How can everything be free? It sounds more like a political principle than a law of business, but certain analysts are convinced that most of the things we’re buying will one day cost nothing at all.
There are two aspects to the concept. The first is that extreme market competition is coming to all sectors, pushed by consumers who can always find the lowest price for a good, and that it’s going to drive the cost-to-consumer of all products down to the marginal cost of production - that is, how much it costs to make one more unit for sale. In digital fields, like software and music, that cost is already zero.
The second aspect is that the marginal cost of all physical products is also going to reduce to zero. Whilst the first precept is from a technology that’s already mature, this second precept is predicated on the growth of rapid prototyping machines, a technology that’s still in its infancy. Digital music being nearly free (on Spotify, say) is the product of easy access to information (everyone knows music is free on Spotify), so has already happened; but the physical element might be a long way down the line.
Author Nicholas Lovell is a major backer of the idea. In his recent book, The Curve, he argues that this drive to free is an opportunity for businesses that can adapt to it. He sees offering everything for free as component of a wider pricing strategy - where you differentiate products primarily by the price the consumer is willing to pay for them, not by some inherent value. So you give away your music for free with an honesty box on hand, but allow people to pay for it if they wish, like Radiohead did with their In Rainbows album. You also make (more expensive) physical versions, and even more expensive limited edition versions, where the artificial scarcity increases the perceived value even more, like Trent Reznor did with Ghosts I-IV. And then you tour and sell t-shirts and so on, and produce a myriad of differentiated products which your fans can pick and mix.
Lovell himself was so enamoured of the concept that he persuaded his publisher, Penguin, to follow the model. He released a free short eBook of the Curve - called Ten Ways to Make Money In A Free World - as well as offering extras like a poster that summarised all the concepts of the book, which could be downloaded for free or bought for £25-100. He also allowed readers to buy premium price goods, including a lunch with him for £300, a pay-what-you-want consultation or talk, and a masterclass with him for £10,000.
I asked Lovell what the uptake was like. He dodges questions about the uptake of the book itself adroitly, but he can claim to be making money from the experiment. “I sold quite a lot of those speaking gigs; I haven’t sold any masterclasses yet.” Not that the latter’s a huge problem for him; taking a hint from Dan Ariely’s experiments with anchoring, he charged £10,000 for a masterclass, to introduce a psychological anchor point so that people have a positively-skewed idea of value for the lower tiers. Apparently, that’s working for him on the mid-priced talks, even if he’s wary of talking about the other offerings.
Of course, certain industries have already been heavily disrupted by free content. Good quality original writing, photography, art and music are available for free on Amazon, Flickr, DeviantArt and Soundcloud, amongst others. Piracy is another huge source of ‘free’ content.
Nicholas argues that its still worth producing this content - as long as you have a plan for monetising it. “Never write for free for no purpose; I totally agree with that. But writing for free is absolutely a core part of my strategy. It’s not just reputation, but the right to talk to people again. I write on a blog to earn an e-mail address. Or to get a follow-up. Or a Facebook Like. And these are the currencies I trade in.” For him, then, selling at free is financial alchemy, a way to convert the lead of social currency into the gold of hard cash - eventually.
The root of that idea comes originally from two Wired alumni. Wired Founder Chris Anderson talked of the Long Tail, the effect that infinite virtual shelfspace would have on product sales. This created two groups of winners and one class of losers. The winners were aggregators like iTunes and Amazon who would get lots of stuff to sell to lots of customers, as well as the customers who would get a huge amount of stuff much more cheaply. They both won. But the creators lost out. As Lovell puts it, “The absolute classic example is the Encyclopedia Britannica, which was a 1.6 billion dollar a year business. And then Encarta came along and turned it into a 100 million dollar a year CD-ROM business. And then Wikipedia came along and turned them into a zero dollar a year business.” The excess supply of content is pushing the value to zero.
So Anderons’s colleague Kevin Kelly, the founding Editor of Wired, posited the idea of 1000 true fans, as a solution. He argued that finding a thousand people who will buy anything you sell is enough for a creator to live on for his entire career, something borne out by the boom in Kickstarter and other social funding operators. In application development (and gambling), these people are called ‘whales’. They may only make up a tiny percentage of any market - but they tend to make up a large percentage of sales by themselves.
Lovell wants his Curve to be the next step, a way to find customers or fans using free content, then to use them as evangelists and/or move them towards paying for your products. For Lovell, giving something away for nothing is a way of finding those true fans, the whales, the valuable consumers. Once you’ve found them, you keep giving them free content and reminding them of the higher tiers, and hope they keep buying.
Yet, whilst this works for digital content, all physical content becoming free is more of a leap of faith. With physical products, even if a product’s variable cost is balanced by a profit elsewhere, there still has to be money-making somewhere in that equation, surely? Even 3D printing still requires raw materials and power; and even ignoring the marginal cost, the fixed costs of assets (like the printer itself) still needs to be paid from time to time. Until self-replicating 3D printers that use trash for their material come along, physical objects will still cost more than zero to make. So the moment when 3D printing become as disruptive as the internet is probably still twenty years away - but Lovell does think it will happen.
“I am very aware of Bill Gate’s statement, that we tend to overestimate the impact of technology in the short term and underestimate it entirely in the long term. I think the arrival of the Internet is the most important transition since the Industrial Revolution. 3D printing won’t be quite as important to life as the Internet, but we don’t know exactly how.” Why buy a £50 Philippe Starck citrus squeezer from a store, when you can just download the template from the net and print it out at home for pennies?
As that day is coming, Lovell thinks the key thing now is to find what you can give away for free before your competitors do. In raw materials firms, for example, there’s no way the marginal price of extraction is ever going to drop to zero. Here, Lovell suggests starting an index of the global quality of your raw materials and giving that away for free. “You give away data and insights, so when people think about raw materials, they’ve heard of and trust your name, so they come to you.”
It’s the Prisoner’s Dilemma writ large; ‘if you don’t reduce your marginal profit to zero or below on the goods you can spread widest, your competitor will.’ It’s notable that Amazon, one of the largest firms in the digital world, already seems to be following this model - despite being shareholder-owned, it makes no profits on its core business, instead focussing on growing its audience, and making its profits from selling other products like server time. Google, similarly, gives away huge parts of its business for free, like Gmail, Drive and Chrome, to tie users to its platform, and make money off advertising to them.
So, no, not everything is going to be free. Many things will be - anything that costs nothing to replicate fundamentally, or any industry that always has new hungry workers joining it. But for things that aren’t inherently free or forced free by competitive markets, from Louis Vuitton handbags to the latest iGizmo, businesses are going need to work out what it is that they can give away for free. To find those freeloaders and turn them into superfans. And make consumers richer along the way.