My $0.00 worth

I have a confession to make. I hadn't actually read Chris Anderson's book before discussing a review of it.

I was OK with that because, judging from Gladwell's review, I've already seen the basic thesis put forth, and because I didn't see any pressing need to buy a book about how everything is going to be free.

But just in case, I just read a shorter version of the same spiel, appearing online in Wired. On the one hand, it's more tightly reasoned than the strawman version that forms in one's head in the absence of the original item (for example, Anderson has of course heard of King Gillette). On the other hand, I still side with Gladwell on this one, and it doesn't seem likely that anything in the book but not the article would change that opinion.

The main beefs I have with the argument are:

Free stuff is not a new idea. Anderson acknowledges as much. Indeed he opens with Gillette inventing the "give away the razor, sell the blades" model. But this puts the burden of proof on Anderson to show how the web is different from other historical examples.

For example, the net offers near-zero marginal cost in some contexts, but so has broadcast radio/TV. The default hypothesis is therefore that the web offers basically more of the same, albeit with localized disruptions such as occur with any technological change -- my not-so-disruptive-technology hobby horse. I simply don't see the clear-cut case that things are radically different.

There are (at least) two kinds of "free" in play here. One is "free" in the marketing sense, which really means that the cost is hidden somewhere else. Anderson gives a taxonomy of six ways this can happen, none of which seems particularly new or peculiar to the web. The other is "near-zero marginal cost," which as Gladwell points out, really means "near-zero marginal cost for part of the puzzle".

In the marketing world, there is a big psychological difference between free and cheap. In the technical world, Moore's law and its cousins provide some hope that certain costs will get exponentially close to zero, but will never actually get there. Implicit in the whole argument is the idea that near-zero costs ("free" in the second sense) enable giving things away ("free" in the first sense). But giveaway marketing doesn't depend on the inputs being free. It depends on being able to hide, defer or otherwise shift the costs. Granted, this is easier when said costs are low, but the two are definitely not the same thing.

Moore's law doesn't apply to everything. When disk space starts getting tight -- yes, it still happens -- it's traditional for development to complain to IT. "C'mon ... you can get a terabyte for a hundred bucks these days. What's the holdup?" The holdup is that the cost of the disk drive is only part of the cost of the storage. Time spent ordering and installing the drive costs something. Adjusting the various administrative parameters/scripts/whatever costs something. Ideally not much, but something.

Google and company have found ways to reduce those costs, too, making it attractive to move storage out "into the cloud". But such a move costs time and disruption. Once you're in the cloud, some of the administrative costs go away, but some don't. New costs might even arise from not being able to just go look at the hardware. Ideally not much, but something.

All the while certain costs are tending asymptotically toward zero, there's generally something in the system resistant or immune to the trend. A big something in many cases is the content -- the movie, song, text or whatever that's being conveyed at near-zero cost. Content costs to produce and the money has to come from somewhere. If it doesn't, some content just won't get produced (rest assured, dear reader, that this blog is definitely not that sort of content).

Gladwell's point about electricity too free to meter, that the important question is why this didn't and couldn't happen, is dead on.

Ah, the irony. It's easy to nitpick, but to me it seems more than curious that an author arguing that prices are going inevitably to zero should choose a good old-fashioned hardback book, and not a particularly cheap one, as a medium [hmm ... have I beaten that point into the ground yet?]. Likewise, if digital technology has driven costs of movies and such to near zero, how can one cite a $15 DVD as a loss leader?

If "[b]roadcast commercials and print display ads have given way to a blizzard of new Web-based ad formats", why am I still bombarded with broadcast commercials and print display ads, not to mention billboards, signage and, for that matter, junk mail? One could argue that "given way" is just a figure of speech here, execpt that it clearly fits an overall pattern of claims that the web has supplanted the old order. Calling out more clearly when the web has and hasn't actually supplanted older forms might have been tedious, but might also have been instructive.


In sum, while I don't dispute that hardware and bandwidth getting cheaper and that this is bound to have some economic effect, and while I agree that the web has had and will continue to have some disruptive effects, I remain deeply skeptical of claims that the web is bound to revolutionize business or economics.

If the claim is merely that the web will cause an increase in various forms of freebie marketing, that's a testable hypothesis and one that, in my own shaky estimation, might well be confirmed. However, I don't get the impression that this sort of gradualism is what the headline "Free! Why $0.00 Is the Future of Business" is trying to convey.

That's all the virtual ink I care to spill on Free: ... at least for the time being. On to something more geekly now, I hope.

[Seven years on, it's pretty clear this has come and gone ... maybe long enough gone that someone will bring it back soon --D.H. Jan 2016]

Zero as a special price

The main thesis of Chris Anderson's Free: The Future of a Radical Price is that "free" is a special price. Reducing a price from two cents to one cent is not the same as reducing it from one cent to free.

That much, at least, doesn't seem implausible (though much of the rest does). Behavioral responses in general are often non-linear, and in any case people are not rational. Better yet, there is some evidence for it. In Zero as a Special Price: The True Value of Free Products, Kristina Shampanier, Nina Mazar and Dan Ariely describe a series of experiments exploring people's reactions to free stuff vs. merely cheap stuff.

In the experiment that seems to get the most press, Shampanier et. al. offered subjects (MIT students, to be precise) the choice of Hershey's kisses at one cent or Lindt truffles at fifteen cents. The students chose Hershey's 14% of the time, Lindt 36% of the time and nothing the other 50%.

