Why Do So Many People Freak Out When They See 'Free' As Part Of A Business Model?
from the divide-by-zero dept
A bunch of folks have been sending in a blog post by entrepreneur Hank Williams apparently attacking the concept of "free" and blaming venture capitalists, saying that they're overfunding a bunch of startups allowing them to give away stuff for free and distort the natural market. There's a lot of things that are incorrect in his analysis. Let's go through a few of them. He kicks it off by suggesting that it's "inherently impossible to start a small self-sustaining business," though there are numerous small online business owners who would disagree with him. It's not inherently impossible at all. In fact, I'd say it's rather common.He then claims "in the digital world, advertising, the only real revenue stream, cannot support a small digital business." This appears to be wrong on two counts. First, there are numerous small online businesses that are supported by advertising revenue. But, more importantly, the idea that advertising is "the only real revenue stream" is inherently wrong. Advertising certainly is one revenue stream -- and an important one at that -- but there are many business models where you can make money by leveraging "free" to make scarce goods more valuable. Advertising is one such business model (using "free" content to make someone's scarce attention more valuable), but it's hardly the only one.
Williams then yanks out the old line that "it is very hard to charge when your competition is free." That, of course, is ridiculous. It's the same thing as saying you can't compete. In a competitive market, prices will get pushed down to marginal cost, no matter what (driving out all profit), so businesses that survive innovate, in order to get an advantage above the marginal cost in order to profit. That doesn't change if the marginal cost is $0 or $10,000. The trick is merely in knowing what scarcity you can sell that can't easily be copied. If you're trying to sell something that is easily copied, then you're selling the wrong thing. You have no competitive advantage. That's not anyone's fault but the business owner. In fact, the only fault I'd pin on VC's is if they pushed their portfolio companies to go against these basic economics.
Finally, he says that a bunch of these companies embracing "free" need to die and then "with less "free" floating around, a more regular supply and demand dynamic can take hold." But that, too, is incorrect. The supply and demand curve includes a price of $0, and when the supply is infinite, the supply curve is flat at the $0 line. So, the proper supply and demand dynamic has taken hold: and it says the price should be free.
This isn't to pick on Williams, as others have made similar arguments in the past, and I'm always interested in understanding why people are so confused by this. In the end, I can only assume that it's a "divide by zero" problem. For most of history, it's been shown that people naturally have trouble understanding the concept of zero. We may think we do, but as soon as a zero enters an equation, people tend to freak out and assume a model is broken. Yet, if we trust the model and realize it's not broken -- good things start to happen. Many businesses have learned that they can embrace "free" not because of a bunch of VC funding, but because that's the natural economic state of the market, and it allows them to make many, many other things more valuable. The real business trick is in making sure those things that are made valuable are what you're selling.
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Filed Under: economics, free, venture capital, zero
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Is free really free?
The thing with proclaiming something "Free" is that it also inherits that the resources come with little or no cost.
I still find it hilarious that many companies think human capital is free.
Earlier today, I chuckled when I saw that the Army is allocating resources to create a phishing scam.. But does anyone look at the human cost involved in getting "Free Software" on a server, setting it up? At least the server is paid for, I guess.
So many times, people forget about those soft costs. Who is paying the salaries of the DB admin, webadmin, email admin for this experiment?
While I won't go so far as to write a letter to my congressman as Eric proposed, it still brings to the surface the fact that there are additional costs involved that many people overlook.
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You make absolutely no sense at all
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Re:
Here are two quotes specifically matching what Mike is saying:
"In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit."
"Marginal cost pricing is the principle that the market will, over time, cause goods to be sold at their marginal cost of production."
How about you explain where Mike is wrong. He looks spot on to me.
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Probably right. That's what venture capitalists do, after all. They fund companies kind of like college students make spaghetti -- test it by throwing it against the wall to see if it sticks.
Which is nice because it means at least he got one thing right.
For the rest of it, there are too many counter-examples to bother with.c
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Cost of "free"
You're quite right that human effort costs. In fact today human capital is likely to be the largest part of the cost of a business.
In fact a well-managed online startup with a free product is likely to have very high human capital costs because human capital (at the risk of misusing an other economic term) is not fungible. There are enormous differences in the value of one human over another. If you're a smart online startup you get the best people you possibly can, just about no matter what the cost.
However you're also reflecting Williams' error: Equating "free" with no revenue stream. You can develop a hefty revenue stream off a free good in a variety of ways. Advertising is one. Community building is another. Sales of auxillary goods is a third. I could probably list fourth, fifth, sixth, etc., and provide successful examples of all of them with more thought than I'm capable of this late at night.
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Re: Is free really free?
Not really. The cost to the end user is $0 but there will be costs, and these costs are covered by other revenue streams. Most people are well aware of the difference.
The great example of this is Red Hat. Their core product - their Linux distribution - is covered by the GPL, which means they have to give away the source code for free. Even so, there are hundreds of programmers, engineers - and yes - DB admins, web admins, email admins, offices, etc. that need to be paid.
Yet in Q4 this year they've posted revenue of $151 million. How? Because they don't depend on the free product for their revenue. They have built an empire around their auxiliary and support services.
It's the same with Google (no end user pays for their services unless they're using it for their own business). And the same for all of these new startups.
"Earlier today, I chuckled when I saw that the Army is allocating resources to create a phishing scam.. But does anyone look at the human cost involved in getting "Free Software" on a server, setting it up? At least the server is paid for, I guess."
