Free!

Chris Anderson, editor-in-chief of Wired and author of The Long Tail, has a new book coming out soon, titled FREE. The major points of the book are summarized in this Wired article.

Here's the best paragraphs:

What [CalTech professor Carver Mead] understood is that a psychological switch should flip as things head toward zero. Even though they may never become entirely free, as the price drops there is great advantage to be had in treating them as if they were free. Not too cheap to meter, as Atomic Energy Commission chief Lewis Strauss said in a different context, but too cheap to matter. Indeed, the history of technological innovation has been marked by people spotting such price and performance trends and getting ahead of them.

From the consumer's perspective, though, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you're in an entirely different business, one of clawing and scratching for every customer. The psychology of "free" is powerful indeed, as any marketer will tell you.

This difference between cheap and free is what venture capitalist Josh Kopelman calls the "penny gap." People think demand is elastic and that volume falls in a straight line as price rises, but the truth is that zero is one market and any other price is another. In many cases, that's the difference between a great market and none at all.

In this context, free doesn't mean "no revenue" -- far from it:

To follow the money, you have to shift from a basic view of a market as a matching of two parties — buyers and sellers — to a broader sense of an ecosystem with many parties, only some of which exchange cash.

Anderson discusses some of the most common monetization models in his piece, and links to the Wired wiki article on how to make money around free content for more.

So what are the consequences of FREE?

On the one hand, free pricing means that content, services, and an increasing number of goods will reach much larger audiences than they would otherwise. When the only cost to a consumer is attention, the barrier to entry is reduced dramatically. When combined with the hugely efficient distribution system provided by the Internet, this allows new entrants to reach truly mass audiences in a flash.

On the other hand, a marginal revenue of zero means that producers are strongly pushed towards keeping their marginal costs close to zero as well. This argues for downward pressure on content, service, and goods production -- which could translate into lower pay and quality for written and recorded media, and increasingly for software and other online services. This dynamic has been in play for broadcast media for nearly half a century already -- broadcast television had very little incentive to make expensive improvements in the quality of their programming, since the dollars invested there could be better spent promoting and protecting their oligopoly .

I also wonder about a related phenomenon: Some newspapers have long maintained that charging a small fee for their product is necessary to encourage customer loyalty and trigger an "attention commitment" to their product. The distinction between "serious" papers and the broader world of "entertainment", "campus", or "tabloid" papers has often boiled down to this difference. The phenomenon is real, but it is becoming clear that it no longer makes good business sense.

addendum, 7-15-2009: Sharp-eyed readers have noticed that Mr. Anderson lifted some large chunks of his book's copy verbatim from the Wikipedia. This is as good a time as any to restate that gratis and libre are not the same thing! Content producers and distributors have a clear and ongoing responsibility to respect intellectual property customs and laws, even if the price charged to the consumer for the content is zero. Mr. Anderson's contention that he didn't have time to get the citation right doesn't hold water for me, and represents a glib dismissal of a serious shipping bug.