Russ Roberts

Chris Anderson on Free

EconTalk Episode with Chris Anderson
Hosted by Russ Roberts
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Chris Anderson talks with EconTalk host Russ Roberts about his next book project based on the idea that many delightful things in the world are increasingly free--internet-based email with infinite storage, on-line encyclopedias and even podcasts, to name just a few. Why is this trend happening? Is it restricted to the internet? Is there really any such thing as a free lunch? Is free a penny cheaper than a penny or a lot cheaper than that? The conversation also covers whether economics has anything to say about free.

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0:36Intro. Recent Wired article arguments: What's free now and why is it only going to get better? Old free: been around since the free lunch, San Francisco saloons; one thing is free but you pay for another. Psychologically powerful word. What is new has been enabled by the Internet. Almost all services are available in a free version. Google doesn't show up in your credit card bill. All the inputs, storage, processing, and bandwidth, are basically halving in price every 18 months. Previously, steel, labor, electricity fell in price every year. Enabled an economy with inputs so close to zero free that you might as well call it free. Challenging questions encouraged. Pace and relentlessness of it--price of steel falling for years would be unusual. What's puzzling is that would usually just mean falling prices. We could observe falling prices or low prices; low is not the same as free. Leap to free is driven by the technology but that alone would seem to suggest just cheaper, not free. Actual underlying costs are substantial. Email, Google, Yahoo. Marginal cost, not average cost. Marginal cost falls lower and lower. In 2002-2003, Yahoo was the leading email provider. Offered 25 megabytes. Heard rumors that Google was going to get into the market. Look at underlying costs of creating email service, basically storage, and noticed they were falling every 14 months. Google said they'd give away a gigabyte for free. Then 2 gigabytes for free. How could they beat that? Value going up, cost going down, curve going down: unlimited gigabytes for free.
8:27One thing better than free: being paid for opening an email account. Participate in survey could reward with a free computer or free TV. Network externalities--economies of scale, if you have a large number of subscribers you can do a large number of things; looking at one user isn't the right way to look at it. This economic model almost requires you to maximize your reach. Microsoft Office. Distribution in stores is costly, but on the internet becomes zero-marginal cost. All about scale. We've never seen a business before where that has been possible. In the physical world, you want to give one muffin away for free and sell the rest. In the digital world, you want to give 99% away for free and sell 1%. Some analogy in pharmaceuticals, but even they have distribution costs. You'd like to charge the 99%, but competition forces you to give it away to that 99%. Even just a handful of players is enough in getting the competitive solution. "Yahoo got freed." Every industry that can become digital will become digital; and every industry that does become digital will become free. Twist: easier for the newcomer to become free than for the incumbent. Existing firm--Yahoo--already has customers; to make it free they have to buy enough servers to offer service free to everyone. Newcomer--Google--can experiment, promise free and only buy a few servers to dedicate to their offer to get it started. Software, even services have become free. Divorce services now nearly free via websites. Tax services, travel agents.
17:55Skeptic: Close to free; cheap isn't free. Hard-cover book, used to go to bookstore, now go to Borders or Barnes and Noble; now go to Amazon. Can also go to half.com, not new; can often find it at less than $1. Why? Likely not making it up on the shipping costs. More likely: reputation building. Strong economies of scale; willing to lose money in the short run to make money in the long run. Cross-subsidize by selling advertising. Is that really an example of what we are talking about? Microsoft example: marginal unit priced very low, $300, educational discounts; wants a large base of MS users who are going to communicate with each other, share documents. No matter how valuable that is, is still not going to be zero. How do these people make money? Standard view of economics: to be in business you've got to make money, so free can't really exist. What that misunderstood is the ability of people to make money as they give stuff away. Media business, Conde Nast: media business has always been built around free--TV, radio, websites. Newspaper boxes on street sells not newspapers but advertiser visibility. Third party--the advertiser--pays. Surprising that the media model has proved so broadly applicable, but it doesn't disrupt economics. The other way to make money is freemiums, to give away 99% and the other 1% pays, subsidizing the free ones. Goog411, directory assistance service, call on cell phone, no advertising, completely free; what you are doing is training their speech recognition algorithm. Joe's Diner vs. Jose's Diner.
26:20Gift economy--the Wikipedias, the Craigs lists, blogosphere--no one making money yet things of value are created. Partly reputational value which can be sold to an employer. Problem with economics is that it really is largely oriented around a monetary economy, monetary incentives. Recognition of reputation, attention, non-monetary incentives are often better at encouraging people to donate their labor. Can you have an attention-economy, what is the money supply of a reputation-economy? McCloskey podcast; Adam Smith, The Theory of Moral Sentiments, talks a lot about these non-monetary economy. Standard economic tools are not particularly good at handling non-monetary aspects. Which markets will work better as gift markets? Hard to predict. Can talk about it ex post. Ex ante economists would have had trouble anticipating Wikipedia as a quality product. Wisdom of crowds.
30:20Free versus a penny: why is that important? The penny gap. Not significant economically, but psychological gap. Every time we are forced to make a choice that involves price we do an imperfect calculus, trying to estimate the value to us and asking ourselves if it's worth it. That is work. Even for a penny, it invokes the whole exercise in our heads. Micropayments. Why not just round out, take the whole psychology off the table? Economists do tend to undervalue the psychological effects. One cent does have the advantage that you do make a cent on each customer: Wal-Mart, Southwest Airlines, cheaper and cheaper but not zero. Baseball game: between innings, usually the mascot and some women, some men, take a cannon and fire about 20 t-shirts into the crowd. Zeal of the crowd of getting something for nothing. Standard joke about economists: can't be a $10 bill on the ground because someone would have picked it up already. Reality is that we are imperfect animals. Free has a magic quality, grabs your attention, turns on all your greed instincts. Microtransactions: eventually you get to a number so small that you might as well round down. At some point it would save you the transactions costs. Then you've got to find some other way to collect revenue. Stamps: why not just get a membership? Fed Ex versus postal stamps. Stamps are also being end-run by email, phone calls. Is there a way to let people mail all they want and pay a fixed price up front? Marginal cost is so low you don't even want to keep track.
38:32Charge zero and make money elsewhere: airfare, music. RyanAir, UK, flight from London to Lisbon for 5 pounds (about $8). What's going on is that they've redefined the business they are in. They make their money from rental cars, hotel reservations, cargo in hold, sandwiches, duty-free business, subsidies from offbeat locations where they bring tourists, gambling on plane. Like free drinks in Las Vegas. Pricing: if you make gambling free you may get a lot of people who don't like to gamble but who just want the free flight. Advertising mystery. Could be constantly harassed with advertising by the stewardesses in the back of the plane, with premium seats up front. Julian Simon proposed to airlines that when they overbook they auction off the seats; it works. Awkward to do it in an informal way. When organized by the airline viewed as normal. Person in airline seat can't gracefully offer you $20 to lean his seat back all the way; but if the seats are designed with different amounts of legroom way people don't object. Example: flight offered $500 voucher to give up seat; woman offered another $500 if you'd give up your seat to her. Enough of that and you've got class warfare. Or set of cultural norms: got to get out of grocery quickly and even quick line has 6 people. "I've got appendicitis and I have to get to the hospital," gets you an advanced place in line; but offering money wouldn't customarily be looked on kindly.
47:11There's no such thing as a free lunch (Tanstaafl). What do economists really mean by this phrase? Common interpretation: If you think it's free it's only because you are not counting the externalities and repercussions. Suppose you go up to a sort of friend and say "I'm going to take you to lunch, a fancy restaurant." Friend demurs. Maybe feels he might feel pressured to reciprocate. Or that he might be asked for something down the road. Is if free to you if you never intend to reciprocate or do anything even if asked? It may be free to you, but it costs someone else or costs you in opportunity cost. Everything has an opportunity cost--something else could be done with those resources. Walking down the street, someone presses into your hand that you recognize as a coupon for a meal at a great restaurant. No out of pocket costs, don't even have to deal with Russ's conversation, better than even daydreaming through Russ's conversation. Chris: What were you saying? It's free in the out of pocket sense, free in the sense of everyday language; but in fact it still costs you your time--the time you spend eating at the restaurant is time you're not doing something else. That's what economists mean by Tanstaafl ("There ain't no such thing as a free lunch"). Reading Wikipedia takes your time as a reader. Tiny cost, eyeball cost, zero compared to the alternative of looking up the information somewhere else--which would also have the eyeball cost. Friedman meant the opportunity cost. Heinlein, 19th century San Francisco bars, if you drank more than one beer you could get a free lunch. "Free beer tomorrow" sign in bars.
53:52Media before the internet: charged below cost and made it up elsewhere, or gave it away free like the Chicago Reader and made it up on advertising. Free is the foundation of modern media, advertiser driven. Google, software services. Media companies themselves are losing ground as they have to compete with more effective forms of advertising such as Google Adwords. Conde Nast, glossy packaging, high end photography. Non-measurability. Shift from pay per view to pay per click. No good model to prove that it works. TV, non-cable, zero out of pocket, watching one more hour wore out your TV but no charge. People left the room during advertisements or turned the sound down, but it remained a viable way to advertise. But don't people dislike popup ads even more? Now switching online to algorithmically selected lines of text. If a MS engineer writes a blog about what he's working on, is that an ad? Blurs the line. In a sense we are all advertising all the time. "I'm a one-man advertising bureau for the man called me." Most of us who blog rely on the newspapers and media to critique. No factual basis to claim "most." Without the NYTimes and Washington Post and Wired the blogosphere would be a very different place. The blogs though not as good are still in competition. Focus with infinite granularity. Attempts to charge for high quality by premium for online media have by and large broken down. What is meant by quality? Commodity versus non-commodity; relevance. I'll pay anything for the material relevant to me. The story's not over. Quote: technology web entrepreneur: "What I love is finding a $4 billion dollar industry that I can turn into a $4 million dollar industry." Media as a service to consumers is a win. Shared experiences. Who knows how we'll get our information in 25 years? Typesetters unions told us 50 years ago that they stood between us and tyranny.
1:06:16Book will be free in digital form. "I'm not in the book business. My publisher's in the book business but I'm not.... I'm the me business." Want to get the book out there to be read. Publisher is Disney. Two physical forms: one with advertising in front and back that will be free; but how will it be distributed? Bookstores won't do it. Conferences, subways. You get what you pay for. Do people value something less if it's free? Village Voice jumped the shark when it went free. But with Google they get mad if it's not free. How do you distribute the book so it evokes a positive effect? Chip in book so when you read about airline, an ad pipes up. Carbon sequestration and will pay people to throw it away. Did Disney give same royalty rate as earlier books? Yes. Advances versus royalty rates.

