Understanding "Free!"
I’m sitting in the train, reflecting on the concept of “Free!”, having just listened to a podcast from the London School of Economics on the diminishing role of European citizenship—a British university, a very dry topic, my thoughts naturally drifted elsewhere. I’ve also been thinking about the dwindling state of print-media and the onslaught of digital media—a topic that has been beaten to death over the years.
I was wondering what made a university give its, let’s call them “words” away for a free, until I realised that the one thing that a university probably has in abundance is words. The same applies to print media, with an excess of its type of media, or radio stations, with an excess of music… etc., etc.
My theory of “freeness” is thus that you should release those things for free that you have in abundance. I’m sure there is a more formal economic theory about it, and I think it comes down to the idea of marginal value and that those things that have less marginal value can be released for free or cheap, while those with a higher marginal value should not be (please correct my interpretation in the comments, if I’m wrong).
The reason we are (or I am) so confused about this subject, is because things cost money. It costs money to produce a newspaper, which is why we are forced to look at adverts on every second page and pay a cover charge as well. So, it’s no wonder that we expect that by releasing stuff for free that they must be losing money!
I’m not a good economist, so I can’t throw a complicated formula at you, just that I think that you have to focus on other values, next to the commodity-cost of words / text / music, when selling a service. For universities, it’s the facilities and access to very smart people; for print newspapers, it’s the convenience of the paper at a fair price; for radio-stations, it’s the freshness of supply and witty comments. As long as you can differentiate yourself in areas like these, other things can essentially be given away for free.
As mentioned, I’m sure a theory exists about this, but I thought it would be a nice thought for today’s post.
A quiz to finish. What parts of following businesses could probably be released for free?
- A strategic consultancy
- A mail delivery company
- A gas station
- A word-processing software business
- A social network business
- An author of books
With at least one of these, I think it’s ok to say nothing at all. And I think that for none of them, it’s ok to say that everything should be free.
Vincent
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Tags: free, marginal value, pricing
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You’re touching very interesting parts of microeconomics of information. One of the basic assumptions of consumer theory is that there is always scarcity. Consumer theory suggests that price is set at marginal costs… under perfect market conditions. And I think it’s from this definition of perfect market that you can look at “free” from other aspects. Information as a good is problematic, not only because its replication (ie. marginal) cost is almost zero. Other aspect is that all producers pump out pretty identical stuff, which means that even though the price is (almost) zero, there is competition. When we add into the mix no transaction costs, free/frictionless entry/exit (ie. virtually no barrier to entry/exit), perfect substitutes and little bit of other pieces of economic fantasy… we have a really odd good on our hands. Both abundance and marginal costs push the price of good to zero.
Naturally these companies/producers of these “free” products/services have some fixed costs and they need to cover those up somehow. If I remember correctly, economic theory suggest subscription or something like it. Like mobile operators not only charge by minute but also by month (because they can’t cover average costs by per-minute price only). (let’s not go into the pricing of sms in this case, and anyway, the mobile operator market is far, far away from perfect market are much closer to monopolies).
You touched the state of music as art elsewhere, but I think it’s sad that even the producers seem to consider their products as perfect substitutes guessing from the way they’re trying to push subscription models instead of per-song/album pricing. Essentially, “we all kind of stuff and don’t really care what you buy, as long as we get some money out of you”.
So, I agree that the only way to get out of “freeness” is to differentiate (in a non-price way, as price is already zero) or go even beyond monopolistic market. The problem I see here is that it’s pretty difficult to differentiate (invest) if it costs a lot, because your cashflow is restricted to subscription-like costs (which also, under competition are also decreasing over time…).
Interesting comment, I just wrote the marginal value part from memory, so I’m glad I wasn’t too far off base.
Regarding your last paragraph, it really depends. One, I think there are ways to differentiate yourself, without adding too many costs, e.g. by organising networking events, though this advantage will be of limited duration.
Second, more differentiations equals more costs and also more profit potential. So you can build a value proposition to investors (a big assumption, I know), that reflects this.
Regarding the subscription-part, I’m not a big fan of that either in the music or any business. I think that this option, for music again, largely exists because the music industry is desperately trying to find a model that works. Differentiation is also difficult, because you are essentially turning your products into a commodity.