Beware of Freeconomics | Hacker News Reader

Beware of Freeconomics

readwriteweb.com

28 pointscawel48 comments

I have another problem with the wired article, It assumes economy scale, but here in Europe, we have at once one bigger market than the US, but way more fragmented for web stuff : social websites market border are language border (27 languages here).

This means that when I launch my service in French, I'm stuck with France and Belgium (70millions people, too bad Switzerland is not in EU). If I add, say German (80millions people more), I won't leverage on 150million people because of the linguistic border. Moreover, adding a language costs me almost the same price each time, it doesn't really drops with the time, since I start with an audience of zero in the new territory.

This means that here in Europe, economies of scale are not as easy as in the US, where there is a continuous market for 300 million people.

Moreover, with the worthless dollar, Adsense revenue tends to drop, but this not a structural issue, I have to seek an euro-based ad system.

That article, the article that inspired it, and numerous comments here are all wrong about one thing. Gmail didn't win. Yahoo Mail has almost 15x the customers, and over half of the web mail market.

  http://weblogs.hitwise.com/leeann-prescott/051007.png

My favorite quote, in reference to email services, "when Google made its move, Yahoo! could not compete." If being unable to compete means having a 15x userbase (some of whom are paying you, unlike your competitor, who has only free customers) then I sure hope every business I ever run cannot compete.

I wouldn't trust that graph :)

Also, Gmail makes money multiple ways, including ads (direct and indirect) and paid customers of Google Apps.

Gmail is clearly a success. I just find it disingenuous to act like it did to Yahoo what Windows did to Mac.

Yeah, the fact that he chose Gmail as his first example of how free is somehow hurting consumers is rather telling.

Am I seeing things, or does this guy specifically argue that it is theoretically impossible for Ryanair to satisfy its customers?

That reminds me of the urban legend about the aeronautical engineers who calculated that the bumblebee cannot possibly fly.

And anyone who complains about the impossibility of competing against a free product needs to explain the bottled water industry.

bottled water is really convenient

and it has pictures of springs on the label

Or book stores next to libraries.

I also have the feeling Iskold is wrong in several places.

The one thing he got right is the GMail case, where big companies are "ready to take a loss to kill the competition" (as said by dkokelly).

His tale about the DVR implies that if it's free, it's going to work. But consumers still have the ability to figure out which of 2 free products is best. Free does not preclude quality. Same rules as before apply.

His tale about startups worried about not being funded is far from convincing. VC's will always fund bright, innovative, potentially profitable startups (with the freeconomics model or others).

His tale about advertisement is not clear. If your ad-sponsored business is going well (during an economic downturn), there is an argument for advertisers to focus on you, and not others that fare less well.

His tale about complex transactions is wrong. Paying only for what you use is far from a bad concept: it creates several types of demand among your consumer-base. And it seems to work, as several European low-cost airlines showed during the last years.

"But consumers still have the ability to figure out which of 2 free products is best. Free does not preclude quality. Same rules as before apply."

That's why his argument that free will impact innovation is wrong as well. If anything, this promotes innovation and kills incrementalism.

He got GMail wrong, too. Yahoo Mail is/was not "perfectly good". Yahoo Mail was pretty poor. Slow, packed with blinking ads, lacking important features, poor spam filtering, etc.

GMail won because it was a superior product. The storage was a marketing tactic - the limits Yahoo had were low, but not that low. GMail wasn't even free at first - I paid $6 for my account to some guy on eBay, and would've happily paid Google for it.

How much were Yahoo/Hotmail making from premium webmail? Not that much, I would guess, and it seems inevitable that charging for something so paltry was going to last anyway.

> His tale about advertisement is not clear. If your ad-sponsored business is going well (during an economic downturn), there is an argument for advertisers to focus on you, and not others that fare less well.

I was listening to NPR this morning, and this scenario is exactly what happened to No Depression magazine. Rising customers and interest, but declining record industry advertising budget, leads to a magazine no longer being published.

I've really enjoyed this series of posts and the comments that follow. But there's something I don't understand:

How does all of this work when I don't see advertisements?

I haven't seen an overt ad (in the standard 'clickthrough' sense) on my browser in a LONG time. I didn't even know, until I went and tested, that YouTube had ads! And this service is ITSELF a -free- service. I don't have to pay for my AdBlockPlus subscription (they should monetize that!), and only rarely do I either have to add an add to block OR disable blocking because it breaks a feature.

So a world in which the user doesn't even see the ads being presented...how does that influence the system?

It seems like there are a few options:

1) Sue people who block ads.

This idea seems silly at first, but it's not entirely unfounded. The concept is explored in Sagan's _Cosmos_. And Kelo v. New London could conceivably provide justification, though probably not. How would an EULA that REQUIRED viewing the ads play out?

2) Require strong enforcement

There are any number of ways to require viewing an advertisement -- almost all of them at the risk of inconveniencing your 'honest' users. Is this the price to pay if you want it free? How does that compare to television advertising? With dozens of channels when I was younger, I rarely saw ads. Now it's harder, as most stations seem to take breaks at nearly the exact time, so you have to watch -someone-. And some shows are so good people daren't change the channel. How can this be ported to the internet? Should it?

