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The Future of a Radical Price

by Chris Anderson

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Hardcover, 274 pages, Hyperion Books, List Price: $26.99 | purchase

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Book Summary

The editor-in-chief of Wired magazine reveals how to run an online business profitably in spite of the Internet's inherently free culture, disseminating the principles of a "priceless economy" in six categories that pertain to advertising, labor exchange, and advanced-version fees. By the author of the best-selling The Long Tail. 150,000 first printing.

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FREE

THE FUTURE OF A RADICAL PRICE


HYPERION

Copyright © 2009 Chris Anderson
All right reserved.

ISBN: 978-1-4013-2290-8

Contents

PROLOGUE......................................................................................................................................1I. THE BIRTH OF FREE..........................................................................................................................7WHAT IS FREE?2. FREE 101  A Short Course on a Most Misunderstood Word......................................................................................173. THE HISTORY OF FREE  Zero, Lunch, and the Enemies of Capitalism............................................................................344. THE PSYCHOLOGY OF FREE  It Feels Good. Too Good?...........................................................................................55DIGITAL FREE5. TOO CHEAP TO MATTER  The Web's Lesson: When Something Halves in Price Each Year, Zero Is Inevitable........................................756. "INFORMATION WANTS TO BE FREE"  The History of a Phrase That Defined the Digital Age.......................................................947. COMPETING WITH FREE  Microsoft Learned How to Do It Over Decades, but Yahoo Had Just Months................................................1018. DE-MONETIZATION  Google and the Birth of a Twenty-First-Century Economic Model.............................................................1199. THE NEW MEDIA MODELS  Free Media Is Nothing New. What Is New Is the Expansion of That Model to Everything Else Online......................13510. HOW BIG IS THE FREE ECONOMY?  There's More to It Than Just Dollars and Cents..............................................................162FREECONOMICS AND THE FREE WORLD11. ECON OOO  How a Century-old Joke Became the Law of Digital Economics......................................................................17112. NONMONETARY ECONOMIES  Where Money Doesn't Rule, What Does?...............................................................................18013. WASTE IS (SOMETIMES) GOOD  The Best Way to Exploit Abundance Is to Relinquish Control.....................................................19014. FREE WORLD  China and Brazil Are the Frontiers of Free. What Can We Learn from Them?......................................................19915. IMAGINING ABUNDANCE  Thought Experiments in "Post-Scarcity" Societies, from Science Fiction to Religion...................................20816. "YOU GET WHAT YOU PAY FOR"  And Other Doubts About Free...................................................................................215CODA  Free in a Time of Economic Crisis.......................................................................................................237FREE RULES  The Ten Principles of Abundance Thinking..........................................................................................241FREEMIUM TACTICS..............................................................................................................................245FIFTY BUSINESS MODELS BUILT ON FREE...........................................................................................................251ACKNOWLEDGMENTS...............................................................................................................................255INDEX.........................................................................................................................................261

Chapter One

THE BIRTH OF FREE

THERE'S NO GETTING AROUND IT: Gelatin comes from flesh and bones. It's the translucent, glutinous substance that skims to the top when you boil meat. But if you collect enough of it and purify it, adding color and flavor, it becomes something else: Jell-O. A clean powder in a packet, far removed from its abattoir origins of marrow and connective tissue.

We don't think much about the origins of Jell-O today, but in the late 1800s, if you wanted to put a jiggly treat on your dinner table, you had to make it the hard way: putting off-cuts in a stewpot and waiting a half day for the hydrolyzed collagen to emerge from the gristle.

In 1895, Pearle Wait, a carpenter in LeRoy, New York, with a side business of patent medicine packaging, sat at his kitchen table poking at a bowl of gelatin. He'd been wanting to get into the then-new packaged foods business and thought this might be the stuff, if only he could figure out how to make it more appealing. Although glue-makers had been producing it for decades as a by-product of their animal rendering, it had yet to prove popular with American consumers. For good reason: It was a lot of work for a pretty small reward.

Wait wondered if there might be a way to take gelatin more mainstream. Earlier efforts to sell prepackaged powdered gelatin, including by the inventor of the process, Peter Cooper (of Cooper Union fame), sold it plain and unflavored on the argument that this was the most flexible form; cooks could add their own flavors. But Wait thought that preflavored gelatins might sell better, so he mixed in fruit juices, along with sugar and food dyes. The jelly took on the color and flavor of the fruits-orange, lemon, raspberry, and strawberry-creating something that looked, smelled, and tasted appealing. Colorful, light, and delightful to play with, it was a treat that could add jiggly, translucent fun to almost any meal. To distance the stuff further from its abattoir origins, his wife, May, renamed it Jell-O. They boxed it up to sell.

But it didn't sell. Jell-O was too foreign a food and too unknown a brand for turn-of-the-century consumers. Kitchen traditions were still based on Victorian recipes, where every food type had its place. Was this new jelly a salad ingredient or a dessert?

