Tuesday, April 08, 2008

Free? Language and hidden costs

While traveling to and from New Orleans for the 4Cs conference last week, I got to catch up on my magazines and ran across this article by Wired senior editor Chris Anderson.

Free sticker from wired articleIn the article, titled “Free! Why $0.00 is the Future of Business,” Anderson argues that improvements in technology have driven down the cost of serving individual web users, meaning that many products and services, both on and offline, can be provided to consumers virtually for free.

In the traditional media model, a publisher provides a product free (or nearly free) to consumers, and advertisers pay to ride along. Radio is "free to air," and so is much of television. Likewise, newspaper and magazine publishers don't charge readers anything close to the actual cost of creating, printing, and distributing their products. They're not selling papers and magazines to readers, they're selling readers to advertisers. It's a three-way market.

In a sense, what the Web represents is the extension of the media business model to industries of all sorts.

The way this works out in most instances is that companies provide services to users for little or no cost, and then make their money using one of the following models:

“Freemium” – What’s free: Web software and services, some content. Free to whom: users of the basic version.
Advertising – What’s free: content, services, software, and more. Free to whom: everyone.
Cross-subsidies – What’s free: any product that entices you to pay for something else. Free to whom: everyone willing to pay eventually, one way or another.
Zero marginal cost – What’s free: things that can be distributed without an appreciable cost to anyone. Free to whom: everyone.
Labor exchange – What’s free: Web sites and services. Free to whom: all users, since the act of using these sites and services actually creates something of value.
Gift economy – What’s free: the whole enchilada, be it open source software or user-generated content. Free to whom: everyone.

While I think this list is helpful, and I agree with Anderson that the internet has created interesting new business models, I was a little put off by some of his examples.

Consider this sidebar on Ryanair’s low-cost flights around Europe. Anderson explains that the airline can sell tickets for $20 even when the flight costs them $70 per passenger because the difference can be made up by selling premiums such as food or the ability to check extra baggage. However, one of the “optional” expenses listed in the article is a $6 credit processing fee. While Anderson presents this fee as an extra, as if consumers could choose to pay it, it seems to me to be a hidden cost—an example of “Gotcha!” capitalism—rather than a optional service.

Similarly, Anderson’s description of Comcast’s “free” DVRs is a little off. Anderson claims that “Comcast has given about 9 million subscribers free set-top digital video recorders,” and that the company makes it money back by charging users a monthly fee for the box. But Comcast customers can’t keep their equipment, so it’s not quite accurate to say that the DVRs are free. Rather, customers are hit with hidden “installation fees” and have to pay $13 a month for the equipment, which will then be reclaimed by Comcast when the customer moves or cancels their service.

In both these cases, what Anderson is describing as “free” is free in name only. Instead of describing a new business model, in the case of the Comcast DVRs the word ‘free’ seems to be used to mask the true cost of the product. While Anderson’s article is interesting, and he provides a helpful description of the uses of free products in the new economy, I think his failure to be more descriptive in this case somewhat tarnishes the overall argument of the piece.

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