“Innovation,“ in the broadest sense of the term, comes in different forms. Sure, there is product or technology innovation. But there is also process innovation, design innovation, organizational innovation, and business model innovation. It turns out that the latter—business model innovation—actually proves to be the most disruptive (if we want to talk about disruptive innovation). As Mark Johnson and colleagues conclude in a recent Harvard Business Review article :
Truly transformative businesses are never exclusively about the discovery and commercialization of a great technology. Their success comes from enveloping the new technology in an appropriate, powerful business model.
But not all business models are created equal: some prove to disrupt more than others. In his book The Silver Lining , Scott Anthony argues that companies should embrace low-cost products and services to connect with budget conscious customers and fend off attacks from competitors. He advises us to “learn to love the low end,“ referring to business models that target under-served customers with lower budgets. He writes:
There is a fortune at the bottom of the pyramid. Companies that follow the tenets of disruptive innovation can dramatically increase their chances of reaching that fortune. (p. 147)
Anthony then presents a framework for large corporations to innovate the low-end of the market, where disruptive innovation occurs most.
Chris Anderson, author of the best seller The Long Tail, explores the lowest of the low-end business models there is in his latest book, Free. After all, there’s nothing more disruptive than offering something for free. Anderson explains early in his book:
Today, we know that the most disruptive way to enter a market is to vaporize the economics of existing business models. Charge nothing for a product that the incumbents depend on for their profits. The world will beat a path to your door and you can then sell them something else. (p. 43)
“Vaporize”—that’s a good word to describe the effect free can have on markets. And throughout the book, Anderson show that free is not only disruptive, but also that there’s a fortune to be made.
The Free Lunch Revisited
The concept of free isn’t new, Anderson reminds us right from the outset. We get free samples of food a deli; or, credit cards offer us the first year of card use for free; or, we may get 33% more laundry detergent free in a promotional offer. We already know about free.
Or, consider the loss leader model, the classic example of which is the story of Gillette razor blades. The Gillette figured out that they can make more money selling blades to customers over their lifetimes than with a one-time sale of the razor itself. So the razor is practically given away, thereby creating a much more valuable market to sell blades to.
Anderson carefully details these and other kinds of free that have been around for over a hundred years. While some of this feels familiar and obvious, his examples are fascinating. And, as usually, Anderson does a great job at packaging and explaining his ideas for ready consumption by the reader. It’s eye-opening to learn about just how many different forms free can have.
Free At Last?
In the new economy wrought on by the online, digital world, we’re experiencing a new kind of free. It’s precisely this new type of free that is a central thesis of the book. Anderson writes:
It the atoms economy, which is to say most of the stuff around us, things tend to get more expensive over time. But in the bits economy, which is the online world, things get cheaper. The atoms economy is inflationary, while the bits economy is deflationary.
The twentieth century was primarily an atoms economy. The twentyfirst century will be equally a bits economy. Anything free in the atoms economy must be paid for by something else, which is why so much traditional free feels like bait and switch—it’s you paying, one way or another. But free in the bits economy can be really free, with money often taken out of the equation altogether. People are rightly suspicious of free in the atoms economy, and rightly trusting of free in the bits economy. Intuitively, they understand the difference between the two economies, and why free works so well online. (p. 12)
Online there’s no “paying later“ effect. There really is such a thing as a free lunch, or so it would seem.
Note that free isn’t just about advertising. On the contrary, Anderson explores a range of ways that products and services can be free without advertisements. Sure, advertising keeps a lot things free—from TV to web services. But there’s more to free in the new digital economy, as Anderson sees it.
A centerpiece of this new paradigm is the “freemium” business model. This model is becoming increasingly popular, particularly with web-based services, where the basic service is given away for free while charging for a premium service. Think Flickr, LinkedIn, and Skype.
The freemium model isn’t just about giving away free samples. It’s not like getting just enough chocolate or perfume or whatever the manufacturer is giving away for a single use. Instead, with digital products, you pretty much can get the whole thing.
