UK: MANAGING REVOLUTION - The new meaning of a free market - Across the web, new companies are signing up ...

UK: MANAGING REVOLUTION - The new meaning of a free market - Across the web, new companies are signing up ... - MANAGING REVOLUTION - The new meaning of a free market - Across the web, new companies are signing up customers and seizing markets by offerin

by ROBERT HELLER.
Last Updated: 31 Aug 2010

MANAGING REVOLUTION - The new meaning of a free market - Across the web, new companies are signing up customers and seizing markets by offering free services - a trend that others can't afford to ignore.

Apparently, there is such a thing as a free lunch. Ever since Netscape gave away its first browsers, a growing array of goods and services, mostly on the internet, has been free of charge.

However, appearances are deceptive. The price must eventually be paid by somebody if the provider is to survive.

There was method in Netscape's madness. The service grew rapidly, enlisted an army of users, led the internet explosion and was poised to convert its free lunchers into subscribers. That stratagem was scuppered by Microsoft, which, by bundling its 'free' browser into Windows, compelled Netscape to forgo its subscription revenue, eventually causing its disappearance into America Online (AOL). Netscape lost more than subscriptions: it blew its chance to replace the Microsoft monopoly. As Bill Gates saw, just in time, internet access undermined his control over the PC market. Given direct access to programs over the web, people could crack the tyranny imposed by the MS-DOS system. The world of personal computing would be truly open.

Microsoft was saved less by Gates' celebrated U-turn than by Netscape's literally overwhelming success. That's the trouble with free provision: there's no price to ration demand.

The Netscape mode was going down a well-trodden route to market dominance.

Forerunners such as King Gillette always charged a full price - they simply repackaged the true cost.

Gillette priced razors at a fifth of manufacturing cost, but marked up the blades by 400%. That still came to only five cents each for half-a-dozen shaves, compared with 10 cents for one visit to the barber. The Gillette principle has been used time and again, not least by mobile phone providers. They recoup the price of their 'free' gadgets through expensive charges.

The mobile pricing model, already wobbly, will surely come under pressure from internet telephony, where cost is negligible - like that of most web processes. The 6,000 redundancies at Barclays are the thin end of a mighty wedge. When internet transactions cost a penny, against £1 at a counter, the counters are doomed.

The move into no-charge operations has been led by newcomers. Golden oldies are understandably loath to lose existing revenues. But £1 cannot compete with a penny. All over the Net, the new kids are using the word 'free' to build huge databases, corner the market or both. Amazon's double assault may mean it is losing money, but it is possibly winning the world.

Originally just the first internet bookseller, Amazon now has 52% brand recognition, a rich cash-flow to balance its $124 million ( £77.5 million) losses - and 8.4 million customers. Value those at the going rate of $2,000 per acquisition and you get a total worth of $17 billion. Small wonder that Business Week says Amazon is frontrunner for the title of 'WalMart of the Web', with eBay the main opposition.

In terms of corporate life, eBay is eBaby. It went public last year but already has 3.8 million customers and 32% brand recognition. As an auction business that brings the buyers and sellers together, rather than selling anything itself, eBay actually makes a profit from its 6% cut. Those two practices - commissions and selling via auctions - are bound to be huge web money-spinners.

Percentage-takers are mushrooming in a mind-boggling manner. Database exchanges, or 'infomediaries', last year facilitated $43 billion of business, a figure expected to reach $1.4 trillion by 2003. For free, the infomediaries provide information so comprehensive and valuable to purchasers that suppliers must participate. What purchaser would choose tedious, uncertain searches when the cheapest suitable supply can be tapped by one click of a mouse?

Here, the free service is paid for by the supplier. For many web sites, the value is harder to exploit. They can accumulate vast customer registrations: with net users up from three million in 1994 to 163 million, that's no problem. The trick lies in converting the names into money. In effect, the site owners are in the media business, selling ads, sales leads, mailing lists, and other people's goods and services (on commission) to their captured audiences - who personally contribute little or nothing to the money pot.

The master strategy is to get in first, get in fast, and become so big that you have the dominant 'share of mind' and (a witty coinage by Gary Hamel and Jeff Sampler) 'word of mouse'. The sky-high valuation of internet stocks will, in theory, tide you over until you find profitable ways of exploiting the audience.

And any competitor who charges while you are 'free' - like OnDigital unless it matches BSkyB's free desktop boxes - will be dead in the water.

The phrase 'free market' thus has a whole new twist. The net is a disruptive technology which disrupts all other technologies. Most of these disruptions are led by newcomers and damage or destroy older players. The latter must cannibalise their beloved business models. Otherwise, guess who will be eaten.

Robert Heller was the founding editor of Management Today.

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