There's an old saying out there - "pie's not free at the truck stop". And if you study thermodynamics at all you'll quickly appreciate the "2nd Law" (http://en.wikipedia.org/wiki/2nd_law_of_thermod...).
I've done free before - Mod_Gzip which in use on millions of servers around the world. It created value by saving bandwidth and speeding up page delivery. (http://www.whatsmyip.org/http_compression/ if your blog was compressed it would save you 67% in bandwidth).
We exchanged value (it took 3 years to solve the problem which boiled down to 52k of code) for attention - we're in virtually every IT shop around the world. Where we (me) failed was to extract value from that attention. We did "too good a job". Mod_Gzip has never had a bug report against it in 9 years of being in the public domain - it solved a problem and no one ever improved it.
Free is (IMO) a tactic not a strategy. Programmers have to be paid, light bills have to be paid - so ultimately while free "might" attract attention it is important to realize that it's just attention and just like your LP's will not keep giving you money unless your return a sufficiently high IRR - free can only ever be a tactic.
We learned from the lesson of mod_gzip and have adopted a different tactic with our mobile solution. There is a free "attention" getter - it does amazing things http://www.5o9mm.com/usecases/avc_1.html - but hopefully this time it will just get your attention - if so then this time around we've done a better job of anticipating the future needs of mobile customers and giving them just enough "pie" to say - wow this is really valuable to me, now where do I buy it.
Those last 6 words are the most important part of free.
fredwilson
· 4 months ago
Freemium, right?
cranstone
· 4 months ago
Yep.
ravisohal
· 4 months ago
How do you monetize user activity when that user can turn around and blog/tweet/youtube/flickr the news? I think the key issue of economic shift is right on target. It's not about what's free but what can now be produced from home or on a mobile phone using prefab platforms and delivery systems. When anyone, anywhere, anytime is a distribution and production channel it really makes today's economic models seem obsolete which are built around the a produce-distribute-consume model.
Arno
· 4 months ago
There is so little reference to Open Source which is doing "free" for years. One of the things to note is that free has side effects that build value and the more valuable your thing is the easier it is to monetize that thing in some way.
Besides attention gained from free distribution of the Open Source Software it creates (if infra is in place) a community of passionate users who not only pass the word on but start contributing back to make the software better and thus more valuable.
It's like Fred's blog, he gives the content away for free and he is doing his best to write valuable content but the real value is added by his great community commenting on his content and together make Fred's initial post much more interesting.
Create something great whatever it is and make sure you value/honor your users and they will add value back to make the creation worth selling extra's/services on top to pay the bills.
fredwilson
· 4 months ago
Open source has inspired a lot of what I think about and do
Arno
· 4 months ago
I know Fred but you hardly see it mentioned in these discussion about Free, only when something is really about Open Source.
dthull
· 4 months ago
Fred, when I read your post I thought "wow, finally I'll be able to get how freeconomics work".
Alas, after reading Brad's text I'm still lost. I post my comment here because this forum seems livelier (and more colorful).
I can follow his reasoning when he says that in an economy of information abundance it's attention that's scarce. But when he then states that attention will substitute money I suspect that he's joining the "overly enthusiastic cyber utopians" he criticizes at the beginning of his posts.
Somebody commented that "attention does not pay the rent" - and this sums it up quite nicely.
Isn't the real question *how* Craigslist makes all that money? Who's paying *real money* for which service?
One of the few things history can teach us is that nothing is for free and somebody has to pick up the bill. I would imagine that the investors in Union Square Ventures prefer getting their returns in $ rather than attention...
kidmercury
· 4 months ago
attention, in a way, can pay the rent. for instance fred blogs for free, in doing so he gets attention, which allows him to promote his portfolio companies, which helps him make money. the key IMHO is that attention needs to elicit a response or engage the user (i.e. get someone to comment, make a purchase, contribute to the site, etc).
i think one thing that is rarely mentioned in discussions of freeconomics is that freeconomics tends to work well with intermediary strategies, and is crucial to how markets get re-intermediated. IMHO that is where it is really at. basically once you get the attention you can start selling other people's stuff. if you do a good job of getting attention, you'll also get influence -- which can help you intermediate more transactions and sell more stuff.
fredwilson
· 4 months ago
Free gets you to a place where you can get paid
fredwilson
· 4 months ago
They are getting their returns because of your attention to this blog
dthull
· 4 months ago
I'm happy to contribute. :) Truly a great blog.
Question: how do they convert my attention to $?
My guess: investors see that fred gets lots of attention, therefore he must be well-connected and knowledgeable, so we trust him to make good investment decisions with our money.
fredwilson
· 4 months ago
Not exactly. Entrepreneurs connect with me here, it leads to an investment, which leads to a return on that investment
nkannan
· 4 months ago
Fred, This is a great debate. If a product or service requires capital, expertise, labor, and technology then it has opportunity costs. If all of this is provided for free to the customer, then someone has to underwrite it. If the currency is attention of audience, then long term retention of that attention in a noisy marketplace of freebies may require someone to underwrite these costs indefinitely until competitors give up and fold. Monetizing sustainable attention must wait until a critical mass develops. Again this is costly.
It is an eCarnival out there with a million experiments crying out for "attention". Let us hope that some day these debates return to basic economics of a business - predictable flow of user fees with the fleeting advertising revenues - to make it a sustainable business.
Nat Kannan
fredwilson
· 4 months ago
I don't think we are going to return to anything. We're going somewhere new
Prokofy
· 4 months ago
Did human beings evolve and not require food and shelter any more?
Nik
· 4 months ago
Fred,
This is fantastic. But you should edit your blog post and update it to include the below line which was really great!
"Since all these services require a large base of users for their filtering techniques work, you could just as easily ask why the services are not paying their producers. Debating whether to charge these same producers make little sense."
fredwilson
· 4 months ago
ok, i'll do that
scott truitt
· 4 months ago
I thought this was the killer quote:
"In a world where the scarce resource is some combination of time, attention, relevance and insight, those commodities become the medium of exchange in a parallel economy alongside traditional currencies..."
