but to manufacturers as well, since even physical goods have some sort of branding or intellectual property associated with them. Anderson examines the Chinese fashion market—where piracy is rampant—to illustrate how designer knock-offs actually drive demand for premium goods. In case study after case study, Anderson proves that free products create markets where there were none.

In his last chapter (pages 251-254) and in various sidebars, Anderson lists over fifty businesses that make money by offering free services. Anderson used to offer a free copy of his book on his website, and any aspiring entrepreneur would do well to read through it. In sum, there are three main business models a company can follow:
  1. Direct Cross-Subsidies: Higher-paying customers subsidize lower-paying ones. Think museum admissions—adults pay while children get in free. 
  2. The Three-Party Market: A third party subsidizes the cost of offering customers a product at reduced rates. This is the way the media industry operates: advertisers pay the costs of producing content that anyone can access. 
  3. Freemium: Some customers purchase a premium product while others try a basic version at no cost. This is the model most software—think QuickTime (bundled with OSX) versus QuickTime Pro ($29.99)—sells with.