Umair Haque / Bubblegeneration
umair haque  


Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Friday, August 13, 2004

Hi folks,

Here's a draft of a fresh piece that I had a lot of fun writing. Enjoy!

The Economics of Free � The Problems with Free Culture (1)

Many marked the bursting of the Net bubble as the End of Free. It wasn�t. We�re only now witnessing the real Beginning of Free � in everything from clothes, to traditional media, to web services, to academic journals. The Beginning of Free � by this I mean the growing economic and social legitimization of the old info-anarchists� notion that things �want� to be free - is having radically disruptive effects on society, business, and innovation. I�d like to discuss one here: the rise of barriers to consumption.

It seems paradoxical for firms to put barriers to consumption in place. But everyday, new invitation-only services � which are trapped in a perpetual state of beta � seem to make the rounds of the digerati.

Why is this happening? Why do firms increasingly deliberately lock entire groups of consumers out of the possibility of consumption? I argue that it�s an interminable consequence of the economics of the Beginning of Free.

If a free service is released on the Net, it�s by definition available to everyone who�s got a net connection. Now, firms are discovering that this costs them more than it benefits them. In fact, firms stand to gain only � as they always have done � by excluding those who can�t pay, in one way or another, for their products.

The costs of Free are fairly straightforward � the costs of scaling a service to meet the needs of all possible users. Clearly, this is a losing proposition for firms without massive scale economies � unless they can justify the benefits. But the benefits are trickier to understand, and here�s where the problem lies.

How do Free services get monetized? Well, firms must charge for access to their customers � that�s the heart of advertising and sponsorship business models. But all customers don�t have the same value to firms. Some part of the distribution of customers, in Free models, represents a net loss � nobody wants to pay for access to these customers. The marginal value of a customer, then, to the Free firm declines after a certain point. So how do Free firms balance rising costs against marginally declining benefits? Well, newspapers charge some nominal amount. TV networks use different kinds of shows to segment and discriminate amongst consumers. But Free models can�t use any of these mechanisms � they can only raise barriers to consumption, such as invitations and referrals.

The point is this: economic orthodoxy teaches that firms must always stop those don�t pay � in one form or another � from using their product. Exclusion is the heart of value. And those who are invited to the Beginning of Free are paying � firms are capturing gains from trading with them. Those who are not invited are those the firm doesn�t want to trade with � they represent a net loss.

Above I argued that firms realize gains to trading with customers from simply charging for access to them. But the truth is a little more complex: Free firms realize gains from consumers in a variety of forms: status benefits, demographic exclusion, technical expertise, and user innovation are some of the most powerful. By definition, not everyone can provide Free firms such benefits � that�s why barriers to consumption have been put in place. If you can�t pay, you still don�t get to play.

But wasn�t Free Culture supposed to make the Net a more inclusive place? Of course. And this is the problem: the unintended consequences of Free Culture might involve exclusion based not on a consumers� ability to pay financially, but his ability to pay in terms of status, technical expertise, innovation contribution, and simply belonging to the right demographic. Some of these are fair; some are not; the problem is that the intervening mechanism of money as a value exchanger has been removed.

This flies in the face of why markets work: because they reward value creation with money , which must be earned by passing the market test. Free threatens to replace the market test � what you�ve done (and by that measure, how much you can pay) � with tests biased towards status and reputation � who you are. In fact, the epistemology behind the Beginning of Free is, taken to it�s logical extreme, even more pernicious: it suggests that markets are completely inaccurate at rewarding people with money on the basis of their achievements, so firms must choose their own mechanisms to separate valuable (and thus those with the ability to pay) consumers from those who must be excluded.

But the barriers to consumption that are the inevitable but unintended consequences of the Beginning of Free are more than just unfair to consumers with open pocketbooks � they�re bad strategy for firms, and a deadweight loss to society. It�s bad strategy for firms because it artificially limits and slows the growth and evolution of new markets. They�re a deadweight loss to society because wealth which has the potential to be created is excluded and vanishes.

Now, of course, there is a model which remedies this situation. It requires a shift to Semi-Free. The concept is simple: those consumers whom the firm doesn�t want to trade nonfinancial benefits with in exchange for the right to use it�s service must pay financially. This way, firms optimize the value they capture from the full population of potential consumers. Free consumers give them nonfinancial benefits; non-Free user give them financial benefits. Barriers to consumption fall, the pie expands, and everyone�s happy.

There�s just one problem: will Free Culture accept Semi-Free models? It�s an ideological shift, especially to info-anarchists. To do so, they must first acknowledge that the unintended consequences of the Beginning of Free may be more unjust (and more costly) to firms, consumers, and society, than they otherwise thought.

-- umair // 4:10 PM // 1 comments


I have found your writings and your insights to be enlightening and brilliant.

I made a post about this article about "The Economics of Free" and applied it to the debate about the email stamp. I paraphrased your words and stated:

"Those producers (email senders) whom the consumer doesn�t want to trade nonfinancial benefits with in exchange for the right to receive their service (email) must pay financially (email Stamp)."

Do you think that I applied your concept correctly?
// Blogger Tim Stay // 7:00 PM
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