Free: The Dismal Deal

Chris Anderson’s provocative new book, Free: The Future of a Radical Price, argues that in the digital world, “free” pricing is a realistic and normatively good approach to pricing information products. Unlike the physical world of “free” products, which is plagued with fraud and tricks, the properties of the digital world make free actually possible when bits are sold. The physical world is limited, but the digital world is abundant. Businesses can leverage this abundance, and give it away while making money by charging for whatever is still scarce. For instance, software can be given away free while support can be charged for. Stripped down products can be provided free, while expert users will pay for fully-featured products that subsidizes the free.

Anderson begins his book by describing two types of reactions to his thesis. The young say, “no duh.” They’ve grown up with Gmail and other free services. Older people react differently, finding free to be a harbinger of fraud. These olds are individuals who have grown up with free in the physical world; they’ve been burned by “free” offers.

In an earlier post, I expressed doubt about Anderson’s thesis, and even made the bold claim that Malcolm Gladwell’s critique had the better argument. After reading Anderson’s book, I’m still with the olds, but for different reasons. Gladwell’s critique missed the mark because it focused upon the secondary costs of delivering free goods. Anderson never says that all things will be free, and there will always be costs associated with infrastructure and information delivery.

Anderson is convincing in arguing that some business models really do work with free as a price. However, the argument that the digital world is fundamentally different fails for reasons that Anderson does not address. Free in the digital world exhibits the same predations it does in the physical world.

Free and the Law

My initial skepticism comes from the legal issues surrounding free offers, something that Anderson does not address. The FTC’s guidelines on the use of the word free allows marketers to use the term to describe products that are not free, so long as the terms are adequately disclosed. Thus, those who approach these issues from a consumer protection paradigm are right to be guarded. Free in the physical world (as Anderson recognizes) is often just a scam. In the digital world, things are different, Anderson claims.

But the problem is that they really are not. Anderson invokes many anecdotes of seemingly free and good digital deals, but I can do the same, with seemingly free but bad deals. Exhibit 1: the FTC, at this moment, has been ordered by Congress to reevaluate the marketing of so called “free” credit reports. Millions of consumers have been hoodwinked into expensive subscription scams in order to obtain a “free” digital copy of their credit report.

The Psychology of Free

The psychology of free is also worth visiting. David Friedman’s recent article, Free Offers: A New Look, explores these forces in detail. Friedman argues:

Over time, merchants, service providers, marketers, and advertisers have discovered a psychological glitch that works to their advantage. Use of the word “free” and the illusion of “gifting” in a commercial context can impact consumer behavior in ways not readily apparent.

One example of this…is the way in which the brain calculates the value of bundles. When a consumer is presented with an unbundled “gain”–that is, a split package of goods–the consumer will value the goods more than if they were bundled. Another way free offers impact and distort behavior is through creation of an atmosphere where the powerful noncommercial obligation of reciprocity is required.

“Free” makes people take different decisions. Ones that lead, in my opinion, to suboptimal outcomes:

Corner Cutting

First, offerors of free products, since the product is free, are free to cut corners. Consumers do not expect high quality when things are free. Often, these are hidden corners that only become apparent when things go wrong.

Anderson invokes Ryanair as an example of a company that has adopted a free business model. But this example makes my point: this is the company whose executive told the Wall Street Journal in 2004 that, “It’s all about re-educating the passenger to accept a lower level of services…” In other respects, Ryanair and other “discount” carriers cut corners–most notably, by landing at airports are in the middle of nowhere. You save money on the ticket, but experience costs elsewhere that are difficult to measure and are often overlooked by consumers until one gets the $90 taxi bill.

“…people will pay if you make them, once they’re hooked.” – Chris Anderson

Second, free products are almost always a gimmick to promote lock-in. In the physical world, Anderson discusses the Gillette razor. As Maryland residents, my brothers and I all received a nice Gillette razor on our 18th birthdays. Once we went to the store to get replacement razors, it became clear how we paid for that free razor. Those razors are so expensive, and the value proposition is so poor that individuals regularly steal them!

Anderson uses this and many other examples as normative arguments in favor of free business models. These models are good for self-interested business, but bad for competition. Writing in Wired, Anderson expounds:

Give away the cell phone, sell the monthly plan; make the videogame console cheap and sell expensive games; install fancy coffeemakers in offices at no charge so you can sell managers expensive coffee sachets.

