Anderson is about to publish Free: The Past and Future of a Radical Price, the full treatment of a Feb. 2008 article in Wired about the "free" business model and how businesses must survive in a "free" economy. (The book is due in July.)
He recently authored an article in the Wall Street Journal titled, "The Economics of Giving It Away," on the same subject.
I spoke on the phone with Anderson about how the "free" business model applies to the tech sector.
ZDNet: What made you decide to write this book?
CA: It organically grew out of The Long Tail. The Long Tail was basically the notion that 20th century culture was determined by the distribution channels of the 20th century. Basically shelf space. We hadn't really internalized how the limits of shelf space were a bias of culture. With the Internet, we had a distribution of abundance. The only way you can have infinite shelf space is if the shelf space costs zero. It's really all driven by free. The Internet is a large country-sized economy where the default price is zero. That's kind of unprecedented. It was jaw-dropping that there was no economic model for free. How could that have happened?
ZDNet: You compare the dual business model to traditional media. Isn't it failing, though? What about Wired the magazine with fewer ad pages?
CA: In the digital world, there are two business models built around free: one is the media business model, the "Two-sided market," and "Freemium," which is based on the notion of different versions of a product. My WSJ article argued that the default model of "free" – the media model – is moving toward "Freemium."
ZDNet: How do you turn a reputation and popularity economy into one that pays?
CA: We have lots of different reputation metrics. Followers on Twitter, friends on Facebook, eBay star ratings, levels in online games, incoming links on the Web. Each one of those constitutes its own economy. There are massively parallel economies. Each is trying to find a conversion rate with economy. We've solved the link economy – the currency is pagerank and we convert that to appearing high in organic search which we convert to traffic which we convert to paid ads. Finding the conversion mechanism. Job Number One is to create a liquid reputation economy. Digg, Twitter, Facebook: Solved! Job Number Two? Find a conversion mechanism. Unsolved!
The exercise that Silicon Alley Insider went through on crowdsourcing, those were really creative.
ZDNet: What tech companies are most at risk right now?
CA: I have a chapter on Microsoft in the book. They've basically had the longest experience of competing with digital free of any company in the world. Bill Gates' original letter to hobbyists in the 1970s said "You should pay for software." Then the '80s they had to deal with all the application software bundled with computers – the WordPerfects of the world – then they had to compete with piracy in China, then compete with Netscape, then compete with open-source most recently, and they've figured how to do that. Now they'll have to compete with Netbooks and the fact that we don't need applications at all. I'm staring at my Netbook right now and I only have Google Chrome installed. It's running Ubuntu, I'm using Google Docs – this is the first computer I've owned that Microsoft didn't make a penny off of me. But I'm a consumer. The conclusion of the chapter is that you can't compete with free.
The market's divided -- there's a people who are price-sensitive and not terribly demanding in their software needs, and maybe that will go free. Then there's the enterprise – different set of needs – they're not paying for software, they're paying for support – a contract. They're not paying for software, they're paying for security. In a sense, Microsoft's in the risk-reduction business now.
ZDNet: Let's talk about Microsoft. Is a free Windows 7 possible?
CA: Yeah. This probably makes no sense on many levels, but here's an idea. Let's say Netbooks are a good idea – I think so. Let's say Windows 7 is actually appropriate for Netbooks – a big "if." Why not make the Netbook version of Windows 7 free? Match Ubuntu on pricing. How much money are you leaving on the table? Right now it’s a choice between XP – rock bottom, $20 – or Ubuntu. I'd rather not use XP, and for God's sake don’t make me use Vista. So I use Ubuntu. But half the stuff I want to do doesn't work. Historically, I'm a Windows user. I'm OK with Windows. [So] treat Netbooks the way you treat Chinese piracy. You don't love it but you recognize that the market exists. You'd rather them use your stuff than the other guys' stuff. I would make the Netbook version of Windows 7 free on the hope that people will still use Windows and find the limitations of Netbooks and when they do, they'll migrate up [to a paid version].
If you are a billionaire philanthropist named Bill Gates who cares a lot about the developing world and are worried about the OLPC, the best thing you can do is to make Netbooks as cheap and ubiquitous as possible. If Microsoft doesn't do it, may I humbly suggest that the Gates Foundation take a global license and donate it to the world. That's the point. It would be smart and sensible on a lot of dimensions and perhaps make Microsoft more money down the road.
ZDNet: You talk about innovation with regard to monetizing upstarts right away. So are companies that are already big and money-making at most risk, innovation-wise?
CA: It's hard to identify a software company that doesn't use Freemium in a way. (Editor's note -- At this point, the two of us think about what companies are exceptions. IBM? No. Cell phones manufacturers? No. We come up with none, short of automobile manufacturers.)
ZDNet: Is it just a matter of making payment a one-click "OpenID-style" affair, or is that too much a psychological barrier still?
CA: There's a flag that goes up in your head every time you see a price, the "is it worth it" flag. If you have that flag never go up, then yeah, that really lowers the barrier to entry. Micropayments are the classic worst-place to be. You get all the psychological barriers of price but none of the revenues. I think micropayments are generally a mistake, but in context, it doesn't seem like that big of a deal. A classic form is putting something on your cell phone bill. In games, the blurring of virtual and real currencies. They're the minority. In general, micropayments are more trouble than they're worth. They tend to slow participation. The accounting is a nightmare.
ZDNet: What's an advertiser to do in the "free" climate?
CA: This doesn't really affect the advertisers. The fact that CPMs are going down is a good thing for advertisers. The price for ads are going down – this is a great time for an advertiser. It's a crappy time to be running ads.
ZDNet: What about Wired, a printed magazine with an almost-independent Website in an industry with falling revenues? How do you cope?
CA: We have multiple revenue streams. We are an ad revenue company. We make it back in ads. We had a record year last year and we will not have one this year. Is this model cyclical or secular? We believe that advertising continues to be effective and our vehicles for them continue to be effective. We're not newspapers, we're not newsweeklies; we are glossy monthlies. We do 8,000 word articles with full-page photographs. We don't really compete with the Web the same way the book doesn't compete with the Web. We're going to have a record circulation this year.
This interview was conducted by ZDNet assistant editor Andrew Nusca. E-mail him.