The "free" business model

Chris Anderson does a nice job of summarizing the rise of the "free" business model starting with the Razor/razor blade to the world of the web where he argues that all services eventually get priced at their marginal cost. And as Chris rightly describes, that price is quickly going to zero in a world of technology where Moore’s Law continues to hold and where storage costs are declining rapidly. 

Among the many great examples in Chris’ article, the one paragraph that stood out most for me follows:

There is, presumably, a limited supply of reputation and attention in the world at any point in time. These are the new scarcities — and the world of free exists mostly to acquire these valuable assets for the sake of a business model to be identified later. Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today.

In a world where everything is free, what is the most valuable asset?  I couldn’t agree more that "attention" and "time" are two scarcities that every company offering "free" services has to overcome.  There is only so much time in the day for all of us to join another social network, add a new widget, and try out a new web service. And this fight is not only for a consumer’s web time but for their overall leisure time – time to spend with their family, time for sports, and time for entertainment.  Given this competition for such a finite resource, you better have something incredible for me to try which will either provide awesome entertainment or provide an awesome utility that gives me a 10x improvement over existing ways of doing things.  Without that, I am sure you will get people to sign up and try your service, but I doubt you will have many active users 6-12 months down the line.

And my final point is that "free" is great and what consumers expect many times, but at some point in time dollars do have to come from somewhere whether it be venture capitalists (who will surely expect a big return on their investment), advertisers who will expect the same, or some other source of capital to sustain the business.  So in concept I agree with the notion that the world is getting cheaper by the second, but on the other hand don’t forget Chris’ points that free only means that dollars do eventually have to come from somewhere to pay the bills.  Oh yeah, one other point-as we move to this world of free, there will be lots of carnage and the road will be littered with many dead companies, as only a small percentage in a growing pie will be able to make this model work and viably consume your time and attention to deliver the money.

Published by Ed Sim

founder boldstart ventures, over 20 years experience seeding and leading first rounds in enterprise startups, @boldstartvc, googlization of IT, SaaS 3.0, security, smart data; cherish family time + enjoy lacrosse + hockey

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