The Economics of Free
Last week when Ratan Tata unveiled the 1 lakh Rupee Nano, the world gasped. When everyone expected a tinny little contraption that would be nothing more than a modified autorickshaw, the Nano is now being touted as the one that could flip the auto industry upside down. But wait, if you thought the Nano was cheap, wait till you hear what Shai Agassi is doing. His Project Better Place is about building a low cost electric car and giving it away free, hoping to make money from selling electricity to run the car.
Don’t laugh, at current oil prices the cost of the average used car in Europe is cheaper than the cost of gasoline to drive it for a year. Shai thinks his project can be built around famed business model that razor blade companies have used for decades. Give the razor away for free and the price of blades should earn enough.
It’s not just Shai Agassi who is thinking free. Wired’s Chris “Long Tail” Anderson is in the midst of writing a book on how free will change the world. New words like Freemium will soon enter boardrooms as businesses start to look at giving things away for free and then find ways to make profits.
Chris Anderson has many examples of how free works. Historically media has always been free, newspapers and magazines were given away free or at a notional cost, hoping to gain readers, to then earn money through advertising. Ryan Air, and many new European airlines, now sell tickets for as little as 10$ and yet make healthy profits. By redefining what business they’re in. They’re not selling seats, they’re selling transportation. They sell hotel and rental car reservations to passengers. They sell tourists to the smaller cities the carriers serve (the payment is in the form of the huge discounts they get on landing fees). They sell cargo shipment to the companies that put packages in the hold (which is why these carriers tend to charge extra for baggage). They even make money off the food and drink they sell on board.
Kevin Kelly in his seminal 1998 book ‘New Rules For the New Economy’ has devoted an entire chapter Follow The Free, where he outlines how many things that cost money to produce could actually be given away free. He says “Because prices move inexorably toward the free, the best move in the network economy is to anticipate this cheapness.”
Some of the biggest viral hits of recent times subvert the 90-10 rule of media versus production, and using free media placements on sites like YouTube to get their messages across for free. Ideas like Still Free and Diesel Heidies took advantage of cheapness of the network economy to become sensations. Here is a list of some 60 sites that can help you seed a viral video media plan for free. There are hundreds more out there that the econsultant list does not mention.
Brands like Audi have started running TV channels online since the cost of doing so has become free or almost negligible. Many smaller brands are using the net economy to reach out to larger audiences.
As we move more aggressively into a world where things relentlessly move towards free or low cost, there will be a premium on one thing. The ideas that will make these concepts stand out. In a world of a billion options, the ideas that make a few of them shine out will be the ones behind which many people will put their money.