FREE: Wired's Chris Anderson explores the Divide-By-Zero problem in the Long Tail

Wired editor Chris "Long Tail" Anderson has written a long rant for Wired, introducing his next book: FREE. When I read The Long Tail (which explores the new markets that get opened by cheaper and cheaper cost of manufacture, distribution and marketing), I thought it was fantastic, right up to the part where Chris started talking about stuff that doesn't cost anything to copy, digital goods like music and ebooks and so on. As I read that chapter, I thought, oh ho, a divide-by-zero error! The market for digital goods isn't a market for goods at all: since the potential customers can choose to get all digital goods for free on the darknet, the digital goods market is actually a digital services market: what iTunes Store and the rest sell is the service of getting the digital files in a way that's easier, smarter, or faster. The end "product" is the same (actually, the end product is often superior when you download it for free than when you pay for it -- the paid-for versions are often crippled with DRM, something that file-sharers thoughtfully remove for you before uploading).

So Free appears to be an exploration of the Divide-By-Zero problem in the Long Tail, and it's the kind of thing we really, really need:

This difference between cheap and free is what venture capitalist Josh Kopelman calls the "penny gap." People think demand is elastic and that volume falls in a straight line as price rises, but the truth is that zero is one market and any other price is another. In many cases, that's the difference between a great market and none at all.

The huge psychological gap between "almost zero" and "zero" is why micropayments failed. It's why Google doesn't show up on your credit card. It's why modern Web companies don't charge their users anything. And it's why Yahoo gives away disk drive space. The question of infinite storage was not if but when. The winners made their stuff free first.

Traditionalists wring their hands about the "vaporization of value" and "demonetization" of entire industries. The success of craigslist's free listings, for instance, has hurt the newspaper classified ad business. But that lost newspaper revenue is certainly not ending up in the craigslist coffers. In 2006, the site earned an estimated $40 million from the few things it charges for. That's about 12 percent of the $326 million by which classified ad revenue declined that year.

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• [Angstrom]

  @Jeff

  if I take that free digital music, use it in some interesting way, then make money off of it, then it has magically become a product again.

  When you take some music and use it for something to make money – you need to apply for a special license to do so (from the music creator). That license is where most money for musicians now comes from. We don’t really get cash directly from end users, but instead we get cash from licensees of our ‘music making service’.
  Typical licensees being film makers, TV companies, public institutions, corporations, etc.
  They don’t own our product, they just have a right to use our music making service to generate revenue.

• [Kid]

  “…In 2006, the site earned an estimated $40 million from the few things it charges for. That’s about 12 percent of the $326 million by which classified ad revenue declined that year.”

  Is that a vaporization of value?

  Basically, if every product is seen as a composite of free and premium versions, it means that more and more items are taken out of the premium version to the free one, as the premium features become more and more of a commonplace.

  In a way, it is pretty much the same trend of luxury items turning into commodity, but happenning much faster. A stone knife used to cut things used to be luxury (or even rarity), but now you can get a pile of plastic knives from any fast food places for free.

  My optimistic side of the brain tells me that the vaporization of value is great for setting the foundation for more advanced products to come in future.

• [Adam H]

  For some great related points, see Kevin Kely’s recent Technium post. “Better than Free”

  http://www.kk.org/thetechnium/archives/2008/01/better_than_fre.php

• [Downpressor]

  It is reasonable to say that digital goods are a service in that entertainment is a service. Whats being sold is the opportunity to experience the entertainment. Its really the same selling a physical container for the experience (CD, DVD, paperback, etc) but proponents of net.think mostly ignore this as a way to claim that “everything is different now”.

  I just cant swallow the koolaid on most of this thinking. Even something thats given away costs something to make available and whether or not DRM reduces value is a subjective matter to which not everyone agrees. Zero cost to customer trials of product have been around for ages with the assumption that the loss leader will demonstrate the quality/value of the product and lead to later sales. Even Yahoo/Google arent really giving away anything for free, just like the TV networks, they are making something available in exchange for the ability to present their users with advertising or the chance to gather data on their users which may be sold on at a later date.

  To my eyes Chris Anderson doesnt really have a great track record on the topic of reality based economics, but I’ll see where this goes, if it is really an exploration of ideas or just more koolaid

  Maybe in the long run I’ll have egg on my face for thinking this kind of thing, but if that day comes I’ll be the first to admit I was wrong.

• [ditda]

  Mike Masnick over at Techdirt has some great analysis on the economics of free:

  http://www.techdirt.com/articles/20070110/004225.shtml

  (Technically there is a series of articles, but it’s rather difficult to find them in order. I linked to one of the first that I found.)

• [Jeff]

  So, anything you can get for free (such as mucic), is not a “product” but a “service.” Isn’t that symantic confussion? The digital copy may not be a thing you paid for, but it most certaintly is a product that has been provided by a free service. And, if I take that free digital music, use it in some interesting way, then make money off of it, then it has magically become a product again. Magic being the ultimate reality, I guess.