Chris Anderson is a hero to some in the internet business community.
The Wired editor-in-chief’s book, “The Long Tail: Why the Future of Business is Selling Less of More” , is often cited by those who believe that the internet is changing economic rules, despite the fact that most of the hard data has actually refuted many of his claims.
Now Anderson is back with another book to be released next year that is destined to become a hit with internet business types: “Free! Why $0.00 Is the Future of Business”.
The basic premise is that technology is pushing the marginal cost of production to zero for many products and services and that:
“Every industry that becomes digital eventually becomes free.“
I take point with quite a few of Anderson’s arguments and think many of them are flawed.
Three items in his article stood out in particular:
1. While Anderson is correct in noting the incredible decrease in the price of bandwidth, storage and processing power over the years – a trend that is only likely to continue – he seems to think these costs are trivial. He also ignores the other costs of running a digital business (e.g. paying the salaries of the people who work for you).
Facebook serves as a perfect example of how “the trend lines that determine the cost of doing business online” do not “all point the same way: to zero“.
While the company is able to provide its service for free to tens of millions of active users, it has significant costs in relationship to its revenues. In addition to the $200m in capital expenditure Facebook plams to spend this year on servers and infrastructure, it also aims to more than double its headcount from 450 employees to 1,000.
Clearly, the costs of running a wildly popular online service may be fairly small given the audience being served, but it’s worth noting that Facebook’s ability to scale to serve such an audience has thus far been predicated on the fact that it has raised hundreds of millions of dollars in outside financing. Without that financing, Facebook would not be able to do what it’s doing since it just isn’t making a whole lot of money.
Whether Facebook can ever build a real self-sustaining business remains to be seen.
2. Anderson’s example of Yahoo offering “infinite” storage to users of its email service is completely asinine. Yahoo is not clearly not capable of fulfilling a promise to give every single internet user “infinite” email storage – nobody is capable of that. It is simply a marketing ploy based on common sense.
Just as the fractional reserve banking system is based on the assumption that all bank customers are not going to withdraw all of their funds at the same time, Yahoo’s offer of unlimited storage for email is based on the assumption that the vast majority of its users are going to use relatively little storage.
And if Anderson had taken the time to read section 13 of Yahoo’s Terms of Service (“General Practices Regarding Use and Storage“), he would have recognised that Yahoo has an out if its situation changed.
3. Anderson provides sample scenarios of “Free!” business models in his article. Some are quite ill-informed.
Take, for instance:
“Scenario 1: Low-cost digital distribution will make the summer blockbuster free. Theaters will make their money from concessions — and by selling the premium moviegoing experience at a high price.”
Unfortunately, as one of the article’s commenters points out, Anderson does not seem to understand that this would not be supported by the motion picture business model.
The production costs of major Hollywood films are often financed in part by high-risk investors who get a piece of “equity” in the films but only get paid when a film makes enough money to trickle down to them through multiple levels of “shareholders” higher on the totem pole.
Ticket sales are the lifeblood for these investors and if Anderson believes they’re going to be eager to invest when their risk is increased by a “free” business model that offers them no tangible benefit, I think he’s been watching The Wizard of Oz far too much.
In all, Anderson provides six “broad categories” of methods that can be used to offer products and services that are touched by digital technology for free, from freemiums and cross-subsidies to advertising and labour exchange.
I find nothing revolutionary about any of these – they’re not new.
The fact that some of them can be implemented more widely and extended further than they may have been before the advent of the internet certainly doesn’t mean that “digital economics has turned traditional economics upside down.”
The bottom line is that every business has to make money. Where that money comes from is almost irrelevant – somebody is paying the bills.
Milton Friedman was absolutely correct to repeatedly point out that “there’s no such thing as a free lunch.”
Anderson tries to convince readers that there’s something remarkable occurring when two people eating a lunch that they’re personally not paying for can’t see who is footing the bill on their behalf. Obviously there isn’t.
Unfortunately, in some of the more convoluted exchanges taking place that enable internet companies to offer products and services for free, long-term viability and stability is questionable.
Advertising-subsidised businesses, for instance, are highly vulnerable to economic downturns, as we learned in Bubble 1.0.
Perhaps the biggest problem with Anderson’s new book will be the fact that it’s so damn myopic.
The cost of a barrel of oil just hit a record high. Wheat prices have doubled in the past year and late last month hit an all-time high of $13.495 a bushel. Inflation is a real problem and may be worse than many think.
So while technologists like Chris Anderson like to talk about the “
economics of abundance
” and celebrate the fact that you now have “
” storage for your email, the truth is that where it counts (i.e. food, energy, shelter, etc.), the “
economics of scarcity
” still dominates.
It’s all too convenient to ignore that when you think more about the virtual world than the real world.
Be that as it may, at the end of the day, books like “The Long Tail” and “Free!” amuse me. They play upon a natural human desire to believe that we live in times where established “rules” are being “broken” and new paradigms are being ushered in.
We do live in interesting times but to sell books, I would argue that authors like Anderson (and Malcom Gladwell) have mastered the art of spin and exaggeration.
They leverage current trends and fads to write “business” books that are heavy on sex-appeal and excitement but short on substance and perspective.
These books typically offer little more than a rehashing of the same sort of “New Economy” bullshit that was bandied about in the late 90s. And bullshit is always bullshit, no matter how it’s (re)packaged and sold.
I personally hope that Anderson practices what he preaches and makes “Free!” free. After all, there would be something distinctly awkward about buying a book whose premise is that the future of business is free.
Somehow, however, I suspect that Anderson’s publisher won’t be turning the economics of book publishing upside down and that I’ll have to go to these innovative public buildings where they loan books to poor consumers like Drama 2.0.
I’m so glad Google invented the public library. Google did invent the public library, right?