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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.
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If goods and services become more valuable...
...as they become more plentiful, and if they become cheaper as they become valuable, then the natural extension of this logic says that the most valuable things of all should be those that are ubiquitous and free.
Ubiquity drives increasing returns in the network economy. The question becomes, What is the most cost-effective way to achieve ubiquity? And the answer is: give things away. Make them free.
Indeed, we see many innovative companies in the new economy following the free. Microsoft gives away its Internet Explorer web browser. Netscape also gives away its browser, as well as its valuable source code. Qualcomm, which produces Eudora, the popular email program, is given away as freeware in order to sell upgraded versions. Thomson, the $8 billion-a-year publisher, is giving away its precious high-priced financial data to investors on the web. Some one million copies of McAfee's antivirus software are distributed free each month. And, of course, Sun passed Java out gratis, sending its stock up and launching a mini-industry of Java application developers.
Can you imagine a young executive in the 1940s telling the board that his latest idea is to give away the first 40 million copies of his only product? (Fifty years later that's what Netscape did.) He would not have lasted a New York minute.
But now, giving away a product is a tested, level-headed strategy that banks on the network's new rules. Because compounding network knowledge inverts prices, the marginal cost of an additional copy (intangible or tangible) is near zero. It cost Netscape $30 million to ship the first copy of Navigator out the door, but it cost them only $1 to ship the second one. Yet because each additional copy of Navigator sold increases the value of all the previous copies, and because the more value the copies accrue, the more desirable they become, it makes a weird kind of economic sense to give them away at first. Once the product's worth and indispensability is established, the company sells auxiliary services or upgrades, continuing its generosity to involve more customers in a virtuous circle.
One might argue that this frightening dynamic works only with software, since the marginal cost of an additional copy is already near zero (now that software can be distributed online). But "following the free" is a universal law. Hardware, when networked, also follows this mandate. Cellular phones are given away in order to sell cell phone services. We can expect DirecTV dishes to be given away for the same reasons. This principle applies to any object whose diminishing cost of replication is exceeded by the advantages of being plugged in.
As crackpot as it sounds, in the distant future nearly everything we make will (at least for a short while) be given away free--refrigerators, skis, laser projectors, clothes, you name it. This will only make sense when these items are pumped full of chips and network nodes, and thus capable of delivering network value.
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The task, then, is to create new things...
to send down the slide--in short, to invent items and services faster than they are commoditized.
This is easier to do in a network-based economy because the crisscrossing of ideas, the hyperlinking of relationships, the agility of alliances, and the nimble quickness with which new nodes are created all support the constant generation of new goods and services.
We will create artifacts and services rapidly, as if they were short-lived bubbles. Since we can't hold back a bubble's drift toward popping, we can only learn to make more bubbles, faster.
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The accelerating expansion of knowledge...
...and technology simultaneously pushes up the demand curve while pushing down the supply curve. One very potent force shifts both sides.
The effectiveness of technology in driving down prices is easy to appreciate. As stated at the beginning of this chapter, price drops have been going on for a while, although now it is accelerating. We know the outcome of this trend: lower prices everywhere. Consumers rejoice. But how are companies to make a profit in a world of constantly sinking prices? In the supply. Technology and knowledge are driving up demand faster than it is driving down prices. And demand, unlike prices, has no asymptote to limit it. The extent of human needs and desires is limited only by human imagination, which means, in practical terms, there is no limit.
Anything that can be replicated will have a price that will tend toward zero, or free. While the cost may never reach free, it approaches the free in a curve called an asymptote.
The quicker the price of transportation drops, the more quality and services and innovation are embedded into cars, planes, and trains, lifting the quality of the "wants" they satisfy.
Over time, any product is on a one-way trip over the cliff of inverted pricing and down the curve toward the free. As the network economy catches up to all manufactured items--from cell phones to sofas--they will all slide down this slope of decreasing price more rapidly than ever.
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Technology creates an opportunity for a demand...
...and then fills it.
This is a very different notion of supply and demand from the one diagrammed in the introductory chapters of any economics textbook. The traditional supply and demand curve conveys a simple lesson: As a resource is consumed, it becomes more expensive to produce. For instance, as gold is mined, the easy (cheap) nuggets are found first; but to mine little particles of gold out of 25 tons of rock requires a higher gold price to make the effort worthwhile. Therefore, the supply curve slopes up, with the potential supply increasing as the price goes up. In contrast, the traditional understanding of demand says that demand slacks off the more supply there is. If you have lobster on Monday, Tuesday, and Wednesday, you'll be less interested in having it again and more inclined to pay less for lobster on Thursday. Therefore, the demand curve slopes down, with prices dropping as a product becomes abundant.
In textbook economics the supply of products would only increase if their price went up; in the new economics the supply increases as price goes down.
In the new order, as the law of plentitude kicks in and the nearly free take over, both of these curves are turned upside down. Paul Krugman, an economist at MIT, says that you can reduce the entire idea of the network economy down to the observation that "in the Network Economy, supply curves slope down instead of up and demand curves slope up instead of down." The more a resource is used, the more demand there is for it. A similar inversion happens on the supply side. Because of compounded learning, the more we create something, the easier it becomes to create more of it. The classic textbook graph is inverted.
As the supply curve rockets upward exponentially and the demand curve plunges further, the new Supply/Demand Flip suggests the two curves will cross each other at lower and lower price points. We see this already as the prices of goods and services keep heading toward the free. But hidden between the curves is a momentous surprise. Supply and demand are no longer driven by resource scarcity and human desire. Now both are driven by one, single exploding force: technology.