More importantly, the ratios of usage are reversed compared to freebies in the physical world. Anderson calls this reversal the 5-percent rule: 5 percent of users support all the rest.
In the freemium model, that means for every user who pays for the premium version of the site, nineteen others get the basic free version. The reason this works is that the cost of serving the nineteen is close enough to zero to call it nothing. (p. 27)
And that’s the real crux of the matter: treating something that approaches zero cost as if it were free. Storage space on computers is so inexpensive, for instance, providers should just give it away, or so Anderson would claim. That’s why Google’s Gmail accounts, for one, offer nearly 8 gigabytes of space to save emails for free. (The cost per gigabyte is currently measured in cents—somewhere between $0.15 – $0.20 per gigabyte—and falling). Anticipate the cheap, the author advises us.
Anderson doesn’t consider any of this a passing trend. Instead, he views free as the way of the future, particularly for digital products:
In the digital realm you can try to keep free at bay with laws and locks, but eventually the force of economic gravity will win.
And this gravitational force can change entire industries. The newspaper and the music industries seem to be on the chopping block first. Others will follow.
Free Beer Tomorrow
In the end Anderson is a realist. He knows that somewhere, someone is paying for free services. In all of the models examined in his book, there is always someone funding it. There’s just a huge difference to previously models of free in how the costs are shared:
What’s changing, however, is that those costs are moving from the mostly “hidden“ (the small matter of the beer you must buy for that lunch) to the “distributed“ (somebody’s paying, but it’s probably not you; indeed, the costs may be so distributed that we individually don’t feel them at all.) (p. 217)
Consider Wikipedia. We all use it, and someone pays for it. Servers and electricity cost money, after all. Apart from a donation, your contribution to Wikipedia comes indirectly by supporting companies that support Wikipedia, like Sun or Google. So the costs get so distributed, they are essentially non-existent to a wide majority of the users of the service.
But Wait, There’s More
In Free, Anderson also debunks myths about Stewart Brand’s famous statement that “information wants to be free.” This is frequently misquoted and taken out of context. Brand never intended to imply that all content should simply be free. On the contrary, looking at what Brand originally said he implies the opposite:
On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.
The first part—about information wanting to be expensive—is all but completely left out of most popular discussions of free content in the digital world. Yet it has important implications, particularly for companies trying to compete with free services.
And while free models can certainly be disruptive, Anderson also reminds us that introducing a free product doesn’t necessarily make that given market collapse. Premium brands have known this for a long time. Quality, satisfaction, brand loyalty, trust, credibility—these are also reasons that people are willing to pay more money for a product.
Kevin Kelly also explores similar factors in an insightful posting entitled “Better Than Free.“  From his studies of the network economy, he identified eight types of qualities of products and services that trump free. He calls these “generatives,“ or attributes that must be grown and can’t be copied easily. Kelly’s generatives that are better than free are:
- Immediacy: Receiving products and services the moment they become available is something worth paying for. The opening night of a movie costs of lot more than a rental DVD of that same movie a year later.
- Personalization: Products that are custom made to your needs are generally worth more.
- Interpretation: Understanding information often comes at a price. As the old joke goes, the software may be free but the manual costs $10,000.
- Authenticity: Getting a certified original is worth paying for in many instances. People may be willing to pay for bug-free, reliable and warranted products, even though a comparable knock-off may be cheap or free.
- Accessibility: People are willing to pay for storage, access, and organization of their things, even in a completely free economy.
- Embodiment: The form in which a product or service is presented can make a big difference in its value. You may pay a considerable price to see your favorite band live although you own all of their music.
- Patronage: Some audiences may want to reward the work of artists, musicians, and authors, among others. Radiohead’s release of the album In Rainbows is one example. ArtistShare.com has based its entire business on this effect.