COMMENTS (48 to date)
Kmele writes:

While I largely agree with the thrust of Mr. Anderson’s thoughts–changing access cost may reverse, prevent, or slow the “freeing” of some services. Excess network capacity has, until recently motivated access providers to be mostly content agnostic. The Net Neutrality debate is primarily a question of just how much of this agnosticism should be maintained.

If access providers begin to charge “tolls” for visiting sites like YouTube, Facebook and BitTorrent, these content providers may in turn charge users directly and/or pay large fees to access providers. While in the later cases some service may remain free to users, it’s not difficult to imagine a competitive landscape altered dramatically enough to create rather expensive barriers to entry for would-be competitors.

While I object strongly to any form of Net Neutrality legislation, the possible impact of access costs are certainly worth considering.

Another very interesting show this week. Keep up the great work Professor Roberts!

David Youngberg writes:

TANSTAAFL comes from Robert A. Heinlein's 1966 classic The Moon Is a Harsh Mistress. I think part of the confusion that arises from TANSTAAFL is that Heinlein describes the idea as people consuming something with zero price but end up paying a lot of some complement. (In the book, the example is the free meal and the expensive drinks.) "Anything free ends up costing twice as much in the long run."

Economists, however, expand TANSTAAFL to mean opportunity cost. Even if the drinks were free as well, there could be a bookstore or an art gallery where the restaurant is. Resources getting the food could have been used to get office supplies or electronics. There's no such thing as a free lunch, but there IS such thing as a good deal and I think a lot of confusion rests because few see that distinction.

Jacob writes:

Dear Russ and Chris

I really enjoyed your podcast. It delivers so many interesting ideas. At Copenhagen Business School where I study we used to pay for our printing at the school, but we just started having free printing with advertisements on the back of the printing paper. I think that we in the future will see the media model being applied in many of the products we are surrounding in our daily life like envelopes, bikes or maybe even toilet paper.

Kevin writes:

Very interesting stuff. In an example from the music business, Nine Inch Nails just put out an album for free over the internet. ABC published an op ed that you can find by asking Google to provide you, for free, search results on the following set of terms:

may 9 2008 abc michael malone album

Roger writes:

Great podcast. Regarding the discussion on free lunches (and opportunity costs), an example that seems to hit home with my friends is Netflix.

I ask, "Netflix has no late fees, right?"

"No they don't, its great," they reply.

"Ah, so you must let you're DVDs sit on the table for weeks."

"Of course not, I want to watch more movies."

I also think that it is pretty neat that Netflix is able to turn demand (wanting to watch more movies) into a mechanism to share DVDs more efficiently.

Schepp writes:

Russ and Chris,

Excellent work. Just Sunday night, I was think how Russ needs to do a show on Econtalk and have Mike Munger interview him regarding the economics of Econtalk, including why it is free. I was very impressed with Chris and was interested to hear more of his ideas of Freemium that were starting float out.

I have many comments so I may comment again later. First, the free stuff ties back to the podcast with Munger when he was discussing bee keepers and orange production. It was not indeed free for the Munger family to have the bee keepers provide the bees to pollinate their orange trees. It was just that they sometimes paid in providing orange trees for the bees to collect pollin. I think that the discussion of truly free really needs to focus in on the what are the hard to see not readily monetized factors that are really being paid.

I would also point to free to one cent as compared to a solid changing to a liquid state. Tempature increases uniformly until it hits the phase change where a specific amount energy is required to change the solid to a liquid before the tempature rise consistently. This is similar to the transaction costs including those decision costs that Chris discussed really well.

I am very concerned about about charging a cost lower than the marginal cost. I just don't think that is useful. I think the different mode of payment needs to be addressed. I would also state that in Russ's example of the free lunch. Even if the individual does not pay by returning the favor in a multitude of ways. The free lunch is an option (opportunity) that the potential buyer is providing to the seller.

I also think that depreciation and appreciation are keys to understanding why things are not below marginal costs. If the transaction results in increase reputation that can be translated into future revenues this is appreciation in their brand. One should be careful about those firms that are alway promising future returns and are not bring home the bacon today (talk about a risk freemium).

Ajay writes:

Nonsense, Chris has the air of a traveling salesman as he carefully avoids topics or makes faulty statements. The real story is the exponential decrease in the cost of computing and the rise of online advertising, which are only briefly mentioned. It still costs money to buy servers and bandwidth so micropayments will have to pay for these one day. The only reason that the rich 1% subsidizes everyone else right now is because of the real problem of the difficulty of payment. There is no ubiquitous payment system in place right now, micro or not, that allows you to pay for online goods within 3 seconds. The online producers have routed around this by using freemium, charging the 1% who would be paying $1 for their actual usage, which is difficult to bill, $10 which covers the 99% who pay nothing. Free is a dumb buzzword that would-be apostles are currently using to trumpet advertising, before it is ultimately killed by micropayments. Regarding Chris's economic calculation argument, do you calculate how much it's going to cost you before turning a light bulb on? No, of course not and yet you use hundreds of dollars of electricity every month. Regarding economics only dealing with the monetary, of course they do as that is our only tangible, quantifiable medium of transfering our work to others. Nobody is going to accept a screenshot of your high wikipedia ranking in a grocery store in exchange for a loaf of bread. And finally, the free lunch argument was just dumb. The statement obviously means that Chris will end up paying some other way, such as for the beer, not Russ's macro explanation.

