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Anticipate the cheap.
What would you do if your current offerings cost only one third what they cost today? They will someday soon, so create models that recognize this trend.
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Invest in the first copy.
That is the only one that will hurt. The second copy and all thereafter will head toward the free, but the first will become increasingly more expensive and capital intensive. Gordon Moore, of Moore's Law fame, posed a second law: that the costs of inventing chips (that are halving in cost every 18 months) is doubling every three to four years. The up-front investment for research, design, and process invention for all complex endeavors are commanding a larger share of the budget, while the capital costs of subsequent copies diminishes.
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Act as if your product or service is free.
Magazine publishers do this. The cover price on a magazine barely covers the cost of printing it, so publishers act as if they were giving it away (and some actually do). They make their money instead on advertising. Says pundit Esther Dyson, "The creator who immediately writes off the costs of developing content--as if it were valueless--is always going to win over the creator who can't figure out how to cover those costs." Memberships in serious discounters such as Cendant are also "as if free." Cendant "gives away" the merchandise very near the cost of manufacturing, as if the stuff were free. They make the bulk of their profits not from selling goods to its members--who get fantastic retail prices--but from selling $40 per year membership fees.
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What can you give away?
This is the most powerful question in this book. You can approach this question in two ways: What is the closest you can come to making something free, without actually pricing it at zero? Or, in a true gesture of enlightened generosity, you can figure out how to part with something very valuable for no monetary return at all. If either strategy is pursued with intelligence, the result will be the same. The network will magnify the value of the gift. But giving something away is not usually easy. It must be the right gift, given in the proper context. To figure out what to give away, consider these questions:
- Is the freebie more than a silly premium, like the toy in a cereal box? There is no power in the gift unless it is crucial to your business.
- What virtuous circle will this freebie circulate in? Is it the loop you most need to amplify?
- In the long run, the unbounded support of a customer is more valuable than a fixed amount of their money. How will you eventually capture the support of customers if there is initially no flow of money?
Every organization harbors at least one creation--or potential creation--that can be liberated into "freedom." This is often an idea with problems, particularly with its price: Should it be $69.50 per minute or $6.50 per box? The answer sometimes is: It should be free. Even if the idea is never actualized, my experience is that the very act of contemplating the free will inevitably illuminate all kinds of beneficial attributes that were never visible before. "Free" has long been a taboo price point. Perhaps because it has been forbidden, many low-hanging fruit are waiting to be plucked by giving the free serious consideration.
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Releasing incomplete "buggy" products is not...
cost-cutting desperation; it is the shrewdest way to complete a product when your customers are smarter than you are.
The protocommercial state and the triumph of the commons is in ascendance. It is no coincidence that increasing numbers of internet companies take themselves public before they are profitable. Investors are purchasing shares in a firm with protocommercial value. The old guard reads this as a signal of greed, speculation, and hype. But it also signals that many of the components of the gift economy--attention, community, standards, and shared intelligence--have to be in place before cold-cash commercialization can kick in. The gift economy is a rehearsal for the radical dynamics of the network economy.
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Tens of thousands of software programs...
...written for almost every imaginable use are available on the net for free. Called shareware, the model is simple. Download whatever software you want for free, try it out, and if you like it, send some money to the author. Dozens of entrepreneurs have made their million dollars selling goods by this protocommercial method. More and more, the triumph of the commons overrides orthodox business models.
As Stewart Brand says, the main event of the emerging World Wide Web is its current absence of a business model in the midst of astounding abundance. The gift economy is one way players in the net rehearse for a life of following the free and anticipating the cheap. This is also a way for entirely new business models to shake out. Furthermore the protocommercial stage is a way for innovation to fast-forward into hyperdrive. Temporarily unhinged from the constraints of having to make a profit by next quarter, the greater network can explore a universe of never-before-tried ideas. Some ideas will even survive the transplantation to a working business.
It's a rare (and foolish) software outfit these days that does not introduce its wares into the free economy as a beta version in some fashion. Fifty years ago the notion of releasing a product unfinished--with the intention that the users would help complete it--would have been considered either cowardly, cheap, or inept. But in the new regime, this precommercial stage is brave, prudent, and vital.
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Talk of generosity...
...of information that wants to be free, and of virtual communities is often dismissed by businesspeople as youthful new age idealism. It may be idealistic but it is also the only sane way to launch a commercial economy in the emerging space. "The web's lack of an obvious business model right now is actually its main event," says Stewart Brand, of the Global Business Network.
When a sector of the new economy passes through the protocommercial phase, it is the opposite of the "tragedy of the commons." The tragedy of the commons was that nobody took responsibility for maintaining the communal pastures that were the livelihood for the entire community. In the follow-the-free economy that seems to precede commercial activity on the net, everyone keeps the commons up because nobody is able to make a living from it on their own. Sophisticated software, as good as anything you can purchase, is written, debugged, supported, and revised for free in this "triumph of the commons."