- Findability: Just because something is free doesn’t necessarily help people find it—in fact it may hinder people discovering it. Being found can be extremely valuable, as the folks in the SEO business are well aware.
While free can indeed vaporize markets, all hope is not lost. If the products you sell can be copied and re-distributed easily, Kelley would advise to start looking at one or more the about attributes as part your business model.
May I Have Your Attention, Please?
The twentieth century, Anderson argues, not only started to embrace the concept of free, it also saw the arrival of abundance. Everything from electronics to cars to information is now so abundant, we take it for granted. What’s more, the “Age of Abundance,” as Anderson calls it, has driven extraordinary social and economic change. Consider this example the author offers:
When I was a kid, hunger was one of the main problems of poverty in America. Today, it’s obesity. Something dramatic has changed in the world of agriculture in the past four decades—we got much better at growing food. A technology-driven revolution turned a scarce commodity into an abundant one. And in that story lie clues to what can happen when any major resource shifts from scarcity to abundance. (p. 45)
Citing Herbert Simon’s rule of economics, Anderson makes another key point in his book: “Every abundance creates a new scarcity.” This is the heart of “freeconomics,” as he affectionately calls it, and how we ultimately can find fortune with free. Namely, while treating the abundant things as if they are free, you must simultaneously find the resulting scarcity. That’s where the money is to be made.
In an information-rich world, the scarcity is attention. A person’s interest in a given matter is worth money. Attention, then, becomes the new currency. In this light, Anderson re-casts Stewart Brand’s quote (above) about information wanting to be free as such:
Abundant information wants to be free. Scarce information wants to be expensive. (p. 97)
Organizations looking to earn profits by providing information are advised to find the scarce information and capitalize on that.
The consequences of too much information are dire, results in a lack of focus and attention. Paul Hemp explores the relationship between attention and information overload in a recent Harvard Business Review article.  He writes:
So it’s a lot of stuff [i.e., information], but what precisely is the problem? Well, the chorus of whining (punctuated by my own discordant moans) apparently has some validity. Researchers say that the stress of not being able to process information as fast as it arrives, combined with the personal and social expectation that, say, you will answer every e-mail message, can deplete and demoralize you. Edward Hallowell, a psychiatrist and expert on attention-deficit disorders, argues that the modern workplace induces what he calls “attention deficit trait,” with characteristics similar to those of the genetically based disorder. Author Linda Stone, who coined the term “continuous partial attention” to describe the mental state of today’s knowledge workers, says she’s now noticing, get this, “e-mail apnea”: the unconscious suspension of regular and steady breathing when people tackle their e-mail.
There are even claims that the relentless cascade of information lowers people’s intelligence. A few years ago, a study commissioned by Hewlett-Packard reported that the IQ scores of knowledge workers distracted by e-mail and phone calls fell from their normal level by an average of 10 points, twice the decline recorded for those smoking marijuana, several commentators wryly noted.
This doesn’t mean you can turn off Outlook and smoke a joint at work. But it does underlie a scarcity in an information-rich environment: your attention.
Hemp goes on to present some interesting statistics from a survey on Intel employees to demonstrate just how distracted people can get from information overload. For instance, knowledge workers average nearly 20 hours a week managing email. They may also turn to email 50 to 100 times per day. Sadly, though, employees consider only one in three emails to be necessary.
By Anderson’s logic in Free, companies looking to innovate the information industry would be better served solving those customer problems rather than offering more information.
Overall, Free is a detailed look at forward-looking business models, particularly in online, information-rich contexts. But Anderson doesn’t just touch on digital products. He looks everything from free silverware to free DVRs to free bikes. His sidebars on these and other topics are quite compelling. For instance: How can air travel be free? How can a university education be free? How can a car be free? Get Free to find out. It’s quite fascinating.
