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Thursday, March 6, 2008

$0.00 -- The Abundance of Nothing -- Free! vs. Free Culture
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I'm a big fan of Chris Anderson and his magazine Wired. So I eagerly read his new cover story and preview of his forthcoming book, both entitled "Free!"

Anderson begins with the story of King Gillette, famous for his give-away-the-razor-and-sell-the-blades business model. Anderson classifies this form of "free" as a cross-subsidy.

Over the past decade, however, a different sort of free has emerged. The new model is based not on cross-subsidies — the shifting of costs from one product to another — but on the fact that the cost of products themselves is falling fast. It's as 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?)

You know this freaky land of free as the Web.

But why are digital and information technologies fundamentally different than massy goods? And why do they make "free" business models far more widespread, or even dominant?

To explain, Anderson goes to the source -- of both the technology, literally, and of the imaginative economic concept that propelled the technology far beyond its initial potential. You see, Carver Mead not only did the research behind Gordon Moore's Law, and named it, but he also (1) created the VLSI manufacturing and design methodology to make very large scale integrated circuits possible and (2) envisioned that Moore's Law could mean entirely new products, new industries, and even a new quantum digital economy.

Forty years ago, Caltech professor Carver Mead identified the corollary to Moore's law of ever-increasing computing power. Every 18 months, Mead observed, the price of a transistor would halve. And so it did, going from tens of dollars in the 1960s to approximately 0.000001 cent today for each of the transistors in Intel's latest quad-core. This, Mead realized, meant that we should start to "waste" transistors. ...

In economics, the parallel is this: If the unitary cost of technology ("per megabyte" or "per megabit per second" or "per thousand floating-point operations per second") is halving every 18 months, when does it come close enough to zero to say that you've arrived and can safely round down to nothing? The answer: almost always sooner than you think.

What Mead understood is that a psychological switch should flip as things head toward zero. Even though they may never become entirely free, as the price drops there is great advantage to be had in treating them as if they were free. Not too cheap to meter, as Atomic Energy Commission chief Lewis Strauss said in a different context, but too cheap to matter. Indeed, the history of technological innovation has been marked by people spotting such price and performance trends and getting ahead of them.

Mead is a friend and hero -- and an unsung giant -- and I was glad to see Anderson give him his due. Anderson then easily pivots to George Gilder's key insight from Microcosm: the new economics is about not scarcity but abundance.

Enabled by the miracle of abundance, digital economics has turned traditional economics upside down. Read your college textbook and it's likely to define economics as "the social science of choice under scarcity." The entire field is built on studying trade-offs and how they're made.

All scarcity does not vanish, of course, but often shifts from physical goods to less tangible, but more important, conceptual goods like your time, your lifespan.

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. Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today.

Another of Anderson's insights, it seems to me, has major implications for the laws of -- indeed, the very concept of -- antitrust.

Technology is giving companies greater flexibility in how broadly they can define their markets, allowing them more freedom to give away products or services to one set of customers while selling to another set. Ryanair, for instance, has disrupted its industry by defining itself more as a full-service travel agency than a seller of airline seats (see "How Can Air Travel Be Free?").

The second trend is simply that anything that touches digital networks quickly feels the effect of falling costs. There's nothing new about technology's deflationary force, but what is new is the speed at which industries of all sorts are becoming digital businesses and thus able to exploit those economics. When Google turned advertising into a software application, a classic services business formerly based on human economics (things get more expensive each year) switched to software economics (things get cheaper). So, too, for everything from banking to gambling. The moment a company's primary expenses become things based in silicon, free becomes not just an option but the inevitable destination.

Tying and bundling have always been with us, and I've always been a deep skeptic of antitrust, but today the quantity and definitions of -- and the boundaries between -- features, products, services, and markets are more numerous, fluid, and undefinable than ever. Several years ago the Justice Department tried to prohibit a merger in the crucial "super premium ice cream market." But if the government is still making such silly definitional decisions in the preposterously narrow market "super premium ice cream," how can lawyers in Washington ever hope to (1) "correctly" define markets in the far more dynamic digital world and (2) deploy an even remotely "correct" "remedy" before the markets, products, features, buyers, sellers, free-loaders, and free-mongers shift into new roles and new markets.

Last, it's important to note that Anderson's Free! is something quite different from Lawrence Lessig's Free-Culture. One is about new technologies and business models that in the end seek to make money. The other is about the demonization of property and profits. One is about voluntary exchange and creative new ways of doing business. The other is about imposing a radical new utopian and quasi-socialist agenda on our imperfect but highly productive and creative capitalist economy. There may be overlap at the margins of Free! and Free-Culture, but at the core they are very different concepts.

posted by Bret Swanson @ 8:51 PM | Innovation

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