Erm, what? It's a fake phishing scam. Nobody suggested that was means to be a zero-cost exercise. It was a security exercise intended to determine the tech security of the armed forces. Any reference to "free" was related to the language of the fake phishing scam itself.
"While I won't go so far as to write a letter to my congressman as Eric proposed, it still brings to the surface the fact that there are additional costs involved that many people overlook."
Yes there are, but it's totally irrelevant. As long as you have a solid business model, you will succeed in the marketplace whether you're giving something away or not. If your business has problems competing with that you either have to offer a) a product or service that's worth more than the free one or b) change your business model to compete on the "free" level. Crying about additional costs don't mean anything if you have a successful business next door that's built on the free model.
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Rambling
From my side, I find it interesting that your focusing on such small issues. If you roll promotional and part of your marketing budgets together and allocate say 10% to some sort of "free" promotional item, you'll have more success than they would have by themselves.
So fans love "Free", and would sit in line for a few days for "Free" if you do it right... :-)
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Several issues
"The trick is merely in knowing what scarcity you can sell that can't easily be copied. If you're trying to sell something that is easily copied, then you're selling the wrong thing. You have no competitive advantage."
Two things fuel Red Hat's success: knowledge of the Linux kernel and the operating system and applications built around it, and the time and energy necessary to make it useful for other businesses.
Another example of "free" and "knowledge equals economic power" is the matter of Spray replicas - Spray, Captain Joshua Slocum's boat for his around-the-world adventure - the basic details are available in his book "Sailing Alone Around The World", now available free from Project Gutenberg and cheaply from Dover, yet people are willing to spend up to several thousand dollars to buy plans from one of several individuals who have made something much more detailed from those basic details. Anyone could turn those details into a Spray replica - but most people don't have the time or training to do so. For them it's cheaper to make use of someone else's hard work, and reimburse them for the time and effort they took.
Every worthwhile business makes use of that trade-off, has done so from the beginning of human prehistory, and will do so even if they are Ferengi selling gold-pressed latinum.
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Free Isn't What It Used to Be
The problem with it NOW is that it has created a culture where the prevailing belief is that EVERYTHING should be free. 10 years ago, or even 5 years ago, the freemium model worked, but now new copycat products are launched virtually every day. If a company moves to a for-pay or freemium model from a free model, odds are the user base will just move on to the next free thing. Look at the number of people who say they rely on Twitter, yet also state if they had to pay for it, they'd move on to Pownce or Jaiku or whatever comes next.
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Re: Free Isn't What It Used to Be
What's new? The fact that the baseline price discussed in these cases are $0 is meaningless. To give your examples, we have Twitter (the current leader in its space) and competing websites. There are 2 questions here - does Twitter offer a service that is considered worth paying a subscription for and does it offer this service any better than its competitors. It sounds like the answer to both of these questions is no. So, if Twitter made an uncompetitive move (significant price rises), their competitors benefit. To be blunt, Twitter started as a free service, so to suddenly charge would be a bait-and-switch tactic that few subscribers would appreciate.
The real question you need to ask about any new service is whether or not they are offering a sustainable business model, regardless of whether their revenue comes from ads, subscriptions, auxiliary services or whatever. VCs don't always make the right move in this regard, but slating one type of model because some people don't know how to compete on the same level is wrong.
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SmugMug on free
http://blogs.smugmug.com/don/2008/04/04/freetards-ruining-the-web/
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Re: Re: Is free really free?
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Re:
I'm pretty sure I'm using the term correctly. Can you explain what's incorrect about it?
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Re: Free Isn't What It Used to Be
That's simply not true. The prevailing belief is that infinite goods should be free, not everything. And that makes economic sense. In the long run, infinite goods will be free.
10 years ago, or even 5 years ago, the freemium model worked, but now new copycat products are launched virtually every day. If a company moves to a for-pay or freemium model from a free model, odds are the user base will just move on to the next free thing.
Yes, if you don't have a good business model. But plenty of companies do. And the model is NOT just "freemium." That's one business model, and not necesarily the best.
Look at the number of people who say they rely on Twitter, yet also state if they had to pay for it, they'd move on to Pownce or Jaiku or whatever comes next.
That's totally besides the point because that would be charging for the wrong thing. You have to charge for what's scarce, not what's infinite.
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Here is why
And when you shove "free" you usuall imply "advertising", and advertising is just advertising for something that is not free, meaning something that generates more money than the cost of advertising.
So why bottom feed off advertising (which is capped at what ? around 6~ billion ?), when products are the real money ? To remind you, HP generates many times more money that all the Internet advertising combined. And so does Cisco. And Ford. And Sony.
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Interesting article
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You have redefined Marginal Cost Again
I have confronted you about marginal cost and your "redefinition" problem and you persist in being wrong.
Mike quote:
"In a competitive market, prices will get pushed down to marginal cost, no matter what (driving out all profit), so businesses that survive innovate, in order to get an advantage above the marginal cost in order to profit."
Wikipedia says that "... and over the longest run, all costs are marginal."
Quote from "http://www.econ.tcu.edu/biery/MICRO/PPT/mic-supply/tsld025.htm"
NORMAL PROFIT = implicit cost of entrepreneur
* the wage she would have earned working for someone else
* the rent and interest she would have earned leasing her property to another business instead of using it in her own
*implicit = there, but not officially identified in financial records.
So you can see that marginal cost over the longest run includes profits (or the implicit cost of the entrepreneur). You are just plain wrong in your "redefinition" of marginal cost to not include profits.
