BoingBoing points to a talk which Chris Anderson recently gave at Nokia. Chris' next book focuses on the notion of zero priced products and services: Free. While Chris gives a good talk (as one should expect), I feel that he is missing out a large aspect of economics which needs to be considered - even more so - when considering the zero price: externalities.
There are two aspects here. Firstly, there is always someone, somewhere making money. While it is apparently 'free' to read Wikipedia, every time you go there, someone makes money. The computer manufacturer? The bandwidth provider? Google via the ads in their search engine? The sites which the Wikipedia article links to? If someone is making money, someone else is paying. Guess who that person is.
Secondly, there are aspects of cost which are not clearly stated in direct monetary terms, even through the chain of third parties not involved directly in the transaction. We get our biodiesel delivered by a vehicle which may well have been constructed from a vendor using Brazilian rain forest in the creation of the metal products used in the manufacturing process. Chris mentions the impact of 'free' electricity: irrigation for vast desolations which could then be used to produce biodiesel. He doesn't mention the cost of exhausting those areas of land via the use of single crops, the environmental impact of the transportation of the fuel (in terms of vehicle manufacture, roads and fuel).
Chris states that Google introduced a gigabyte of free mail storage because they realised they could make money with that number. I'm not aware that Google is making money with GMail (of interest). In fact, there is another motivation behind introducing larger free web mail. Firstly, each user does not get the claimed amount of storage. Most will use far less, so it is a perception that is being marketed. If all GMail users uploaded a gigabyte of data the system would go down. Secondly, GMail is not winning in web mail, but due to the brand power Google has forced its competitors (most noticeably Yahoo! and Microsoft) to offer the same storage capacity for their users which are orders of magnitude more numerous.
Free-to-me is not the same as Free. Even Free-to-me is not Free-to-me. Ever tried to read Wikipedia without paying for electricity? Without paying for coffee? When you pick up all the 'free' cosmetics from your hotel room you are increasing the cost to all hotel guests.
In the example of airlines, what appears to be free (a 10 euro ticket) is not - it costs you your attention where upsell will occur (ever been pushed a visa card on an airline?).
I'm excited to see what Chris is going to put in his next book. I'm hoping that he will approach the topic in terms of the complete ecology implicit in every transaction rather than simply in terms of the cost to the end user as they reach for their wallet.
Valid concerns; it's good to see you raising them. Let's hope Chris's book does indeed address them.
Posted by: Sam Pablo Kuper | January 05, 2008 at 08:43 AM
I'm not sure what you mean when you say Google isn't making money on GMail. Every time I open an email there, very good, targeted ads are presented to me. I even click one of them from time to time. I guess there's some money to be earned there for Google.
Posted by: JX | January 07, 2008 at 05:43 AM
But Chris Anderson's point isn't that these things are COMPLETELY free to the end user, it's just that their cost is so low, they can be treated as free. Very fine, but important point. So yes, it costs me something to read Wikipedia in terms of electricity used, but the amount is so minuscule and the cost so small, it may as well be free. Same with Gmail from Google's perspective as storage costs are so low.
I like his argument, but it is 'obvious' to some extent. Definitely interested to see where he takes it.
Posted by: Paul Soldera | January 07, 2008 at 08:24 AM
JX - thanks for the comment. When I said 'making money' I guess I was really meaning, making a significant profit. The presence of ads indicates more that they are trying to make something out of it. You see plenty of ads on blogs with low readership - we can't conclude that each of these bloggers is 'making money'.
Posted by: Matthew Hurst | January 07, 2008 at 09:29 AM
Paul
I'm afraid to say that the 'so cheap we can call it free' attitude is very worrying. Think of this: using a gas powered lawn mower uses a tiny piece of fuel each time it can hardly have an impact on the environment, right? Now - how about a million lawn mowers? In addition, there is a difference between what it costs you in terms of you wallet and what the true cost is.
Posted by: Matthew Hurst | January 07, 2008 at 09:32 AM
Matthew, right I agree. The consequences of a small cost (monetary or environmentally) can have huge aggregate effects. But that's not really and argument Anderson is making - or debating (I am sure he would agree). He's just looking at it from a producer's perspective - when marginal cost falls to or tends to zero, you're better off - in an economic sense - treating the good as free to the consumer and finding other ways to generate revenue from the 'transaction' - Google ads in Gmail, concert tickets for bands, etc., etc.
Externalities are a society's concern, not a producer. Taxes and incentives that change the marginal cost of the good (like fuel taxes) can tackle these to some extent. Yeah I know, this doesn't always work. But then there are plenty of 'FREE' markets that have no negative externalities either. But I do get your point.
Posted by: Paul Soldera | January 07, 2008 at 10:35 AM
RE: GMail is not winning in web mail
Actually, I disagree with that. There's winning in terms of marketshare and there's winning on technical merit. As far as technical merit is concerned (and as an engineer I care about this very much), hats off to Google, they showed everyone how it should have been done to begin with and they continue doing so. They're the only free provider that doesn't barrage you with blinking ads and offers secure POP, IMAP and SMTP for free. And their UI doesn't suck.
Posted by: Dmitry | January 12, 2008 at 05:46 AM
RE: GMail is not winning in web mail
I also disagree with that, gmail has so many features like the best search, googledocs, download all attachments, view all images, using keys to navigate the interface, ..they are just the acme of innovation in web mail.
But, how really free is wikipedia .. is hardcore economics!
Posted by: Marios Perdiou | January 13, 2008 at 09:37 PM
Interesting post. Anderson missed a few fundamentals in The Long Tail as well, specifically with his Wikipedia / Britannica example (see my post on this from a few years ago at http://www.gbrandonthomas.com/2007/03/long-tail.html ). His ideas are fascinating, but he definitely needs to enhance is understanding of economic fundamentals...
Posted by: Brandon Thomas | January 24, 2008 at 12:23 PM
Sure there are associated costs with anything. But is it free of cost to you... Would the electricity be on to your computer anyway? So where is the cost to you that you are not already paying?
I have a service officezilla.com that I give away for "free" but it is not free in the sense that you have to move your fingers and mouse which burns calories therefore you must eat so it is not free because I do not come to your house and feed you to give you the energy to use it.
Posted by: George Scott | March 12, 2008 at 07:13 PM