Tuesday, July 07, 2009

The best most efficient things in life...

May really be free.  Or perhaps more of them will be soon.

There is an emerging debate about the economics of free stuff, not unlike the blog you are reading now.  To be sure, you have to pay for your Internet service and hardware, but spread out over all you can do with a computer that fixed cost is darn close to zero.  Especially since the IRS thinks you use it 100% for business.

One trigger was a book by Chris Anderson, “Free: The Future of a Radical Price”. But things really got rolling when Malcolm Gladwell reviewed it with a critical eye.
This is the kind of error that technological utopians make. They assume that their particular scientific revolution will wipe away all traces of its predecessors—that if you change the fuel you change the whole system. Strauss went on to forecast “an age of peace,” jumping from atoms to human hearts. “As the world of chips and glass fibers and wireless waves goes, so goes the rest of the world,” Kevin Kelly, another Wired visionary, proclaimed at the start of his 1998 digital manifesto, “New Rules for the New Economy,” offering up the same non sequitur. And now comes Anderson. “The more products are made of ideas, rather than stuff, the faster they can get cheap,” he writes, and we know what’s coming next: “However, this is not limited to digital products.” Just look at the pharmaceutical industry, he says. Genetic engineering means that drug development is poised to follow the same learning curve of the digital world, to “accelerate in performance while it drops in price.”
But, like Strauss, he’s forgotten about the plants and the power lines. The expensive part of making drugs has never been what happens in the laboratory. It’s what happens after the laboratory, like the clinical testing, which can take years and cost hundreds of millions of dollars. In the pharmaceutical world, what’s more, companies have chosen to use the potential of new technology to do something very different from their counterparts in Silicon Valley. They’ve been trying to find a way to serve smaller and smaller markets—to create medicines tailored to very specific subpopulations and strains of diseases—and smaller markets often mean higher prices. The biotechnology company Genzyme spent five hundred million dollars developing the drug Myozyme, which is intended for a condition, Pompe disease, that afflicts fewer than ten thousand people worldwide. That’s the quintessential modern drug: a high-tech, targeted remedy that took a very long and costly path to market. Myozyme is priced at three hundred thousand dollars a year. Genzyme isn’t a mining company: its real assets are intellectual property—information, not stuff. But, in this case, information does not want to be free. It wants to be really, really expensive. [More]

My glancing contact with media makes this debate pretty crucial to many of my friends' futures.  The business model of publishing is at best, under duress due to free stuff on the Intertubes.  I know I am stumped for a way to recover from the loss of readership/viewership and the industry is getting pretty desperate to find someway to continue.  They are not alone, as businesses as like software are struggling to deal with what Google among others has done to formerly reliable cash cows.
I suspect most practitioners in the SaaS industry will be surprised to learn that freemium is now their main business model, as Anderson asserts. That may be true for productivity software vendors — Zoho, Google Apps and Adobe all practice a freemium model — but I’d find it hard to identify any freemium in the business models of leading SaaS application vendors such as Salesforce.com, NetSuite and SuccessFactors. Freemium won’t work for everyone. But there are a couple of important trends described in Anderson’s book that we should all be conscious of.
  1. The cost of distributing content and software online has fallen close to zero. This is highly disruptive for companies whose business model was designed for a prior era when distribution was more costly, such as print media, entertainment and software publishing. Software with mass market appeal — so long as it’s easy to develop, operate, support and maintain — now costs virtually nothing to deliver to customers, which means the high prices and comfortable margins vendors used to charge are now being wiped out.
  2. Certain classes of software, delivered as SaaS, will become free at the point of use. The virtual elimination of distribution costs will allow new vendors to enter markets with business models that rely on one or more of three alternative revenue sources to cover the cost of their free offering. The most disruptive of these competitors will be the ones that identify alternative revenue sources with high value and/or high margins, because this substitute revenue will fund low-to-free software pricing in markets where conventional vendors have traditionally charged high prices. [More]
Free stuff could be a big part of our future.  Not long ago, I sure didn't see the entertainment value of the Internet showing up essentially free as part of my future.  But while reading about the implications of free stuff, I stumbled across this tidbit from Tyler Cowen in an interview with Free Exchange flogging his new book:
FE: In a recent Fast Company piece, you wrote of Twitter, "It's not quite a perpetual-motion machine, but if other parts of the economy were equally efficient, we'd all be swimming in free or near-free stuff." Do you anticipate that an ever larger share of the economy will come to resemble the self-ordered online world people create for themselves that you describe there (and in your new book)? What will that look like?
Mr Cowen: An ever-larger share of our personal satisfaction will come from free or near-free sectors of the economy, as I explain in my new book "Create Your Own Economy".  But those same sectors won’t comprise such a large chunk of gdp, just as agriculture is so efficient that it too is a small part of national income.  Inefficient sectors such as health care and education are rising in relative size.  This will mean more government, more inefficiency, less accountability, and more dissatisfaction with results.  One key question is how much individual liberty can survive in these niche sectors or whether the inefficient sectors will have too large a role in setting the overall cultural tone. [More][My emphasis]
After flinching, I realized it kinda makes sense, but seems to violate some Adam-Smithy axiom or other.  As the economy becomes more about inefficient industries, are the efficient ones headed for "free"?

I dunno, but after today's close, that could be where beans are headed.

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