The most popular software used to run web sites is called Apache. It is not sold by Netscape, or Microsoft, or anyone. Apache, which has 47% of the server market (Microsoft has 22% and Netscape 10%), was written (and is maintained) by a network of volunteers. It is given away free. Apache, which is used by the developers of such commercial sites as McDonald's, keeps getting better because the triumph of the commons rewards a completely open product: Anyone has access to Apache's software source code and can improve it. "If you give everyone source code, everyone becomes your engineer," says John Gage, chief scientist at Sun Microsystems.
The most popular operating system for web server workstations is not sold by anyone. It is a product called Linux, a Unix-compatible program that was originally written by Linus Torvalds, and given away for free. In the manner of building medieval cathedrals, hundreds of software engineers volunteer their time and expertise to refine and improve Linux, and to keep it free. Beside Apache and Linux, there are many other free software suites, such as Perl and X-Windows, maintained by a network of programmers. The engineers don't get paid in money; rather they get better tools than they can buy, tools that can be easily tweaked by them for maximum performance, tools superior to what they can make alone, and tools that increase in network value, since they are given away.
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But the migration from ad hoc use...
... to commercialization cannot be rushed. To reach ubiquity you need to pass through sharing.
Increasingly we see technologies pass through a protocommercial stage. Huge numbers of people, exerting millions of hours of collective effort, will jointly craft hundreds of thousands of creations, but without the exchange of money. An entire society following the free! Author Lewis Hyde long ago called this arrangement a gift economy. The central task in a gift economy is to keep the gifts moving. By social debt, barter, and pure charity, gifts circulate and generate happiness and wealth.
The early internet and the early web sported amazingly robust gift economies. Text and expertise (FAQs, for example) and services (page designs) were swapped, shared generously, or donated outright. Information was bartered, content was given away, code was exchanged. For a long while the gift economy was the only way to acquire things online. In the first 1,000 days of the web's life, several hundred thousand webmasters created over 450,000 web sites, thousands of virtual communities, and 150 million pages of intellectual property, primarily for free. And these protocommercial sites were visited by 30 million people around the world, with 50% of them visiting daily, staying for an average of 10 minutes per day. This is a raging success by almost any measure you'd want to use. No other emerging media in the past experienced such glory so early in its growth.
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Another way to view this effect...
...is in terms of attention: The only factor becoming scarce in a world of abundance is human attention.
As Nobel-winning economist Herbert Simon puts it: "What information consumes is rather obvious: It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention." Each human has an absolute limit of 24 hours per day to provide attention to the millions of innovations and opportunities thrown up by the economy. Giving stuff away captures human attention, or mind share, which then leads to market share.
Following the free also works in the other direction. If one way to increase product value is to make products free, then many things now free may contain potential value not yet perceived. We can anticipate the eruption of new wealth on the frontier by tracking down the free.
In the web's early days, the first indexes to this uncharted territory were written by students and given away. The indexes helped people focus their attention on a few sites out of the thousands available. Webmasters, hoping to draw attention to their sites, aided the indexers' efforts. Because they were free, indexes became ubiquitous. Their ubiquity quickly made them valuable (and their stockholders rich) and enabled many other web services to flourish.
What is free now that may later lead to extreme value? Where today is generosity preceding wealth? A short list of online candidates would be digesters, guides, catalogers, FAQs, remote live cameras, front page web splashes, and numerous bots. Free for now, each of these will someday have profitable companies built around them selling auxiliary services. Digesting, guiding and cataloging are not fringe functions, either. In the industrial age, a digest, Reader's Digest, was the world's most widely read magazine; a guide, TV Guide, was more profitable than the three major networks it guided viewers to; and a catalog of answers, the Encyclopaedia Britannica, began as a compendium of articles written by amateurs--something like online FAQs (Frequently Asked Questions).
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The natural question is how companies...
... are to survive in a world of such generosity? Three points will help.
First, think of "free" as a design goal for pricing. There is a drive toward the free--the asymptotic free--that, even if not reached, makes the system behave as if it has been reached. A very cheap rate can have an effect equivalent to being outright free.
Second, pricing a core product as free positions other services to be expensive. Thus, Sun gives Java away to help sell servers, and Netscape hands out consumer browsers to help sell commercial server software.
Third, and most important, following the free is a way to rehearse a service's or a good's eventual fall to free. You structure your business as if the thing that you are creating is free in anticipation of where its price is going. Thus, while Sega game consoles are not free to consumers, they are sold as loss leaders to accelerate their journey toward their eventual destiny--to be given away in a network economy.