How 'Free' Has Even More Value Than People Think It Should

from the and-so-it-goes dept

Earlier this year, we pointed to some of the psychological reasoning for those in the RIAA/MPAA's of the world (and their supporters) for arguing against giving stuff away for free, even when there was evidence that they could make more money doing so. In that case, psychological experiments showed that people don't act rationally when they think something is "unfair." That is, they'll take a worse absolute result, just to make sure that they're relatively better off.

Now there's a new book that just came out that highlights a related irrationality. This one is by behavioral economist Dan Ariely. Someone had told me a year ago to look out for Ariely's book, which I had forgotten about, but now that it's out, it appears to include discussions on some very interesting experiments. If you listen to the audio interview at that link, Ariely discusses an experiment he ran with children at Halloween. He first gave them all three Hershey kisses. Then he held up two Snickers bars -- one tiny one and one large one. He offered to trade them the small one for one kiss and the large one for two kisses. Most kids quickly made the trade for the larger Snickers bar -- which is a perfectly rational move.

He then changed the terms of the experiment. He offered to give kids the small Snickers bar for "free" or the large one for one Hershey kiss. Most kids now took the free small Snickers bar -- even though they are worse off in that case. Having two Hersheys kisses and the big Snickers bar providers more chocolate than three kisses and the small bar -- but the impact of "free" got them even more interested. Ariely ran more similar experiments (economist Tyler Cowen wrote about one recently) and found that again and again people overpay for free.

This is certainly an interesting finding, given all that we talk about the use of free in economics. If anything, this (bizarrely, I'll admit) makes the case even stronger for using free as a part of any business model. It suggests that people value something that's offered for free more than they should. That has enormous implications for the promotional value of "free." If you're using it that way, it actually increases the value relative to other things, despite the myth some people still have that if something is "free" it means it has no value. Anyway, Ariely's book, Predictably Irrational is now available. Ariely has also put up a blog about the book, though there's not much info there just yet.

Filed Under: behavioral economics, dan ariely, free, value

The Economics Of Free Isn't Good Or Bad -- It's Simply What Happens

from the understanding-economics dept

One of the problems that comes up whenever we discuss economics around here is this prevailing belief that there's a moral component to economics -- and that whether something is "good" or "bad" plays a role in determining the economics. Economics is just an explanation of the forces at work on a market. Asking if economics is good or bad is like asking if physics is good or bad. Sure, gravity sucks for those who want to fly, but it's simply a force that is. The same is true with the economics associated with infinite goods that force a price to free.

That's why it's rather disappointing to see someone complaining that the economics of "Free" is somehow a bad thing. This is written by Alex Iskold, who recently was confused about how free economics actually works. He compounds that problem now by suggesting that it's somehow "bad." The fact is it's neither good nor bad. It's an economic force that is impacting the market. Worrying about it being "bad" is missing the point. Again, it's like worrying that gravity is bad or that Thursday is bad. These are things that are going to happen no matter what, and are generally neutral.

Even worse, Iskold fails to show how it's actually bad on a larger scale. What he does is show how it's bad on a micro scale for certain companies. But, you could make that argument for anything. Automobiles were "bad" for buggy whips. The printing press was bad for scribes. The telephone was bad for telegraph operators. Yet, on a larger economic scale, all of these things opened up more opportunities to the economy. The same is true with the economics that are being discussed these days. Recognizing the inevitability of infinite goods to be offered for free increases the resource pool and opens up many new opportunities to provide goods and services -- and to profit from them.

Filed Under: business models, economics, free

That 'Free' Stuff Is Catching On...

from the it's-everywhere... dept

It seems that everyone is jumping on the "free" bandwagon. Just a few weeks ago, we wrote about Kevin Kelly's take on the subject. On Monday, Chris Anderson's manifesto published in Wired Magazine, and at about the same time, the consumer trend research firm Trend Watching published its only monthly trend report highlighting the growing importance of "free" in business models. It's worth reading, as it lays out not just a variety of business models that include free, but a large set of examples showing how each one works. It's neat to see all of these different things come out at the same time -- once again highlighting the concept that ideas generally aren't formed in a vacuum. The trends that resulted in so many people recognizing the same thing at once are all around us. Yet, if we believed in the world where artificial scarcity rules, then we'd be focused on who "owned" this concept and who got the rights every time someone else mentioned it. That, of course, would be silly. By allowing so many different people to express these concepts, not only do we all get to see different perspectives on the same concept, but we get to learn from each other and build on these ideas.

Filed Under: business models, economics, free, trend watching

Chris Anderson Takes Up The Free Banner

from the economics-of-free dept

As we mentioned recently, Wired Editor-in-Chief Chris Anderson has been working on a book called "Free" for a while now. To kick off discussion on the concept he's now written an article in Wired describing how "free" has been a part of economics for a while and then noting that it's becoming more common thanks to the digitization of so many industries. It's one more piece of the puzzle that you can point people to when they insist that "free" is a bad business model. While it's great that he's writing the book (and has written this article) as it will add to the wider understanding of how "free" needs to fit into so many business models, I have a couple of very minor quibbles about it.