The choice was then changed to free Hershey's* kisses vs. Lindt at fourteen cents. The ratios changed from 14:36:50 to 42:39:19. That is, many more people went for the free Hershey's, many fewer went for the fourteen-cent Lindt and somewhat fewer opted for nothing.

One thing to note here: The experiment was conducted in a booth at MIT's student center as people came and went. In such a setup it's hard to tell to what extent you're getting the same people before and after the change. The experimenters imposed a 30 minute break between changes in an attempt to minimize the overlap, since if you can't do a direct comparison with the same subject being presented each choice, it's best not to muddy the waters and instead try to make the samples as independent as possible.

This little distinction seems worth noting, since you're not measuring the response of the same person seeing the same price difference but with different prices. The people who saw the fourteen-cent Lindt would generally not have had the impression that Lindt was "supposed to" cost fourteen cents more than Hershey's. One might plausibly argue that the comparison in both cases was between Lindt at some random price and Hershey's either free or at one cent.

However, when the choice was given between free Hershey's and Lindt at a dime, the ratios were 40:48:12. Effectively (assuming the effect is statistically significant, and I'll take their word on that), lowering the price of Lindt caused people who would have paid more to instead do nothing.

Did I mention that people aren't rational?

The authors argue that the results are best explained by the theory that people see free Hershey's as being worth more than one-cent Hershey's, and that generally people assign a premium to free goods purely on account of their being free, as when people spend hours of their time standing in line for a free coffee promotion.

The authors go to some lengths to eliminate other possibilities. For example, they compare prices of two cents and 27 cents vs one cent and 26 cents vs free and 25 cents. The first two give basically the same results. The second is dramatically different, suggesting that whatever non-linearity there is lies close to the zero price.

They also conducted an experiment on Halloween in which the kiddies were given the opportunity to switch chocolate bars in various ways. Frankly, I didn't take the time to grok that one completely, but it seemed to support the general hypothesis.

The discrepancy between Lindt at a dime and Lindt at fifteen cents is an example of the more thoroughly studied tendency, well exploited by clothing designers and others, of people to perceive higher-priced goods as being worth more.

They also mention research suggesting that when the price becomes free, social norms take over from economic concerns. For example, students would take an average of four Starburst candies for a penny, but would only take one if they were offered for free.

So ...

Lots of interesting stuff here. Clearly "free" is a different price from others. This has been known to marketers forever, but the authors provide interesting data and insights.

The next obvious question is what effect a negative price would have. Would more people have gone for a free Hershey's vs. a fourteen-cent truffle, or for a Hershey's and a penny vs. a thirteen-cent truffle?

Meanwhile, back at the web, does this mean that giving stuff away online is the way of the future and previous business models are obsolete? Looking at the specific results from the candy-pricing experiments, that seems like a bit of a leap.

* All trademarks are property of their owners. Please don't sue me for leaving off the "TM" or whatever I was supposed to include.

Required Reading

In just under 3000 words, Malcom Gladwell takes apart Wired editor Chris Anderson's Free: The Future of a Radical Price, lays the pieces out on the floor for examination, then sweeps them up and tosses them in the nearest dustbin. If I ever write such a pithy and devastating critique, of anything, I hope I may have the wisdom to quit while I'm ahead.

Along the way he articulates one of the major reasons that disruptive technology can end up being not-so-disruptive technology:

Anderson begins the second part of his book by quoting Lewis Strauss, the former head of the Atomic Energy Commission, who famously predicted in the mid-nineteen-fifties that “our children will enjoy in their homes electrical energy too cheap to meter.”

“What if Strauss had been right?” Anderson wonders, and then diligently sorts through the implications: as much fresh water as you could want, no reliance on fossil fuels, no global warming, abundant agricultural production. Anderson wants to take “too cheap to meter” seriously, because he believes that we are on the cusp of our own “too cheap to meter” revolution with computer processing, storage, and bandwidth. But here is the second and broader problem with Anderson’s argument: he is asking the wrong question. It is pointless to wonder what would have happened if Strauss’s prediction had come true while rushing past the reasons that it could not have come true.

And why isn't electricity too cheap to meter?

As Gordon Dean, Strauss’s predecessor at the A.E.C., wrote, “Even if coal were mined and distributed free to electric generating plants today, the reduction in your monthly electricity bill would amount to but twenty per cent, so great is the cost of the plant itself and the distribution system.”

Indeed. It's easy -- human nature, probably -- to get so caught up in a particular technical advance as to forget that said advance is only part of the picture and that, rather than falling like dominoes, the other pieces of the system are more likely to shift slightly and go on doing more or less what they ever did.

I have only two quibbles with the piece.

The article quotes the Credit Suisse analysis I mentioned putting YouTube's annual loss at around $470 million. As I said, the actual figure might be closer to $170 million, but I don't think the distinction is that significant to the overall argument.

More disappointing is the last sentence:

The only iron law here is the one too obvious to write a book about, which is that the digital age has so transformed the ways in which things are made and sold that there are no iron laws.

As far as I can tell, there are no more or fewer iron laws of business and economics than there were fifty years ago. On the tail of a convincing argument that digital technology isn't going to change the cold fact that people have to and are willing to pay money for things of value, it's strange to see an assertion that it has completely changed the game after all.

But no matter. It's a great review.

Free: ... is available in print for $26.99.