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Re: You have redefined Marginal Cost Again
Now, I'm no economist so I have to resort to Wiki as well, but this is what it says:
"In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit." (http://en.wikipedia.org/wiki/Marginal_cost)
That's what Mike's normally referring to, I believe. The cost for duplicating 1 unit of a digital file is not significantly different from producing 1 million. Therefore, it's an infinite good and the usual economies of scale related to physical, scarce goods don't apply. So, as per Mike's quote in your post, a business needs to innovate to leverage the non-infinite goods (and therefore earn the "normal profit" you linked to via other means).
Feel free to dispute this understanding or any of Mike's posts above but please at least refute the actual definition of marginal cost if nothing else...
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Re:
So one interesting statistic is that 9 Billion hours were spent in 2003 playing Solitare. People are starting to take notice of this free time and are finding ways to capitalize on it.
Consider REcaptcha, http://recaptcha.net/learnmore.html
and The ESP Game
http://www.espgame.org/
One of the most interesting videos I've seen about "free" was Luis Von Ahn's speech about Human Computation, at CMU. His research interest is in finding ways to get folks to work for free. Many times it just involves introducing the the work package as a game. Then the game is the game.
http://video.google.com/videoplay?docid=-8246463980976635143
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Re: You have redefined Marginal Cost Again
Err, so? Is that news? That doesn't say that the marginal cost is zero though. The marginal cost depends what is being produced. For some things that cost tends towards zero but for other things it doesn't. That's the difference between scarce and non-scarce goods. It's really not that complicated, some people just don't like reality.
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Mike: STOP sending out messages like this it's dangerous.
Secondly: STOP sending out messages like this!
The world is full of dumb people - just let them be.
The more people that understand the 'free' model can be a fantastic way of getting zillions of viewers for your product and charge for a more premium for a slightly better version (and thereby making your profits there!) - the more trouble it is for those of us who DO understand this model!
More trouble because: then if other people do the same.. then we have to re-innovate and re-invent ourselves and think of more clever and fiendish ways of making money.
I don't think anyone has pointed the *biggest* and *most* successful free product giveaway model - one that has made billions of $'s: Microsoft!!
This company, who you may not have heard of, gave away just about ALL their products and charged 30% of the market (for the SAME product that they gave away).
This company employs some of the cleverest people in the world - yes somehow it's easy peasy to get hold of bootleg copy of their software, install and away you go!
The same I would argue about Sony Playstation: get your Playstation chipped and *just* copy the damn games!!
Well... this my personal, unfounded on any factual basis, theory.
(Mind you: Nintendo have reinvented this model with their latest consoles over the past 2 years: where it's much harder to chip and then play games.)
So: please stop spreading this message: in fact, just delete your post and let the world be.
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FREE
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Re: You have redefined Marginal Cost Again
Huh? You show definitions of normal profit, but not marginal cost.
You are just plain wrong in your "redefinition" of marginal cost to not include profits.
I'm not wrong at all. Marginal cost does not include profit for the producer. It is merely the cost of producing one more good. You can try to include a small profit for the producer on top of marginal cost, but your own common sense should tell you why that wouldn't work. A smart competitor will merely drop his price all the way to marginal cost, undercutting the company that includes a profit margin, and use that to try to push the competitor out of business. And an even smarter entrepreneur will sell certain goods at marginal cost to better sell a complementary good that the competitor does not have or cannot easily get access to.
So, while I appreciate your attempts to keep me honest, so far we've repeatedly shown that you seem to be the one twisting the truth to do so.
Feel free to learn what marginal cost means before you try to debunk me. It'll make this conversation a lot more interesting. As it stands, all you've done is shown that you do not understand marginal cost at all. That doesn't help your argument and it wastes everyone else's time.
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Re: Cost of "free"
...
However you're also reflecting Williams' error: Equating "free" with no revenue stream. You can develop a hefty revenue stream off a free good in a variety of ways. Advertising is one. Community building is another. Sales of auxillary goods is a third. I could probably list fourth, fifth, sixth, etc., and provide successful examples of all of them with more thought than I'm capable of this late at night.i>
Good catch. Normally, I would have tried to tie this logic to a downstream value-added transaction, and usually am good at doing so.
The problem is when the business believes that "Free" truly leads to a dead-end of no additional revenue or value. But to look beyond the short-term single transaction, the business needs to look at lifecycle activities of their customer, and find ways to capitalize upon it.
For example- I've come to believe that Google isn't a search engine, it's really an advertising agency masquerading as a search engine... And very, very good at doing it. Don't believe me, look at revenue-generating activities. Google's value-add is email, news, YouTube, et cetera, all which create value and drive ads. Pure brilliance in my mind.
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Why?
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THIS IS INCORRECT: "prices will get pushed down to marginal cost, no matter what (driving out all profit)"
This profit will equal q*(p-i)/2, where q = quantity sold, p = price of units, i = marginal cost at production rate of 0.
In other words, the top triangle is consumer surplus, the bottom triangle is producer surplus.
This ties nicely into a theory of mine -- economists cling to classical assumptions because THEY follow those assumptions (while everyone else does not). But if every student in the world were taught economics for four years (as apparently most of you weren't), everyone would be an (amateur) economist, and those theories would match the data much better! Just think of all those efficiently allocated resources...
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Re: THIS IS INCORRECT: "prices will get pushed down to marginal cost, no matter what (driving out all profit)"
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Re: Re: THIS IS INCORRECT: "prices will get pushed down to marginal cost, no matter what (driving out all profit)"
Er, not for infinite goods. Which shows that the original statement was correct. Price will get pushed to marginal cost, driving out profit.
