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September 23, 2008

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Goncalo Barral

Hi Chris
Thanks for adding this kind of free to the list. But if you allow me, I think you should add the green arrow of money as a last flow after the reputation and recognition. But not only an arrow from C to P. This C will spread the message word-to-mouth to other Cs that likely will pay for the product/service of P. I am spreading the message that this Post is great and maybe some friends of mine will read it first and buy your books afterwards(it's not a promise ;-)). Take care....

Cory Doctorow

At least two other kinds of free are important, Chris!

"One man's junk" -- my grandfather was a rag and bone man; he was paid to take away people's trash and then he was paid again to sell it to scrap dealers. Eventually, he became a dealer himself. Today, sites like Freecycle enable this business-model in spades (there's also people like Darren Atkinson, whom I wrote about for WIRED in 1994, who is an amazing, prolific and wealthy high-tech dumpster diver).

"Positive Externality." Lots of meatspace examples (listening to your neighbor's music through the window or using your neighbors' WiFi through the wall). There are probably a lot of examples from web-land too -- umm, connecting voyeurs and exhibitionists? Or Google, getting latent information about the web by mining links?

Chris Anderson

Cory,

I'd argue that the Freecycle example is covered by the Gift Economy category. As for your second case, which is sort of "passive free" (you don't even realize that you're giving something away), is that not also covered by the Gift Economy? After all, you get a reputational return when Google crawls your site, as you do when a neighbor enjoys the sight of you getting out of the shower ;-)

Cory Doctorow

The big difference with Freecycle is that it's not done for gifting purposes. Freecyclers don't get reputation, or Whuffie, or props or anything. They just get rid of junk. I have a Japanese-Canadian friend whose grandfather got rich after WWII internment when, penniless, he found the salmon fishers on the Vancouver docks tossing the salmon roe into the sea. He convinced them to pay him to get rid of it for them, then he sold it to the Japanese market in Japan for a fortune -- when he died, he was the third richest man in Canada. This is VERY different from the karmic or aggrandizement or passionate fire basis for contributing to free software, for example. He collected fish guts because of information asymmetry and because he was willing to add value to them in a way that the white fishermen couldn't or wouldn't.

Re Google -- the reputation returns came AFTER the practice of linking was established, e.g., AFTER Google got rich. People who made links didn't know that there was unrealized value in them until Google proved it, and no one actor could have realized that value, because they were only valuable in aggregate across multiple places.

In the first example, something has negative value to me (the old console TV in my front room) and positive value to you (the basis for your steampunk art project). I don't want your respect or your karma, I don't want to prove how cool my TV is, I just want it GONE.

In the second case, I possess a non-rivalrous good (the judgment I made linking between two sites) whose value to me is zero (not negative, as above), and whose value to you is positive. I don't know, care, or notice that you're "taking" it from me, but you can still get rich from it.

Chris Anderson

I'm choosing to accept the broad definition of Gift Economy, which is "stuff given for non-monetary reasons". That can include reputation, but it can also include anything else that's sufficient incentive: expression, good karma, personal satisfaction, enlightened self-interest (getting rid of junk), etc.

That's why I've got the "etc" in the diagram above.

You raised an interesting point before about passive giving, but I think the defition of Gift Economy can stretch to that, too.

Galen H. Brown

This is good stuff, but I'm wondering about your use of the term "subsidize." Maybe the way you're using it is standard in economics, I don't know, but to me when you "subsidize" something it's because you think it has inherent value that you want to promote and you're willing to invest other resources into promoting it. But in most of the scenarios you're dealing with it's not that the company is subsidizing the distribution of the free goods--Google isn't selling advertising because they think it would be great if everybody had access to free e-mail accounts, they're giving away e-mail accounts because they want to sell advertising. Free is, in most of these cases, just an extreme version of a loss leader.

I also think it's interesting to draw a distinction cases where the profit mechanism is built into the free good and cases where the free good is a delivery vehicle for the firm's advertising. Free Cell Phones, Free introductory versions of software, etc. are all cases where the revenue stream relies directly on having already gotten the free items into the hands of the customers. Banks giving away pens, record companies giving away free CDs and downloads, etc. are basically a way of delivering advertising to prospective future consumers. I'm not sure where to go with this, but it seems significant.

Chris Anderson

@Galen: A subsidy is just a transfer of money from one place to another, typically to compensate for a shortfall. In some of these cases it's an intentional transfer because the party making the subsidy believes that subsidizing the product will produce a return. There's no "moral value" needed in this sense, just economic value. Google subsidizes Gmail and most of its other services because it believes that consumer attachment to Google will pay dividends, one way or another.

