Last night I was interviewed by Brian Lehrer on Brian Lehrer Live – a New York cable TV show on CUNY TV – about my controversial piece about “too much free.” In the interview I repeated a statement that I have made recently about my belief that there is too much free in part because there is what I am calling a state of “artificial abundance.”
As background, artificial abundance is the creation of too much free product in a marketplace, where indirect financial support props up the offering. Examples include Google subsidizing money losing free web operations with their very profitable search revenue, and over zealous VCs, funding companies offering free services in categories that seemingly have little hope of generating revenue.
Artificial abundance is significant not because there are too many companies or products, but because of the psychology all of this deceptively free stuff is creating. Consumers are being inappropriately trained to believe that everything can be had for free and nothing should be paid for.
When I mentioned the concept of artificial abundance to Brian, he quickly shot back, “is that just another word for bubble 2.0.”
I was taken aback because I had never thought of that formulation. But boy was he right.
The best reflection of the problem caused by artificial abundance is the fact that there are *very* few profitable exits right now. There are essentially no IPOs, which could be blamed on Sarbanes-Oxley. But there is not that much M&A activity right now either. I presume the reason for this is a perception by acquirers that not enough revenue is being generated. Otherwise why would companies not want to buy other companies if the transaction opportunities are anything close to accretive?
My belief is there are very few such deal opportunities because except in the extraordinary cases, it is hard to make much money off of free. And so I suspect there is shrinking interest in buying money-losing operations in the hope that the acquisition will turn the un-profitable company profitable.
And so I agree with Brian. Artificial abundance is just Bubble 2.0. There are too many Internet businesses offering free products that have no hope of making money. They are going to go away. Am I happy about this? Not in the sense that a lot of entrepreneurs will lose and, of course that sucks. But I do think it is important to reset what the public expects from the Internet. Everything can’t be a free ride because the money has to come from somewhere. And advertising revenue is just not big enough to support all the cool useful things the Internet can bring us.
Thursday, April 10, 2008
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8 comments:
I wrote a piece covering
Free is the Tagline
I agree to what you have written about it..but the sad part it, in order to recover from it, we will have to see lot of blood spill...
Hank, you're too much fun. I'm so glad you've come out and said something I've been wondering for years. I hope that after this free thing dies down, you pick another huge fight that gets everyone riled up. You're the man!
-Peter
Complaining about how the excess of free products may hurt others in the industry is no different than to complain that the use of mechanical machines in agriculture may lead to unemployment in rural areas. It doesn't make much sense.
I'd rather have abundance of free and chaotic innovation than an industry which has must keep finding a way to take money out of the customer to keep itself alive.
What better example than taking a look at "Skype and VoIP" vs "traditional phone companies"?
I really doubt we should complain how the abundance of free communication may hurt the telecom industry. Or should we?
Hank,
As the founder of a software startup company I find your observations are right on track. I think this psychology of free has become very pervasive in our culture. I see it in the software industry, music industry, and I think it has even seeped into our politics where government spending has no limits.
While I do agree with your observations 100%, there was an interesting blog on The Economics of Free back in May. It offers a sustainable business model with a free component by contrasting “Infinite” components and “Scarce” components to expand your market.
In the end there in no such thing as “Free”, someone always pays. If the customer does not pay then revenue must come from some source like advertising or selling customer analytics. And as you have pointed out these alternative revenue sources have a limit. Hence, there will be an increasing number of entrepreneurs and VC’s that make the final payment.
Keep up the good work!
Bob Lancaster
Oops, forgot to include this link.
The Economics of Free:
http://www.techdirt.com/articles/20070503/012939.shtml
Very interesting thread.
It all reminds me: what ever happened to micropayments? That was the presumed savior back in bubble 1.0.
I'm wondering how Adobe is going to fare charging for their new "Photoshop online" app, Photoshop Express, when there are already Flex apps available for free, such as Splashup (www.splashup.com). Following your thinking through to its logical conclusion, we're talking about Adobe charging $600 for an online version of Photoshop, which is what they charge now for the boxed version running on my machine (using Mac OSX). Even if Adobe at some point says "we will now only offer the program as an online app", will people buy it? Will they accept that they don't get to have a copy locally? That, to me, seems to be the challenge: can an industry-standard application make the leap to online-only?
Hank,
You are right. Free (as in beer) makes it really hard to generate revenue. Advertising money will continue to float the boat for ventures providing compelling free service to users for a few more years because of the flood of ad money switching from TV and print. Even established sites have not seen the competitive pressures of a normal business environment where this potential revenue is growing organically rather than 30% per annum.
Of course, the top targets for ads are fairly obvious with low barriers to entry (TV on line, how to books --> videos, ...). Where is the fundamental business value? Exclusivity of content? Brand name? Quality of service? It is hard to see why Google would bother buying anybody unless they have a clutch of great engineering talent. The Internet, like the music industry, has become so diverse and fragmented finding new opportunities to build really large communities will be increasingly challenging.
Two ideas: One is to invite people to exchange something of value for a 'free' service which the venture can transform to something that can be sold to businesses and people. The other is to offer a service to replace a service for which they already pay. One challenge is that few existing services people use (and pay for) are purely digital. It may be useful to think about combining the virtual and real in new service models. Open cell phones, geolocation, etc. offer interesting possibilities because the user (by virtue of being mobile) can mitigate some of the distribution, trust, or payment challenges is the service is localized in some way.
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