Why is it good to fool the consumer into a relationship where the value of the free offer is extracted through hidden fees and add-ons? Take wireless phones. Ringtones can play natively on unlocked phones. But when you get a “free” phone, that functionality is often locked, thus causing you to have to pay for tones (the carrier gets a 50% revenue share). That phone is free, but marketed such that total cost of ownership is increased and obscured. We’d be better off if these products were presented in a total cost of ownership framework rather than “free.”

These are the same practices that the financial services industry engages in. You get a card with “no annual fees” but the FIs have mastered ways to pack in costs “at the back of the product.” You optimistically believe that you’ll never be subject to those fees. But this very moment, there are teams of people just as smart as you whose enormous bonuses are keyed to their ability to make you believe that.

Anderson seems to argue that lock-in is good, and that consumers have to exercise common sense. The problem is, as Friedman has elucidated, common sense goes out the window when “free” is invoked.

The Free Mediocracy

Third, the combination of corner cutting and lock-in promotes mediocrity. Companies cannot compete with free, and this is one of the many reasons why bad products remain on the market despite the presence of better ones. People who value quality will have a harder time finding it, and in some cases, it will simply disappear.

Still Wearing Uggs? Free is for You!

This leads to my audacious prediction: eventually, tastemakers will see these trends in free offers, and much like big-box stores and other signals of massification, “free” will become uncool. There will be a backlash against free. Because free is cheap and consumers will want to distinguish themselves from the big-shorts-wearing mouthbreathers, paid services will gain reputational value.

Conclusion

Anderson’s is an optimistic book that does not fully address the reality of what free offers have been. Experts in consumer protection have long been skeptical of free offers as both potential scams, but also impediments to competition. Anderson addresses these counterarguments breezily.

Privacy issues are dealt with glibly too, and some important ones are missed entirely. For instance, I’d pose these questions to Gmail users: what is the cost to civil liberties from Gmail? How can one reasonably expect their email to be private from law enforcement in a world where users allow companies to scan content for advertising?

More problematic are Anderson’s examples. He lauds the New York Times for removing its paywall, but this is the same paper that is facing layoffs by the end of the year, while the Journal is increasing its subscribership with a paywall in place.

From a public policy perspective, Anderson’s book highlights why the FTC should revisit its free guidelines. Businesses are knowingly trading upon the psychological biases that free produces. The book also points to the need for total-cost-of-ownership advertising. In my consumer heaven world, most advertising could be comparative, like this. “Free offers,” in a world of such advertising, would soon be shown to be what they really are.

Free is available at no cost to you in audiobook format at Audible, and at Amazon for about $20.

Comments

  1. #1 Kapitano
    November 28, 2009

    This man Anderson seems to have fallen into the common trap of thinking, “A little of X is good, so more of X is better, and even more is great.”

    Printing extra banknotes in a time of economic crisis can revive the economy…but there comes a point where all you’ve got is a lot of worthless bits of paper flying around and no functioning economy.

    Companies sometimes find that changing working conditions increases production temporarily, so get it into their heads that bigger and more frequent changes must therefore send production through the roof.

    Free loss leaders can indeed be good for business. So more loss leaders must be better, right? Oh hang on, where’s our profit going to come from?

  2. #2 Paul Hutch
    November 28, 2009

    I find it very odd that the unabridged version of the audio book is free but the abridged version is $18.89. Are they trying to say that until an editor worked on the abridged edition the book it was of zero value? :-)

    The issue with the credit report scams is a good example of how free can nail consumers. Another recent example is the loyalty programs where they asked only for an email address to get a free discount coupon, then your merchant gave them your credit card info behind your back.
    http://www.techdirt.com/articles/20091117/1303456975.shtml
    http://news.cnet.com/8301-1023_3-10399880-93.html?part=rss&subj=news&tag=2547-1_3-0-20

    Gmail I would never use because AFAIK they reserve the right to archive copies of your email indefinitely, including ones you’ve deleted. I do not store email on servers that don’t belong to my employer or myself. This way I can be sure that when I and the party I sent it to have deleted an email it is really gone for good.