But it's a distant second to Brad's description of the USV investment strategy:
"… arbitrage the difference between the capabilities of the new medium and readiness of the existing economic and social structures to exploit those capabilities."
There's gold in them there hills.
fredwilson
· 4 months ago
Yup. We are trying to find it
Ben Atlas
· 4 months ago
Fred, yesterday Dan Ariely posted on this subject: http://www.predictablyirrational.com/?p=653&date=1 I am not sure what he considers "not nuanced" but clearly there is a psychological threshold of free that creates a different ball game so to speak. The point I am trying to make is that the progression is not linear or "predictably rational".
fredwilson
· 4 months ago
Ooh. I have to go read his post. Thanks for the tip
Ryan Graves
· 4 months ago
Ben, I'm reading Predictably Irrational now and am thoroughly enjoying this mans thought processes. I studied economics in undergrad and absolutely love Ariely's behavioral spin to the traditional understanding of the field. Thanks for sharing the link!
The fascinating element in that blog post is that it extends to how it could change the rest of the economy, especially at the government level.
"unless traditional governments can learn from the efficent governance systems of social networks and provide more for less"
is key to this debate. As health systems, to a point, and pension plans, very much so in various countries, become inflated Ponzi schemes, the day when the welfare state's limits will be tested might come more rapidly than previously thought with the efficiency and market optimality brought by the web.
Oh, it should not be "provide more for less", but "provide better with less".
fredwilson
· 4 months ago
Yes, I really like how brad ended the post and started something else at the same time
DGentry
· 4 months ago
I hope you'll expand on your own thoughts on this topic. What is the value of the attention and interaction of people using a site? Yesterday Facebook announced the acquisition of FriendFeed; what is the value of the time and energy, in various amounts from various users, that goes into sharing content and conversations online?
DGentry
· 4 months ago
If I may: the value of user engagement should not be measured in dollars. Even in cases where there is a pool of money available, divided amongst the participants the amount is so small as to be a de-motivator. This is definitely not the effect one would want.
Jeff Atwood of stackoverflow.com makes frequent references to the "expert economy." That is, the valuation of user contributions is in the admiration and respect of one's peers, which might be quantified and measured but must never be tied to a monetary value which could turn it into a de-motivator. Cory Doctorow referred to the quantization of respect as "Whuffie" in Down and Out in the Magic Kingdom; by making up a new word he avoided any residual meaning associated with an existing term like Karma or Reputation.
Well-executed expert economies bring tangible benefits to the high-whuffie population of the site without draining the resources of the site operator. Earning badges/widgets/gewgaws are a good example, like XBox Live achievements. The incremental monetary cost of these awards is zero or very small, yet are perceived as a significant reward for spending one's time contributing.
kidmercury
· 4 months ago
great comment. i'm convinced there's big money in badges, particularly as a tool for crowdsourcing.
fredwilson
· 4 months ago
I love whuffie and there is so much of it here at AVC
Prokofy
· 4 months ago
I don't want any whuffies. If I have earned any whuffies, give them away...to the poor in attention in the attention economy or...something.
Here's the latest hilarious page about the attempts of the pundits to try to push reputations and badges in Second Life again:
That's dangerous territory for me to get into given my investments and board memberships, but I'll try to come up with something that doesn't get me in trouble
John Bennett
· 4 months ago
Lots to think about in there, however, it seems to me that the crux of the argument is the assertion that Craigslist collapsed a multibillion dollar business into a $100, 000,000 business. Is this true? And what about Google's phenomenal revenue growth? How does that fit in?
alan p
· 4 months ago
I think Brad is correct when he says its still Good Old Economics, but that it needs to be calibrated for the new bottlenecks (just like Green Economics had to highlight the external costs of pollution etc).
On this overall subject though - far be it for me to pimp my own blog posts :) - but today I summarised a rather interesting piece of research at Wharton that shows that if transaction costs - or what they call "Friction costs" in the piece - go too far towards free, then it is very difficult to retain surplus in the value chain as the cost of competition outweighs any benefits of efficiency.
In other words if everything is free, you can't make money ;-).
fredwilson
· 4 months ago
Alan; feel free to pimp your posts here as often as you like. There are not many bloggers out there that I've enjoyed reading more than you. I don't always agree but then again reading differing views is the key to learning something new
Gilad Manor
· 4 months ago
Hi Fred, I need to ask, what does "the currency is not dollars, it’s attention" mean? if 100 people give me a minute of their time (each), is my minute then worth 100? how then is this governed by the same laws of economics as hard currency?
kidmercury
· 4 months ago
here's my take:
1. in the old economy, person A might make an instructional guitar video and sell it for $10 2. in the new economy, person B might put it on youtube for free just because he/she wants comments (so the comments/attention are the "currency" that provide the incentive for the labor). it might not be as professionally produced, but it might be good enough (especially when priced at free), and the comments and social nature of it might make the lower production quality more meaningful and authentic, in some instances.
fredwilson
· 4 months ago
Here's a way to think about it. I get paid for writing this blog but not in dollars. I get by the time everyone spends reading it. That leads to money indirectly for me but not directly
kidmercury
· 4 months ago
oh schnap! out of nowhere, brad burnham enters the gladwell/anderson beef -- AND WINS. damn. congrats to brad for puttin' the smackdown, not only by droppin' knowledge in the body of the posts, but more entertainingly with the provocative title directed squarely at gladwell/anderson. will they respond? hope not. when you lose, best to just be quiet about it and learn your lesson.
that's a great post, brad really nailed it. i do think craigslist is an indication of the economic model of the future, and that the referenced yahoo model is on the way out. i don't think there will be underemployment of any macroeconomic problems because CL-type businesses are too efficient; if anything i think these types of efficiencies are much needed and perhaps a saving grace for the government-created economic woes plaguing the rest of the economy. rather, i think there is an enormous opportunity of sorts in enabling businesses like CL, but as that opportunity becomes apparent, the margins will collapse due to competition, as they do in any maturing industry.
the more intriguing question, in my opinion, is what is the next evolutionary step in improving upon CL? that is in my opinion where the biggest disruptive opportunity lies (for web startups that can get by with very little capital, that is -- of course there are more capital-intensive opportunities where freeconomics is applicable and immensely disruptive, my favorite being RFID). i tend to think it is blogger-based communities, which of course explains part of my interest here at AVC.
i only wish brad had dissed govt as much as he dissed gladwell/anderson. he hinted at it politely with the last paragraph about how govt could learn from the efficiencies of social networking. too bad the existing govt won't learn a damn thing, and the people are too irresponsible to do anything about it. that's how disruptive opportunities get crushed by criminal incumbents. will the dream of freeconomics disrupting an increasing amount of industries get crushed? being an optimist i doubt it, but taking it for granted -- the strategy employed by most folks -- isn't helping.
fredwilson
· 4 months ago
Brad's headline is a take on malcolm's
kidmercury
· 4 months ago
damn, throwin' his own words back at him. i had no idea brad was so brutal. i like it!