For two years, Wait kept trying to stir up interest in Jell-O, with little success. Eventually, in 1899, he gave up and sold the trademark-name, hyphen, and all-to Orator Frank Woodward, a fellow townsman. The price was $450.

Woodward was a natural salesman, and he had settled in the right place. LeRoy had become something of a nineteenth-century huckster hotbed, best known for its patent medicine makers. Woodward sold plenty of miracle cures and was creative with plaster of paris, too. He marketed plaster target balls for marksmen and invented a plaster laying nest for chickens that was infused with an anti-lice powder.

But even Woodward's firm, the Genesee Pure Food Company, struggled to find a market for powdered gelatin. It was a new product category with an unknown brand name in an era where general stores sold almost all products from behind the counter and customers had to ask for them by name. The Jell-O was manufactured in a nearby factory run by Andrew Samuel Nico. Sales were so slow and disheartening for the new product that on one gloomy day, while contemplating a huge stack of unsold Jell-O boxes, Woodward offered Nico the whole business for $35. Nico refused.

The main problem was that consumers didn't understand the product or what they could do with it. And without consumer demand, merchants wouldn't stock it. Manufacturers of other products in the new packaged ingredient business, such as Arm & Hammer baking soda and Fleischmann's yeast, often bundled recipe books with their boxes. Woodward figured a usage guidebook might help create demand for Jell-O, too, but how to get them out there? Nobody was buying the boxes in the first place.

So in 1902 Woodward and his marketing chief, William E. Humelbaugh, tried something new. First, they crafted a three-inch ad to run in Ladies' Home Journal, at a cost of $336. Rather optimistically proclaiming Jell-O "America's Most Famous Dessert," the ad explained the appeal of the product: This new dessert "could be served with the simple addition of whipped cream or thin custard. If, however, you desire something very fancy, there are hundreds of delightful combinations that can be quickly prepared."

Then, to illustrate all those richly varied combinations, Genesee printed up tens of thousands of pamphlets with Jell-O recipes and gave them to its salesmen to distribute to homemakers for free.

This cleverly got around the salesmen's chief problem. As they traveled around the country in their buggies, they were prohibited from selling door-to-door in most towns without a costly traveling salesman's license. But the cookbooks were different-giving things away wasn't selling. They could knock on doors and just hand the woman of the house a free recipe book, no strings attached. Printing paper was cheap compared to making Jell-O. They couldn't afford to give out free samples of the product itself, so they did the next best thing: free information that could only be used if the consumer bought the product.

After blanketing a town with the booklets, the salesmen would then go to the local merchants and advise them that they were about to get a wave of consumers asking for a new product called Jell-O, which they would be wise to stock. The boxes of Jell-O in the back of the buggies finally started to move.

By 1904, the campaign had turned into a runaway success. Two years later Jell-O hit a million dollars in annual sales. The company introduced the "Jell-O Girl" in its ads, and the pamphlets grew into Jell-O "bestseller" recipe books. In some years Genesee printed as many as 15 million of the free books, and in the company's first twenty-five years it printed and distributed an estimated quarter billion free cookbooks door-to-door, across the country. Noted artists such as Norman Rockwell, Linn Ball, and Angus MacDonald contributed colored illustrations to the cookbooks. Jell-O had become a fixture in the American kitchen and a household name.

Thus was born one of the most powerful marketing tools of the twentieth century: giving away one thing to create demand for another. What Woodward understood was that "free" is a word with an extraordinary ability to reset consumer psychology, create new markets, break old ones, and make almost any product more attractive. He also figured out that "free" didn't mean profitless. It just meant that the route from product to revenue was indirect, something that would become enshrined in the retail playbook as the concept of a "loss leader."

KING GILLETTE

At the same time, the most famous example of this new marketing method was in the works a few hundred miles north, in Boston. At the age of forty, King Gillette was a frustrated inventor, a bitter anticapitalist, and a salesman of cork-lined bottle caps. Despite ideas, energy, and wealthy parents, he had little to show for his work. He blamed the evils of market competition. Indeed, in 1894 he had published a book, The Human Drift, which argued that all industry should be taken over by a single corporation owned by the public and that millions of Americans should live in a giant city called Metropolis powered by Niagara Falls. His boss at the bottle cap company, meanwhile, had just one piece of advice: Invent something people use and throw away.

One day, while he was shaving with a straight razor that was so worn it could no longer be sharpened, the idea came to him. What if the blade could be made of a thin metal strip? Rather than spending time maintaining the blades, men could simply discard them when they became dull. A few years of metallurgy experimentation later, the disposable-blade safety razor was born.

But it didn't take off immediately. In its first year, 1903, Gillette sold a total of 51 razors and 168 blades. Over the next two decades, he tried every marketing gimmick he could think of. He put his own face on the package, making him both legendary and, some people believed, fictional. He sold millions of razors to the army at a steep discount, hoping the habits soldiers developed at war would carry over to peacetime. He sold razors in bulk to banks so they could give them away with new deposits ("shave and save" campaigns). Razors were bundled with everything from Wrigley's gum to packets of coffee, tea, spices, and marshmallows.

