Tech Industry vs. Free: Who Survives?

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NEW YORK — While many of today’s Web users associate the word “free” with “download”, Wired editor Chris Anderson said that the pricing strategy dates back to the nineteenth century.

He said that the free economy was made possible by the industrial revolution and dates back to Jello. Anderson pitched his latest book, called “Free: The Future of a Radical Price,” at Wired magazine’s Disruptive by Design conference. Anderson is best known for his Long Tail marketing thesis. “Free” details the changes Anderson expects to see in the business models of the future.

He said that when the Genesee Pure Food Company was preparing to launch its new gelatin product, it needed to find a way to get customers to ask for it by name at the general store. One idea was to sell it door-to-door but that required licenses. Free products, however, did not require licenses so the Genesee Pure Food Company made a Jello recipe book, printed 5 million copies, hired the best artists, and gave it away for free.

A few years later, Anderson added, the Gillette company came up with the razor and blades strategy that is a more famous model for today’s IT economy: giving a product away (or selling it at below cost) in order to charge for the services or software that support it, a model used by video game console makers and cell phone providers.

The business model of free stuff is even more viable, Anderson said, on the Internet. “With physical stuff, you had to get paid quickly, but now we’re looking at a different economic model,” he said. “With Moore’s Law, (define) we have deflation. We have never had an industry where everything gets 50 percent cheaper every year — not just processing but also storage and communications (bandwidth)!”

Anderson said that today’s economy answers a theoretical question first posed in economics in the 19th century. Two French economists reached the opposite conclusion. Joseph Bertrand said in 1883 that in a competitive market, the price falls to the marginal cost. Corneau, on the other hand, said that businesses would form cartels to collude to restrict the supply of a product in order to maintain the price.

“The Internet is the most competitive market the world has ever seen,” Anderson said. “If your product is not free, it will need to be available in a free version or to compete with a free product.”

Microsoft vs. free

“Microsoft has competed with free for 35 years” since it was founded, said Anderson, offering a mix of free and paid software and services.

Famously, in 1976, Bill Gates wrote a letter to computer hobbyists asking them to pay for software which was being widely copied.

Anderson said that in the 1980s, the company competed with bundled software, especially as it started to sell Microsoft Office. In the 1990s, it competed with a free browser called Netscape and used its operating system as a distribution system. In the current decade, the company competes with the LAMP (define) stack.

Today, the U.S. government is looking at competition between Google and Microsoft. Both tech giants are using free services to good effect.

“Watch this space,” Anderson said. “It’s a big challenge for the Obama administration: deciding who can use free and who cannot.”

Article courtesy of InternetNews.com.