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the economics of free
Wednesday, February 27. 2008
Chris Anderson is a smart guy, but his Wired article on the zero dollar economy has some major flaws.
- Convoluting the fixed costs of filling a server rack, with the marginal cost of serving additional customers, with economies of scale, is rather confusing. The fact that serving an extra customer is free, does nothing to explain how you'll reach return on investment and pay for depreciation. Nor does scaling, which does explain a tendency to monopolization, but that isn't mentioned.
- Narrowing externalities down to the non-monetary values of reputation and attention is rather unhelpful. There's enough monetary externalities that merit attention. Network effects, anyone?
- A glaring deficiency is any treatment of transaction costs. It's transaction costs diving to zero, far more than marginal costs diving to zero, that powers the surge in networked business today. The two are highly complementary.
More generally, his analysis focuses mainly on business models. That is, the behaviour of individual firms. Important topics like: market dynamics, innovation diffusion, network externalities and complexity theory are glossed over. In other words, the scale of Anderson's analysis is off. It's like he's charting a continent with a microscope.
However, let me also point out a really insightful gem:
There is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you're in an entirely different business, one of clawing and scratching for every customer.
Ultimately, thinking about the economics of abundance is hard and will give you a headache. Is all this talk about the advent of "free" largely overhyped, as the folks @Techdirt argue? Or does an attempt to explain 21st century dynamics in conventional commercial concepts actually underhype the immensity of changes that are underway? And how does the deflation of computing and networking relate to the huge inflation we're seeing in commodity and asset prices?
, economics
, externalities
, foodforthought
, free
, infonomics
, transactioncosts
, wired
, zerodollar
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Guido A.J. Stevens is internet entrepreneur. After obtaining his MBA (with distinction), he co-founded two open source technology companies:
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