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Re: Re: Re: THIS IS INCORRECT: "prices will get pushed down to marginal cost, no matter what (driving out all profit)"
Your original statement from the post implies that this phenomenon occurs regardless of the marginal cost function (i.e. including the increasing marginal costs case), according to my interpretation.
If that wasn't the intention, we are on the same page.
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Free model
The "free" model is the future. And there is no distortion of the market. The market balances itself. So trying to restrain "free" models is an unnatural action that creates in itself an unbalance. When "free" comes into town, either you accept it or you die. It's a format invasion. It's a new way of business. Another example of a format invasion is IKEA. And today, most companies in the market do business like IKEA. But not all. There are niches. And again, is the market that will highlight these niches.
In conclusion, "free" is the model why we are all using internet today. Imagine google would charge for each search? Or for each time you access google maps? Free as already modelled our present and it will continue to dictate our future.
FCC
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I'll answer your question, Mike.
To me, the consumer, free means it costs me nothing to get. No purchases, strings, or surcharges (S&H).
To businesses, free means offer it to consumers, but make them pay for it via other means, such as other services, contracts, or advertisements.
In other words: Free is no longer a definition. It's now an infinite good.
Under no circumstances does a business give away free without finding some method to recoup the loss of the good. Whether this loss be made up with supporting services, advertising, or contract obligations.
This is why I get "freaked out" because I know, long term, I will be paying for the so-called "free" item regardless if the payment is advertisements, limited versions, or services.
A cost, Mike, that's now getting to the point that it's just no longer worth it.
Evident when it's clear customer service is no longer a business priority.
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Re: Re: Re: THIS IS INCORRECT: "prices will get pushed down to marginal cost, no matter what (driving out all profit)"
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Re: I'll answer your question, Mike.
Sure, that's what the business hope but it's not the case all the time. I'm sure there are many RedHat Linux Users that have never paid RedHat for support. For the informed Linux user, the web offers plenty of support without having to pay. Same thing with Canonical & their Ubuntu offering - I've used it for 3 years and haven't paid for support yet.
The only thing one could argue is that you're "paying" because of advertisement. But, it's still not costing you anything so it's still free to you.
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Re: Re: I'll answer your question, Mike.
The important thing to note here is that Linus Torvalds, the developer of Linux, didn't develop the OS from a business perspective.
It wasn't until businesses touched it did "free" go from a definition to an infinite product.
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Re: I'll answer your question, Mike.
This is not accurate. First of all, there's no "loss of the good" to recoup with an infinite good, because a copy costs nothing to make and no one loses anything.
Second, if you look at most business models that embrace "free" economics, they're not doing what you say they're doing: that is, they're not forcing those who get it to "pay" in some manner. In many cases a large majority of those who get the good don't pay in anyway. The idea is to attract the small percentage who are willing to pay for something else. So you don't mind the people who get it for free. You don't try to charge them for something. You're merely trying to use the infinite good to convince some small percentage to pay for something else.
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Re: Re: Re: Re: THIS IS INCORRECT: "prices will get pushed down to marginal cost, no matter what (driving out all profit)"
Huh? That's not accurate at all. An infinite good is defined by the facts, not by me declaring it so. I'm merely pointing out what is, not redefining anything.
Besides, if you think I got something wrong, why not point it out rather than just make an anonymous swipe at me that doesn't actually say anything?
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Re: Re: Cost of "free"
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Re: Re: I'll answer your question, Mike.
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Re: Re: Re: I'll answer your question, Mike.
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Wow- Predatory Pricing
Marginal cost does not include profit for the producer. It is merely the cost of producing one more good.
Sorry wrong.
A normal profit (not an excess or economic profit) is included in the marginal cost. You can yell and scream all you want but that is in the definition and day to day practice of working marginal cost analysis. The short term, medium term and long term analysis of costs include all the costs all of the time (but the percentages of costs to each other can sometimes vary in short vs long term scenarios). For an example, if you have a long term history of a 3% bad receivables cost, then you would have to include that 3% also as a cost in your short run analysis. The mistake that you and others here keep making is to just wish away the long term costs (..."in the longest run all costs are marginal") when doing short run analysis (the cost of making the next unit). You can't just make longterm risks (systemic and catastrophic and market, etc) and costs (including normal profits) go away in short run analysis because it is convenient for your theory. Many entrepreneurs underestimate on both costs and risk factors (as I can attest from my own business mistakes and battlescars).
Mike quote:
A smart competitor will merely drop his price all the way to marginal cost, undercutting the company that includes a profit margin, and use that to try to push the competitor out of business.
Wow - this is a doozy!
1. Using your wrong redefinition of "marginal cost=no profits" what you have done here is praise and endorse "predatory pricing" (look it up in Wikipedia).
2. You are encouraging companies to engage in an illegal activity. Granted you are safe because the hurdles are so high on the prosecution of this "illegal activity" but it certainly leaves a bad taste in my mouth when I read this.
3. In addition if you read up on predatory pricing you will find that it often backfires on the firm trying it because they misjudged their own or competitors strength or miscalculated barriers to entry. So you are not only recommending an illegal activity but one that has a relatively low success rate.
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Example of how
So many of the comments I see here remind me of the old days of "whining" from so many "vanquished to the back of the room" vendors that charged an unreasonable $30,000+ per seat for a custom Unix "high end" work station that because of costs, were only affordable to large companies. The little guy had virtually no chance of getting this high priced equipment and software unless they had a "rich uncle" to fund it.
