4: FOLLOW THE FREE

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.