Herbert writes:

The theory of opportunity costs is related to scarcity thinking. What Chris Anderson and new economic theory tell us is that we're never running out of anything. In other words, it's how you apply your human ingenuity, your human mind and creativity to your physical resources that literally creates your business resources and your wealth. This way of looking at economics is totally different from conventional economic theory, which teaches scarcity.

Conventional economics, scarcity theory tells you that you live in a world of scarce resources. However, scarcity theory does not explain what we see around us in our modern technological, creative internet economy.

Moreover, the market economic system we call "capitalism" is based on FREE. The doctrine of free enterprise was launched by the Scottish philosopher Adam Smith in his book The Wealth of Nations, written in 1776.

Add to the concept of "free enterprise" the number of people you are willing to share your products or services with (the concept of 'free trade') and the idea of how well and how fast you know how to communicate through today's instantaneous global communication system, the Internet (the concept of 'free exchange of information') and you see that the concept of "FREE" points us to an economics of abundance.

Chris@Hampden-Sydney writes:

I've noticed an increasing level in the complexity of economic topics considered over the past few podcasts. I extremely enjoy it when you kick up the level beyond the introduction level.

Chris@Hampden-Sydney writes:

Also, I think you put too much thought into the free lunch argument. The free lunch has a very close cost, THE OPPORTUNITY COST. If I give you a free lunch worth $20 when you could be making $50 an hour, the cost is giving up that $50 an hour.

Jim writes:

An interesting rebuttal: http://mises.org/story/2971

Jonathan writes:

I agree Jim, here is a good section that should cause Anderson to reflect...

'Google offers us free use of their search engine and other web applications. Why? Because that is how Google attracts our attention to its advertisements. Google doesn't sell its online services to us; it sells an audience to its actual costumers, the advertisers. Google is buying our time and selling it wholesale. As time is a scarce resource, and time (and attention) demand is increasing as a result of fierce competition on the Internet, Google has to pay us ever more, according to the law of diminishing returns. This payment is made not in terms of money, but as storage and process capacity. That's why Google keeps increasing its "free" offering to us, its providers, in terms of, e.g., storage capacity for e-mail accounts.

If this does not prove to be enough, it is likely that these firms may start paying money in exchange for our time. According to Anderson's economic analysis, this would mean that marginal cost is now below zero, which is completely absurd.'

william fischer writes:

really enjoy the program, find russ to be a very amusing interlocutor, but i do think that the bumper intro music is not quite worthy of the enterprise....

lead generation is often a source of free offers. Free asset planning seminars, time-share stays,initial consultations, the massive "free to consumer" 20th c biz- the phone directory.

The 1 cent offer vs. a free offer isn't a desire to build a mountain of pennies or a cry for micropayment solutions, but an effort by sellers to limit a subsidized trial to individuals who will reach for their wallet, negotiate the shopping cart/checkout process, and have a credit card with enough headroom to make a purchase at a later date hence the "auth" charges incurred - approx 23 cents/per. Nominal charges serve a similar vetting process in other sectors.

quick additional anecdote:
free + tip: a "bike taxi" service in santa barbara offered free + tip rides to circumvent a restrictive gov't permitting process, it increased ridership and, ironically, avg payments exceeded the previous posted rates. Many bloggers accept donations/Amazon gifts, or free advertising through links, etc. what are the tax/regulatory implications of gift/barter economic activity?

Fabio Franco writes:

I too thought that the article "Is Our Future Really $0?" by Fernando Herrera-Gonzalez at mises.org raised some interesting questions:

"In the short term, price exclusively depends on the preferences of individuals and on the available stock; there is no dependence on costs. So, there is no direct relationship between the price of a good and its marginal cost.

But, finally, even if we were to accept that prices have converged to marginal cost, it must be noted that this cost is of no relevance to the decisions of the capitalist."

This sounds like a central critique to Anderson's thesis, which seems do resort to unsound economics to support it (something reminiscent of Marxian value theory?).

Thomas A. Coss writes:

Russ-
It appears that Chris received some free counsel from a learned Economist, perhaps he's on to something.

Economists have been too articulate on the rear view mirror interpretation of digital economics, it is interesting to hear a conversation seeking a broader understanding of these market behaviors and their effect on more traditional market understandings.

Thanks

Brad Hutchings writes:

Where to start... What I dislike about the piece Jim links to is its failure to recognize that one business model of free is to build up an audience. Once the audience is built up, you can find some way to monetize it, whether it be ads, premium services, etc. Chris is talking about business models that are outwardly free.

The interesting economic argument isn't in getting into the minutia and semantics of whether they are really totally and completely "free". The interesting economic argument is in figuring out what types of businesses can be outwardly free and how saturated the free universe can be. With the Yahoo! and Google mail example, Chris is saying that if cost of goods is plummeting to zero, you've got a good candidate for such a business even before it gets there. The flip side of this is that if you plan to sell a product, you have to figure out whether someone can compete with you for free.

One thing Chris didn't seem to touch on is that "free" gives producers certain liberties with quality and support. You almost got it with the 1 penny discussion. If there is a free alternative to your paid product, and the free alternative is crappy but passable, and your paid product is excellent, you've got to bring something else to the battle. Shareware and open source turned the software business upside down in the 90s. But why hasn't Linux supplanted Windows, or OpenOffice supplanted MS Office? There is a clear lesson in the limits of "free" there. But you get an F for using "Microsoft is a monopolist" if you try to answer ;-).

One last thing... Chris, a sincere thank you for packaging and proselytizing the ideas in The Long Tail and Free. These concepts have been the business model anchor to my ability to make a good living over the past 5 years. You've presented them in a way that's accessible to business people who don't necessarily have a deep interest in economic theory. You've made the conversation possible. See my link for how we're applying these ideas to getting kids to read and write.

mjh writes:

Dr. Roberts:

I just read your article comparing Bill Gates vs Linus Torvalds. I think that you miss something in your discussion of the incentives around the people who produce Linux. For a full discussion of this, I would recommend "The Cathedral and The Bazaar" from Eric Raymond: http://www.catb.org/~esr/writings/cathedral-bazaar/

But I can summarize at least a couple of incentives that I think you missed. I am a *very* small contributer to open source software. And these incentives motivate me to contribute my code to open source projects. Frankly, these are much bigger motivators to me than pride.

First, by having access to the source code I am *able* to fix bugs that show up. This is (for all practical purposes) impossible with closed source software. Which means that with opensource software, I get to fix things that I can fix. I don't have to wait for the vendor to fix it. Being able to fix something is a very strong motivator for why I do the work.

Second, contributing back those fixes is the cost of what I got in return for receiving all of the code that I got. I get millions of lines of code. I've contributed only thousands of lines of code. From an ROI perspective, I receive many orders of magnitude more than I contribute. So it's worth it.

Please note, however, that the code that I've contributed was frequently tweaked further by the maintainer of the project that I contributed to. In other words, my exact code doesn't get implemented into the project. It's hard to take too much pride in the code I contributed since it's typically tweaked to fit better into the code base. As a result, pride doesn't really play as much a role for me as the above two incentives.

My main point is this: the geek incentive is IMHO much bigger than just pride.

$.02.
- Mark

James writes:

I agree with Ajay that Chris does not really sound like someone who knows what he is talking about. Rather he sounds like a journalist-turned amateur economist hopped up on too much coffee (Chris if you read this please take it as a constructive warning not an insult)! This podcast seemed to leave a lot of important aspects of the "free" digital economy unexplored (such as piracy and intellectual property). Isn't the basic question really, "Does standard economics apply to the digital intellectual-property internet market?".

