How big is the free economy?

Here's a question I get all the time: how big is the free economy? That's harder to answer than you might think, for both definition and measurement reasons. But here's a first pass at doing it anyway.

(Note: I'm just using US figures below, unless marked otherwise)

There are at least three classes of free:

The first is the use of "free" as a marketing gimmick: "buy one, get one free", "free with purchase", "free phone if you commit to the two-year service plan", etc. All basically cross-subsidies or loss leaders--sooner or later you'll pay. I suspect that there isn't an industry that doesn't use this one way or another. There's no new economic model there and it's totally impossible to quantify, but arguably it touches every bit of the entire consumer economy itself, which is to say trillions of dollars a year. And thus it's a meaningless number. So I'll move on....

The second form of free is the "three-party market", which is to say the world of advertising-supported free media. That's most radio and broadcast television, most web media, and the proliferation of free print publications, from newspapers to "controlled circulation" magazines. For the top 100 US media firms alone, in 2006 radio and TV (not including cable) advertising revenues were $45 billion.

Online, almost all media companies make their offerings free and ad-supported, as do many non-media companies such as Google, so I'll include the entire online ad market in the "paying for content to be free to consumers" category. That's another $21-$25 billion.  Free paper newspapers and magazine are probably a billion more, and there are no doubt some other smaller categories I'm omitting and a lot of independents not included in the numbers above. Let's call the total of offline and online ad-driven content and services $80-$100 billion.

Finally, there is what I call "real free".  Products and services that don't cost most consumers anything at all, either in cash or ad clutter. (Most of this is online, where the marginal costs are near zero). This includes companies that use the "freemium" model (where a minority of paying customers support a majority of non-paying customers, as in Flickr and Flickr Pro or the growing world of online games), all those companies that are in the pre-revenue part of their evolution, and the entire "gift economy", from Wikipedia to the blogosphere. 

This last category is impossible to properly quantify, especially since much of it has no dollar figure attached at all, but I'll break out some interesting subcategories that do have some numbers attached:

Open source software (service and support around free software):

• The "Linux ecosystem" (everything from RedHat to IBM's open source consulting business) is around $30 billion today.
• Other companies built around open source, such as MySQL ($50m annual revenues) and Sugar CRM ($15m), probably add up to less than $1 billion.

Free-to-play videogames:

• These are mostly online massively multiplayer games, which are free to play but make money by charging the most dedicated gamers for digital assets (upgrades, clothing, new levels, etc). They started in South Korea and China (where they're now a $1 billion business) and have now come to the US, with games like Runescape and NeoPets.
• The "casual games market" (think everything from online card games to flash games) is now at nearly $3 billion.

Free music:

• How much of Apple's iPod $4 billion in annual sales should be credited to the libraries of "free" MP3 that created demand for gigabyte storage devices? How much of MySpace's $65 billion estimated value is due to the free music bands put there? How much of the $2 billion concert business is driven by P2P file sharing?

So what's the bottom line? By a strict definition of free (just the third category), it's pretty easy to get to $50 billion total revenues. Include the next most interesting free market, online ad-driven content and services, and you're around $75 billion. Expand that to the traditional ad-supported media, and you can get to $150 billion. Go worldwide, and you can easily double all those figures.

Whichever definition you like, there's a lot of money to be made around free.

Comments

[John Banfill]

Thanks for a great article and putting some numbers to the free economy. It is helpful and should be tracked as a metric as it grows.

Your figures reflect only the digital side of the free economy. The entire free economy also includes gifts and services by family and friends such as child rearing, care of sick, handicapped and elderly people, cleaning, cooking etc. Volunteer work and charity also need to be included in the total reach of the free economy.

Farming, fishing, mineral extraction and energy take free resources which nature has provided at no cost and sells them to consumers after some processing.

The total value of the scarcity/money economy is a very small percentage of the total goods and services that we use.

[ahmmmed]

thank you.
thank you
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[YLlama]

I believe you meant to write "first pass," not "first past."

[Chris Anderson]

Good catch! Fixed...

[kabin]

good page nice documents thank you.

[Sean Carmody]

Nice piece! One of the challenges for traditional media, and the music industry in particular, is coming to grips with your third category. It's clear to some that there's a lot of money to be made there, but the established industry is afraid of change as it threatens to undermine their existing revenue models and so are more focused on fighting new technology than working out how to profit from it.

[Gavroche]

I think the long tail will continue to prove its viability, but some tweaks need to be made in the way that the long tail is distributed and monetized. As a musician, my interest is obviously in the long tail of music, and while it may not have produced great results, the opportunity is still there. It's just about a way of distributing long tail works that enables us unsigned/DIY artists to compete with the big boys. Got an article about this over on evolvingmusic.wordpress.com.

[asher]

Fine post, and your overall all the blog is very informative and of the best quality. Thanks

[Jane Tappuni]

Very interesting - we are using FREE to help sell books for UK book publishers.
In the UK publishers are using us to tag their marketing with a short code and a call to action "Text 64888 keyword to get your free chapter" or we create bespoke mobile campaigns for publishers.

Our business model is based around giving the consumer free rich content, in our case chapter samplers with the option to CLICK TO BUY. What we are doing in order The proposition is simple; give away free content or sample to entice customers to buy the product or give away content for them to take with them on their phones. All the content we give away s direct to mobile phones so it's sustainable, direct, portable, immediate etc...

It is working and we are seeing uptake increase exponentially but I still think a huge barrier is the cynicism - a lot of consumers in the UK don't believe there really is a Free!

[kabinci]

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