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James Wanless

this is where I write

The folly of free

I’ll admit that I’m really qualifying the title of this, specific to business critical applications, regardless of what sector that business is in. We now seem to be in pre-bubble-burst 2.0, big-time. How long before the social web balloon pops in favour of more realistic and sobering economics? The social part is clearly here to stay, while the “everything-is-free” part can’t.

As a provider you can’t really offer something of value for free for a very long time. You need to have a business model that includes more than angel funding, venture capitalists or simply being bought by a big player. Particularly the last strategy will make you into a small part of a large ad platform. However, there’s only really probably a handful of services that are valuable enough to survive.

As an end-user, do you want to depend on free tools to deliver business-critical services? It might be nice to use the latest Web 2.0 technology for e-learning, but if you’ve built a nifty mash-up on an open API which suddenly disappears, or becomes not free overnight, how do you factor that into your course or program budget? And what of web services versus hosting an open source tool yourself? The latter makes far more sense than the former, but then you’ve got to have the thing you probably don’t (and the reason you went looking for a free tool in the first place) – technical support and programming/design skills.

The last and, perhaps, most important thing – free cloud applications and data ownership. Can you really manage your data and mitigate security risks?

Building value

While Facebook will clearly be around for a while, it’s not presently making enough money to have staying power. As Peter Schwartz said before Christmas:

Now, as we close the books on 2008, one might wonder if Facebook is actually worth anything. The company has grown rapidly by any measure, with estimated 2008 revenues of nearly $300 million. From zero to $300 million in four years is nothing to sneeze at. But the company is burning through cash much more quickly than it can replenish its coffers. Its electricity, bandwidth, data storage, and personnel costs are immense.

I think the biggest questions here are, other than the social graph, what real value has Facebook created for you? Not much, in an economic sense … and just try to remove your data completely.

Would you pay for news delivery? I’m not sure how to answer that one, except that I know I wouldn’t pay for the news AND the conduit. Maybe a subscription to a number of sources, but then a quick look in the news I get in Google Reader feeds everyday suggests not. BBC, CBC, and a couple local papers cover me pretty well. Everything else is more germain to work, school and personal interests.

For something like this to succeed it will take a good bit of effort. Internet users are used to information being free, and will balk at the idea of having to pay for it. The additional services that make this project compelling and valuable will also have to be easy for the average internet user to understand, and – let’s face it – we’re not there yet.

We can get all kinds of information from the web, lots of it of the opinion or review nature. However, if you’re talking about objective journalism, then I’m not so sure I’d pay for an app that delivers it, but I might pay for online access to the same thing I pay for a newspaper to get, particularly if the paper version disappeared. After all, it looks like online news is taking over print in a big way and the news business models haven’t figured out how to get people to pay for it online. Could an online, totally ad-supported news model work on a big scale? We’re probably about to find out. If you get past the enjoyment of flipping through a newspaper, the strain of the online version on your eyes, and the need to be at a computer, would you pay for a completely online newspaper? Is the value proposition solid?

Depending on the free cloud

Suppose you do find something of value. Let’s take a little app like Twitter. The fact that it presently doesn’t really have a business model isn’t stopping it from becoming useful. Whether you’re using it as a rapid update text service, or perhaps you’re learning to follow the people who are actually tweeting things you find useful, what if it disappeared tomorrow? The uses I’ve just described probably aren’t a big loss, but what if you were using a Twitter stream to keep critical communications happening between connected people in a group. It might seem ridiculous to do that with a free service, but lots of cash-strapped groups and individuals likely depend on it for some pretty important communications.

Beyond information services, what about cloud computing? From Zoho to Google Docs to Adobe Air apps to Live Presentations, you can now do a lot in the cloud, that you used to need a hard drive for. And what of the rumours of a GDrive? On the one hand, we’re seeing unprecedented variety in ways you can work directly on the web, and the power in those applications. These developments are great for productivity, access and democratizing information, but I’m not so sure allowing your data to be stored in the cloud is really completely to your benefit. Google makes a lot of money from selling ads based the content of your searches, mail messages and other intellectual property. What will they do with your data on a GDrive and how much control would you have over it?

A new way of doing business

According to the Chris Anderson from Wired, it’s partly a whole new business model. Quality applications and products, free to the end user and companies which are still making profits. He claims the shrinking cost of tech, coupled with the continual improvements in processing power, means costs continually plummet.

Mr Anderson refers to Moore’s Law, which states that computer power doubles every 18 months. The economic reciprocal of that, he says, is “the cost of a net unit of computer power falls by 50% every 18 months, which means that everything gets cheaper by 50% or more every year and a half.”

“Imagine a factory of the 19th Century where the labour got cheaper, where the steel got cheaper, where coal got cheaper, the real estate got cheaper, every aspect.”

“That’s why there’s such an imperative to make things digital, because you go from an economy where things get more expensive, such as oil and food – the economy of atoms – to an economy where everything gets cheaper, which is the economy of bits.”

However, people still need to eat. I think a little deeper analysis is required when you claim web software companies are making money. Some, yes. Most, no.

His claims about the costs being so low, that they don’t need to make much money doesn’t hold a lot of water in the long run, methinks.

“The new form of cross-subsidy is one where a tiny minority of people who really appreciate the product, really get value from it, can subsidize everybody else, because the underlying cost of doing things online, in digital, is so low that you can give away 90% of it for free.”

Going back to the Facebook example, there’s no long-term stable revenue model and their costs will likely burn anything they do have in reserve. The funding they’ve secured thus far won’t keep replenishing. While Anderson’s arguments about cost are probably true, producers of web services and applications have to make money eventually. Facebook can’t give away 90% of it forever, when they require thousands of servers in the next year to support their growth.

Pragmatism

We can expect some things to be free. We can expect certain bricks and mortar services to continue to move online, and we undoubtedly need to get our heads around new economic models. However, we also need to understand that, ultimately, there still will not be any completely free lunch. Putting your critical eggs in one cloud basket just yet could be a really dangerous thing.

Comments

Tony Wanless says:

Hey James:
As I’ve said often, it’s immutable: the value of free (to users) rapidly becomes zero. To providers, it’s in the negative, because they incur costs.

Social sharing aside, it’s human nature to believe that if something is free, its value is very low. If a price tag is put on it, it increases the value because it has provided a measure.

Yes, the great mass expects free. But increasingly, segments are recognizing that it’s not really free. Your information has a value, as does your attention (for marketing purposes).

I think many will start calculating when seeking out specific information — not what Paris Hilton did or said yesterday, but real information. And they’ll recognize that a modest price is in fact cheaper than “free”.

James says:

Thanks Tony. I got so caught up in factoring in the business realities that I didn’t touch enought on the very important point you’ve made.

The value of our own intellectual property and giving some piece of it away to pay for free apps is all the rage with social media and cloud computing gaining so much traction.

The price is actually pretty high and, as you’ve so eloquently stated, people only think of the dollars and cents.

Even with a user fee and commitment to complete data privacy, would there be any guarantee that Google, Facebook or Twitter still wouldn’t leverage your data?

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