Why did Russ let him get away with saying that “software goes free”? Last time I checked video games still cost $50 a pop and have for a long time (I remember buying Final Fantasy II for $50), old Windows XP still costs $100-$250! I don’t think “software” generally is a good example of what he is talking about, a lot of good software unfortunately still costs an arm and a leg. Sure there is a lot of great free software too, but he needs to explain what is special about the free stuff vs. something like Adobe Creative Suite. The discussion did not convince me that the core of what he is talking about really extends beyond news/opinion media, and other similar ad-supported information services (email, MapQuest, search engines, etc). The directory assistance example was a special case, not part of a general trend.

On micropayments, Ajay's point about light bulbs is a great one. The problem with micropayments is not that they miss the magical "freeness"; it is the psychological salience and hassle of the transaction. If there were an invisible way to auto-debit my account $0.50 every time I downloaded an episode of House, I would treat it like a service instead of a piecemeal product; just like electricity. I would try to conserve my overall consumption, but I would not be weighed down psychologically by the cost per episode. Since there is currently no such service I am forced to either watch it live, TiVo it, or download a bootleg version. This is why people love subscription services like DirectTV, Netflix, Gamefly, etc.

I would say rather that the exciting future is in subscription services and invisible forms of payment, not in “free”.

I thought the long tail episode was better.

Chris, you have some great ideas but they need more polish!

mjh writes:

Correction: I should have said, "I get billions of lines of code." Not "millions".

Martin Brock writes:

mjh:

You make a good point about open source. Open source is not "free" in the "free lunch" sense. It's a non-monetized exchange, a service for service barter. It's true that some people use open source software without ever contributing, but this use imposes no cost on the people who do contribute, so it has no effect on the barter. Software to which I contribute is not worth less to me because someone else uses it without paying for it.

Open source software developers often are paid monetarily by some organization benefiting from the continual improvement of a software package; however, insofar as a developer contributes to a package solely for the barter value of using other contributions (as well as the freedom to debug, learn from other code and so on), he enjoys another benefit as well. He pays no tax on the transaction. If I did pay you a bit for your contribution while you paid me a bit for mine, and if we paid one another equally, the transaction would be far more costly, even if our accounting costs were negligible, because we'd owe so many taxes.

The "free rider" who uses the software without paying us anything costs us nothing in reality, but the statesman's cut is very real. In other words, the non-contributing user's free ride is less costly to us than the statesman's free ride, and since we must choose between the two, we choose the barter transaction.

People barter this way all the time, of course. My sister is a vet and often barters her services for non-monetary payments. She deworms your dog and spends a few nights in your B&B. No money changes hands. No one reports the exchange to the IRS. For most of human history, most exchange occurred this way. Money is an effective accounting device, but that's all. What the digital age is doing in part, I suspect, is providing new modes of bartering. Products are not "free" as much as exchanges are "under the table" and out of the sight of the IRS.

Martin Brock writes:

Brad:

Microsoft's copyrights, software patents, trademarks and other intellectual property are statutory monopolies as a matter of fact, and all of these monopolies and more interact with the value of standards to increase the value of Microsoft services. Why would I get an F for stating the obvious?

It's much too early to say that the persistence of Windows and Office, over Linux and OpenOffice, demonstrates some fundamental limitation of the open source model. A surprising amount of new Unix development is underway, especially on the server side; however, I'm not sure that Linux and OpenOffice, or open source per se, are the primary threats to Windows' supremacy.

Thin clients, primarily software delivered over the web through browsers, seem a more likely threat. Google Docs seems more of a threat than OpenOffice. It's "free" but not strictly open source. Google Maps and its competitors are also killer apps threatening more conventional, proprietary software delivered on a pay-per-copy model, and Google is developing offline versions of some of this software. You'll still use the browser interface, but some apps will be available offline.

We don't abandon Windows for Linux. We abandon Windows for our web browsers, including browsers running under Windows. Once this transition occurs, we don't care so much whether our browser runs on Windows or a Mac (which now runs a flavor of Unix) or Linux. I practically fall into this category now when I'm not working. I endure Window's incredibly clunky boot sequence only to open my browser.

Practically all of the software I use regularly, personally, is inside the browser window now, so maybe the next time I buy a personal laptop, I'll finally try a Mac, but I won't buy the Mac for Mac OS or any Mac applications. I'll buy it because it runs Firefox as well as Windows.

Brad Hutchings writes:

I listened to the podcast again tonight, and another thing struck me. A common rhetorical device in pop business and pop economics books is to simply explain a likely complex phenomenon. In the podcast, Chris offers the explanation of GOOG-411 to be that they are training their voice recognition algorithms for regional accents. I don't doubt that there is some truth to that, but it seems like too simple an explanation. Before launching and promoting the service, they had to have some idea of how much usage they'd need to get to get such training of their algorithms and when diminishing returns would kick in. They've also got to consider the impact on their brand if they change the service or eliminate it. There was a lot of confusion when they phased out Froogle and moved it to Google Shopping, for example. So what happens if GOOG-411 gets way bigger than they need and becomes something they can't shut down or scale back without hurting the Google brand?

A book on Free would be more interesting in my estimation if it showed the agony of a move to free decision. I've been involved in two such decision processes that made it to free. They were agonizing. There was tremendous discussion, weighing of trade-offs, repositioning of pay points, etc. Among the non-believers, there is no leap of faith. If you're going to give something "valuable" away for free, then you're on the hook to replace the revenue from somewhere else immediately, not ride the adoption curve and figure out how to monetize the audience later. Established and large players can line up large audiences for a free initiative easily. Small, unknown players have to compete with a lot of noise even in the free space. If the network you create is very tightly connected though, you can get to profitable with a smaller network. It's not just eyeballs and earballs (great word, BTW), it's how they interact with your product. We need a word for that. Most people new to free will want the cookie cutter recipes. In reality, the challenge of free is building up the right user base with the right properties and paving the way for opportunities to monetize to arise. Oh, and when free gets the attention of a monetization avenue, you may end up battling with that source of money to keep the product free. For real. Been there. It is an ongoing battle to keep the value of a free product evident to all concerned.

I suspect that Chris's book will be the first of a whole genre of business books about free business models that gets business people, business schools, and maybe even academic economists interested in the nuances. No offense Russ, but I read your piece on Linux and thought it was basically the same morality play of how passionate the volunteers are with a side of chaos as, say Eric Raymond's piece. Many small to medium sized development shops and teams within large companies are leveraging the distributed chaos model already. The last time I visited Microsoft in late 2001, it was clear that they were already leveraging the best of that kind of flexibility with the benefit of the chaotic people having rooms of hundreds of computers with precisely documented configurations that they could test their code against on an hour's notice. Chris, your challenge isn't to rehash freeware, shareware, and open source software, which contributed a bit to the foundations of free a decade ago, but to look at products and services that can now go free because of tightly coupled network effects of user bases, technology costs dropping to zero quickly, and creative pay points found by companies. Getting back to the GOOG-411 example, I have a feeling that mutation and natural selection (evolution) offers a more accurate explanation that intelligent design, although the latter may satisfy many people's need for something more intellectually pleasing.

Ethnic Austrian writes:

Interesting podcast.

What has been overlooked so far in the podcast as well as in this discussion, is the mechanism of copyleft licences used by free software projects as well as wikipedia.

The license Wikipedia uses grants free access to our content in the same sense as free software is licensed freely. This principle is known as copyleft. That is to say, Wikipedia content can be copied, modified, and redistributed so long as the new version grants the same freedoms to others and acknowledges the authors of the Wikipedia article used (a direct link back to the article satisfies our author credit requirement). Wikipedia articles therefore will remain free under the GFDL and can be used by anybody subject to certain restrictions, most of which serve to ensure that freedom.

A lot of contributors, especially commercial entities like IBM, don't contribute for altruistic reasons to free software projects, but because it lowers their cost compared to starting from scratch.

These types of licences also prevent a lot of traditional business models.

