Richard Florida
by Richard Florida
Tue Jun 30th 2009 at 10:54am UTC

Free, or Not…

Chris Anderson’s new book Free argues that with the rise of digital marketplace business can profit more from giving information and content away than by charging for it.

Malcolm Gladwell, reviewing the book for the New Yorker, says not so fast.

There are four strands of argument here: a technological claim (digital infrastructure is effectively Free), a psychological claim (consumers love Free), a procedural claim (Free means never having to make a judgment), and a commercial claim (the market created by the technological Free and the psychological Free can make you a lot of money). The only problem is that in the middle of laying out what he sees as the new business model of the digital age Anderson is forced to admit that one of his main case studies, YouTube, “has so far failed to make any money for Google.”

Why is that? Because of the very principles of Free that Anderson so energetically celebrates. When you let people upload and download as many videos as they want, lots of them will take you up on the offer. That’s the magic of Free psychology: an estimated seventy-five billion videos will be served up by YouTube this year. Although the magic of Free technology means that the cost of serving up each video is “close enough to free to round down,” “close enough to free” multiplied by seventy-five billion is still a very large number. A recent report by Credit Suisse estimates that YouTube’s bandwidth costs in 2009 will be three hundred and sixty million dollars. In the case of YouTube, the effects of technological Free and psychological Free work against each other.

So how does YouTube bring in revenue? Well, it tries to sell advertisements alongside its videos. The problem is that the videos attracted by psychological Free—pirated material, cat videos, and other forms of user-generated content—are not the sort of thing that advertisers want to be associated with. In order to sell advertising, YouTube has had to buy the rights to professionally produced content, such as television shows and movies. Credit Suisse put the cost of those licenses in 2009 at roughly two hundred and sixty million dollars. For Anderson, YouTube illustrates the principle that Free removes the necessity of aesthetic judgment. (As he puts it, YouTube proves that “crap is in the eye of the beholder.”) But, in order to make money, YouTube has been obliged to pay for programs that aren’t crap. To recap: YouTube is a great example of Free, except that Free technology ends up not being Free because of the way consumers respond to Free, fatally compromising YouTube’s ability to make money around Free, and forcing it to retreat from the “abundance thinking” that lies at the heart of Free. Credit Suisse estimates that YouTube will lose close to half a billion dollars this year. If it were a bank, it would be eligible for TARP funds …

And there’s plenty of other information out there that has chosen to run in the opposite direction from Free. The Times gives away its content on its Web site. But the Wall Street Journal has found that more than a million subscribers are quite happy to pay for the privilege of reading online. Broadcast television—the original practitioner of Free—is struggling. But premium cable, with its stiff monthly charges for specialty content, is doing just fine. Apple may soon make more money selling iPhone downloads (ideas) than it does from the iPhone itself (stuff). The company could one day give away the iPhone to boost downloads; it could give away the downloads to boost iPhone sales; or it could continue to do what it does now, and charge for both. Who knows? 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.

3 Responses to “Free, or Not…”

  1. Creative Class: Free or Not … | Lies My Gantt Chart Told Me Says:

    [...] Class: Free or Not … By jarie Interesting read about giving away content over at Creative Class The example of YouTube is a good one but the free model can work at reduced scales. There are [...]

  2. Mike L. Says:

    Google’s advertising model does not seem to be working at YouTube. I googled “youtube cat”. First hit was a YouTube video of a cat in a goldfish bowl. But there were no advertisements for cat food, cat toys, goldfish, bowls, DVDs of the show “Cats”, etc. -Is this YouTube policy or don’t advertisers see an opportunity?
    Can’t YouTube automatically splice advertisements onto both ends of a video? Or as a banner caption underneath?

  3. Michael Wells Says:

    I’m with Gladwell. Basic economics, the second law of thermodynamics, Newton’s action/reaction all argue that nobody gets something for nothing. At some point, everyone has to get paid and everything has to be paid for, one way or another.

    This has all of the earmarks of another dot com bust, but this time one that will affect all of us. Either we’ll develop new working economic models or all of the free sites on the Internet will eventually disappear — the question is after Wikipedia drives Britannica out of business, blogs replace newspapers, online communication replaces phone companies, if the new media go broke what will be left?

    This is a huge gamble, with every aspect of business and communications dependent on the Internet we’re putting a lot of eggs in one basket with no precedent. By comparison, the stimulus package is conservative, practically gold standard safe.