3) Consider it the 'cost of doing business'.

Some people will block ads just like some people will change the channel. Do advertisers care?

4) Integrate ads with content.

TV shows started integrating product placement in order to make more money from advertisers. Can bloggers be bought? How much is a "content-full" endorsement worth? Radio personalities already do this: the most expensive ads are the ones integrated into "host banter". Would a blogger be torn to shreds if readers discovered he or she was being paid to place content as a POST rather than as a clearly demarcated ad?

5) Adusers

Using 'trusted users' to push a product has already been done. Sell your posting history for profit! Do these 'guerilla tactics' work? Probably. But it's hard to see how a service provider can utilize this power: it's the users that get the 'insider status' that makes their endorsement worthwhile.

It seems to me that failing to address how the Freeconomic process can be subverted is problematic to the overall argument.

How does all of this work when I don't see advertisements?

Would be interesting to see what's the proportion of users using ad blockers. I'm guessing it's a small minority.

It seems to me that people are taking ads for granted on internet, just like they take them for granted on TV.

Would be interesting to see what's the proportion of users using ad blockers.

I agree. I'd further guess that there is a strong correlation between the likelihood of a person running an ad blocker and the likelihood of a person ignoring ads in a non-blocked environment.

I use Adblock Plus

Just combine freemium (where 1% of users generate 100% of revenue) with ads to produce a model where only 1% of users need to click on ads. Thus it doesn't matter if, say, 50% of users are blocking ads. Whether this model can work is another story.

This guy keeps getting stuff wrong.

Instead of fearing free, take some time to understand it.

I don't know. He has a point about the monopolistic policies of taking a loss on something to kill the competition, but that doesn't exactly work the same way with information products. If you can make money from free, then by all means it's not monopolistic. If you use free to clear the market so that you can charge later, then it is monopolistic.

Agreed - there's nothing really to "understand" here, as the grandparent called for. Businesses like Google are just doing what will maximize their profits. They aren't trying to be free or partaking in some "free!" revolution - they're just saying "Oh, ok, that will make us the most money, let's do it." It's a side effect rather than a goal.

Well, not really - free is maximizing value creation, not value capture. Chris Anderson explained all this: "the world of free exists mostly to acquire these valuable assets [attention, reputation, etc] for the sake of a business model to be identified later"

It just so happens they already have a great business model, but they didn't when they released their search engine. They didn't make their search engine free to "maximize their profits"

I shouldn't have used "profits"...

I guess I'm thinking of what is called "Net Present Value"...which basically factors in short term losses for long term gains. Which kind of is what you're saying with "value creation" I guess.

In which case, yes, they decided to give away Google Search for free (as well as GMail) because they saw future revenue streams in another area.

My point is calling it "free" is BS in terms of NPV - which business decisions are all about, which valuation is all about, etc.

Do you have an example of a company undercutting prices to kill competition and then later raising prices? Gmail is still free. I'd worry about a company establishing a monopoly by using government coercion. It seems to me a company that figures out how to improve my standard of living by offering services free is a good thing.

Using very low prices to undercut competition and then later raising prices only works where there is some way to lock customers in. Japanese companies do it all the time (they have exclusive contracts to provide lock-in). This is extremely common in game consoles because the dominant console will have the most games which will tend to make it stay as the dominant console. In general, anything with high switching costs can make use of this. (Phone and cable companies also used to do this). I would argue that these kind of monopolistic practices are bad for the economy but should only be dealt with after it can be proven that a monopoly exists. Thats because government stifling of beneficial businesses is a far bigger danger than monopolies.

Using very low prices to undercut competition and then later raising prices only works where there is some way to lock customers in.

Exactly. That's why many utilities (water, gas, electricity) are granted government-sanctioned monopolies on their products or services. The infrastructures required to provide these utilities are so great that competition is near impossible.

IIRC GMail isn't exactly making money for Google. I never thought about it before reading this, but I can see GMail being offered for free to drive people away from Yahoo and Hotmail. Chances are once you're on Google services you're more likely to use Google Search (which is where the money lies).

For example look at the nicely placed Search the Web box at the top of GMail.

>He has a point about making a loss on something to kill the competition, but that doesn't exactly work the same way with information products.

Actually, I have never seen a good example of this phenomena in the real world. People say it is true about Wal-Mart, but they don't raise their prices after they kill the competition, which defeats the thesis.

They may not raise their prices right after major competition leaves, but by removing the competition, they do increase traffic.

So, even though they may not raise prices, they make it up on volume.

Taking a loss to kill competition was standard operating procedure for Standard Oil at the turn of the 20th century.

Who said Google was taking a loss on Gmail? All they did was shift the source of revenue. Gmail displays a LOT of ads on any given day. I know I spend more time in my gmail account than on any other website (including YC News), so the exposure is huge. Since ads are the primary revenue source for Google, this looked like a brilliant move to support its ad product, not an attempt to muscle into the email biz for its own sake.