@Brad Hutchings,others:
Microsoft had to discount Windows in the third world and is now starting to do so in the Ultra Low Cost Laptop market that recently emerged with the Asus EeePc, OLPC etc. As PCs get cheaper, Microsoft is forced to compete on price. So Windows users are benefiting from the existence of Linux.

Regarding newspapers and other traditional media:
Newspapers are subsidized in Austria as well as other small countries. I am usually against subsidies, but this is probably a good thing, since a healthy democracy needs traditional brick and mortar journalism. So far, I don't see bloggers being able to replace that, as bloggers only blog about their narrow field of expertise, but are usually even too lazy to pick up the phone to get a story from non-blogging sources.

Meanwhile, the TV industry is feeling the pressure of TIVO, piracy and a changing ad market. They are selling DVDs now, but it is only a matter of time until everybody can download an HDTV show in a matter of minutes for free.

The artificial scarcity intrudoced by governement enforced copyrights is disappearing. This destroys the incentives to produce expensive tv shows. I don't see a solution to the problem on the horizon.

Will the future be one without The Sopranos and The Office? Will the only new stuff we get be Diet Coke + Mentos vids and piano playing cats? I sure hope not.

Brad Hutchings writes:

Guys. "Free" is a post open source, post copyleft phenomena. This thought experiment ought to distinguish it for you. If Microsoft were to discount Office or Windows to the point of being close to free, the copyleft crowd would call Microsoft's actions anti-competitive. Open sourcers are hung up on the source, not thankful that some services have come down in price to free or near free. To them, free as in beer isn't free as in speech, right? Tell that to a thirsty frat boy.

@Martin: Linux has been poised to dethrown Windows on the desktop for a decade, for exactly the reason you sited: that everything interesting is happening through the browser. Au contrair mon frere! There is plenty of interesting left on the desktop, only augmented by the network. Let's see your browser do 30 frames per second of a first person shooter, print booklets, sync with your iPod, etc. Of course the price of Windows will come down as it reaches untapped markets! The truly funny thing happening in the third world space is that evil corporations like Asus and Microsoft can deliver a package competitively priced with and far more relevant than the überpolitcially correct OLPC project. Go figure!

Anyway, of the software developers I know who are considering or doing free these days, it's not about open source. Far from it. They might bring an open source angle in if it gets them needed street cred with that crowd. They're certainly more religious about providing a valuable service to a large customer base and making money. Playing nice with the geeks is at best something they might or might not do in the course of business.

Ethnic Austrian writes:

@Brad:
Who cares what some ideologues would say about Microsoft competing on price? It wouldn't change the dynamics of the situation.

If in fact the entire open source world would think like Richard Stallman and Negroponte, then copyleft wouldn't have been necessary in the first place.

Your thought experiment lacks a business model that would allow Microsoft to give their cash cows Windows and Office away for free, while still paying for the entire development cost. If they had to reduce the prize to almost free, it would then probably make sense to them to open source Windows and Office altogether or at least partially to reduce development cost.
(This btw. would make Richard Stallman happy)

You got your facts wrong on the Asus EeePc. The first generation was Linux only. Windows could only be added as a hack. The new version will be available with Windows XP (not Vista). So it is Microsoft that was forced to react by discounting and keeping XP alive. They had wanted to kill XP it against many of their customer's wishes.

What Negroponte got right, is that there is utility in ultra low cost laptops. What he did wrong was to stubbornly refuse to sell the OLPC to those who would have been willing to pay for this utility. It is a classic case of "Oh my god, the wrong kind of people want to buy my product and the right kind of people don't". LOL

Brad Hutchings writes:

I guess my point is that I don't think the open source crowd is terribly relevant to the "free" game. Case in point: OLPC and Apple. Steve Jobs offered them Mac OS X royalty free, and Negroponte rejected it. That was when I realized that insistence on open source (or some subset like GPL) wasn't so much a new religion, but just warmed over "not invented here" wrapped in philosophy. We've seen countless companies and industries flame out from NIH attitudes. Or think of the hand-wringing about Chinese products -- Not Manufactured Here. Open source will lose its relevance due to its insistence on Free Speech when Free Beer (and damned good beer at that) is what most people are interested in.

Let's state the obvious here... You can't charge for some good unless you have some limited monopoly on that good. If I'm selling grapes for $3/pound in my fruit stand, and the fruit stand next to me is giving the same grapes away for free, I'm not gonna sell any grapes to even quasi-rational people. If I'm giving away a product and selling advertising, I'm not going to be able to sell advertising if everyone else can give away or acquire the product without me in the middle. This is where a significant portion of the open source world jumped the shark. GPL 3 seeks to eliminate this kind of competitive advantage that makes "free" business models possible! So Stallman et al want to take away the ability of companies to provide free (insert service here). Who is the thug now?

At any rate, Apple already found the business model for a free operating system. It's probably super messy and much more than "if the poor third world kids use the Mac OLPC laptops now, they will buy iPods when they have enough to eat". But it exists and Microsoft could certainly copy it, right? XP is an asset for Microsoft. They may not want it to compete so much with their more prized asset, Vista, but they're not "forced" to do anything with it. They're milking it for all it's worth as opportunities come up.

Martin Brock writes:

Brad:

If Microsoft were to discount Office or Windows to the point of being close to free, the copyleft crowd would call Microsoft's actions anti-competitive.

No, they wouldn't. Where is the "copyleft crowd" calling Google Docs anti-competitive? Google Docs is already free as in beer, and it's not open source, though it could be.

Open sourcers are hung up on the source, not thankful that some services have come down in price to free or near free. To them, free as in beer isn't free as in speech, right? Tell that to a thirsty frat boy.

"Free as in beer" has nothing to do with open source, and "free as in speech" isn't very close to the mark either. I've paid for copies of Red Hat Linux. If you can build Linux from the source code, more power to you, but the overwhelming majority of users happily buy a copy for the documentation and product support. Open source software is not free as in beer. It's costly to develop and costly to use. Developers are paid, and users pay.

Open source is "open as in accessible and malleable" and "free as in market". There's nothing remotely "left" about it. Closed source is further left than necessary for most purposes, and software patents are the extreme left. The principle behind open source is transparency and the rapid diffusion of innovation. The web spread much faster, because browsers had a View Source option from the outset. No one thinks this option a problem, because it has always been there, but early web development could just as easily have followed the closed source model. If it had, progress would have been much slower.

Java applets did follow a closed source model, and Java failed as a web development language, soundly defeated by more open approaches like Javascript. No central committee of the Copyleft Party dictated this outcome. On the contrary, all the dictating comes from the software patenters.

A single copyright standard applying both to source code and to a novel is absurd. It's simplistic central planner thinking. Source code copyrights should last a decade or two, more like a patent, and software patents shouldn't exist at all. This standard is far freer, in the sense of a free, competitive market for software development services, than the direction we've been heading for the last decade.

Somehow Bill Gates managed to become the richest man on Earth without any software patents, and he likely wouldn't have done it with software patents, since Apple then might have won the Mac "look and feel" dispute. The idea that we can't expect innovative software development without patents is ridiculous. We've had it for decades.

If you really want to protect source code, it's not so difficult. Source code copyrights primarily protect source code developed within a corporation from the people developing it, to prevent the developers from competing with the corporation that sponsored the development. I think these copyrights are defensible, but software patents are a far more extreme prohibition of competition, and software developers oppose them most for this reason.

@Martin: Linux has been poised to dethrown Windows on the desktop for a decade, ...

No, it hasn't. I never expected Linux to unseat Windows on the desktop.

... for exactly the reason you sited: that everything interesting is happening through the browser. Au contrair mon frere! There is plenty of interesting left on the desktop, only augmented by the network. Let's see your browser do 30 frames per second of a first person shooter, print booklets, sync with your iPod, etc.