Free is well written and well researched. As expected, Anderson carefully dissects the free business model with surgical precision. Discussions include everything from the history of free (chapter 3) to the psychology of free (chapter 4) to explanations of “freeconomics” (chapters 11-16). This book should prove to be of interest to a broad audience—not just MBA-types in marketing positions or folks deciding on product price points. It’s recommended for anyone who designs, creates, and sells products, online and offline.
Quotes From The Book
“Therein lies the paradox of Free: People are making a lot of money charging nothing.“ (p. 3)
“Twentieth-first-century Free is different from twentieth-century Free. Somewhere in the transition from atoms to bits, a phenomenon that we thought we understood was transformed.“Free“ become Free…The older critics, who had grown up with twentieth-century Free, were rightly suspicious: Surely “free“ is nothing of the sort—we all pay sooner or later. Not only is it not new, but it’s the oldest marketing gimmick in the book. When you hear “free,“ reach for your wallet. The younger critics had a different response: “Duh!“ This is the Google Generation, and they’ve grown up online simply assuming that everything digital is free.” (p. 5)
“It’s as if our brains were wired to raise a flag every time we’re confronted with a price. This is the “is it worth it?” flag. If you charge a price, any price, we are forced to ask ourselves if we really want to open our wallets. But if the price is zero, that flag never goes up and the decision just got easier.” (p. 59)
“So from a consumer’s perspective, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely difference business, one of clawing and scratching for every customer. The truth is that zero is one market and any other price is another. In many cases, that’s the difference between a great market and none at all” (p. 63)
“This is one of the negative implications of Free. People often don’t care as much about things they don’t pay for, and as a result they don’t think as much about how they consume them. Free can encourage gluttony, hoarding, thoughtless consumption, waste, guilt, and greed. We take stuff because it’s there, not necessarily because we want it. Charging a price, even a very low price, can encourage much more responsible behavior.” (p. 67)
“…Free is almost always a choice. If you don’t offer it explicitly, others will typically find a way to introduce it themselves. When the marginal cost of reproduction is zero, the barriers to Free are mostly psychological—fear of breaking the law, a sense of fairness, an individual’s calculation on the value of his or her time, perhaps a habit of paying or ignorance that a free version can be obtained. Sooner or later, most producers in the digital realm will find themselves competing with Free.“ (p. 72)
“The problem is a classic one in Free. It’s easier for the newcomers than for incumbents. That’s not just because the incumbents have a revenue stream that they’re in danger of cannibalizing. It’s also that they have a lot more users, and the costs of serving millions of customers can be astronomical.“ (p. 144)
“The way to compete with free is to move past the abundance to find the adjacent scarcity. If software is free, sell support. If phone calls are free, sell distant labor and talent that can be reached by those free calls (the Indian outsourcing model in a nutshell). If your skills are being turned into a commodity that can be done by software (hello, travel agents, stockbrokers, and realtors), then move upstream to more complicated problems that still require the human touch. Not only can you compete with Free in that instance, but the people who need these custom solutions are often the ones most willing to pay highly for them.“ (p. 231)
“Ten principles of abundance thinking:
- If it’s digital, sooner or later it’s going to be free.
- Atoms would like to be free, too, but they’re not so pushy about it.
- You can’t stop free.
- You can make money from free.
- Redefine your market.
- Round down. If something is heading to zero, free is just a matter of when, not if.
- Sooner or later you will compete with free.
- Embrace waste.
- Free make other things more valuable.
- Manage for abundance, not scarcity. “ (pp. 241-243)
 Mark W. Johnson, Clayton M. Christensen, Henning Kagermann, “Reinventing Your Business Model.” Harvard Business Review (Dec 2008).
 Scott Anthony, The Silvering Lining. Harvard Business Press, 2009.
 Kevin Kelly, “Better Than Free.“ Blog post part of The Technium (Jan 2008). http://www.kk.org/thetechnium/archives/2008/01/better_than_fre.php
 Paul Hemp, “Death by Information Overload.” Harvard Business Review (Sept 2009).