Free items used as promotion fall under Free 1; Free sample versions (such as trial versions of software) fall under Free 3

Jermaine Griggs

Chris,

What about the hybrids in between?

Like the combination of FREE2 and FREE3. In the direct response marketing arena, there might be a free autoresponder service, which makes money from the free users by including ads in each mailing (and ads to the users in the control panel). But they'll also have a premium service.

Are these all separate models or is it implied that they can be mixed and matched? I'm fairly new to your blog so sorry if what I say doesn't make sense.

Jermaine

P.S. - Reading "The Long Tail" right now. Should have picked it up when I first heard about it a year or two ago. But it's encouraging me to make some really big shifts in my business. Looking for DRM system as I type to convert my hard products into downloadable versions, etc.

Thanks and keep it up!

Chris Anderson

@Jermaine. Yes, most companies use combinations of all of these.

Torsten Eymann

Chris,

the difference between FREE1 and FREE4 is only in a kind of monetary presupposition. The key economic notion you are overlooking here is the concept of "utility", which needs not to be monetary (cf. Friedrich von Hayek). Utility is subjective to both buyer and seller, so if you give me a free product, I can reward you either with money or with increased reputation - whatever tickles your fancy and is more utilizable for you (in the long run). FREE4 thus is an example for maximizing the utility function of all the NGO's out there - the Red Cross, Medicines sans Frontieres etc. And yes, they have a utility function, just as the two partners in FREE1. It is just computed differently, but is still Economics.

Torsten


Galen H. Brown

I'm comfortable with the idea that economists use terms in ways that diverge from the common sense meaning, so "subsidy" is probably fine. But I'm not interested so much in "moral" implications as in a means/ends distinction. I feel like the distinction is worth capturing, but I can't yet articulate why.

My second thing, though, about free either coming with a built-in profit mechanism or as a vehicle for advertising can be used to split any of the types of free:

Free 1: In this case, everybody who gets the free thing is paying the firm for something else. If I get a free cell phone with my phone service, the business model is that I'm actually going to pay the firm for the upkeep of the free product. On the other hand, if I get a free toaster when I open a bank account the toaster isn't built into the revenue stream, it's just an incentive.

Free 2: Less clear cut, but I think the difference between a free newspaper and a free trade journal is helpful. With a free newspaper, advertisers are selling any old product, but with a trade journal the ads are directly related to the subject matter of the journal. The subject matter in the journal actually drives interest in the specific products being advertised--the free product that the consumer vales creates desire and perceived need for the products being advertised.

Free 3: In this case a few people pay for something and a lot of people get something for free. Letting kids in to the zoo for free increases the liklihood that the parents will bring them and pay for tickets themselves. Banks giving away free pens, though, is still a case of a few people subsidizing many people, but the pen isn't connected to the revenue stream. Generally, the more connected the free thing is to the revenue stream, the more expensive it can be.

And finally, with apologies for the length of this comment, is there a Free 5 where many paying customers subsidise free for a few people? Examples: Buying a product makes you elligible to win a prize or no-purchase-necessary raffles. The first X people get in free, or free entry during the slow parts of the day. Free showings of movies before general release. People who recruit enough paying customers get the product for free. Free for celebrities and media.

Kevin Kelly

Brilliant analysis, Chris. I think this parsing is very robust. You could probably shape the book around it. Presumably you can mix and match to come up with various hybrids. It would be an interesting exercise to see which hybrids of the four have not be invented yet.

Subsidize is a loaded word, though technically correct. You might seek a more neutral one. Supports?

Comedy Blog

I like any kind of free. I'll never forget my father who told me "If it's free, it's for me"

I wish he would have told me something that would let me yield less free things.

Thomas

Hi Chris,

one question: What`s your definition of "free"?

I'm asking cause, when I, maybe sometime, will buy my Iphone to a specific price and will get a music subscription service for free as part of the deal, than how is your definition of free? Is the music for free in this case? Is it in your model up there version "Free 1"?
Or isn`t it in this case more like buying a car with or without an air-conditioning system. Nobody would say I bought this car and got the air-conditioning system for free. It`s a product feature. It´s not for free... it`s part of the product, it`s an important feature and has big impact on my buying decision.

Maybe many of the cases for your model "Free 1" have this problem: When is the "Free" product really "on top" and just a "lure"? And when is a "product" not really a product on his own but part of the bigger product, part of the product bundle?
Many thanks in advance!