Rather than commenting on 'another' perspective, here are my key points on free, which I have been repeating over and over here and there. I think there are too many fuzzy (and sounding fancy and deep) statements when it comes to discussing freeconomics. So, I stated using 'right' and 'wrong' to make it as clear as possible.
1. Ever decreasing marginal cost naturally lead to free. (Wrong) First, marginal cost is never zero. Unless you invented a perpetual motion machine, there will be costs of electricity, network, computers, storages, etc. Small price times many units, which is necessary if you want to make profits, are still a lot. Most importantly, living expenses of people involved, whether you classify it marginal or not, is substantially over zero.
Second, even if we assume the marginal cost was really zero, it does not justify zero price. There is always the economic cost, which is called opportunity cost, cost of capital, etc. Put simply, you don't want to do a business just because you are not making loss. Unless you make certain level of income, you have no reason to do it over a long term.
2. You should give away contents, and make money giving services, consulting, lectures, performances. (OK, if it's your philosophy. Wrong, if it is your logic.)
I think those who argue for this are generally against the idea of 'idea being sold at any price'. Because it's their value and philosophy, we cannot discuss it analytically. You cannot say I am wrong, because I like rock music more than jazz. So, if you don't like paid contents, you don't have to justify it analytically.
But if you are saying 'that's the only way to make money with contents', that's an analytical statement. And a wrong one. When you have two things to sell, you can make one loss leader and the other profit leader. Assuming piracy is reasonably controlled, it makes as much (or often more) sense to give lectures/consulting for free and make money with contents.
3. Free can be a powerful element to have in a business model. (Right) First, as someone commented quotating Dan Ariely (though I think it is too obvious to quote an economist), free seems to have a powerful psychological appeal. So it will bring more than usual increase in demand.
Second, free actually saves costs other than the price itself, namely transaction costs. By pricing a product as free, you don't need payment process, which costs time and money. So it is possible that free is economically better than a really low price.
4. Freemium is the best business model for many content and web services. (Not much to comment)
I generally agree with this statement, but there is little to argue for or against. Free samples are almost necessary and have existed always. And it is very efficient to give away free samples on the web. I think the statement should be more concrete, like having some quantitative threshold or distinguishing between what's just tradtional free samping and what's new freemium. For example, is HBR freemium or just traditional paid model with some free samples?
5. You should make contents free for occasional reader and charge niche contents consumed by heavy users. (Not sure, yet.)
This is difficult for me, as it appears to conflict with loyalty economics. In my view, loyalty economics is more solid and lasting management theory than RMS-ROS, BCG matrix type of scale-based strategies. Loyalty says loyalty of your customers, not scale per se, makes your business grow and healthy. And many problems of modern companies occur from the fact that they are nicer to new customers and focus too much on sales. You are treated best when you are a new subscriber, and they milk you over time.
I like loyalty economics, not only because it is analytically solid but also because it's morally high-road. Basically, you give back to whom you owe your living.
On the other hand, it is probably necessary to give away some samples to non-users. And when you have very innovative products, the ones who do the most favor to you are the ones who dared to use your products initially. I think in this situaltion, they are the loyal ones who deserve your special treatment. However, the problem is that, when you distribute your most popula contents for free, most of the users are not the brave early adopter who risked their valuable time and efforts.
My hypothesis is that this is a problem of degree or subtle business model design(free which content to whom and how much). Just like how much focus on sales and how much on caring loyal customers are a subtle degree issue.
I hope Fred Reichheld, Bain partner who started Loyalty Economics, to think about this from loyalty perspective. He seemed to find it interesting, but it would be really nice to listen to his perspective.
P.S) Is there a way to copy, other than copy and paste, this comment of mine to my blog? I tend to write long comments here. I think you have the capability to ask good questions, which I appreciate.
fredwilson
· 4 months ago
Click on the more link under your comment and select reblog this. That's how you make a comment here a post on your blog. Another feature request from your's truly
slowblogger
· 4 months ago
That's great. But it does not support Blogger.
William Mougayar
· 4 months ago
Yes, that was a well thought-out piece which focused on reality more than theory. My favorite part was "The network that takes attention and converts it into insight is also quite different than a traditional firm." More on the Freeconomics debate and its ramifications here: http://portal.eqentia.com/free (open access now).
Boris M. Silver
· 4 months ago
Fred is there anyway to merge the discussions on this post and Brad's post through Disqus? [just realized when I think of Disqus comments I think of the word "discussions" instead of "comments"]
fredwilson
· 4 months ago
I screwed up. I could have used the usv post's comment thread here and I didn't do that yesterday morning so it is too late now
Sorry about that
ShanaC
· 4 months ago
The big question I have, and still have, especially involving newspapers, but not exclusively so., is "who is going to create the right kind of link passage for my needs"
Ideally, as odd as this sounds, it is going to mostly be fragments of people like me, but not completely. There has been huge amounts of critique of living in an "only me" world, but I think people would pay for elite access to link passage that is really revelant to them. Examples come to mind such as Social Networking around PubMed to talk about the Issues in PubMed. Or a Social Network/Document creation around WestLex. Or even inside a bank, a social network for the bank just to communicate effeciently about what the bank is doing at the end of the day (and don't say SAP, it needs to go to the group up as well, as well as lineally, despite firewall rules) Brad posts keep reminind that I would do that, because it always brings down time costs to have help, especially help of those in the know.