Not a problem at all. I have streaming video now, over the web, and I can play anything through the browser window. I don't need to be online. I print online booklets, but I rarely print more than a few pages. Why would I? Adobe has browser plugins, and HTML makes a decent document for printing if you know what you're doing. I've done most of my documentation in HTML for decades.

If Apple wants me to sync with an iPod through a browser interface, it can be done, but this view is short-sighted. The iPhone is a browser interface itself. Soon my primary PC will be six to eight inches across. It'll be my phone, my mp3 player, my PDA and my wireless web browser. It'll sync to my full-sized keyboard and monitor wirelessly when I sit down at my desk. I won't even take it out of my pocket. I can have most of this stuff now.

Of course the price of Windows will come down as it reaches untapped markets!

It won't matter. It's not about price. It's about thin clients and distributed network services. Microsoft tried to dominate this arena and failed. It tried COM and DCOM and failed. It tried to dominate the browser and failed. It tried to compete with Yahoo and Google and failed. It's trying thick .Net clients, and I'm not sure it's succeeding. I use ASP.Net for web applications, mostly on the server side, but I don't see Microsoft dominating client development in the browser. It's just not happening. I'd rather use Javascript and DHTML without Microsoft's controls.

The truly funny thing happening in the third world space is that evil corporations like Asus and Microsoft can deliver a package competitively priced with and far more relevant than the überpolitcially correct OLPC project. Go figure!

"Evil corporations like Microsoft" is a bore.

OLPC is central planning on steroids. It was doomed from the outset.

I'm not predicting the end of Windows or Microsoft or proprietary software, but I do see the end of Windows and Linux and Mac OS as the target platforms for application development. In a decade or less, thin clients, primarily web browsers, will be these platforms. You won't install software. You'll browse to it. Some software will be subscription-based, but most won't be. Your data will be distributed, sometimes on your laptop and sometimes on network servers, mostly web servers. You'll have access to the software and data offline, and marshalling between the server and your laptop will be largely transparent.

Google is clearly moving rapidly in this direction. Much of what I'm discussing already exists, and it's not only about email. It's word processing, presentations, spreadsheets, databases, reporting, drawing, mapping, games. It's already there, dude. You just aren't using it yet. Why do you think Microsoft is desperate to acquire Yahoo? They can write the software, but when was the last time you browsed to msn.com?

Anyway, of the software developers I know who are considering or doing free these days, it's not about open source.

I agree. Open source is a separate issue, but it's still an issue.

Far from it. They might bring an open source angle in if it gets them needed street cred with that crowd. They're certainly more religious about providing a valuable service to a large customer base and making money.

Open source advocates have never opposed making money.

Playing nice with the geeks is at best something they might or might not do in the course of business.

The software developers you know are the geeks.

Open source is about the geeks and not the users, but closed source is not about the user either. HTML development was extremely open from the outset, and it was hardly an issue. There is absolutely no reason why software development more broadly shouldn't follow the same path. You'll see more open web development in the future. If you want to see the code, you'll click View Source. If you like what you see, you'll cut and paste.

Why? Because the developers want it. Browse around. It's already happening. Users don't care one way or the other. Corporatist planners won't drive this development. They'll oppose it. Software developers will drive it, just as musicians will distribute recorded music to advertise their concerts. It's a copyright, not a copyobligation.

Lowcountry Joe writes:

Russ,

I was kind of frustrated around mm 27:10 - 28:20 when your guest talks about non-monetary economics, a so-called brave new world in economics, is economics the correct model to even use here. Your reply should have dispelled this kind of talk by your guest, suggesting the concept of utility, homoeconomicus, behavioral economics. Heck yes economics is the correct model -- the foundation of microeconomics is utility, not monetary.

I don't suggest that you should have been mean about it but some education on the subject would have been helful to him and anyone listening that doesn't understand it. Though, in your defense, you did sort of touch on it a minute later when you discussed satisfaction as a motive for providing things. I just think that you should have jumped on this immediately instead of letting the comments slide.

So, were you caught off guard, lulled to sleep, or just playing Solitaire on your PC in the background?

29:50

Ron Hardin writes:

The media have a huge audience for news in soap opera form, an audience that's not likely to stop viewing in favor of the internet any time soon.

I'd claim that's the form all network news is in today. They sell the audience to advertisers.

No public debate that doesn't interest this audience has legs on the air.

Martin Brock writes:
Open source will lose its relevance due to its insistence on Free Speech when Free Beer (and damned good beer at that) is what most people are interested in.

No. Open Source and Free are completely separate issues, and there is no conflict between the two. Open source enables more developers to fix bugs and learn coding techniques. By making the source a published product, it encourages better documentation and discourages spaghetti code, and it appeals more to the ego of coders, who want people to appreciate the effort they put into developing the source. Open source is a good development methodology in its own right.

Open source has already won on the web. HTML is source code. The only reason you don't perceive it in the same way that you perceive other source code is that HTML development was always radically open from the outset. HTML is not Turing-equivalent, but that's a very minor point. Javascript is a very nice language, and its successors will be even nicer.

Let's state the obvious here... You can't charge for some good unless you have some limited monopoly on that good.

Some limited monopolies encourage production. Others discourage production. Some do a bit of both, and the question is: what's the net effect?

As Stallman says, two people can't easily sit in the same chair, so granting one person a monopoly on the chair can increase its utility by decreasing conflict over it. Nothing similarly prevents a billion different people from using the same source code for a billion different purposes. The force required to prohibit this divergent use can be much more destructive than any conflict likely to result from the use, and the advocates of force always bear the burden of proving its utility in my way of thinking.

This is where a significant portion of the open source world jumped the shark. GPL 3 seeks to eliminate this kind of competitive advantage that makes "free" business models possible!

I haven't read GPL 3, but I'm skeptical of this assertion.

So Stallman et al want to take away the ability of companies to provide free (insert service here). Who is the thug now?

How does GPL 3 prevent anyone from offering a free internet service? No one is obliged to license his source code this way. If you don't want to use GPL code in your development, you don't use it. If you want to use it, accepting the license is the price. What's the problem?

At any rate, Apple already found the business model for a free operating system.

Mac OS X was based on Open BSD which has a license more open than the GPL, and I always preferred Open BSD for this reason. The most open approach to open source is simply to release the code into the public domain. This approach doesn't prevent copies of standard quality. I don't really see the point of the GPL, but if developers want to use it, I don't have a problem with it either. Maybe it discourages more developers to release source. If so, it's a good thing.

But it exists and Microsoft could certainly copy it, right?

No. Apple's modifications to Open BSD are proprietary. If Apple had based OS X on Linux, licensed under the GPL, it would be required to distribute the source code, including its modifications, when distributing the compiled product, and its users would be licensed to modify the source and redistribute it. The Open BSD license doesn't include these restrictions. Microsoft may begin with Open BSD, without Apple's modifications, and develop its own variant, but it needs a specific license from Apple to use Apple's modifications.

I don't see how any of this prevents someone using GPL source from offering a free service on the web.

Martin Brock writes:
This destroys the incentives to produce expensive tv shows. I don't see a solution to the problem on the horizon.

I haven't watched TV in years, but the cost of producing a TV show has also plummeted. Anyone with a few thousand dollars and friends can produce a show with 60s production values and stream it on the web now.

Furthermore, charging for access to a more costly production or selling advertising on it is not fundamentally difficult. The net isn't destroying this potential, but it could be destroying demand for more costly productions. The question is: will enough people tune into the Sopranos to make it a paying proposition, when people can browse YouTube and millions of other sites instead? The answer is not obvious to me. I've never seen an episode of the Sopranos.

Ethnic Austrian writes:

@Brad:

Open source will lose its relevance due to its insistence on Free Speech when Free Beer (and damned good beer at that) is what most people are interested in.
You keep personifying open source, which is odd.

This claim that it isn't about free beer was mostly a defence against the claim that you can't make money with free software. I don't agree with this defence, since free software always implies free beer. Certain business models just don't work with free software and that is why certain special purpose tools will probably always be proprietary until somenone bothers to develop a free alternative.

