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The Future of a Radical Price
By Chris Anderson
"Zero is not just another price," behavioral economist Dan Ariely reminds us. "Zero is an emotional hot button - a source of irrational excitement." When something is free, we perceive it as "immensely more valuable than it really is."
Throughout the 20th century, free was mostly a marketing gimmick, loss leader or cross-subsidy. In an on-line economy, however, the prices of more and more products and services actually are zooming toward zero. Like Wikipedia and MapQuest, Craigslist and Club Penguin.
In Free, Chris Anderson, the editor-in-chief of Wired magazine, explores the implications of this revolutionary development. A sequel to his best-seller The Long Tail, which described a marketplace enabled by the unlimited "shelf space" of the Internet and the near-zero marginal costs of digital distribution, Free delineates this new "force of economic gravity," based on the movement of bits rather than atoms. Making money around free, in a "truly competitive market," he argues, "will be the future of business."
Free is a work-in-progress. Anderson is at his best providing richly detailed examples of "freeconomics." He acknowledges, however, that we're better at scarcity thinking than abundance thinking - and that when users expect to get things gratis, designing a business is not easy. His promise to show entrepreneurs "how to use Free or compete with Free," alas, often gives way, in essence, to exhortation: "You'll have to figure it out." And he does not pay sufficient attention to the downside of "Econ. 000."
Anderson identifies "an entire ecosystem" of companies, not all of them Web-based, that make money by having one customer - or one product or service - subsidize another.
Just as publishers don't charge subscribers anything close to the actual cost of their magazines because they're selling readers to advertisers, the Dublin-based carrier Ryanair has prospered by deciding to be in the travel business as well as in the airline seat business. Though it costs $70 to fly a passenger from London to Barcelona, Ryanair charges only $20. It makes up the difference through surcharges for priority boarding, baggage, beverages and credit-card fees. Ryanair turns a profit by collecting a share of car rentals and hotel reservations booked through its Web site.
Better Place, Anderson claims, is "redefining the auto industry" by leasing electric cars for free - and charging for the power that keeps them on the road. As the gap between gas and electricity costs widens, executives believe they will make more and more money.
Profit margins for these companies, however, are very small. And their business models aren't applicable everywhere. Now that it's so easy to download songs, the music industry, Anderson admits, is in "terminal decline." He urges artists to give away their "albums" to win "reputational currency" among people "who may someday become paying customers in the form of concert attendees, T-shirt buyers or even - gasp - music buyers."
He may be right. But at the moment, record sales in the United States fell by 15 percent in 2008, "the bottom is nowhere in sight," and there aren't many performers who, like Radiohead and Prince, are thriving by giving away their music.
A true believer in market self-regulation, Anderson is unperturbed by the theft of music (and movies) by Internet pirates. When the marginal cost of reproduction approaches zero, he insists, piracy is inevitable. If the crime is not exactly "victimless," the costs to the rightful owner, involving lesser gain rather than loss, may not be all that high. And so, instead of fighting piracy, entertainers should embrace it as "a form of zero-cost marketing," which brings their work to the largest possible audience. According to Anderson, "it is up to them" to find ways to convert their celebrity into cash.
Economics, like evolution, "has little place for morality," Anderson indicates, because "the dismal science" describes what happens, not what should happen. But what about society and government? Can they - should they - do nothing to protect intellectual property? Anderson doesn't say.
And what about the social and cultural costs of "free"? With so many newspapers dead or on life support, investigative journalists have become an endangered species. Internet sites steal the news from newspapers and television and, even more often, they substitute opinion for information.
Reiterating his faith that the market will figure it out, Anderson asserts that there are no "hidden" costs in "freeconomics." Although salaries in the news business will surely shrink, he suggests, without elaborating, "leveraging the free" may become "the salvation" of professional journalism as "others use their skills to teach and organize amateurs to do a better job covering their own communities."
And then again, maybe not. Utterly unfettered markets don't always supply the answer - and often don't ask the right questions. Nor are we all that close to the "economy of abundance" Chris Anderson welcomes as the new 21st-century reality. Nonetheless, if you want to get a charge thinking about how to "monetize eyeballs," download the abridged audio book of Free - for free - and consider the costs and benefits of driving toward zero.n
The writer is the Thomas and Dorothy Litwin Professor of American Studies at Cornell University.