I am not writing this to argue the "good or bad" about Bill Gates and Microsoft, or get into operating system wars. Quite frankly, this is irrelevant to the argument. When computing was NOT within reach of so many people, even small businesses, Mr. Gates had the goal of "a computer in every living room". (And he had nothing to do with hardware). Because that goal has become a worldwide reality, it is safe to say that this has changed the entire world, and probably forever. It has changed all business for the better, no matter the size. From the very affordable "Wintel" alliance, India and China are now "right next door". Without a "computer in every living room" being a reality, we would be STUCK with the digital world being only for the "big" and the "byte heads". I dare say that many of you would not even be able to respond to this blog, if a blog would even exist. Yes, dramatically lower pricing initiated by Microsoft and Intel has really had that much of an impact. Does anyone remember the $250,000 single seat CAD station in the 80's that now costs less than $5,000 including the PC and has more power?
I have a 20 year old software development company that was a struggling start-up in those early days. In 1987, software was so expensive, not to mention hardware. In my first professional job, our first "system" was a total cost of $28,500 for purchase, and over $5,000 for annual maintenance, PER COMPUTER! Now, because of lower costs, that same vendor now sells the product for $4,000 the first year and $1,650 per year. My company drove their pricing that low. The industry we serve "boomed" and quickly became a technology driven industry. High productivity, order accuracy, installation accuracy, literally everything changed for the better...for everyone! Where would our industry be at $28,500 for first year costs? The answer is still designing and ordering manually. Even with widely available business software; Word Perfect was over $700 per computer. Wow...$700+ for a blank blue screen! What would that be in today's dollars? What happened to Word Perfect? Microsoft introduced Word for $129.00 per seat. Wow...I could actually afford to buy multiple seats of a word processor. My employee productivity skyrocketed. What happened to the powerhouse Lotus 123 whom, like Word Perfect, had an amazing market dominance? Microsoft introduced Excel for $129.00, packed with features and the ability to load and save Lotus files. Now that was smart. Enough said. By the way, aren't these companies among the group of "whiners" along with the super expensive hardware vendors that sued Microsoft because they couldn't compete and keep their massive margins? What was so bad about so many more people having access to technology? No one can argue the results today.
Now for the "free" part. As you all know, Google purchased a product now called Google SketchUp for the sole purpose of creating 3D models for Google Earth in 3D. No, people would NOT have paid for such a program with such a purpose, so Google produced a free version with a few features removed to enhance the capabilities of Google Earth, and still maintained a "pay" version for a reasonable fee, SketchUp Pro. As an "offshoot" of SketchUp, some of the features were tailor made for our industry, and the number of people using SketchUp is enormous. In our industry, AutoDesk is the "big boy" and they haven't lost a single sale of AutoCAD to SketchUp. Why? Because someone using SketchUp for a primary tool would never have afforded a seat of AutoCAD, and some of the features of SketchUp actually enhance the "look" of the AutoCAD output. But now a design tool is in reach even for the tiny "one person startup" that wants to take a crack at starting a business. Affordable entrepreneurship produces great competition.
My company now has a new business model to provide menu driven data for SketchUp users and a market that was never available before SketchUp. Here is the potential for quite a nice revenue stream from a "free" product with such a large user base. Yes, our data will be available in 3D warehouse at no charge, but who wants to sift through over 2.5 million parts to find the right 3D part? Our menu system and add-on tools are free also, but the data is available at a very affordable price to cover over 2.5 million part numbers! The advantage is that we have an existing product line that provides a migration or "step up" of productivity and features from "free" all the way up to our very powerful, industry leading packages. The advantage is that the user is now in our format, not our competitors. They can take the SketchUp drawing all the way though to AutoCAD without losing a single attribute or piece of embedded data. Now everyone can "talk" in the common language of AutoCAD. Yes, we took the time to build that into all of our software. Our competitor can't do that, or won't, as they can't afford to. They are a "lumbering giant" that by head count, is more than 10 times our size. Our license counts are dramatically closer.
This "free" Google SketchUp just provided us a new revenue stream by providing tools and data that otherwise wouldn't be available, allows for a user upgrade path as their business grows, and forces our competitor to either step up to the plate or "hemorrhage" with financial loss. But isn't this competition? Can someone answer how this "free" is bad for us?
Sorry Twinrova, but there are no strings attached or surcharges, no shipping and handling, no service charges, no contracts, and no advertisements. Limited version? The only "limitation" is that the data and software are "free". Period. As a new business person, if you want the next step up of a menu system for rapid placement and dramatic productivity with fast access to over 75 industry manufacturers, we have a $249 data package; the same data that is available in the 3D warehouse for free, but a much better way to use it. But added only if the user wants it and/or needs it. By the way, the data is updated at least 12 times per year. This is very affordable for the one person start-up for so much benefit. Yes, there is even a step up from "free" with a very powerful pricing tool. There is even a step up to the top level with an incredibly powerful AutoCAD tool added to the industry's most powerful pricing tool in the industry specific format. A simple migration path, starting with "free", genuine "free", and building up with different levels of product the user can afford. And yes, with almost 9,000 current seats of software in use, we make a profit.
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Re: Re: I'll answer your question, Mike.
Agreed, however, there is a cost to distribute that good. In the case of digital copies, there's server/electricity/ISP costs. This is still considered "loss of good".
In many cases a large majority of those who get the good don't pay in anyway.