I seriously doubt that Linux would be as popular as it is, if it wasn't also free beer (transactions cost not included of course).
Whether Richard Stallman aproves of this motivation to use Linux or not, doesn't really matter.

What free software also brings to the table, is more free beer on the development side. Just look like at Apple for example. They built their successful Safari browser with pre-existing free source code. This mechanism is a big, self-propelling driving force for infrastructure type software.

@Martin:
I wouldn't be so sure about everything going to be delivered through a browser. The browser would have to turn into a rich desktop to do that.

Have you seen a recent linux desktop version? On Ubuntu, there is a menu item named "add/remove software", which allows you to browse a huge software catalogue from which you can do a one click install. Windows or Mac OS don't provide this facility (yet), which is probably a reason for the alledged popularity of mediocre web applications like Google Docs.

Also I don't see much use in your proposal of a 20-year copyright for software. Who cares about a free binary version of Word 1.0 from 1988? The source code would be useless too and it wasn't released to the public anyway. Source code for proprietary applications is much more of a trade secret.

The patent system is a mess though.

Martin Brock writes:

Austrian:

I wouldn't be so sure about everything going to be delivered through a browser. The browser would have to turn into a rich desktop to do that.

I don't know how rich the interface really needs to be, but the ability to create resizeable, floating windows and the like inside a browser is already there. I've done it myself. Asynchronous server interaction is also there. A browser app can do almost anything that a thick client can do now, especially with plugins like Flash.

Have you seen a recent linux desktop version? On Ubuntu, there is a menu item named "add/remove software", which allows you to browse a huge software catalogue from which you can do a one click install. Windows or Mac OS don't provide this facility (yet), which is probably a reason for the alledged popularity of mediocre web applications like Google Docs.

I haven't, but I don't need a million bells and whistles in my word processor, and thin clients offer other benefits. My documents are on the server, so I can access them from any client anywhere. My desktop is not on my personal laptop anymore. It's anywhere I find myself with any computer. I get bug fixes immediately. I'm always using the latest version of the application, and so is everyone else.

Also I don't see much use in your proposal of a 20-year copyright for software. Who cares about a free binary version of Word 1.0 from 1988?

Exactly. So why do we need a 120 year copyright for source code? That's what we have now.

The source code would be useless too and it wasn't released to the public anyway.

The source code in its entirety is useless as an application, but it's still potentially useful as a library of algorithms, especially if I wrote the code myself. In the current, corporatist model, source code of this kind often has no value, even to the code's author.

Source code for proprietary applications is much more of a trade secret.

It can be. Copyrights tend to lock code away that really has little value as a trade secret. I leave a corporation but continue working with users of corporate software I've developed, and I can't even read the source code to trouble shoot, much less make minor enhancements or fix bugs, even though I'm the most qualified person to do it, even though the corporation isn't doing it because it lacks the resources, even though users are perfectly willing to pay me or I'm willing to do it without pay. This scenario is not hypothetical. I deal with it all the time. I end up hacking around problems that I could solve more effectively if I could only read source code that I wrote myself only a few years ago. If I keep this source code when leaving a corporation, only as a reference, I'm committing a crime.

Stephane writes:

On the $0.01 vs. free discussion, I recommend Chapter 3 of Dan Ariely's 'Predictably Irrational'.

He presents an experiment where people are offered discounted chocolates in three different settings. They must chose between $.30 truffles on sale for $.17, and ordinary $.15 chocolates on sale for $.02 (respectively $.16/$.01 and $.15/$.00 in the other settings). Therefore, the discount is always the same between both offers, and yet the last setting produces very different results : most people go for free.

The way I understand Ariely's psychological explanation is the following : Paying whatever small amount involves estimating a potential loss/risk. This mental process creates aversion and hesitation. When the product is totally free, this process is not activated.

Phil writes:

The latest podcast with Chris Anderson confused and annoyed me. First the confusion. How can any of the services discussed be considered free? While I don't transfer cash to Yahoo for their email service I surely pay an attention and annoyance fee with the ads that I have to work through to retrieve my mail and around the spam that is not being adequately filtered. Has our society become so inured to ubiquitous advertising that we no longer consider its annoying presence a cost to us? I do not consider it an extraneous cost that Russ Roberts and Chris Anderson feel free to brush aside.

Another, secondary issue was what should be an embarrasing admission by Chris Anderson. I believe he admitted to not having used a postage stamp in recent memory. Had he no occasion to send a thank you note for a gift or for a invitation to a party? Even if he visited his mother for the recently passed mother's day virtually or in the flesh it would still be appropriate and thoughtful to send a card. Good manners never goes out of style; even in the 21st century.

Martin Brock writes:

Me:

Maybe it discourages more developers to release source. If so, it's a good thing.

I intended "encourages" here.

I'm still waiting for Brad to explain to me how GPL 3 prevents or even discourages anyone from providing a Free (third party payer) web service. If I have the source code for Apache web server software and may modify it on my server, why doesn't this freedom make it easier for me to provide any internet service?

Web users aren't necessarily aware of the fact that open source has long been the winner on the server side of the public web. Apache software is not "free as in beer", but it is open source. The software has countless developers who profit from developing and employing the software simultaneously.

Apache's principal rival, which could dominate public web servers but doesn't, is Microsoft's web server software, IIS or Internet Information Services. No conspiracy of copyleftist ideologues commanded Apache's victory in this arena. Every single developer of an Apache web site is free to use Microsoft's product and would use it if the software were more useful to them. Web browsers aren't compelled to browse these sites either. They don't even know the difference.

On the contrary, the command and control model gives Microsoft's server software a lead in the smaller market for corporate intranets. Web developer/administrators don't make this choice, and web users don't make it either. Corporatist lords of propriety make the choice after three martini lunches with their counterparts at Microsoft. That's just the reality of the situation.

Some corporate geeks (including me) also ride the Microsoft bandwagon because the technology surrounds them and they perceive its dominance as inevitable, but the progress of open source at the leading edge of development in the age of the web is truly remarkable.

In the eighties, Microsoft actually won the battle for PC desktop dominance because, within the closed source paradigm, it was more open than competitors like Apple, and because the organization was driven by a user/developer-first mentality from the top down. I'm not sure how much this corporate culture persists at Microsoft today. Maybe it does, but the free marketplace is choosing open source for thin-client/server development regardless.

Again, open source is also the winner on the web's client side, not only for web applications coded in HTML, Javascript and other languages, but increasingly also for the browser itself. I'm not sure how the proprietarians posing as libertarians account for this development. Maybe they just ignore it.

I'm now a Firefox user almost exclusively, so I don't really know how IE compares anymore. I use Internet Explorer only in rare cases when a particular site requires it or I need to test code for IE compatibility. I do know that Firefox meets my needs, despite some flaws, and that's all I need to know. I'm certainly not under the illusion that IE is flawless. I am concerned that Yahoo could morph rapidly into one of these sites requiring IE if Microsoft acquires the property; however, at this point, I expect this development only to accelerate a shift away from IE. The real threat to open source is software patents, i.e. the force of a state commanding monopolies.

Martin Brock writes:

Phil:

Switch to gmail. The spam filter is much better. You still get ads, and they're even targeted based on email content, but I rarely notice. I used Yahoo mail for years, and I still read email there occasionally, but the spam ultimately drove me away. I even get too much spam in my regular inbox now, though some of it is solicited.

I'll say this about gmail's targeted ads however. Once, when I was breaking up with a fiancee (we're back together now), some email in which I discussed the situation had a Google ad for a web site pitching advice to lovelorn men on how to get your lover back or how to pick up chicks or something. I know how these ads work, so I don't believe that any person was reading my email, but this particular example of targeting really rubbed me the wrong way. If anything was ever going to make me drop gmail for the targeting, that was it. Automated decision making can offend customers in countless, probably unintended ways.

