Free To Be Ignored

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In the late 1960s, two separate groups—the Diggers in San Francisco and the Yippies in New York—began operating "free stores." These were places where people could come to get things they needed—food, medicine, clothes, and, in some cases, cash—for free. These were designed simultaneously as parodies of, and alternatives to, the usual American consumer materialism. The stores were not around for very long because (at least in New York) people would come in and simply take everything they could put their hands on. Such predictable incursions were contrary to the spirit of the enterprise, but people who set themselves against market principles are ill-positioned to enforce "limit one per customer."

Now, four decades later, comes Chris Anderson, editor of Wired and author of The Long Tail [2], whose new book proclaims that giving things away for free is the "radical" new business model of the future. According to Anderson, there are a variety of ways businesses can and should do this, and once they do, they can charge for other goods and services to make their money. Readers can decide whether they think the model is radical; certainly, Anderson does not claim that it is new, although he does propose applying it in a number of ways that seem unprecedented. Which is odd, since if he followed his own advice he'd be out of a job.

The problem is that—outside of a handful of examples, almost all of which are Internet- or digital-based—giving things away for free does not work, or does not work in any significant way. Here's why: Just about any activity that merits the title "business" has a cost of producing its goods or services. Take, as a particularly rapacious example, the oil-and-gas business. It costs a huge amount of money to extract petroleum from the ground (in many places, more now than it used to), as well as refining the stuff, storing it, shipping it, and so on. Those costs may or may not justify the price of a barrel of oil or a gallon of gas, but neither do they justify a price of zero.

It's exceedingly difficult to envision a way in which the oil industry—which, by the way, is fairly large—could recoup its expenses without charging the people who use its product. Presumably, if oil companies owned all the car companies, they could give you a car for free as long as they charged you a lot to fill it up: Although wildly impractical and undesirable in this instance, it is a version of Gillette's old razor-for-free, charge-you-for-the-blades model. Or gas stations could give you a free plate when you fill up your tank. Neither of those is original or terribly interesting or necessarily very effective. Interestingly, as Anderson notes, Gillette mostly did charge for razors; these days it sells especially expensive razors [3]. Come to think of it, gas stations don't give away plates anymore, either.

Apply this lens to almost any nondigital business—pharmaceuticals, manufacturing, law, banking—and the same problem emerges. Businesses need to recover labor and capital costs, and giving things away for free doesn't meet that need very well. Anderson makes much of a supposed distinction between an "atoms economy" (you know, stuff) and a "bits economy," but it really doesn't help, because "bits" don't run the economy. Even as Wall Street felt the need to ask Congress for hundreds of billions of dollars in bailouts, you didn't see investment banks offering their services for free, and I don't think that free toasters were going to save Wachovia's business.

Actually, even in the digital world, there are plenty of cases in which "free" hasn't worked. Back in the dot-com boom, the Internet services provider NetZero promised "free Internet forever." The company is still around, sort of, in the form of United Online [4] (UNTD), except that it doesn't really provide free Internet access anymore, and it doesn't make money. (Note: UNTD lost money in 2008; as a reader points out below, it had a profitable first quarter in 2009.) Ditto Vonage [5] (VG), a "freemium" voice-over-Internet-protocol phone company that also loses money.

Of course, it's not Anderson's fault if most established businesses ignore his diagnosis and prescription. But what about the one business over which Anderson presumably has the most influence—Wired magazine? Why should I have to pay $4.95 for a copy of Wired since, if Anderson's thesis is correct, the magazine would be better off giving itself to me for free? Indeed, if I subscribe for free, the magazine should be, at least according to Anderson, better off still!

Cynics might argue—and Anderson himself suggests—that at $10 a year for 12 issues, a Wired subscription is already a loss-leader; the problem with that is that Wired owner Condé Nast is taking the loss without leading its readers to anything that generates sales. No, the reason that Wired still charges you lies in the somewhat magical economics of advertising. If Anderson's thesis were correct, Condé Nast could presumably build the circulation of a free Wired magazine so high—it's very good; I'm sure millions would read it—that they could then charge advertisers even more than they currently do and not only make up for lost circulation revenue but exceed it. This remains the hope of many Web publications (including this one) that give away all their content for free.

But here's the rub: Condé Nast doesn't want those readers. It charges a very high price to advertisers—in Wired's case, about $90,000 a page, according to Publishers Information Bureau, though in reality much less. The only possible justification for such enormous sums is the notion that advertisers will reach a select—Condé Nast really likes the word prestigious—group of readers. Expand that reader pool too much, or in the wrong direction, and the prestige justification evaporates. It's a hoary, almost certainly apocryphal story, but the rationale that Bloomingdale's CEO Marvin Traub supposedly gave to Rupert Murdoch for not advertising in the New York Post still makes the point: "Your readers are our shoplifters."

Which brings us back to the free-store dilemma, but in reverse. The reason that Anderson can't run Wired as a store that gives everything away is not on the demand side (i.e., shoplifters); it's on the supply side. If advertisers won't pay and the magazine loses money on its subscriptions, where will the money come from to create the goods that Wired gives away? Which just raises the ultimate question: If the free model would ruin Anderson's own business, why does he think it's so great for most other businesses?