Tuesday, May 5, 2009

Chris Anderson on "Free" at SIIA NetGain

Chris Anderson of Wired magazine, and author of "The Long Tail", gave a fascinating talk today that is aligned with the contents of his latest book, "Free". He began by examining the ambiguity inherent in the English word "free", which can mean (among other things) either the same as "gratis" (i.e., no cost or charge) or can mean unrestricted or independent. (It's clear that sayings such as "information wants to be free" are really a pun on these two meanings, and beg many important questions.)

The key question Anderson asks in this talk is: what happens when key resources become so cheap as to be (almost) not worth measuring, when they become essentially free? The answer is that people (rightly) start "wasting" them. Thus the plummeting price of processing power (down 50% every 18 months) has led to the proliferation of personal computers that people didn't know they needed. Cheap storage (about $110 a TB today) makes a mockery of company policies that expect highly-paid professionals to take time out of their day to decide which documents to delete to meet disk quotas. Cheap bandwidth gave rise to mass media, first radio then TV, where the marginal cost of supplying an extra customer with prime-time, lowest common denominator entertainment is essentially $0. Even now, the cost to stream a Netflix movie is about 5 cents and falling.

Anderson made some interesting statements in the course of this talk which are worth quoting verbatim. Talking about how mammals are unusual in their nurturing attitude towards a small number of young, he states that "Nature wastes life in pursuit of a better life", i.e., the norm is for most of an upcoming generation to perish, while only a few survive and even fewer find better environments. Analogously, people "waste" bandwidth on YouTube, trying anything and everything, just because doing so is a cost-free activity, beyond the investment of time, energy, etc. Of course, survival (measured as popularity) is very highly skewed, but diversity ensures that pretty much every taste is catered for. For example, many 9-year olds would rather watch amateur stop-motion animations of Star Wars made by their friends than watch a conventional Star Wars movie on a plasma TV with surround sound. As Anderson says, "Relevance is the most important determiner of quality", not conventional production values.

The central axiom is the following: "In a competitive market, price falls to the marginal cost." This quote, from the French mathematician and economist Bertrand, has acquired new meaning in the world of the Web, where the marginal cost of any bit-based product is close to $0. It follows (says Anderson) that, sooner or later, there will be a free version of everything.

How does business survive in a "free" world? One strategy is called "freemium". This inverts the 20th century marketing model of giving away a few free samples to drive sales volume. Instead, one gives a version of a product away to the majority to users to drive the adoption of a premium version by a minority of users.

How does this work? The assumption is the only 5% or so of users are really needed to cover your marginal cost. Going big via freemium ensures that this is 5% of a large number. You can then try and drive above 5% to pay back your fixed costs and get your business into the black. Sounds easy, doesn't it? Obviously, your sums have to be right, and adopting the strategy takes intestinal fortitude (as well as access to capital).

The premium version can be differentiated from the free one along any number of dimensions, e.g., it has time/effort saving features, it's limited by number of seats, it's only available to certain users (such as small companies), etc. The lesson from freemium in online gaming is that people will pay to save time, lower risk, enhance their status, and other inducements.

This is certainly a brave new world for the software and information industry, and one that will require many mental (and price) adjustments. But, if Anderson is right, the triumph of "free" is inevitable, in the sense that in future there will tend to be a free version of almost any given resource. I like his account, because it also allows for the other reality, which we live at Thomson Reuters. Namely that people who want more accurate legal research, more up-to-date financial quotes, and deeper analysis of scientific trends, will always be prepared to pay for the advantage so conveyed. The trick is to stay ahead of the value curve and provide must-have information that is both intelligible and actionable.

Nature may waste life, but life is still a zero-sum game.