I don't understand why one of the large email providers doesn't offer a pay-to-send service. It seems so obvious. I need a credit card to use the service. Email recipients advertise a rate for unsolicited email and may decline payment for any email. If I want email from someone outside the system, I include them in a list of solicited senders. Senders know that they can be required to pay. When a sender has sent a hundred unsolicited emails or when he exits the system, he's billed and recipients are paid. The service provider gets a percentage and may also offer services to senders like surveying. Problem solved.

This idea has been around for ages. Why hasn't it happened? Maybe people are too reluctant to give out their credit card numbers, but the success of Amazon and other online retailers seems to contradict this assumption.

Brad Hutchings writes:

@Martin: I am just blown away by open source slash coder views of value. You say there is no trade secret value in code you wrote for some corporation a decade ago. I'd like to meet the fool who hired you to write it then! Of course it has value! By keeping it closed, it forces any would-be competitor to spend money to develop similar functionality. Would you reasonably think that a sales person should be able to take prospect lists with him when he leaves a job? Would you think that a general contractor who builds a home should be allowed to use the home occasionally to entertain his friends when the job is done? Failure to see source code as property of its creator (or assignee in the case of your former employer) is simply ignoring abstraction. We can agree that 120 years is too long for copyright, but your moral argument about stuff made in the last 20 years rings hollow. Seriously Martin, if you want to own your code, own the key parts and license it to clients. That strategy has worked quite well for me. Insisting that the code be available for everyone to share has always seemed self-defeating to me. Arguing that there should not be some property right in code (or intellectual products in general), when there is in anything else humans create, seems to argue against any benefits of specialization.

@Phil: Don't hate the players, hate the game. Advertising and other cross-subsidies proliferate because they work. They work because lots of people lend their eyeballs and earballs (what a great word) in exchange for access to (mostly informational) goods. The most important point in my mind from this podcast is that for informational goods where the incremental cost of users is near zero, EVERYONE gains from larger user bases. Users have more people to share with, creators have a larger audience to monetize. To decry cross-subsidized goods because they subject us to advertising is also to decry the benefits of larger groups of users. The latter benefit is tough to identify or even just see, but is probably the most important benefit for many free products.

Kenneth East writes:

I saw no response at all to Jim's suggestion on 13May to visit http://mises.org/story/2971 for a lucid counterpoint. That may be because Jim didn't provide any reasons why one might want to do so. Let me echo Jim's recommendation as well as provide a little motivation for one to take the time to read the article by Fernando Herrera-Gonzales..

1) The notion that price approaches marginal cost is not true. In the short run, price depends purely on supply and consumer demand. Nothing else. Longer term, price and marginal cost converge due to adjustments on both sides of the fence.

2) Yes, Google, Yahoo, and others give away storage, email, and other services with value to the users of those services. However, Google and Yahoo are not in the business of giving away those services, they are in the business of selling the data that is generated by users of those free services.

One sentence from the closing states, "If the price in a particular market seems to be zero, we are looking at the wrong side of the market." This is clearly true. While the "free economy" is a nice idea, it is also an invalid one.

I encourage anyone with an interest in economics to visit the mises.org website.

Russ Roberts writes:

Kenneth East,

I don't find the criticisms in the article by Fernando Herrera-Gonzales at mises.org compelling. He argues that price doesn't tend toward marginal cost in the short run. But the short run, long-run distinction he makes isn't relevant for this discussion. A company that prices an email service for years (or even months) is a long-run situation so I really don't know what he has in mind.

It's true that a mindless application of marginal cost pricing leads to confusion, especially where fixed costs come into play but I don't think Anderson's claims have anything to do with that.

He is making a simpler observation--sometimes charging the customer zero can make sense if the marginal cost is low enough and enough money can be made in other ways to cover non-marginal (fixed) costs. I don't think he's saying that Google or Yahoo are charities.

As far as I can tell, the critique by Fernando Herrera-Gonzales is essentially methodological, an area that Anderson isn't really interested in.

Charlie writes:

Isn't sunlight a free lunch?

Charlie writes:

"One sentence from the closing states, "If the price in a particular market seems to be zero, we are looking at the wrong side of the market." This is clearly true. While the "free economy" is a nice idea, it is also an invalid one.

I encourage anyone with an interest in economics to visit the mises.org website."

The article mentioned was clearly dumb and misguided. It was just a complete misunderstanding of what Anderson was saying. Anderson was pointing out how Google and Yahoo make money through advertising he wasn't implying they were doing it as charity.

Here is the sense that the market is moving toward free: two days ago if I wanted to know a phone number I would dial 411 and pay some small amount, now after hearing the podcast, I dial goog-411 and get the same number free. This is a windfall gain for me. Something I used to pay for, the number, is now free. It doesn't matter to me that google is now harnessing my labor services; I'm putting the same amount of labor in that I was.

On marginal cost, "the cost to produce an additional unit," the marginal cost for google of producing an additional email account for me to use is already NEGATIVE. And it costs them money, so the marginal revenue is NEGATIVE. Why? Because google isn't in the business of producing email accounts, they are in the business of producing an audience and they sell that audience to advertisers. The marginal cost of producing an audience member is positive (they have to give me free stuff), and the marginal revenue of producing an audience member is positive (they get more money from advertisers).

Of course, we need to look at the other side of the market. THAT'S THE WHOLE POINT. The point is what else can fit into this model. I currently pay money to attend a university and study economics (which apparently does a considerably better job than they do in Spain). Could my university fit into this business model? Could my professor video tape his lectures and put them on the internet, and every 15 minutes pause for an ad break? Could my problem sets be about, "Joe who gets paid wage, w, from the job he loves at Fed Ex and derives utility from coca-cola and Doritos, which are complements because they go great together..."

Chris is thinking about, why do we get web searches in this freemium business model and not college education? Will that change in the future and why? What things can fit in this business model, and how are those things changing with technology? These are really interesting questions, why get bogged down in some semantic discussion about what a marginal cost is. That completely misses the point.

Damian Bickett writes:

Russ--

I think you overlooked something in describing the zeal for the free t-shirt at the baseball game. Most of the enjoyment of getting the t-shirt or hot dog or foul ball shot into the stands is the chance to catch something in front of all your friends--When I caught a ball, it was the enjoyment of making the catch in front of the entire stadium, and those right next to me.

Dave writes:

I thought this was relevant and timely to your discussion of businesses paying their customers: http://online.wsj.com/article/SB121136250134610255.html?mod=googlenews_wsj

Microsoft is planning to give cash back to customers who buy items through advertisements found using its internet search service, in an effort to gain ground on Google.

Unit writes:

I'm late to the discussion. But the internet is not really free: I pay 20 or 30 dollars (I don't even know) a month for the internet connection. So it could be that the music industry, the film industry, the publishing industry, will disappear and morph into web delivery companies.

Also, 'free' might just be another aspect of 'progress', e.g., these days you can walk down the street without smelling horse droppings for free. In the old days you would have had to pay a lot to avoid that inconvenience.

r.green writes:

I really enjoyed, the podcast. A few out there have pointed out some flaws, but I think this was for a work in progress, not a finished product so lighten up people.

Here are a couple of things that may well be worth commenting on: the near "freeing" of things in real world economics. Such as the history of film, from video rental, to Netflix and now even the Mcdonalds Red Box thing.
Tv going to internet with fewer commercials(though who knows how long that will be the case.)

Also: I think this idea of companies being "Freed" is particularly ironic in that most mentioned were created here the states. Are there good examples other than Linux that can be shown from more socialized countries? Why aren't more American companies being "freed" by business from other countries or are they?

thanks again. look forward to digging back to the Long Tail now.

Ed writes:

It would be interesting to know the limits of how free things will become, and at what point, a business will decide that it just can't make money giving away something for free.

purpleslog writes:

Here is the article mention at the beginning of the podcast:

http://www.wired.com/techbiz/it/magazine/16-03/ff_free

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