Chris Anderson's Free Model and a short Globe & Mail interview on it

David Armano's Interpretation of Chris Anderson's Free Model
(source: Graphic by David Armano of Logic+Emotion)

The Globe & Mail conducted a short interview with Chris Anderson, the editor of Wired magazine and a technology visionary from America, and I thought I would quote some of his thoughts and inject my opinion. I have always had high regard for Chris Anderson. One of the reasons I like listening to him is because he is good at synthesizing business, technology, and science, while presenting it in an easy-to-understand manner. For instance, I really like how he takes advances in technology and tries to explain the impact on business models. There are many, especially those who come from a business background, who attempt to do the same thing but end up failing (in my eyes) because they don't understand science or technology. In contrast, Anderson was educated in physics and apparently wrote for Nature and The Scientist, as well as The Economist.


Anderson's latest book deals with a new business model that is developing, particularly on the Internet, around the concept of "free."

I really feel that the so-called free model is extremely important for investors to understand but I don't have time to write up much, but hopefully will do that in the distant future. It is important because it is very disruptive and we may not have seen anything like it since the Industrial Revolution—yes, I mean that! All sorts of businesses are being turned upside down and it's important to realize what may happen. I haven't read Anderson's books or haven't read enough of his thoughts on his thoughts about "free" but, so far, I think Chris Anderson's thinking on the "Long Tail" is revolutionary but his views of "Free" seem a bit too muddled and uncertain. In any case, it's something to contemplate.

The Globe & Mail interview was short but it touched on some useful issues. Here are some issues that were discussed...


How Small Businesses Can Benefit

Dave M, Globe and Mail: Here's a question (and answer) that came in earlier this morning:

Mr. Anderson, can you give us a quick overview of the ways small businesses in particular are making use of the "free" strategy?

Chris Anderson: Small businesses use the "free" concept both as consumers and producers. For small businesses as consumers, technology has never been cheaper than it is today. Open-source software, hosted ("cloud") computing and special free forms of enterprise software mean that small businesses can get access to world class technology on a credit card budget.
For small businesses as producers, free is the best form of marketing. Small businesses who offer online products and services can offer a free version of their goods to show, not just tell, what they can do. And in the process they can save a fortune in advertising.

The barriers to entry for entrepreneurs in many industries has never been lower. This doesn't mean everyone will be successful but at least the average guy off the street has a shot. Even once-expensive customer relationship management systems, accounting software, inventory management systems, and so forth, can be rented or purchased for very low cost nowadays. Direct mail advertising costs on the Internet are also a fraction of what they were in the real world.

Impact on Shrink-wrapped Software Vendors Like Microsoft

Dave M, Globe and Mail: Chris, what do you think will happen to Microsoft as the "free" software trend continues? How can they adjust their business model to adapt?

Chris Anderson: Microsoft has been competing with free for three decades (they're even a chapter in the book). First getting people to pay for software in the first place (software used to be something you got free with a computer), then competing with piracy, free bundled software in new PCs, then open source, and now software as a service online. In each case, they had a different strategy, from moral suasion to lawsuits to releasing a free form of their software (Microsoft Works) to now moving their software online and offering free versions. Microsoft Office will be available as a free online version, and you can get all of their enterprise software for free today if you are a small business (under $1m in revenues and under three years old) as part of their BizSpark program. It's classic Freemium: free software to help companies get started cheaply, then convert them to paid once they're able to afford that.

A lot of people, including investors, think that a company like Microsoft is vulnerable to emerging "free" or "freemium" models. I beg to disagree. As Chris Anderson points out, Microsoft has been competing against various notions of free for 30+ years. If you go with the thinking of someone like Peter Drucker, who has suggested that the two functions of a business are design and marketing, then it's hard to see too many others who excel at both like Microsoft (sure, someone like Apple is even better on both counts right now but historically it has been an un-even effort.) A lot people focused on technology, or too young and unaware of the 90's, don't realize that Microsoft basically dominated because of marketing (the design portion was good but not spectacular.) For instance, MS SQL Server, a big portion of revenues now, only became dominant with Microsoft marketing.

I think the most vulnerable companies to the Free model are the enterprise software companies like SAP, Oracle, and the like. Although nothing is going to happen for many years, possibly decades, these companies can easily fall apart if someone starts renting or offer low-cost enterprise services (off a cloud or some future networking scheme.) There are issues with security, performance, speed, etc, but once those are worked out, I just wonder.

Anyway, it remains to be seen what comes of shrink-wrapped software companies.

How Do Some Make Money?

There was a question about how companies that give away stuff for free make money:

[Comment From Diana_G Diana_G : ]
I have a question from a consumer's point of view, there are websites such as www.swagbucks.com that offer users free stuff for searching the internet using their website or search bar. I was wondering how these companies made money? (I use this site a lot and was wondering is there a catch). Also, are there any other sites that offer users free things just for using their site?

Chris Anderson: Diana, although I'm not familiar with that site, those kinds of companies are usually doing some sort of advertising arbitrage (they make more from advertising than they pay you) or using an affliate model where they get a percentage of anything you buy from an advertiser. As for others, I do talk in the book about things being "cheaper than free", which is to say they pay *you*. This is usually done to gain market share or otherwise grab customers from free competitors, and Microsoft among others have paid customers to use their search engine. Ideally, the things they pay you with don't have a real cost (free access to otherwise paid digital services) or discounts on other products, but I've seen the whole range of experiments out there as people try new pricing models.

It remains to be seen how many of these companies can actually survive and sustain their business model. I think there are two categories here.

The first category, as Anderson alludes to, consist of companies "arbitraging" some pricing scheme. This is the easiest to implement but I wonder about their sustainability. If the arbitrage-type opportunity dissapears—say the businesses that they are arbitraging reduce their prices and match the lowest cost—then I don't think these companies will survive.

The other category involves companies that capitalize on market prices that are higher than their costs. This ties in more to the concept of the Long Tail in my opinion, and is common in digital products or services. For instance, the cost of selling music online may be very tiny. Storage costs, bandwidth costs, etc are very low and continuously falling; and you don't have printing costs, CD pressing costs, and so on. This allows some companies to give away products without actually losing money per se. In other words, the variable costs are very low, so once you cover the fixed costs, the product is near-free.


Anyway, I'll cover some of these concepts in the future...