Monday, July 06, 2009

Father Guido Sarducci on the Free" versus "Paid" Internet Debate

At Fred Wilson's "A VC" blog over the weekend Fred posted a long post on the recent Chris Anderson book Free: The Future of a Radical Price.

In the book Anderson argues that...

"Free is emerging as a full-fledged economy" and ..."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."

This book is causing a bit of a firestorm of interest and argument over whether this "Free" approach to commerce on the internet is truly as viable and as likely to succeed as Anderson seems to propose.

I'm in general agreement with Fred Wilson's position that "I don't believe everything will be free on the Internet. There will be plenty of paid business models." Instead of the purely "Free", Fred talks about the idea of "Freemium" where providers on the internet make some services free, while others have a price.

However Fred also seems to gloss over a bit an important point I think needs to be considered.

Does Free, or even Freemium in it's current "give-it-away-for-free-for-a-while-then-a-miracle-happens-and-you-can-charge-for-something" model actually scale enough to be emerge as a "full-fledged economy"?

An old Saturday Night live skit I think applies here is one from way back in the 70s where Father Guido Sarducci, in his "5 minute University routine" boiled Business down to something that still applies. He said “Business? 'Itsa' very simple. You buy something…you sell it for more. ("See him do this bit in standup routine on Youtube at 1:54 mark of this clip.)

The barebones problem with Free and even the current Freemium model is this:

Until grocery stores start giving away food for free, houses/apts are free and dept stores give me free clothes and shoes, I need to earn a salary to feed, cloth and house my kids…and so do you and so does every other responsible adult. That means I, or my employer, needs to get paid enough so I can feed my kids. That means my employer, who pays me, can’t operate unless someone pays them for products and/or services..

Now certainly Google and a dozen, or a hundred, other companies are using “Free” and some are even making enough money off the Pay-Per-Click or other ad-based models to sustain operations.

But here’s the problem. A “Free” based economy can’t scale. Even if 1,000 US companies could survive using “Free”, and pay lets say an average of 10,000 people a piece a living wage of some level, that is still only 10,000,000 jobs that perhaps can feed/clothe/house an average of 2 adults and 2 kids per salary. That’s only 40,000,000 people getting 3 squares and a place to sleep. With manufacturing largely gone form the US and white collar corporate job migrating overseas also, what about the other 260,000,000 people in the US? And in reality, in the long run, what about the other ~5.75B people on the planet?

The reality is there is no way that even 1,000 companies with 10K employees per company are going to be able to be money-making concerns for any significant length of time on “Free”. “Free” simply doesn’t scale.

The reason is, there aren’t enough ads being impressed today on internet users, nor will there ever be, to generate enough money to allow Free to be a viable foundation for any significant portion of the economy. In fact people are getting better every day at ignoring and not responding to advertising on TV, Internet and everywhere else. Sure there are still, for a while at least, going to be a handful of companies who can reach a critical mass using Free and ad-based revenue. But it will never be enough to support a significant number of people with food/shelter/clothing.

So this whole argument over whether Free versus Paid is a bit of a tempest in a small teapot. The future of the internet, for the long run, is in “paid” services. This current transition period from 1999 to 2009 is merrely that, a transition period.

In 1999 I desperately needed access to a LOT MORE information of all kinds. So I was willing and eager to immerse myself fully in the full stream of info available on the internet and web. But in 2009, I desperately need LESS total information access because the full stream is way to big for me or anyone to handle on their own. So 1999 to 2009 has been a blip in time where ad based revenue works because everyone had to wade through the flood on their own and therefore we’ve been susceptible to the internet advertising that has made Google and some others quite rich.

But today? Things are changing. Today, I desperately need to get ONLY the information from the internet stream that I NEED to achieve the goals I have set for myself. Other than that I don't even want to get the least “wet” from the rest of the information in the stream. It is already nearly impossible for each of us to sort through the immense flood of data to find the best and specific examples of information we each want/need.

So, going forward; The main thing people will pay for is personalized/customized filtering of the internet information tsunami that continues to grow exponentially. If there are 30 companies all offering me Free service in every possible category then I have a BIG dilemma. Which free service do I choose so I don’t waste all my time trying Free services? I will eagerly pay to have someone point me at the “RIGHT” Free service for ME. Then I likely will be willing to also pay for the services I choose to make sure the quality remains acceptable over time. I don’t have the time/attention to spare have to be switching services to the “NEXT BIG THING” every 6 months.

To dig a bit further though; Why is this true? What is the fundamental concept that requires that economies operate “for pay”, in this universe we live in?

The core problem is a combination of having no unlimited, even virtually unlimited, source of free energy and a law of physics known as the "Second Law of Thermodynamics". This law of physics says that in this universe “things tend to disorder” (a.k.a. Entropy). Right in line with this concept, the proliferation of Free services on the Internet is causing massive disorder and increasing the waste of people's energies trying to keep up. Services come and go constantly and we have to continuously expend energy just keeping up with all the random changes happening every day. Eventually we will all lose patience with Free because its a big mess that takes too much time to wade through. Paid services will emerge that help clean it up for useful consumption.

People have always and will always, until we discover a free and virtually unlimited energy source in this universe, pay extra for cleanliness, quality and leisure time.

As the Internet stream devolves from enjoyable dip in a clean and invigorating stream that most people can handle into; an overwhelming, near-drowning experience in a tsunami of toxic waste and dangerous sharks; you’ll start to see “for pay” services emerge. These services will distill the toxic, fullstream Internet flood into something that is again not only consumable, but actually more enjoyable and more useful to the mainstream of Internet user.

Eventually every “Wild West” has to be tamed. The Internet Cowboys will all mourn as the "Open Range" of the "1995 to 2010" Internet evolves into an internet fenced farms, ranches, city planners and where you have to pay for "real estate" instead of roaming around and squatting wherever we see a nice piece of land. But such is life.

1 comment:

  1. Hi Roger, good post.

    Freemium is not only about giving your stuff away. As Fred Wilson himself said "Free gets you to a place where you can ask people to pay for your things"

    This makes a lot of sense, but my issue with the way that freemium is currently implemented is that on average 97% of your users just stick with the free version.


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