The other question it brings up- as more social networks get linked together, how does it affect social networks and networked affects. I wrote this http://bit.ly/XZpDg a while back, about how I think the math is wrong for Reed's law and proposing something different. I'm feeling very uneasy about Reed...What does happen when multiple Social Networks start to interconnect, as they do now? How do you talk about attention, and finding, and cost, then? Who becomes the pack leader, and who ends up having the most valuable link? Still bothers me...Help on that idea would be so appreciated. It seems to be a fundamental problem of how to monetize into hard dollars the internet.
kidmercury
· 4 months ago
What does happen when multiple Social Networks start to interconnect, as they do now? How do you talk about attention, and finding, and cost, then? Who becomes the pack leader, and who ends up having the most valuable link?
great questions that too few people are asking, IMHO. i think new governance systems that dictate relationships between soc nets will be needed. i think these governance systems will then end up rivalling the governance systems of nation-states, but that is of course a more controversial route, likely to be filled with many beefs.
ultimately i think folks will need to find the soc nets that reflect their value systems, and that they will "live" in that world of their choice.
ShanaC
· 4 months ago
I actually have some guesses, but...this is the most I can say, anything more would be a blogpost (in process) and I do think is critical to understanding how long term people will come to understand technology, even if only superficially.
I also think people will pay for time as individuals if you can conceive of a world where time is in some way relatively equal to space. We tend not to live in any one space, nor in any one time. What if one could control all inward and outward travel asyncrously, as if one lived in a house with many partions and windows to change the view? The only thing is, one only let's the breeze in and out, because the house would be too open for your developing private needs...
davidshore
· 4 months ago
So how much is Chris selling his book for?
Exactly.
DaveinHackensack
· 4 months ago
Right. And how much will he charge on the lecture circuit afterwords?
This freemium evangelism seems like an inside joke sometimes. I suspect a lot of folks are buying into it (or claiming to buy into it) in the hopes that the attention they generate with their free work will eventually lead to them getting paid in cash for it, without fully digesting that the leading evangelists of the concept aren't waiting to get paid.
fredwilson
· 4 months ago
That's not entirely true. Chris, and seth before him, had his book on the net for free for a long time
egoboss
· 4 months ago
Always needs re-stating - good point, David.
For all the permutations of free downloads available of Free (oh yes - abridged, note), exactly. This publication isn't some exercise in intellectual altruism to spark a debate.
Debate is publicity. If you have a product, publicity inevitably leads to an increase in sales.
In a world where values are pretty confused (let alone economics), the free debate is so active because we're (those of us involved in it, to whatever extent) are largely online, talking about a world we have some vested interest in. We're not too interested in what's been happening to house prices, car sales, etc.
It will always be hard to assign a value to something digital, ethereal - hence the record industry holding on to the CD medium at the point of sale - so the consumer feels they get a tangible entity that can be extravagantly charged for (with no real assessment of value that can be logically justified), even though the cost is/was negligible in that hard medium - as ever, the value is in the content itself. Which is subjective.
Our biggest problem in this debate is that ultimately we're pretty simple creatures. Even the intellectual titans involved in the debate.
DaveinHackensack
· 4 months ago
"This exchange is still governed by the basic laws of economics but the currency is not dollars, it’s attention."
After reading Brad's post, here is a thought experiment: Union Square Ventures is considering investing in a start-up company. The entrepreneurs say, "We'll take your dollars, but, if we're successful, we're going to repay you in another currency, attention. We'll visit your blogs every day, and even comment occasionally." My guess is that you and Brad would laugh and tell them not to let the door hit them in the ass on the way out.
A quote from David Mamet's movie Heist comes to mind: "Everybody needs money. That's why they call it money."
kidmercury
· 4 months ago
you can make a lot of dollars by creating attention economies. reality television is a prime example: reality TV shows create an attention economy, in the sense that you have all these people doing labor (singing, dancing, doing weird stunts, etc) primarily for attention. there exist many opportunities for creators of reality TV shows to monetize the attention economy they are creating -- which is why reality TV has such high profit margins, and why it has become a dominant form of television programming, much to the bewilderment of those of us who wonder who is watching this crap.
DaveinHackensack
· 4 months ago
Kid,
See my reply to David Shore above: it's same dynamic at work with reality TV. Contestants ultimately hope that their attention will translate into cash, whether it's the $1 million prize offered by Survivor, or the big record contract offered by American Idol, etc.
kidmercury
· 4 months ago
there are lots of reality shows. dance your ass off, big brother, all the crap on MTV.....not all of them are giving out big cash prizes. compensation or the promise of compensation plays a part, but the production cost of reality TV is so low largely because the contestants are being compensated primarily with attention. i don't think the folks who go on "dance your ass off" or that show about having a gross job are expecting to make big bucks. also, compensation can be part cash and part attention. the more it is attention-based, the more profits are left for the creators of the attention economy.
froggertv
· 4 months ago
Attention Economies, a new term heard by me? can you please explain it mate?
fredwilson
· 4 months ago
I'd take attention in return if all we invested was attention
Nathan Bowers
· 4 months ago
Why is "free" so hard to understand? That's how TV and Radio work.
You get enough hydrogen in one place and boom, you have new star.
Get a big enough audience together in a way that you can harness the heat of their activity, and boom, you're making money for "free".
One more thing, TV's attention economy is passive, far less valuable to the world than the web, which is active and actually creates value (Google gets smarter, Wikipedia gets built, etc).
DaveinHackensack
· 4 months ago
The advertising-supported model of broadcast TV and radio developed when there was very little competition for broadcast media, and no DVRs to enable viewers to fast-forward through commercials. Advertising-supported content requires a relatively large audience. Maybe the web will evolve (or devolve) in this retro fashion, as most unpaid content providers drop off and focus on their day jobs while the most promising ones are hired or acquired by a handful of advertising-supported content publishers. Is that what you are suggesting?
