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The Free Economy

A quick rundown on the past, present, and future of getting free stuff online.
by

Jake Hester

on 28 April 2010

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Transcript of The Free Economy

The Free Economy A brief rundown on getting something for nothing The Origins Around the turn of the century King Camp Gillette invented a new product: The disposable razor His first year, he sold just 51 razors. -not exactly setting the world on fire- Until he came up with a slick business plan He decided to give his razors away. Gillette conceived that if people had tried a razor and still owned the handle, they might be willing to buy more blades. He was right. The following year, he sold 123,648 blades. Ten years after that he had plants in four countries and sold 70 million blades a year The idea was simple but brilliant. The "free" product drove sales of it's companion product, which in turn subsidized the cost of the freebie. Before long, other companies adapted Gillette's idea for their own industries. Radio, for example, developed a Three Party Model whereby end users didn't need to pay at all. Instead, listeners got (arguably) free content while advertisers paid for it. Of course, with radio and television, the content isn't completely free. You 'pay' for it with time spent listening to advertisements. This is time you might rather spend doing something else. Economists call these 'opportunity costs'. This is an important way in which 'free' on the internet is often different from the 'old' free. The Internet and the Free Economy Perhaps one of the biggest business questions of the 21st century has been How can we make money on the internet? As a medium still in its infancy, there has been a great deal of trial and error. Tim Witger of the University of Toronto discusses Dot Com Failures Those errors cost a lot of people a lot of money. Ultimately, we've discovered a few key principles, and a few workable approaches. Perhaps the most important principle to keep in mind is Economies of scale Making money on the web is ultimately all about pulling as many users as possible to a central point. This decreases the cost per user while increasing the likelihood for a positive response to whatever income strategy you have. No small part of Google's success has been thanks to exciting new free services which bring in lots of new users on a regular basis Once you have an idea for a service that will bring in the users there's a couple of ways to go about making money which seem to work Advertising The first wave of web advertising had low response rates. Today, web advertising is about targeting. For example, Facebook knows all about me, and uses that information to show me relevant ads Like with radio, all users got the same ads. But unlike radio, users could now completely ignore the ads It knows I'm a dad. It knows I'm a working adult. It knows I live near Asheville, NC Since these ads are targeted specifically at me, they have a higher chance of success.

Which means advertisers have a greater incentive to advertise here. "Freemium" The idea here is that while most of the content/services of a site are offered for free, users may opt to pay an additional amount for premium content, to avoid ads, or both. Ideally, income from premium users covers the cost of the free users and allows for a reasonable profit. Examples: Flickr Pro: http://www.flickr.com/upgrade/ Runescape: http://www.runescape.com/ - Gets you unlimited storage, ad-free browsing, stats, and more - Gets you ad-free browsing and premium game content Box.net http://box.net/ - Gets you more storage space, increased file limits, and more Other income streams Selling data on users - For example, Facebook sells access to it's users to Zynga, the
maker of Farmville and other casual games, so that it may, in
turn, provide Freemium content to those users Merchandise Selling access to users Brand Licensing - Amazingly, people who won't pay for content on a site
will gladly pay for merch to show off an allegiance to that site So, where's the Free Economy going? Really, these five can tell you better than I can: Christ, don't I wish I knew. Ultimately, as with anything else, the key to success is Tireless innovation and smart marketing I think King Gillette would agree.
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