Eduardo Cruz

ok, that´s fine if you think in product. But if you put services on the way, there is a little more to think about it.

Zac Martin

This is incredible. A couple of days ago I posted what I thought were some interesting new media business models, and it looks like they almost perfectly tie into your first three types of free; http://www.pigsdontfly.com/2008/09/new-media-business-models.html

Love the explanation and the diagrams, I'm going to reference this in my degree at some point!

Martien van Steenbergen

Hi Chris,

Please find a Dutch translation and comilation of this article and "Three Kinds of Free" on Vier soorten gratis.

Succes en plezier,

Martien van Steenbergen.

Jeff Weir

I think Thomas' question needs to be answered before you go further. That is, What is your definition of "free"?
If your definition is "requiring no money to be paid by the recipient" then perhaps your diagrams are fine. Although economists will generally argue that some form of currency will always have to be paid by someone. The default payer is the person who offers the free good: if they can't get anyone else to help recompense them for the offering, then they bear the full cost themselves. This cost might be in terms of their time or bandwidth charges, their opportunity cost of giving something away for free in the hope that this would help generate an income stream somewhere else, when in fact they could have sold it outright (perhaps for less than they expected to generate from their ‘free giveaway’ model). If this leads to a ‘waterbed’ effect, then are consumers of the ‘free’ product kidding themselves. (water bed effect refers to regulation of one of the prices of a multiproduct firm that causes one or more of its other unregulated prices to change as a result of the firm's profit-maximising behaviour. This may arise when demands and/or marginal costs are interdependent, firms use nonlinear pricing, or there is a zero-profit constraint or global price cap. This definition from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=905172)
Are blogs or websites free if I have to suffer the disutility of adds? Even if one blog or website I visit has no adds, isn’t this lack of adds in effect subsidised by the many other blogs and websites that are in fact monetized in some way (even if only funded directly by the people that created them). Ultimately, many people offering ‘free’ services are doing so using technology that someone somewhere has paid for or contributed to. If those payers passed those costs to us, then we paid something for the free stuff we are reading.

Chris Anderson

@Thomas: Good question. As I tried to make clear above, Free 1 isn't really free. You're going to pay, sooner or later--it's the standard razors and blades mode. So in the case of music plan with the phone, the cost of the music is built into the phone, so it's just a cross-subsidy. I include Free 1 in the taxonomy because it's the most common use of the word "free" and invokes the psychology of free, even if it's not really free in an economic sense.

@Jeff. I've lumped non-monetary costs into the fourth category. As I mentioned, there are many hybrid models, and you could certainly superimpose reputation and attention arrows on all four models. But that would be a mess.

Fabio Ramos

Hi Chris, another good example. Microsof will pay users to use Live Search. It´s so free-culture.

Take a look at:
http://www.techcrunch.com/2008/10/01/microsoft-throws-prizes-at-you-for-searching/

Contrags for you blog!

David Armano

Hi Chris,

I've made revisions to the visual, updating 2 per your direction and adding the 4th. Have a look.


http://darmano.typepad.com/logic_emotion/2008/10/the-4-kinds-of.html

Christopher S. Penn

There's at least one more "free" missing. Sale of audience as the commodity itself in a non-advertising format - i.e. I register on your site and you sell my personal data to a list broker. It's one step away from advertising, but it's fundamentally a different revenue model - the consumer IS the commodity.

Chris Anderson

@Christopher: Ads aside, isn't that just another example of a three-party market (Free 2). The list broker is the third party here, rather than an advertiser, but it's the same model. Economist lump these all together under the "two-sided market" category.

Brad4d

How do we allow the giver to feel the health benefits of generosity?
Encouraging the value of interest could be credit potential. Participation with donation is the new admission but we're losing honesty integrity from tricking our TRUST for profit.
Profit was product-based but won't convert to conceptual properties.

cartouche d'encre

Oh thanks for this post, its really an informative post.. If its free then i definitely going to do this on any how, diagrams is really very nice.. This diagram is such an easy logical, nice information..

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Tidbits

The Long Tail by Chris Anderson

Notes and sources for the book

FREE was available in all digital forms--ebook, web book, and audiobook--for free shortly after the hardcover was published on July 7th. The ebook and web book were free for a limited time and limited to certain geographic regions as determined by each national publisher; the unabridged MP3 audiobook (get zip file here) will remain free forever, available in all regions.

Order the hardcover now!