(I don't know if Gmail is actually profitable, because I doubt even Google breaks it down like that officially, but I suspect they aren't just pitching money down a black hole in order to gain marketshare in the email business.)

i think the issue with 'free' revolves around marginal cost as well as competition. gmail is something that has substantial value to google as a company internally (hence you sink money into it) and it is trivial given their resources to give it away. use email as a beachhead to a suite of products and presto - you get people aware of and already used to google's business apps which i definitely pay for. a 'free' service is equivalent to advertising - the only difference is that it is borrowing your eyeballs by providing a benefit rather than a bikini-clad model.

Unfortunately, there is nothing you can do about it. It a market with low barriers to entry, incentives tend to get played out to the extreme. In the web industry, marginal costs are low enough that zero is a possible price point, with advertising, so most of the industry has adopted it.

This is not a new phenomena. Most local daily newspapers charge $0.25 or $0.50 even though the price doesn't cover their production cost. However, it ensures a wide distribution so they can make it up on advertising.

What interests me is the cause of freeconomics. People easily pay lots of money on all kinds of stuff, but are extremely hesitant to buy anything on the web.

My gmail account is worth at least hundreds of dollars to me, but I pay nothing for it. $25 per year seems entirely reasonable considering the value it offers, but if Google charged money, nearly all users would flee.

Why are people so reluctant to spend money on the web?

Because it's so hard to pay for stuff, and so easy to go elsewhere.

Because there are so many companies willing to provide comparable service that supply is nearly infinite. That offsets any feeling of what it's actually worth in productivity.

Iskold is CEO of a startup that is boostrapping a semantic web framework through top-down crowdsourced information from free plugins and widgets http://www.adaptiveblue.com/overview.html

It seems like even if a few points are off in this article, his company is using free in an intelligent fashion.

> a startup that is boostrapping a semantic web framework through top-down crowdsourced information from free plugins and widgets

Web2-speak is leveraging the new synergistic paradigm! ;-)

There might have been a heavy overlap with market speak, but each word was deliberately chosen.

boostrapping: opposite of Cyc. Starting with a unintelligent system, and making it more intelligent.

semantic web framework: machine understandable content

top-down: creating a taxonomy of areas of understanding like songs, books, movies, etc.

crowdsourced: built into existing pages, with user input

free: zero cost

plugins and widgets: blocks of code that go into sites like blogs

edit: I think I took your comment too seriously. Thank god for emoticons ;-D

I am glad you guys are finding my article discussion worthy, but why aren't you commenting on Read/WriteWeb? This way it is much easier for me and other readers to respond. the whole point of blogs is to discuss things around content not in remote seclude chats like this one.

And regarding me being wrong about Free - not all as simple as a lot of you think here.

You might want to tell your visitors about your post having been picked up by HN and that they can find additional comments here. To comment on the article on readwriteweb I need to

a) scroll all they way to the bottom,

b) need to create an account or type other boring details like my name and email address

c) potentially wait for approval (it's not exactly clear if I need to wait for approval, which fields are required, etc)

d) have another site to check to see replies to my comments,

e) discuss an article in a boring, non-hierarchical comment structure (how do I see who is replying to me, how do I reply to someone else?)

f) miss out on the interesting/insightful replies and comments of my peers on HN (specifically in reply to one of my comments)

You certainly might not like having to come here to check for comments to your post, but understand there are no incentives for HN users to post their comments somewhere else. Hopefully you find the discussion thread here interesting and worthy of your time and attention.

Yeah, it's 'free' to comment here, but there is a 'cost' associated with using that site, as cstejerean nicely explains:-)

hehe

a) Scrolling to the bottom means you read it. Or do you comment without reading?

b) c) No account is needed and no approval is needed

I see why you'd rather comment here - it is more interactive and individual centric. That make sense.

Alex

Scrolling to the bottom means you read it. Or do you comment without reading?

No, scrolling to the bottom means scrolling to the bottom. If I scroll so that the last word of your content is at the very bottom of my browser screen, my scrollbar shows that I'm only about 15% into the entire content of the page. The following 85% is taken up by clutter and the comments of other readers which are poorer in organization and in content. Furthermore since ReadWriteWeb has no karma scheme, there is no good way to provide feedback to other commenters.

ReadWriteWeb's layout also sucks. On my laptop the silly ads and tag box to the right consume 40% of the window's horizontal area. That area is completely blank for 90% of the page (everything after I get to the section titled "Monopolistic Markets: The Tale of the Unfunded Startup"). If I try to correct for this by using my browsers zoom control, all that happens is I get smaller text and even more whitespace to the left and right of the content. YC Hacker news on the other hand handles this exactly right.

No account is needed and no approval is needed

I can distinctly recall otherwise when replying to something else on ReadWriteWeb in the past. Is that something you configure or did they change their policy recently?

Because this is the place where we like to hang out. There are many smart people around and the quality of the discussion is very good. Plus we don't want to register in every blog on earth.

Some of us like discussing articles within the bounds of a familiar community.

Do you really think Flickr won't survive unless they change their freemium model?

What's the point of debating if $0 is good or not? There's the demand, there's the supply.

Zero cost for customer means he will choose the better provider, and here the world evolves again.

Reply on news.ycombinator.com