The first, is that even though he positions "free" as something that's played a role in business models for a while, at the end he implies that this has "turned economics upside down." That probably helps sell books, but it's incorrect. By this point, we should be wary of books that claim economics has somehow "changed." As even Chris noted earlier in the piece, all it's really doing is applying economics correctly and realizing that "zero" doesn't break basic economic equations (as many had assumed it would). The second problem, is that by focusing on the most incendiary part ("free") it gets people focused too much on the controversial part, rather than the useful part. Again, that probably helps sell books, but as I've discovered here, focusing too much on "free" simply gets people yelling at you, rather than taking time to understand the arguments you're making. We're already seeing this, as News.com has a snip describing Anderson's theory as "more money can be made tricking consumers into thinking they are getting something for nothing." There's no "tricking" at all, but some people have trouble accepting that notion when it comes to "free." Perhaps it is for the best, though. Chris knows a lot more about selling books and influencing people than I do -- and if he can influence a lot more folks to recognize that "free" isn't a bad thing, then that's going to help push a lot of businesses forward.

Filed Under: chris anderson, free

Another Business Model That Leverages 'Free'

from the having-someone-else-pay-for-it dept

When I first heard about TrialPay, I thought it was a bit gimmicky. However, in reading through a NY Times article about the company, I'm realizing it's actually yet another example of how to use "free" in a business model. The service is mainly used by software providers (who, remember, are offering an infinite good, which will face pricing pressures towards a zero price). The software developers officially offer their software for a price, but then also offer it for free if you agree to buy someone else's product. For example, you can get free anti-virus software if you also agree to get a subscription to Netflix. Note what's happening here (and how it sounds familiar). Software providers are giving away their (infinite) product, but they're attaching it to the sale of a totally unrelated (scarce) good, and are then profiting from the referral fees associated with those other goods. In other words, even if not explicitly, they've realized that their software products act as a promotional good for those other products. What's most interesting here is that those scarce goods are totally unrelated to the software that's for sale, other than through TrialPay's service. Effectively, TrialPay has helped makers of infinite goods tie up their products with other scarce goods that people would have thought were unrelated. So, the next time someone insists that there can't be a scarce good attached to certain infinite goods, remember this example.

Filed Under: abundance, affiliate programs, free, scarcity
Companies: trialpay

Another Free Book Example; Oprah Book Give Away Keeps Actual Sales Strong

from the and-again-and-again-and-again dept

As publishers continue to fight Google over its efforts to scan books for searchability purposes, we're still seeing more and more evidence that free books don't hurt sales, but can actually help them. The latest is that Oprah apparently promoted a year-old Suze Orman book by giving it away for free on her website as a download for 33 hours. 1.1 million people decided to download it. Even though the book was a year old and available for free... it was still the #6 most popular sold book on Amazon.

Filed Under: books, free, oprah

Harvard Faculty Agrees To Free Up Its Research

from the about-time dept

While MIT has received plenty of attention over the years for its effort to free up all course materials a potentially equally as interesting move happened at Harvard yesterday, where Arts & Sciences faculty agreed to free up their research. For many years, there's been a push by some to change the process for publishing research. Typically, academic research would appear in journals that were incredibly expensive, potentially limiting the access to that research, even if the research was publicly funded. However, what this group of Harvard faculty have now done is agree that any research they publish will also be available for free online. As mentioned recently, in an age where everyone is so focused on intellectual property, it suddenly makes things like teaching and learning appear to be mighty similar to what others call theft or infringement. It's nice to see some universities starting to push back on that.

Filed Under: free, harvard, research
Companies: harvard

Publishers Jumping On The Free Book Bandwagon (Somewhat, But Not Fully)

from the and-you-thought-free-was-evil... dept

For many, many years, Sci-Fi publisher Baen Books has offered free downloadable books, and has found it to be a good way to generate more interest and sales for its authors. It appears that many others are starting to realize this as well. We've recently seen unknown authors and best-selling authors both embrace the concept, while pointing out that obscurity is a much bigger threat to their writing than piracy. Now, it appears that other publishers are beginning to catch on. Sci-Fi publisher Tor is giving away free e-books (apparently with no DRM, either) and the NY Times is now reporting that HarperCollins has decided to start posting free e-books on its website (including a bunch by Paulo Coehlo, the best-selling author who encouraged people to download unauthorized versions of his books). Unfortunately, these "free" e-books are ridiculously limited. They'll only be online for a month -- and you can only view them with a web connection (no downloads allowed). On top of that, the print functionality will be blocked. This seems totally pointless. For most books, it costs more to print out a copy yourself than to just buy the actual book. It's nice to see some additional support for free books, but HarperCollins plans seem akin to the music industry's first forays into online music. That is, they're designed so that the company can say "look, we're doing something!" but are so locked up that very few people will actually be interested.

