Free: The future of a radical price
Random House £18.99
Chris Anderson is famous and influential. He brought us the concept of the Long Tail in the best-selling book of the same name. This proposed that the combination of web search and online stores like Amazon meant that niche book titles, for example, can become viable as they enjoy what amounts to unlimited internet shelf space, which cannot be offered in a conventional store. In Anderson's words: 'We can choose from the infinite aisle rather than just the best-seller bin.'
Anderson is an excellent writer and diligent researcher - as you might expect from the editor-in-chief of Wired magazine. Now he has brought us another big idea, which is that digital products such as music, film and software will see their price trend to zero.
He hints that giving away intellectual capital can help build an artist's reputation. Three quotes illustrate the nature of 'free': 'Piracy is a form of zero-cost marketing, which brings (musicians') work to the largest possible audience'; 'In a competitive market, price falls to marginal cost'; and 'Once you switch from shipping atoms (plastic boxes and discs) to transmitting bits, Free become inevitable.'
For consumers to be offered something free is not a new idea, but it has usually been just a marketing device. The 'free lunch' started in America in the 1870s, when bar owners gave food to anyone who purchased an alcoholic drink. Gillette distributed free razors to stimulate the sale of blades. When Jell-O was launched, it sold well because jelly recipe books were given away in their millions. Free mobile phones and satellite TV receivers get people to sign up to annual subscriptions. But these 'gifts' have real physical costs.
Free identifies four kinds of zero-price offer. Two are time-honoured. 'Cross subsidies' are things like the promotional gimmicks described above. The 'three-party market' is the model of traditional media where advertisers pay broadcasters to get access to consumers. The two new ideas are the 'freemium' structure, in which a few users of a product pay for a premium service while the vast majority enjoy it for nothing; and 'non-monetary markets', where people donate their labour because they enjoy the task: Wikipedia is the obvious model.
These last two happen because of the digital economy. If, as Moore's Law predicted, the number of transistors on a chip doubles every two years, their price seems to halve as often. Now the marginal costs of data storage, bandwidth and processing power are all trending to zero, and, argues Anderson, the price of digital goods will follow them down. As Free points out, most of us use Google, but it never appears on our bank statement or phone bill. Its search service is free because it can be.
This is a book about behavioural economics, and Anderson has a lot to say about the price of corn and raw materials and the psychology of pricing. He argues that conventional thinking about supply, demand and resulting price is too restrictive. There are 'two types of markets: free and everything else', and any price, however small, radically reduces people's propensity to use something. 'Give a product away and it can go viral. Charge a single cent and you are in an entirely different business, clawing and scratching for every customer.'
This is far more than just another 'gosh, isn't the internet amazing?' book. Anderson gives us a well-researched and presented intellectual tour of the economics of Adam Smith, the psychology of Abraham Maslow, the strategy of Bill Gates and the sci-fi of Arthur C Clarke.
This is behavioural economics meets online entrepreneurship. It is an intriguing insight into the likely development of web business and should be required reading for executives in traditional media and retail companies, as well as anyone interested in what happens next to e-commerce.
If your product or service is digital (music, news, TV or books), you'll be competing with 'free' and will thus need to focus on providing value in other ways - such as convenience, time or reputation. 'Free may be the best price,' says Anderson, 'but it can't be the only one.' Recorded music may be free, but concerts cost more than ever.
And the book is not free. The UK list price will be £18.99, which, of course, almost no-one will pay.There are many books about the workings of the new economy, but Anderson seems to be one of the most reliable and skilful guides. Free is worth the money.
- Roger Parry is chairman of publishing group Future.