Nathan Bowers
· 4 months ago
I'm suggesting that we've seen Free at work for decades and what's really being disrupted is the old passive consumption, interruption advertising, TV version of Free.
Now Free and Freemium can take many forms and can create huge value to society beyond just delivering eyeballs to beer commercials.
DaveinHackensack
· 4 months ago
Nathan,
Broadcast TV can be "free" (advertising-supported) because there are relatively few broadcast networks, so each can get a large enough share of the audience to make the free/advertising-supported model viable. This model breaks down when you replace a handful of broadcast networks with hundreds of satellite or cable channels, which is why satellite and cable are not free. It takes a large audience to support a content provider with free advertising, and relatively few web-based content providers have audiences that large.
davidshore
· 4 months ago
Nathan,
Keep in mind that when you watch "free" TV or listen to broadcast radio you are paying for the experience by listening to the ads.
If you subscribe to the feed you can listen without the ads. Then you pay with cash.
Either way, its not really free.
I've been wanting a service that lets me choose on the fly - I'll pay $0.10 per song with no ads when I have guests. When I'm not paying as much attention, I may choose to listen to ads and pay nothing.
Now, if you target the ads, your putting gas on the opportunity for the broadcaster, the advertiser and the service that enables it....
nkannan
· 4 months ago
TV and Radio are not free. it forces people to watch advertisements, which pays for expensive content development, for risk, and for profits. It is free to watch but the quid pro quo is one must wait for the advertisements in a chopped-up content delivery.
The internet bypasses these forced "attention" as people can use AD filers or click through. For it to be more like TV, every content will require user to watch an AD and may be even take an interactive quiz. Sooner or later everyone will come to understand free distribution of content over internet does not mean cost-free creation of high quality content. Someone is taking the risk and must reap the reward, by forced "attention" grabbing.
Nat Kannan
egoboss
· 4 months ago
Supply and Demand ... 'twas ever thus.
pawellubczonok
· 4 months ago
Nothing is free !!! The "free" software relying on advertising, is making people pay with their time reading advertising. Time is the most valuable thing we have. Pawel Lubczonok ThoughtExpress
Prokofy
· 4 months ago
Oh! Fred! Now I understand how you are able to make money. You've got this great partner that doesn't have the views you do about freeconomics!
You think it's "the market" reducing everything to $0 because, oh, Craig Newmark thinks ads should cost most of his customers $0 and only some escorts $25 or whatever, and undercut the Times. But that's not "a market," it's "a technocommunist campaign" with "Bolshevist" ideas.
Open Source=Close Society, plus, it costs a bunch cuz you have to pay a geek to run it and he endlessly charges up the wazoo for "consulting" to make this "free" wonky stuff work. A racket, if there ever was one.
The worst thing about opensource is that you think it should bleed as a culture and a governance mode into every aspect of life and you even want to foist it on education. This will fail. You haven't figured out how to help people generate wealth, you are participating in forced wealth distribution without think how ordinary people besides you can make a dime.
Here's the scariest part of what Brad is saying: "The network that takes attention and converts it into insight is also quite different than a traditional firm. The services they provide are more like those we expect from a government than a company."
You all celebrate Google, Facebook, Twitter, Craigs List. But...they should NOT be the government. That they are because they have a wired President under their control in some respects doesn't make them the government. The government should not be *this*. If the government becomes just a lot of big IT companies that use the users, we are doomed, it kills off freedoms and private property and civil rights needed to keep generating the value that economies require. This trendy and often vacuous notion of "the attention economy" forgets what the wellspring of attention is: discretionary time on computer systems that aren't exactly cheap. Discretionary time comes from paid jobs, that may or may not get a source of value in this system -- mainly not. Thus the attention-economy users scraping the data and trying to grab the attention to sell the ads are undermining the other businesses that create the ecosystem sustaining the people's attention.
vinaySingh
· 4 months ago
Can Freeconomics work when you are working on your own without any outside investor ? I guess not until you have some funds to support yourself and then build a traction around your product. But the problem is would the same people pay for the services if they are using it for free ? Can facebook or you tube charge its user ? If not then their revenue would always be around ads . Can this work for most of the web based companies ?
fredwilson
· 4 months ago
Ad supported web services can bootstrap without outside funding and many have
fredwilson
· 4 months ago
Ad supported web services can bootstrap without outside funding and many have
fredwilson
· 4 months ago
Ad supported web services can bootstrap without outside funding and many have
benjaminjtaylor
· 4 months ago
One of the more compelling articles from a long list that I've been following online and from a Squidoo debate Seth Godin put together a while ago http://www.squidoo.com/the-free-debate, (mentioned in the Burnham piece) a number of good position pieces on the list. In terms of "attention, relevance and insight, and how we are necessary participants in the creation of services like Facebook, Last FM" etc.... mentioned by Burnham, those are the "commodities" that often seem most overlooked.
Kidmercury made and important point about attention and paying rent. Coincidentally Anil Dash made a similar comment recently about his blog, in terms of the exposure it gives him i.e. business & making money. Dash also provided a great quote regarding Anderson's Book "these are books designed to create culture, presented in the guise of reporting on culture. I like that!" A great piece too on Fee if you have time to go back and read.
John DeMayo
· 3 months ago
"you could just as easily ask why the services are not paying their producers."
In many cases it's more cost effective to pay for producers "advertising" then it is to pay producers, given the minimum amount you need to pay someone to get them interested, and given you often get more users making it free and making people feel special, as opposed to paying them an insultingly low amount.
All Comments
There's an old saying out there - "pie's not free at the truck stop". And if you study thermodynamics at all you'll quickly appreciate the "2nd Law" (http://en.wikipedia.org/wiki/2nd_law_of_thermod...).
I've done free before - Mod_Gzip which in use on millions of servers around the world. It created value by saving bandwidth and speeding up page delivery. (http://www.whatsmyip.org/http_compression/ if your blog was compressed it would save you 67% in bandwidth).
We exchanged value (it took 3 years to solve the problem which boiled down to 52k of code) for attention - we're in virtually every IT shop around the world. Where we (me) failed was to extract value from that attention. We did "too good a job". Mod_Gzip has never had a bug report against it in 9 years of being in the public domain - it solved a problem and no one ever improved it.