The freebies helped to sell those products, but the tactic helped Gillette even more. By selling cheaply to partners who would give away the razors, which were useless by themselves, he was creating demand for disposable blades. It was just like Jell-O (whose cookbooks were the "razors" to the gelatin "blades"), but even more tightly linked. Once hooked on disposable razor blades, you were a daily customer for life.

Interestingly, the idea that Gillette, the company, gave away the razors is mostly urban myth. The only recorded examples were with the introduction of the Trak II in the 1970s, when the company gave away a cheap version of the razor with a nonreplaceable blade. Its more usual model was to sell razors at a low margin to partners, such as banks, who would typically give them away as part of promotions. Gillette made its real profit from the high margin on the blades.

A few billion blades later, this business model is now the foundation of entire industries: Give away the cell phone, sell the monthly plan; make the video game console cheap and sell expensive games; install fancy coffeemakers in offices at no charge so you can sell managers expensive coffee sachets.

Starting from these experiments at the beginning of the twentieth century, Free fueled a consumer revolution that defined the next hundred years. The rise of Madison Avenue and the arrival of the supermarket made consumer psychology a science and Free the tool of choice. "Free-to-air" radio and television (the term used for signals sent over the airways that anyone can receive without charge) united a nation and created the mass market. Free was the rallying cry of the modern marketer, and the consumer never failed to respond.

TWENTY-FIRST-CENTURY FREE

Now, at the beginning of the twenty-first century, we're inventing a new form of Free, and this one will define the next era just as profoundly. The new form of Free is not a gimmick, a trick to shift money from one pocket to another. Instead, it's driven by an extraordinary new ability to lower the costs of goods and services close to zero. While the last century's Free was a powerful marketing method, this century's Free is an entirely new economic model.

This new form of Free is based on the economics of bits, not atoms. It is a unique quality of the digital age that once something becomes software, it inevitably becomes free-in cost, certainly, and often in price. (Imagine if the price of steel had dropped so close to zero that King Gillette could give away both razor and blade, and make his money on something else entirely-shaving cream ?) And it's creating a multibillion-dollar economy-the first in history-where the primary price is zero.

In the atoms economy, which is to say most of the stuff around us, things tend to get more expensive over time. But in the bits economy, which is the online world, things get cheaper. The atoms economy is inflationary, while the bits economy is deflationary.

The twentieth century was primarily an atoms economy. The twenty-first century will be equally a bits economy. Anything free in the atoms economy must be paid for by something else, which is why so much traditional free feels like bait and switch-it's you paying, one way or another. But free in the bits economy can be really free, with money often taken out of the equation altogether. People are rightly suspicious of Free in the atoms economy, and rightly trusting of Free in the bits economy. Intuitively, they understand the difference between the two economies, and why Free works so well online.

A decade and a half into the great online experiment, free has become the default, and pay walls the route to obscurity. In 2007, the New York Times went free online, as did much of the Wall Street Journal, using a clever hybrid model that made stories free to those who wanted to share them online, in blog posts or other social media. Musicians from Radiohead to Nine Inch Nails now routinely give away their music online, realizing that Free lets them reach more people and create more fans, some of whom attend their concerts and even-gasp-pay for premium versions of the music. The fastest-growing parts of the gaming industry are ad-supported casual games online and free-to-play massively multiplayer online games.

The rise of "freeconomics" is being driven by the underlying technologies of the digital age. Just as Moore's Law dictates that a unit of computer processing power halves in price every two years, the price of bandwidth and storage is dropping even faster. What the Internet does is combine all three, compounding the price declines with a triple play of technology: processors, bandwidth, and storage. As a result, the net annual deflation rate of the online world is nearly 50 percent, which is to say that whatever it costs YouTube to stream a video today will cost half as much in a year. The trend lines that determine the cost of doing business online all point the same way: to zero. No wonder the prices online all go the same way.

George Gilder, whose 1990 book, Microcosm, was the first to explore the economics of bits, puts this in historical context:

In every industrial revolution, some key factor of production is drastically reduced in cost. Relative to the previous cost to achieve that function, the new factor is virtually free. [Thanks to steam,] physical force in the Industrial Revolution became virtually free compared to getting it from animal muscle power or human muscle power. Suddenly you could do things you could not afford to do before. You could make a factory work 24 hours a day churning out products in a way that was just incomprehensible before.

Today the most interesting business models are in finding ways to make money around Free. Sooner or later every company is going to have to figure out how to use Free or compete with Free, one way or another. This book is about how to do that.

First, we'll look at the history of Free and why it has such power over our choices. Then we'll see how digital economics has revolutionized Free, turning it from a marketing gimmick into an economic force, including the new business models it enables. Finally, we'll dive into the underlying principles of freeconomics: how it works, where it works, and why it's so often misunderstood and feared. But to start, what does "free" really mean?

(Continues...)




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