I believe this is where our breakdown occurs. What you're clearly defining is a customer doesn't have to open their wallet to obtain the "free" product.
Where I see the "payment" is what the consumer must do in order to obtain the "free" product. In the case of Techdirt, I must "pay" for the content I wish to read by having to deal with the ads by sponsors of the site, even if I never click the ad which is necessary for Techdirt to receive the revenue. This, to me, is a cost, regardless if it generates revenue or not. To you, the content I'm reading is free to me because I've not generated any revenue for Techdirt, merely sucking up resources someone has to pay.
In RedHat's example, their product must be free because it is not theirs to sell which is why I can go anywhere to obtain it. It is, by true definition, free to me. No ads. Nothing.
Can I go anywhere to obtain a FREE Smart Dossier?
You're merely trying to use the infinite good to convince some small percentage to pay for something else.
Translation: "You're merely trying to use the infinite good to convince some small percentage to pay for the free good in addition to generating revenue."
It is nearly impossible for a business to give away anything for free without the support of revenue from other means. To do so would mean a loss in profits and one step closer to no longer being a business.
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Re: Re: Re: I'll answer your question, Mike.
It's not cynicism. It's reality.
Let me clarify: "Buy one, get one free".
Does the consumer pay for the free one or not?
Answer carefully. ;)
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I'm glad you put that free in quotes.
It isn't free. It's free to use. Who do you think paid to give Sketchup to those who can use it for free? Hint: See those ads here on Techdirt? ;)
Ask Mike who pays for Techdirt so we can enjoy it for "free".
I believe I'm getting way to literal here because people can not distinguish the difference between a consumer and a business.
If one can't do this, then one will never understand my position. A business can not give away free without making up the cost elsewhere.
Without revenue, one doesn't have a business.
One just has a very expensive hobby.
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Free??
If you are on a "free" project that means the company has realized that you are incompetent and you will be jobless soon.
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Re: Re: Re: Re: I'll answer your question, Mike.
What we're seeing here is water as the product but koolaid being added. I can still get Linux for free and I can most certainly tweak it to resemble any "flavor" I want to.
But I can still never sell it. It will always be free.
However, the genius behind the different flavors is hoping someone downloads Ubuntu with the expectation of Fedora and needing support to meet these expectations or better yet, wants to find ways to save money by removing the Windows overhead.
Smart move on their part, indeed.
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Re: Wow- Predatory Pricing
That being said, normal profit will also decrease as the costs of reproducing a good are decreased. Therefore, including the normal price in the marginal cost equation doesn't change the overall downward trend in pricing over time.
In a competitive market, prices will get pushed down to marginal cost, no matter what (driving out all profit)
I think it was fairly clear that "driving out all profit" means that when prices are lowered to marginal cost, there will be no economic profit. In the case of infinite goods, the marginal cost(including normal profit) would be pushed to zero as the cost of reproduction is effectively zero.
So, in fact, all that needs to be done is to substitute "all profit" with "all economic profit" (which was the obvious intention anyway) and your rather silly attacks are rendered moot.
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Re: Re: Wow- Predatory Pricing
Here is the "Sense 3" synonyms of "free" on synonym.com; They pretty much encompass my understanding of "free" in this case. Of course there are other uses of the word "free".
complimentary, costless, free, gratis(predicate), gratuitous
unpaid (vs. paid)
I can tell you first hand that your statement just simply isn't correct. I my thousands of "trips" to Google, I have never once clicked on an advertisement. EVER! Can you please explain what COST I have in downloading Google and finding out that if I put my rendering into SketchUp, it has an appealing "Hand Drawn" look? You're telling me that I have a "cost" by sitting with my laptop while watching TV and learning to use Google SketchUp? Perhaps you have a theoretical definition for "Cost", but it isn't in my reality. My company hasn't had a cost, but a new revenue stream. Is that negative cost? If so, than I guess I have a "cost". In real life, real time, I have no cost. Even so, what "cost" would there be in clicking an ad if I did choose to click one? Did I pay for that ad? No.
Are you saying it is better if I paid something to look read this blog? Why would I do that when for "free" I can read and LEARN from this site for no charge? I haven't touched a single ad on this blog, so what "cost" do I have? Perhaps companies advertize on Mike's blog because they receive a benefit from doing so. I simply can't make the connection to anyone reading this blog having a "cost" from Mike's advertising. If everything you are saying has a "cost" also has a "benefit", then how much "real cost" is there? None. Can benefit be considered a form or profit?
In my understanding of the term "business to business", the business making the purchase is a consumer. Here are the definitions of "consumer" from dictionary.reference.com. I believe both one and 2 apply, as "thing", as a business is a thing rather than a person. Definition 2 speaks for itself. Business IS a consumer when it purchases goods and services. There is no distinction between the two words, literal or otherwise.
1.a person or thing that consumes.
2.Economics: person or organization that uses a commodity or service.
3.Ecology. an organism, usually an animal, that feeds on plants or other animals.
You are correct about "making up the cost elsewhere". Having a "just out of college" entrepreneur who can't afford the standard industry packages,(AutoCAD at $3,995.00, etc.) but can afford Google SketchUp then uses our "free" product to get started. There is obviously a "cost of doing business" for any product bought or sold. But downloading Google SketchUp and using 3D Warehouse just simply doesn't show up as an expense in the accounting reports of income vs. expenses, at least in our books. Helping him or her get started and providing this new business a migration path to keep and use all data for their business is a benefit for us. Our "upgrades" are easier and less costly than the other alternatives. That is a benefit to them and a benefit to us. Providing a "path" to upgrade to our products is a very definitely making up the costs elsewhere. Paying for ads and selling products from that is definitely making up for the cost of the ad. No, there is not and won't be any ads in our software. But eventually they will need to upgrade.
