The Complete Guide To Freemium Business Models
techcrunch.com
techcrunch.com
That's not really true at all. I remember reading an analysis of Google's costs somewhere (sorry tried but can't find the link) that each search costs something like 70c.
Even if it were much less (1c or 2c) that's still a hell of a cost for the "paying" customers (ie. the circa 10% of people that actually click on google ads) to be covering.
Even two years ago, there were 3 billion Google searches per day. I think it's safe to assume this figure has gone up a bit since then. http://searchengineland.com/by-the-numbers-twitter-vs-facebo...
I also think it's safe to assume that Google Search doesn't cost a trillion dollars a year to run.
"In other words, if the cost to serve a customer (support aside) is zero, the long-term price of the product in the market will be zero (because of competitive pressure)."
I can't think of any large scale operation where the cost to serve a customer is zero. Sites like Google, Facebook and YouTube have massive operational expenses that they struggle to cover with aggressive advertising.
Of course, the freemium model works very well for many companies. Nevertheless - "zero marginal cost" is an illusion.
A whole operations team is needed to attend the infrastructure, whether or not your company actually owns its infrastructure.
Granted, thanks to automation, an operation team can attend to a larger number of servers than before, but this cancels out with the growth in the number of servers needed as the application complexity grows.
If they were, none of them would own 60% of the total market. There would be many more market participants and there would be no barriers to entry. That's what he was referring to.
In a market where there are no barriers to entry (i.e. perfectly competitive), the long-term price will tend to zero.
Now that I am thinking about it, even though the internet is 'free', and has very low barriers to entry for some businesses, I can't think of an example of some sub-industries (search, social networking, video hosting, etc.) online where the market is perfectly competitive. There is always an inherent advantage and some outsized competitor, relative to everyone else.
Yes, the price will gravitate towards zero because of competition or due to the fact that end users would not be willing to pay for the product anyway (who would use Facebook if it wouldn't be free?). But the marginal cost of such operation would not be zero and costs would have to be covered by other sources (VC funding, advertising, premium services...)