Free For All? Profits Can Be Elusive Online One of the buzzwords in the world of Internet business these days is "free." It's a trend in marketing — and something customers have come to expect, especially in the digital world.
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Free For All? Profits Can Be Elusive Online

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Free For All? Profits Can Be Elusive Online

Free For All? Profits Can Be Elusive Online

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STEVE INSKEEP, host:

Even before the recession, some companies were struggling with the notion that many of their customers expected to get their products for free. That's a trend in marketing and pricing and something customers have come to expect, especially in the digital world. So for the next three days, we're going to examine how free is changing how companies do business. The Free World.

NPR's Wendy Kaufman has our first report.

(Soundbite of elevator)

WENDY KAUFMAN: When you emerge from the elevator and step inside the offices of TeachStreet, the gaggle of software engineers and casual atmosphere remind you of a dotcom era start up. But the business model here is decidedly 2009. The company is an online marketplace for teachers and students, and TeachStreet founder and CEO Dave Schappell says free is part of its marketing strategy.

Mr. DAVE SCHAPPELL (CEO, TeachStreet): So if you teach piano, you can come to TeachStreet, add your profile and a listing that says that you teach piano. That's free. It's likely always going to be free.

KAUFMAN: Some of the firm's services have a price tag. But Schappell believes that in order to get people to use his site, it has to be free, at least initially.

Ms. DEBORAH MITCHELL (Wisconsin School of Business): Free takes away risk.

KAUFMAN: Deborah Mitchell of the business school at the University of Wisconsin says human beings try to minimize risk. It's something our brains do, but we might not even know it's happening. What's more, she says, in many instances especially in the digital world we've come to expect a price of zero.

Ms. MITCHELL: You know, the so-called Google generation, or people under the age of 30, certainly under the age of 20, have grown up having all kinds of access to things online that didn't cost anything. So they expect music, other kinds of content, news you know, even in the industry of pornography, they feel like the content should be free.

KAUFMAN: In the online world, some things cost very little. In his new book, Free: The Future of a Radical Price, Chris Anderson explains the logic behind an old assertion that some information wants to be free.

Mr. CHRIS ANDERSON (Author, Free: The Future of a Radical Price): Digital stuff this is bits have unique characteristics. They can be copied at almost no price. They can be distributed at almost no price. And these unique properties of bits carried with them economic implications. And one of them is that, is that they could be made free. And therefore because they could be made free, that there was a sort of a gravitational force for them to tend to become free.

KAUFMAN: Not everyone agrees with this thesis. But it's fair to say that when most people think about getting things for free on the Web, what they really mean is they don't pay any money. The cost is often shifted from users to advertisers. Google makes a bundle with this model, but many other companies haven't. It may surprise you to learn, for example, that so far neither Facebook nor YouTube has turned a profit.

Mr. ANDERSON: You're right that YouTube is not profitable today.

KAUFMAN: But Anderson says it will be soon.

Mr. ANDERSON: This is the thing about new companies, is they tend not to make money in the early years. What you build is, you build non-monetary assets, you build audiences, you build attention, you build content, you build data, you build something of value, and then you figure out what the business model is.

KAUFMAN: But once something's been offered for free, it's hard to get people to pay. Just ask newspapers who are struggling to find ways to make money from online content that's now available for nothing. Some marketing experts, including Peter Fader of the Wharton School, suggests that this move to free has been too fast and too dramatic.

Mr. PETER FADER (Wharton School): It's created this impression that we must go in the direction of free, and that could be harmful. It could become a very dangerous self-fulfilling prophecy. There are still many areas of digital content where people are quite willing to pay and don't need any notion of free at all.

KAUFMAN: Author Chris Anderson views things a bit differently. He says in many instances companies can find a way to make more from giving things away than from charging for them. Just about everyone in the digital world lets you try a free sample. Some companies hope that what they offer is so valuable that people will pay for it. Other firms are turning to what's called a freemium model - give most things away but charge some people for a premium product. In theory, at least, those who pay will subsidize everyone else.

Wendy Kaufman, NPR News, Seattle.

INSKEEP: Tomorrow we'll examine how two companies are learning to adapt, coexist, and compete in the free world.

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