The curse of the free revisited

The Freesphere has been bugging me for a long time. For the technology and publishing industries it's a major challenge to see how we are going to make money out of the services people are increasingly expecting to get for free.

Fred Wilson has a challenging blog entry on his VC blog on how it can work, he also links back to Chris Anderson's latest entry in Wired.

The fallacy in all of this thinking is that free is not the entire business model. Fred himself admits in his blog comments that of the businesses he's invested in "none use it as a primary business model but many use it as a part of their business model".

Chris confuses things in his Wired piece by comparing the Freesphere with the razor blade business model where the razor is sold cheaply, or given away, and the money made on the blades.

That business model is valid and works, but it's not comparable with the current free mentality on the Internet: You might be giving away the razor for free but your customers are getting their blades from the guy up the road whose business model is the exact opposite of yours.

In fact, Chris even touches on why the Freesphere model fails by mentioning how King Gillette was unsuccessful selling his razors below cost to the Army and banks in the hope soldiers and customers would like the product and be prepared to pay for it.

That's exactly the model many of today's free services use without success. We see Yahoo! fighting for independence, the New York Times laying off hundreds and even Google's share price fell today on fears the ad revenue that underpins the free services is threatened.

The simple fact is Milton Friedman was right; there is no such thing as a free lunch. Someone, somewhere pays.

Until now it's been willing investors that have picked up the tab. If in the new era of scarce and risk adverse capital we find investors are no longer prepared to pay for providing this free stuff, then a lot of people are going to have to get used to paying for things again.

Giving away products for free can be good marketing, and there's nothing new there, but simply giving everything away for free isn't the recipe for a successful business.