Why Free Is Big Business

'Free' is a word that makes marketing executives anxious because for a long time it either meant cheap and nasty or hippies in fields of mud.  Neither of which look good in a boardroom powerpoint.   But that's all changing, because in networked media - free is big business.  Firstly, it's vital to realise that we are not talking about joining a cult, flower-power or sticking the combination to the company safe on Digg.  That said, these days free does get shareholders reaching for their tie-dye.  Just think about Google.  The mega-corp is a big giver in the shape of a free search engine, video hosting, email...

...and now spreadsheets, calendars, word processing and much more.  But this isn't a charity exercise.  What comes back to Google is people's attention and that has allowed them to create advertising revenues worth $11bn dollars a year, equating to a stock market value bigger than Nike, Sony and Disney combined.

Here's Murdoch talking about Google and their free strategy: "What are they going to do next? They're devising a lot of computer applications which would directly challenge Microsoft, which they'll give away. So it's going to be very interesting. Four or five years ago we were all convinced Microsoft was going to take over the world. Now we're all convinced it's Google."

Or CraigList which started in 1995 as a free online forum for friends to share tips about happenings in San Francisco and morphed into one of the world's biggest online communities helping people find flats, furniture, cars ad jobs in 450 cities around the world.  All of which is free apart from small charges for job ads and estate agents listings - of which there are millions.  Talking about the service the Editor of The Guardian, Alan Rusbridger noted that, "The reason CraigsList is destroying the American newspaper industry is because it has a very unusual business model - it's free.  Which is a hard thing to beat."

But it's not all about advertising.  It turns out that free is a great way to get people's attention and then sell them other things.  The model, christened freemium by US VC Fred Wilson, works by offering a limited service for nothing in the hope that customers get hooked and start paying for other bells and whistles.  It's practically an industry standard for some types of online software providers.  And the reason is very simple.  If you aren't free, you aren't visible online, which these days is almost the same as not existing.

Another area where free is the only way to go is if you are trying to create some kind of network where the more people who join the better things get.  Skype knew this and gave away the product for free to successfully attract 100 million users and create a business for which eBay was happy to pay $4.1bn.

And if you think free is really a passing fad, then take a look at the music industry which has been grappling with the idea for years.  Originally the problem was thought to be that a few people were offering tools that made illegal pirating very easy.  Which was a no-brainer that involved letting the legal attack-dogs out of their kennels.  However, over time it has become apparent that what was actually happening was a shift in the marketplace driven by the hyper-efficient economics of the modern web - which in English translates as a whole generation now thinks music is free.  Note that doesn't mean to say that they won't pay to see their favourite bands, buy merchandise or even purchase good quality recordings of their favourite tracks.  And while big labeldom and the dead hand of the RIAA continues to try and force the genie back in the lamp, a few freesters (think Lily Allen) spotted the goalposts had moved and went on to create huge fan bases which have driven their fame and subsequent fortune.

Any talk of free on the web wouldn't be complete without mention of the Daddy of all free stuff models.  The Free Software Movement was established by Richard Stallman to try and keep software free, but famously free as in free speech not as in free beer.  However, for some that was all too abstract and the Open Source Movement was created.  But regardless of their differences, both were about keeping certain types of programming languages out of the hands of grasping corporate legal departments.  Not that that stopped large, profitable industries being built around them.  Red Hat is a very important player in the open source community but is also a corporation listed on the New York Stock Exchange.  It has embraced the world of free stuff and makes lots of money by offering development and support services.  (Strategy freaks should now head to see the Doc.)

The word 'free' still gets an emotional reaction from many executives for whom it sounds a bit like 'cash drain'.  However, these days it's important to get over that initial, stomach-churning sense of doom and start asking the question, "How can free make us money?"  Because if you aren't someone in your industry will.

Comments

[Will]

'The word 'free' still gets an emotional reaction from many executives for whom it sounds a bit like 'cash drain'. However, these days it's important to get over that initial, stomach-churning sense of doom and start asking the question, "How can free make us money?" Because if you aren't someone in your industry will.'

Brilliant, brilliant, brilliant.

Lovely writing - nice one James.

[James Cherkoff]

Thanks Will, always nice to know people read to the end ;-)

[Will]

Hey - I can't resist knowing the ending. :)