Free is (IMO) a tactic not a strategy. Programmers have to be paid, light bills have to be paid - so ultimately while free "might" attract attention it is important to realize that it's just attention and just like your LP's will not keep giving you money unless your return a sufficiently high IRR - free can only ever be a tactic.
We learned from the lesson of mod_gzip and have adopted a different tactic with our mobile solution. There is a free "attention" getter - it does amazing things http://www.5o9mm.com/usecases/avc_1.html - but hopefully this time it will just get your attention - if so then this time around we've done a better job of anticipating the future needs of mobile customers and giving them just enough "pie" to say - wow this is really valuable to me, now where do I buy it.
Those last 6 words are the most important part of free.
Besides attention gained from free distribution of the Open Source Software it creates (if infra is in place) a community of passionate users who not only pass the word on but start contributing back to make the software better and thus more valuable.
It's like Fred's blog, he gives the content away for free and he is doing his best to write valuable content but the real value is added by his great community commenting on his content and together make Fred's initial post much more interesting.
Create something great whatever it is and make sure you value/honor your users and they will add value back to make the creation worth selling extra's/services on top to pay the bills.
when I read your post I thought "wow, finally I'll be able to get how freeconomics work".
Alas, after reading Brad's text I'm still lost. I post my comment here because this forum seems livelier (and more colorful).
I can follow his reasoning when he says that in an economy of information abundance it's attention that's scarce. But when he then states that attention will substitute money I suspect that he's joining the "overly enthusiastic cyber utopians" he criticizes at the beginning of his posts.
Somebody commented that "attention does not pay the rent" - and this sums it up quite nicely.
Isn't the real question *how* Craigslist makes all that money? Who's paying *real money* for which service?
One of the few things history can teach us is that nothing is for free and somebody has to pick up the bill. I would imagine that the investors in Union Square Ventures prefer getting their returns in $ rather than attention...
i think one thing that is rarely mentioned in discussions of freeconomics is that freeconomics tends to work well with intermediary strategies, and is crucial to how markets get re-intermediated. IMHO that is where it is really at. basically once you get the attention you can start selling other people's stuff. if you do a good job of getting attention, you'll also get influence -- which can help you intermediate more transactions and sell more stuff.
Question: how do they convert my attention to $?
My guess: investors see that fred gets lots of attention, therefore he must be well-connected and knowledgeable, so we trust him to make good investment decisions with our money.
It is an eCarnival out there with a million experiments crying out for "attention". Let us hope that some day these debates return to basic economics of a business - predictable flow of user fees with the fleeting advertising revenues - to make it a sustainable business.
Nat Kannan
This is fantastic. But you should edit your blog post and update it to include the below line which was really great!
"Since all these services require a large base of users for their filtering techniques work, you could just as easily ask why the services are not paying their producers. Debating whether to charge these same producers make little sense."
"In a world where the scarce resource is some combination of time, attention, relevance and insight, those commodities become the medium of exchange in a parallel economy alongside traditional currencies..."
But it's a distant second to Brad's description of the USV investment strategy:
"… arbitrage the difference between the capabilities of the new medium and readiness of the existing economic and social structures to exploit those capabilities."
There's gold in them there hills.
http://www.predictablyirrational.com/?p=653&date=1
I am not sure what he considers "not nuanced" but clearly there is a psychological threshold of free that creates a different ball game so to speak. The point I am trying to make is that the progression is not linear or "predictably rational".
http://benatlas.com/2009/03/the-five-question-i...
Thank you for your comment.
"unless traditional governments can learn from the efficent governance systems of social networks and provide more for less"
is key to this debate. As health systems, to a point, and pension plans, very much so in various countries, become inflated Ponzi schemes, the day when the welfare state's limits will be tested might come more rapidly than previously thought with the efficiency and market optimality brought by the web.
Oh, it should not be "provide more for less", but "provide better with less".
Jeff Atwood of stackoverflow.com makes frequent references to the "expert economy." That is, the valuation of user contributions is in the admiration and respect of one's peers, which might be quantified and measured but must never be tied to a monetary value which could turn it into a de-motivator. Cory Doctorow referred to the quantization of respect as "Whuffie" in Down and Out in the Magic Kingdom; by making up a new word he avoided any residual meaning associated with an existing term like Karma or Reputation.
Well-executed expert economies bring tangible benefits to the high-whuffie population of the site without draining the resources of the site operator. Earning badges/widgets/gewgaws are a good example, like XBox Live achievements. The incremental monetary cost of these awards is zero or very small, yet are perceived as a significant reward for spending one's time contributing.
Here's the latest hilarious page about the attempts of the pundits to try to push reputations and badges in Second Life again:
http://junkworld.weebly.com/achievements.html
On this overall subject though - far be it for me to pimp my own blog posts :) - but today I summarised a rather interesting piece of research at Wharton that shows that if transaction costs - or what they call "Friction costs" in the piece - go too far towards free, then it is very difficult to retain surplus in the value chain as the cost of competition outweighs any benefits of efficiency.
(see here http://bit.ly/4Ovm3 )
In other words if everything is free, you can't make money ;-).
I need to ask, what does "the currency is not dollars, it’s attention" mean?
if 100 people give me a minute of their time (each), is my minute then worth 100?
how then is this governed by the same laws of economics as hard currency?