I have revenue, and I will get revenue from this. It is not a hobby.
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Re: Free?? by Bill Gates
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Re: Free??
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Re: Response
I believe the term for the difference between "free" and "free to use" would be classified as minutia. Pleae, the last thing I want to do is sound insulting. You are obviously a very smart person, and probably forgot more about business than I could hope to know. But what difference does it make? I have no "cost" in using SketchUp. I believe "no cost" and "free" are the same entity. No cost out of pocket is the end result. What form of currency did you use or what payment did you make for downloading and using SketchUp? "Cost" from and ad you didn't pay for? If YOU didn't "PAY" anything for the use of an item or entity, than there is no "Cost" to you. That would make it "free". If an advertiser paid for an ad on Mike's blog, how can this possibly be a cost to you?
Here is the "Sense 3" synonyms of "free" on synonym.com; They pretty much encompass my understanding of "free" in this case. Of course there are other uses of the word "free".
complimentary, costless, free, gratis(predicate), gratuitous
unpaid (vs. paid)
I can tell you first hand that your statement just simply isn't correct. I my thousands of "trips" to Google, I have never once clicked on an advertisement. EVER! Can you please explain what COST I have in downloading Google and finding out that if I put my rendering into SketchUp, it has an appealing "Hand Drawn" look? You're telling me that I have a "cost" by sitting with my laptop while watching TV and learning to use Google SketchUp? Perhaps you have a theoretical definition for "Cost", but it isn't in my reality. My company hasn't had a cost, but a new revenue stream. Is that negative cost? If so, than I guess I have a "cost". In real life, real time, I have no cost. Even so, what "cost" would there be in clicking an ad if I did choose to click one? Did I pay for that ad? No.
Are you saying it is better if I paid something to look read this blog? Why would I do that when for "free" I can read and LEARN from this site for no charge? I haven't touched a single ad on this blog, so what "cost" do I have? Perhaps companies advertize on Mike's blog because they receive a benefit from doing so. I simply can't make the connection to anyone reading this blog having a "cost" from Mike's advertising. If everything you are saying has a "cost" also has a "benefit", then how much "real cost" is there? None. Can benefit be considered a form or profit?
In my understanding of the term "business to business", the business making the purchase is a consumer. Here are the definitions of "consumer" from dictionary.reference.com. I believe both one and 2 apply, as "thing", as a business is a thing rather than a person. Definition 2 speaks for itself. Business IS a consumer when it purchases goods and services. There is no distinction between the two words, literal or otherwise.
1.a person or thing that consumes.
2.Economics: person or organization that uses a commodity or service.
3.Ecology. an organism, usually an animal, that feeds on plants or other animals.
You are correct about "making up the cost elsewhere". Having a "just out of college" entrepreneur who can't afford the standard industry packages,(AutoCAD at $3,995.00, etc.) but can afford Google SketchUp then uses our "free" product to get started. There is obviously a "cost of doing business" for any product bought or sold. But downloading Google SketchUp and using 3D Warehouse just simply doesn't show up as an expense in the accounting reports of income vs. expenses, at least in our books. Helping him or her get started and providing this new business a migration path to keep and use all data for their business is a benefit for us. Our "upgrades" are easier and less costly than the other alternatives. That is a benefit to them and a benefit to us. Providing a "path" to upgrade to our products is a very definitely making up the costs elsewhere. Paying for ads and selling products from that is definitely making up for the cost of the ad. No, there is not and won't be any ads in our software. But eventually they will need to upgrade.
I have revenue, and I will get revenue from this. It is not a hobby.
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Re: Wow- Predatory Pricing
As for predatory pricing, I have a few comments. First, you totally misread what I wrote. I wasn't advocating predatory pricing, I was advocating smart pricing: which is using something that you can give away at marginal cost to sell something else for much more.
Second, laws against predatory pricing have never made sense to me anyway. I don't see why companies shouldn't be allowed to set whatever price they want. As you noted, traditional predatory pricing tends not to work. But that's because it's done vindictively, dropping a price *below* marginal cost, not dropping it to marginal cost. There's nothing predatory about dropping price to marginal cost. That's just basic economics.
Finally, I'm not advocating or recommending or encouraging or praising anything illegal, I'm simply explaining what happens. It's not a recommendation, it's a description of a simple economic fact. In a competitive market, the producers is pressured to drop price to marginal cost. That's not a recommendation. It's what happens.
So, again, nice try, but you are simply incorrect and are making yourself look foolish in doing so. If you can't understand the basic difference between explaining how basic economics works and saying that's recommending an illegal strategy, then you really ought to go back and hit the books a bit.
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Re: Re: Free??
Either you depend on ads or smooch off innocent donors I guess!.
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Re: Re: Response
The cost of advertising supported goods and services depends upon how much the receiver would have been willing to sell access to his attention and/or time for otherwise.
For example, some people pay for expensive "plate dinners" just to gain access to an influential person or celebrity. Backstage "meet and greet" events are another example. The influential person or celebrity is selling "access". Access is also what advertisers want (they sometimes call it "eyeballs"). To obtain it they often barter something else of value. Of course, when bartering is beneficial if you can convince the other party that what they are giving up is of little or no value. So when they say that what they are giving you in the exchange is "free", they are really just trying to convince you that your time and attention are totally worthless so that you'll give it up for less. But it really isn't free because there is an exchange taking place.