Filed Under: books, free, publishing
Companies: harpercollins, tor

Kevin Kelly's Eight Key Scarcities

from the business-models-for-the-next-century dept

One of the coolest things in writing out my own economic theories on new business models has been seeing some other, much smarter, folks coming up with similar thoughts at the same time. Chris Anderson, editor-in-chief of Wired Magazine and the author of "The Long Tail" is working on a book about "free." He'll be showing how it's not such a crazy idea to price things at free -- and it's actually been done for ages. It should go well with the books on the number zero that inspired some of my thinking. Chris and I have had a few talks about these theories, and I can think of no one better suited to chronicle the history of "free" as it fits into the economic realm. On top of that, it appears that former Wired editor-in-chief Kevin Kelly is now working on another book that touches on the space, and he revealed some of the thinking behind it last week, noting:

"When copies are super abundant, they become worthless. When copies are super abundant, stuff which can't be copied becomes scarce and valuable. When copies are free, you need to sell things which can not be copied."

Hopefully that sounds familiar, just much more eloquently stated than I could put it. While I noted that, even beyond tangible goods, there are always scarcities associated with digital goods, Kelly has put together a fantastic list of eight categories of scarce goods associated with digital goods, noting that each one is "better than free." It's a list worth memorizing, because combinations of those eight things represent the key to a bunch of new business models: Immediacy, Personalization, Interpretation, Authenticity, Accessibility, Embodiment, Patronage and Findability.

It's fantastic to see these ideas getting more and more serious study -- and it also highlights how ideas and concepts spread. All three of us (and quite a few others as well) all came to these ideas through a combination of factors -- mostly independently, I'd imagine. Some interacting with each other. Some through interacting with others. I know that much of my thinking was driven by certain professors I worked with and other books that I read -- combining the different ideas I learned about into this understanding.

If you truly believed in the importance of artificial scarcity, we would all be hoarding our ideas or keeping them secret. Yet that would limit all of us. Seeing Chris and Kevin independently writing and speaking eloquently on these topics helps me both better understand the concepts myself, while also giving me an opportunity to build on their works, to incorporate their thoughts into my own writings, and to hopefully take those thoughts (combined with my own) into new and different areas as well. I can't see how anyone could consider the idea of building on someone else's thoughts "stealing." It appears to be a lot more like "learning" to me. It's the same thing that I see happening here every day as well. While there continue to be people who challenge us in the comments (often helping me to better understand my own arguments as well), I'm also constantly amazed at others who take my own arguments in the comments and make them better. We're all building on the work done by each other, making all of us better off in the long run. It's really quite an eye-opening experience.

Filed Under: chris anderson, economics, free, kevin kelly, scarcity

Go To The Movie, Get The Soundtrack For Free

from the yet-another-idea dept

It always amazes me when movie industry execs complain that the models we discuss wouldn't work for the movie industry. That's ridiculous, because in many ways, it's already working for the industry. As Marcus Loew once famously said: "We sell tickets to theaters, not movies." The movie has never been the "product." The experience of seeing the movie is the product, and so the focus shouldn't be freaking out about "pirates" while making the movie-going experience worse. It should be the opposite. It should be about enticing people to want to go out to the movies by giving them something extra that makes it worthwhile. Going to the movies is a social experience. It's much cheaper to eat dinner at home, but plenty of people go out to eat at restaurants because those restaurants (while more expensive) give people a reason to go (better food quality, better service, a chance for a night out, no need to cook or wash the dishes, etc.). There's no reason why the movie industry can't do the same.

While we've talked about a number of different ideas for enticing more people to go to the theaters (beyond making the experience better, why not let people buy a discounted DVD of the movie they just saw as they exit the theater -- if they really liked it, many will want to own it to see again, and to see the extras). Mark Cuban, who has actually been at the forefront of many of these ideas (and, also happens to be very involved in the industry, though more on the independent side) has an interesting new suggestion. He points out that only a small number of people actually buy the soundtracks associated with movies -- but if you want to attract more people to go to the movie, why not give them the ability to download the soundtrack of any movie they go see in the theaters. Put a special code on the ticket stub that takes them to a download store -- and on that store include the soundtrack as well as extras, such as the script from the film. Obviously, this content will be spread around and can be accessed by others, but many will value the fact that by seeing the actual movie they get access to the official content. As Cuban notes, this can also be a win for the music industry, as a portion of the movie ticket sales can be used to compensate them as well. It's yet another example of the model we've discussed repeatedly: using infinite goods (music, script) to make the scarce good (seats in a theater for a show) appear to be more valuable.

Filed Under: free, mark cuban, movies, music, soundtrack