1. in the old economy, person A might make an instructional guitar video and sell it for $10
2. in the new economy, person B might put it on youtube for free just because he/she wants comments (so the comments/attention are the "currency" that provide the incentive for the labor). it might not be as professionally produced, but it might be good enough (especially when priced at free), and the comments and social nature of it might make the lower production quality more meaningful and authentic, in some instances.
that's a great post, brad really nailed it. i do think craigslist is an indication of the economic model of the future, and that the referenced yahoo model is on the way out. i don't think there will be underemployment of any macroeconomic problems because CL-type businesses are too efficient; if anything i think these types of efficiencies are much needed and perhaps a saving grace for the government-created economic woes plaguing the rest of the economy. rather, i think there is an enormous opportunity of sorts in enabling businesses like CL, but as that opportunity becomes apparent, the margins will collapse due to competition, as they do in any maturing industry.
the more intriguing question, in my opinion, is what is the next evolutionary step in improving upon CL? that is in my opinion where the biggest disruptive opportunity lies (for web startups that can get by with very little capital, that is -- of course there are more capital-intensive opportunities where freeconomics is applicable and immensely disruptive, my favorite being RFID). i tend to think it is blogger-based communities, which of course explains part of my interest here at AVC.
i only wish brad had dissed govt as much as he dissed gladwell/anderson. he hinted at it politely with the last paragraph about how govt could learn from the efficiencies of social networking. too bad the existing govt won't learn a damn thing, and the people are too irresponsible to do anything about it. that's how disruptive opportunities get crushed by criminal incumbents. will the dream of freeconomics disrupting an increasing amount of industries get crushed? being an optimist i doubt it, but taking it for granted -- the strategy employed by most folks -- isn't helping.
1. Ever decreasing marginal cost naturally lead to free. (Wrong)
First, marginal cost is never zero. Unless you invented a perpetual motion machine, there will be costs of electricity, network, computers, storages, etc. Small price times many units, which is necessary if you want to make profits, are still a lot. Most importantly, living expenses of people involved, whether you classify it marginal or not, is substantially over zero.
Second, even if we assume the marginal cost was really zero, it does not justify zero price. There is always the economic cost, which is called opportunity cost, cost of capital, etc. Put simply, you don't want to do a business just because you are not making loss. Unless you make certain level of income, you have no reason to do it over a long term.
2. You should give away contents, and make money giving services, consulting, lectures, performances. (OK, if it's your philosophy. Wrong, if it is your logic.)
I think those who argue for this are generally against the idea of 'idea being sold at any price'. Because it's their value and philosophy, we cannot discuss it analytically. You cannot say I am wrong, because I like rock music more than jazz. So, if you don't like paid contents, you don't have to justify it analytically.
But if you are saying 'that's the only way to make money with contents', that's an analytical statement. And a wrong one. When you have two things to sell, you can make one loss leader and the other profit leader. Assuming piracy is reasonably controlled, it makes as much (or often more) sense to give lectures/consulting for free and make money with contents.
3. Free can be a powerful element to have in a business model. (Right)
First, as someone commented quotating Dan Ariely (though I think it is too obvious to quote an economist), free seems to have a powerful psychological appeal. So it will bring more than usual increase in demand.
Second, free actually saves costs other than the price itself, namely transaction costs. By pricing a product as free, you don't need payment process, which costs time and money. So it is possible that free is economically better than a really low price.
4. Freemium is the best business model for many content and web services. (Not much to comment)
I generally agree with this statement, but there is little to argue for or against. Free samples are almost necessary and have existed always. And it is very efficient to give away free samples on the web. I think the statement should be more concrete, like having some quantitative threshold or distinguishing between what's just tradtional free samping and what's new freemium. For example, is HBR freemium or just traditional paid model with some free samples?
5. You should make contents free for occasional reader and charge niche contents consumed by heavy users. (Not sure, yet.)
This is difficult for me, as it appears to conflict with loyalty economics. In my view, loyalty economics is more solid and lasting management theory than RMS-ROS, BCG matrix type of scale-based strategies. Loyalty says loyalty of your customers, not scale per se, makes your business grow and healthy. And many problems of modern companies occur from the fact that they are nicer to new customers and focus too much on sales. You are treated best when you are a new subscriber, and they milk you over time.
I like loyalty economics, not only because it is analytically solid but also because it's morally high-road. Basically, you give back to whom you owe your living.
On the other hand, it is probably necessary to give away some samples to non-users. And when you have very innovative products, the ones who do the most favor to you are the ones who dared to use your products initially. I think in this situaltion, they are the loyal ones who deserve your special treatment. However, the problem is that, when you distribute your most popula contents for free, most of the users are not the brave early adopter who risked their valuable time and efforts.
My hypothesis is that this is a problem of degree or subtle business model design(free which content to whom and how much). Just like how much focus on sales and how much on caring loyal customers are a subtle degree issue.
I hope Fred Reichheld, Bain partner who started Loyalty Economics, to think about this from loyalty perspective. He seemed to find it interesting, but it would be really nice to listen to his perspective.
P.S) Is there a way to copy, other than copy and paste, this comment of mine to my blog? I tend to write long comments here. I think you have the capability to ask good questions, which I appreciate.
More on the Freeconomics debate and its ramifications here: http://portal.eqentia.com/free (open access now).
Sorry about that
Ideally, as odd as this sounds, it is going to mostly be fragments of people like me, but not completely. There has been huge amounts of critique of living in an "only me" world, but I think people would pay for elite access to link passage that is really revelant to them. Examples come to mind such as Social Networking around PubMed to talk about the Issues in PubMed. Or a Social Network/Document creation around WestLex. Or even inside a bank, a social network for the bank just to communicate effeciently about what the bank is doing at the end of the day (and don't say SAP, it needs to go to the group up as well, as well as lineally, despite firewall rules) Brad posts keep reminind that I would do that, because it always brings down time costs to have help, especially help of those in the know.
The other question it brings up- as more social networks get linked together, how does it affect social networks and networked affects. I wrote this http://bit.ly/XZpDg a while back, about how I think the math is wrong for Reed's law and proposing something different. I'm feeling very uneasy about Reed...What does happen when multiple Social Networks start to interconnect, as they do now? How do you talk about attention, and finding, and cost, then? Who becomes the pack leader, and who ends up having the most valuable link? Still bothers me...Help on that idea would be so appreciated. It seems to be a fundamental problem of how to monetize into hard dollars the internet.
great questions that too few people are asking, IMHO. i think new governance systems that dictate relationships between soc nets will be needed. i think these governance systems will then end up rivalling the governance systems of nation-states, but that is of course a more controversial route, likely to be filled with many beefs.
ultimately i think folks will need to find the soc nets that reflect their value systems, and that they will "live" in that world of their choice.
