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He may be selling books, but reality has not been kind to Chris Anderson. His theory that the future of business is selling more of less as presented in his best-selling book, The Long Tail, is refuted by observational data.

And his latest novel idea - that the future of business is $0.00 - looks downright absurd in today's economy. That's the thesis behind his upcoming book, Free. In fact, it's so absurd that Anderson had to address the elephant in the room in a recent guest piece in The Wall Street Journal.

In The Wall Street Journal, Anderson writes:

"All this worked well in a rising economy, where non-monetary riches such as attention (Web traffic) and reputation (Google PageRank, which determines how high your site will appear in a search) could be turned into cash with the wave of a venture capitalist's wand or a well-timed acquisition. But this year, for the first time since 2001, the overall tide of investment and advertising won't rise. Indeed, it will almost certainly fall."

He asks what this means to "Free as an economic model".

In his eyes, this is great news for consumers, who don't have money to spend anyway. They're all going to buy netbooks (which, incidentally, aren't free) and use web-based applications (which, incidentally, often aren't as free as they used to be).

When it comes to answering the question of how good this is for businesses who are supposed to be providing all of this free stuff, the words of Borat spring to mind: "Not so much."

Anderson waxes philosophical:

"What about the oldest trick in the book: actually charging people for your goods and services? This is where the real innovation will flourish in a down economy. It's now time for entrepreneurs to innovate, not just with new products, but new business models."

He goes on:

"...Free is not enough. It also has to be matched with Paid. Just as King Gillette's free razors only made business sense paired with expensive blades, so will today's Web entrepreneurs have to not just invent products that people love, but also those that they will pay for."

Amen. Unfortunately, if it seems like Chris Anderson, the high priest of voodoo economics, is rewriting history, that's because he is.

In his original Wired article, he wrote:

"It's now clear that practically everything Web technology touches starts down the path to gratis, at least as far as we consumers are concerned. Storage now joins bandwidth (YouTube: free) and processing power (Google: free) in the race to the bottom. Basic economics tells us that in a competitive market, price falls to the marginal cost. There's never been a more competitive market than the Internet, and every day the marginal cost of digital information comes closer to nothing."

And:

"One of the old jokes from the late-'90s bubble was that there are only two numbers on the Internet: infinity and zero. The first, at least as it applied to stock market valuations, proved false. But the second is alive and well. The Web has become the land of the free."

Apparently, through the Great Recession, Anderson is learning an important economic lesson: just because somebody treats you to lunch on Monday doesn't mean they're going to pay for your meals for the rest of the week or for the rest of your life.

Nor would you want them to.

Unfortunately Anderson still doesn't quite get it. When he suggests that entrepreneurs need to develop “new business models” to support their giveaways, what he’s really suggesting is that these entrepreneurs convolute their business models even further, to develop new ways of convincing Peter to pay for Paul.

Think of it this way: the advertiser (Peter) previously wanted to get some face time with Paul (the consumer). You knew Paul so Peter was more than happy to pay for a nice lunch so that everyone could spend some time together. But Peter has a lot less money to spend these days and has a lot less desire to pay for six-course meals that may or may not lead to business being conducted. Just because you've already made reservations at a steakhouse doesn't mean that Peter is going to continue footing the entire bill.

That's a problem because Paul has come to expect filet mignon, not Filet-O-Fish, and you've agreed implicitly to provide it. If Paul, on the other hand, knew you as a chef and not as a host, chances are that he'd have been willing to pay you to cook the meal in the first place.

This is why the original business model (charging the users of your product or service) is still the best: you’re selling directly to the person who receives the value you create.

While Anderson writes that “The psychological and economic case for [Free] remains as good as ever -- the marginal cost of anything digital falls by 50% every year, making pricing a race to the bottom, and 'Free' has as much power over the consumer psyche as ever” I think he should ask himself whether he’s watching the right game.

Frankly, I’ve never started a business that was in a “race to the bottom” when it comes to pricing - or anything else. Why would you want to? There are so many opportunities to create products and services of tremendous value that individuals and companies will happily pay gobs of cash for.

Even for those who do compete in markets where marginal costs are falling, there’s almost always opportunity to differentiate, compete more effectively and charge more by providing a better product, quality service, highly-customized solutions, etc. Price is a reflection of value. Deliver higher perceived value and a higher price isn't necessarily more 'expensive'.

From this perspective, the challenge entrepreneurs face is not to find new ways to give stuff away for free but to build stuff that people don't even expect to be free because they're eager to pay for it.

But I digress. At least Anderson is starting to get it. Perhaps he should revise his new book now that he realizes “Free may be the best price, but it can't be the only one.

Unfortunately, that would probably require an entire rewrite and a title change, as it’s clear that his latest theory about “the future of business” has been dismissed by reality before it was even published. Of course, I expect plenty of people will pay for Anderson’s new book, ironically providing yet another demonstration of just how wrong Anderson was in the first place.

I for one can't wait to see what Anderson believes the "future of business" will be next year. I'm sure it will make for a sexier book than the one I'm currently working on, which is titled "So Paid: How I Make Big Money Selling Stuff to People."

Drama 2.0

Published 4 February, 2009 by Drama 2.0

237 more posts from this author

Comments (3)

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JKA on Economics

Great piece,

The Long Tail was more of a good tale.

We have our own critique in Economics Bloggers have a long tail.

almost 8 years ago

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techchuff

Anderson has the problem that he creates some pseudo-intellectual 'buzzword' and then has to write a book to justify it. And of course make some cash to cover the cost of his fleet of ferraris and call girls.

You can almost see his face half-way through writing the book as he thinks 'fuck this makes no sense at all....nevermind'

almost 8 years ago

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Sam B

As an economics graduate, let me clarify that when Anderson (and I think Arrington as well) say "basic economics shows that in a competitive market, price falls to marginal costs", it's clear that they have no idea what the fuck they're talking about.

Basic economics assumes, reasonably rationally, that marginal revenue falls to marginal cost - i.e. businesses keep selling stuff, at the price the market will bear, until they have to ship at such a low cost to keep up demand that they stop making a profit. On the face of it the marginal revenue you make on each good is the same as the price you charge for it. But this is only a simple number in a very simplistic economic model, one where every item you sell sells for exactly the same price at the same cost. Which never happens in the real world. Even a six-inch nail made by the same company will sell for more in a Waitrose in Islington that it does in a Lidl in Leeds.

The fact that the model never reflects reality doesn't make the model useless. Economic models are like maps; when drawing a map you throw out any detail that the user doesn't need. But the user has to bear in mind what the map represents and what it doesn't. When Anderson and Arrington claim the model of a perfectly competitive market has anything to do with e-commerce, they're trying to cross a city centre using an atlas. The web industry doesn't remotely resemble the economic model of a perfectly competitive market, anymore than the streets, rivers and buildings of my home city resemble a perfectly round unfilled circle on the globe.

almost 8 years ago

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