Umair Haque / Bubblegeneration
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Tuesday, March 13, 2007

How Not to Think Strategically About the Future of ... Pt 4721758245


"...The lie of the Web 2.0 bubble is that free is the way to succeed in the new economy. That’s not true. The rules of economics have not changed. The best way to make money in the new economy, in the Web 2.0 economy, comes down to the same fundamental business model that has always existed: create something of value for people who will pay for it."

Wow, I cannot believe I read this on Gigaom. It's not just wrong - it's passionately narrowminded in the beancounterliest of ways.

Look, this is completely the wrong way to think about free. In fact, it's sophistry - but that's another story.

Let's deconstruct the errors in the argument above.

What is free? A business model - as the post suggests? No! It's just a pricing strategy.

But it's a very powerful pricing strategy.

There's a very simple reason almost all businesses dependent on complex network effects ultimately shift to free pricing. These aren't just 2.0 plays - in fact, free pricing can be seen at work across media, software and increasingly, consumer goods, pharma, etc. The reason is that there are powerful increasing returns dynamics at work.

In other words, free maximizes the potential for value creation.

Now, capturing value from "free" pricing is where we get stuck. How can we profit if something is "free"? The trick is that "free" isn't the business model; it's not even the profit model - it's just one end of how we price things.

So, to capture a share of the value we've created, we can take many paths. We can shift to services, we can resell consumption, etc.

Now, I think this is a really damaging post. Killing network fx is really what kills next-gen businesses - way before they ever have to worry about a profit model.

The point is that you can figure out revenue streams and profit models - but not if you've already destroyed your business by not thinking about the value created by free.

Look, I don't make this stuff up.

Liberating value creation from the strictures of price is the story of nearly every radical innovator in the last 5 years. It's the story of Google - how far would Google have got, if at it's birth, it worried about free vs not free, and charged us all pennies for search? Clearly, not very far.

-- umair // 12:05 PM // 4 comments


Comments:

Umair,

I'm so glad you articulated this. I'm so tired of hearing people talk about "free" services.

They're not free. They just someone else to pay for them. I had a similar argument with some guy on GigaOm who was saying that free dating sites were going to kill the vertical. He said that using price discrimination to keep out the spammers and stalkers was the only way, etc. etc.

Anyway, yes, I completely agree. Google couldn't charge pennies per search, so instead, they roll those up, and get a quarter or dollar's worth of attention out of us every thirty days or so when we click a relevant ad.

Free is never free in business. It's usually just "free for you" or "free for now" etc.
// Blogger Pete Kazanjy // 1:34 PM
 

I'd like to hear more about the free drugs ("pharma")
// Blogger Bill Seitz // 9:24 PM
 

Could you give some examples of start-ups getting to break-even from new models, at least comparable in size to, say, 37signals?
// Blogger Bill Seitz // 9:31 PM
 

I don't think the text you quoted is that bad. One way of interpreting it in the context of free could be to think of it as building an audience (something of value) to sell to advertisers (who are willing to pay).
// Anonymous Rob // 2:14 PM
 
 

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