As another example, if you like coffee and someone offers you a cup of coffee for no cost and no strings attached then is it free? But, what if they offer you the "free" cup of coffee on the condition that you first attend a day long timeshare sales pitch event (all expenses paid)? Would you still consider that cup of coffee to be free? I certainly wouldn't because they would otherwise have to pay me to subject myself to such an event. How much they would otherwise have to pay me is the true cost of that cup of coffee.
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Re: Re: Response
Sometimes I wonder. ;)
After re-reading some of my posts, I can see where my lack of communication can really piss people off. Although I try my best to stay focused, I've a bad habit of combining points.
You, as a consumer, are paying for Sketchup right now. You don't realize it, but you are. See those "Ads by Google" placement Techdirt has on its site?
You just helped pay for Sketckup. Every person who hits this site helps pay for Sketchup, regardless if a link is clicked or not. The mere fact you see this advertisement is "payment", thus, not "free".
Sure, we can argue the points of Sketchup as a stand alone product being free, but remember the blog's point about "freak out" with the word "free".
Google isn't giving this product away for free no matter what Mike tries to convince his readers to believe. It's offering a product at no cost to use.
Google must still pay for the distribution of the product because server maintenance, employee salaries, electricity, and everything else needed to distribute the product is not free and Google must make this up some how even if it's not directly related to Sketchup itself.
If you, as a consumer, do not see this, then there is nothing more I can offer to help you understand. Enjoy your "free" product. :)
Personal side note:
I want to add an observation after visiting the sketchup website: If a product is offered for free but a cost version is available, I call the free product a demo regardless of what features it offers me at no cost. As a consumer, all demos should be given away for free. :)
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While i do pay for the movie theater experience, I don't "pay" for the DVD physically (maybe like 25 cents). take away the IP and sell me the movie without special features and i'll take that free version over some movie studio's bundle. i only pay more right now because i have to, else i'd pay a quarter and the studio would not make back their fixed costs.
yes you can add concerts or insider tracks or ties to this and that (new movies coming out whatever) but if that has to compete with a free version, i wonder how many people will choose the value added versions? is there enough value to be added? and if we can't think of enough does that mean we should simply stop producing movies then (except people who do it for the love of it) until we can think of a viable secondary bundling etc business model?
ditto for music but maybe this is more viable because seeing the artist in person is difficult, so offerings along that line have more intrinsic value (which is of course relative to the individual fans). Linux is hard to administer and customize, so selling support makes sense, the "free" version has a built in problem to be solved. but what's the model for pharmacology? buy my pill (with the same ingredients) because it has 1-800 support or comes with a pamphlet of directions and side effects? buy mine and get some other additional medicine? i honestly can't think of any model for this and i bet that's not the only thing. and
The second problem is, still, suppose there were a business model. If the fixed costs for pharma is huge, and then anyone can take that and incorporate it into some other product or bundle, why would some company product that medicine just to have someone else potentially outcompete them by marketing their bundle or added service? the other company can essentially do the same thing that the company that discovered the drug can do but for free.
Music and other forms of art have a human motivation, people are creative and will make music for free to express themselves. while some people might love medicine, or have had a family member succumb to a disease and be personally motivated to find a cure at all costs, the barriers to entry and finances required at this point (even to do trials and get FDA approval) are huge, so direct profit is much more heavily a motivator. Linus Torvalds made linux because he loves it, not to make money. Phizer makes drugs to make money, not for the love of it or to advance mankind. if they can't recover their fixed costs they aren't going to produce it. If after they develop a medicine and spend all that money they have to compete on even footing with another company that spent $0, why would they ever do it? 2 companies start from the same place, one spent nothing the other is already $800 mil in the hole and has to recover that.
So seems to me your answer is just exactly as said, find a viable business model. and if there isn't one, then instead of creating an artificial way for companies to recoup costs, we should just forgo that as a business at all.
I'm generally not in favor of DRM, not because i like to pirate things but it gets int he way of fair use and is generally a pain in the ass. I won't buy music with DRM because not that i want to put it on Kazaa (is that even still around?) but because i'm not buying 27 copies for my house, my pc, my car, my psp, my ipod, my zune, whatever. if i buy the rights to that, i'm using it on whatever device i want and in whatever room i'm in. and if that's not the agreement well, then i don't need the music bad enough. So certainly there is too far in one direction.
But it also doesn't make sense to me that someone can possibly spend a lot of resources to come up with some information, formula or what have you and then is unable to profit from that directly, they have to come up with some secondary model that may or may not exist, and they have to out compete companies allowed to do the exact same thing that had to spend 0 dollars.
i mean heck if it were me and i invented the cure cor cancer, then fine, the only way anyone's getting it is if they come into my lab, are searched by security, and then i give them the shot and they have to stay there until the medicine works it's course so there is no way it can be reverse engineered. that's creating a scarcity without any laws to profit from it and guess what, it's not good for society as a whole. that's not a good answer for pharma either.
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- broadcast television (since 1940)
- newspapers (since 1760)
- radio (since 1918)
- Google (since 1998)
- magazines, events, promotions, concert in the park, etc., etc., etc.
In other words, advertising has always been subsidizing the cost of
distributing content, and often subsidizing 100%. There is nothing new at
all about this model and anyone who doesn't get that is fairly clueless.
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