I also think people will pay for time as individuals if you can conceive of a world where time is in some way relatively equal to space. We tend not to live in any one space, nor in any one time. What if one could control all inward and outward travel asyncrously, as if one lived in a house with many partions and windows to change the view? The only thing is, one only let's the breeze in and out, because the house would be too open for your developing private needs...
Exactly.
This freemium evangelism seems like an inside joke sometimes. I suspect a lot of folks are buying into it (or claiming to buy into it) in the hopes that the attention they generate with their free work will eventually lead to them getting paid in cash for it, without fully digesting that the leading evangelists of the concept aren't waiting to get paid.
For all the permutations of free downloads available of Free (oh yes - abridged, note), exactly. This publication isn't some exercise in intellectual altruism to spark a debate.
Debate is publicity. If you have a product, publicity inevitably leads to an increase in sales.
In a world where values are pretty confused (let alone economics), the free debate is so active because we're (those of us involved in it, to whatever extent) are largely online, talking about a world we have some vested interest in. We're not too interested in what's been happening to house prices, car sales, etc.
It will always be hard to assign a value to something digital, ethereal - hence the record industry holding on to the CD medium at the point of sale - so the consumer feels they get a tangible entity that can be extravagantly charged for (with no real assessment of value that can be logically justified), even though the cost is/was negligible in that hard medium - as ever, the value is in the content itself. Which is subjective.
Our biggest problem in this debate is that ultimately we're pretty simple creatures. Even the intellectual titans involved in the debate.
After reading Brad's post, here is a thought experiment: Union Square Ventures is considering investing in a start-up company. The entrepreneurs say, "We'll take your dollars, but, if we're successful, we're going to repay you in another currency, attention. We'll visit your blogs every day, and even comment occasionally." My guess is that you and Brad would laugh and tell them not to let the door hit them in the ass on the way out.
A quote from David Mamet's movie Heist comes to mind: "Everybody needs money. That's why they call it money."
See my reply to David Shore above: it's same dynamic at work with reality TV. Contestants ultimately hope that their attention will translate into cash, whether it's the $1 million prize offered by Survivor, or the big record contract offered by American Idol, etc.
You get enough hydrogen in one place and boom, you have new star.
Get a big enough audience together in a way that you can harness the heat of their activity, and boom, you're making money for "free".
One more thing, TV's attention economy is passive, far less valuable to the world than the web, which is active and actually creates value (Google gets smarter, Wikipedia gets built, etc).
Now Free and Freemium can take many forms and can create huge value to society beyond just delivering eyeballs to beer commercials.
Broadcast TV can be "free" (advertising-supported) because there are relatively few broadcast networks, so each can get a large enough share of the audience to make the free/advertising-supported model viable. This model breaks down when you replace a handful of broadcast networks with hundreds of satellite or cable channels, which is why satellite and cable are not free. It takes a large audience to support a content provider with free advertising, and relatively few web-based content providers have audiences that large.
Keep in mind that when you watch "free" TV or listen to broadcast radio you are paying for the experience by listening to the ads.
If you subscribe to the feed you can listen without the ads. Then you pay with cash.
Either way, its not really free.
I've been wanting a service that lets me choose on the fly - I'll pay $0.10 per song with no ads when I have guests. When I'm not paying as much attention, I may choose to listen to ads and pay nothing.
Now, if you target the ads, your putting gas on the opportunity for the broadcaster, the advertiser and the service that enables it....
The internet bypasses these forced "attention" as people can use AD filers or click through. For it to be more like TV, every content will require user to watch an AD and may be even take an interactive quiz. Sooner or later everyone will come to understand free distribution of content over internet does not mean cost-free creation of high quality content. Someone is taking the risk and must reap the reward, by forced "attention" grabbing.
Nat Kannan
The "free" software relying on advertising, is making people pay with their time reading advertising.
Time is the most valuable thing we have.
Pawel Lubczonok
ThoughtExpress
You think it's "the market" reducing everything to $0 because, oh, Craig Newmark thinks ads should cost most of his customers $0 and only some escorts $25 or whatever, and undercut the Times. But that's not "a market," it's "a technocommunist campaign" with "Bolshevist" ideas.
Open Source=Close Society, plus, it costs a bunch cuz you have to pay a geek to run it and he endlessly charges up the wazoo for "consulting" to make this "free" wonky stuff work. A racket, if there ever was one.
The worst thing about opensource is that you think it should bleed as a culture and a governance mode into every aspect of life and you even want to foist it on education. This will fail. You haven't figured out how to help people generate wealth, you are participating in forced wealth distribution without think how ordinary people besides you can make a dime.
Here's the scariest part of what Brad is saying: "The network that takes attention and converts it into insight is also quite different than a traditional firm. The services they provide are more like those we expect from a government than a company."
You all celebrate Google, Facebook, Twitter, Craigs List. But...they should NOT be the government. That they are because they have a wired President under their control in some respects doesn't make them the government. The government should not be *this*. If the government becomes just a lot of big IT companies that use the users, we are doomed, it kills off freedoms and private property and civil rights needed to keep generating the value that economies require. This trendy and often vacuous notion of "the attention economy" forgets what the wellspring of attention is: discretionary time on computer systems that aren't exactly cheap. Discretionary time comes from paid jobs, that may or may not get a source of value in this system -- mainly not. Thus the attention-economy users scraping the data and trying to grab the attention to sell the ads are undermining the other businesses that create the ecosystem sustaining the people's attention.
But the problem is would the same people pay for the services if they are using it for free ?
Can facebook or you tube charge its user ?
If not then their revenue would always be around ads .
Can this work for most of the web based companies ?
Kidmercury made and important point about attention and paying rent. Coincidentally Anil Dash made a similar comment recently about his blog, in terms of the exposure it gives him i.e. business & making money. Dash also provided a great quote regarding Anderson's Book "these are books designed to create culture, presented in the guise of reporting on culture. I like that!" A great piece too on Fee if you have time to go back and read.
In many cases it's more cost effective to pay for producers "advertising" then it is to pay producers, given the minimum amount you need to pay someone to get them interested, and given you often get more users making it free and making people feel special, as opposed to paying them an insultingly low amount.