  3. #3 sng
    November 28, 2009

    Paul,

    If you think *any* email is ever gone for good you don’t understand how email works. For starters that statement assumes that you and/or your employer never does backups. It assumes that none of the people you’ve sent it to has backups. It assumes that, somehow, they all disappear off of the servers of the people you’ve sent them to. It assumes that nobody who is running any of the tens of servers a typical email will pass through is saving stuff off just because.

    Once you hit send on an email it’s out there forever.

  4. #4 Cousin Andy
    November 29, 2009

    Wow! That nostradamus-america site was the most jumbled, confusing grouping of malarkey I have ever seen. You really proved something, but I’m not sure what it was.

  5. #5 Kagehi
    November 29, 2009

    Yeah. Free only really works if everyone can keep an eye out and catch the guy being dishonest. Free from people that you a) can’t watch, b) don’t know, or c) are selling you a proprietary product as part of the “free” nets you cell phones that have 10 billion features, all of which would work in you where some place like.. Japan, or even Europe where the entire society thinks that most of those features **need** to all work on your “plan”, so they do, versus the US where, if they could figure out how to charge you extra for every damn time you plugged it into a battery charger, you would have to “activate” the charging service, and pay and extra $10 a month to *use* it.

    And that isn’t even talking about the horrid use of the term “free” on the internet, which makes it literally impossible to find the 2 products some guy in his basement made to solve problem X, because there is no other word you can use (unless you are lucky and its open source and they use that *specific* term in the description), and there are 800 other products around, ranging from the near useless $20 one, to the over the top, does everything, including wash the dishes in your sink, $800 one, all of them providing “free demos”. I hated that BS 10 years ago, and its only gotten bloody worse since.

  6. #6 ron
    December 1, 2009

    It seems that there are two subjects here. One is the use of the word ‘free’ and the other, things that are actually free.

    In my opinion allowing anything other than the literal definition of the word is too generous. And it’s the same dishonesty when a price is advertised and ridiculous shipping charges are added. I consider it dishonest even when it’s included in the ad. I believe that the early teaching of marketing and how it affects consumers would encourage skepticism that would blunt many of advertisings abuses.

    And I believe that some free products are successful models, even though I’m one of the olds. Adobe Acrobat and FlashPlayer come to mind. If they didn’t give away enough of the reading software no one would want to buy the writing software. They are ‘stripped-down versions’ but there’s a lot of incentive to keep the quality high.

  7. #7 Nick Lamb
    December 4, 2009

    Of course you can always shuffle the value around to come to the conclusion that it’s not free. If I give you a box of chocolates, you can say “Now society obliges me to say ‘Thankyou’ and that’s a use of my time, which is a cost, and so these chocolates weren’t free at all” and the right response to that is for us to never give you anything.

    But Anderson talks about a price, which is a headline figure. The price of the toy doesn’t include a lifetime’s supply of batteries, the price of carrots doesn’t include a knife, a tutorial on how to safely cut up carrots, or a recipe for stew.

    The _price_ of Google searches, Linux, jogging in the park, and BBC Radio 4, is free. This is the same price as a fair hearing in a court of law, a march in support of a change in policy and a consultation with my GP.

    All of these things cost resources, which translate to money. But choosing not to try to reflect that in a price (“£18.50 for a GP appointment today, £6.00 if you can wait until Monday” maybe?) makes a huge difference.

    The word free attracts scumbags. But so does medicine. We shouldn’t give up on medicine just because you can buy homeopathic “remedies” in the local drug store and there’s a “clinic” at the end of the street offering to cure you with crystals, and we shouldn’t give up on “free” as a price just because there are people trying to trick us into buying expensive razor blades.

    Your tastemaker argument has been made before, but it doesn’t work out very well. What happens is that the price becomes a positive factor for some people, but remains independent of quality. So now scumbags can get more money for the same lousy product. You’ve actually made things worse! You can see this pattern in many consumer tests, whether of cars, mince pies, or software – there’s either no correlation between price and performance or the correlation is very loose, meaning that on average paying more helps, but an individual consumer is almost as likely to pay more and get a worse product.

  8. #8 James Sweet
    December 14, 2009

    Without addressing any of the other arguments, I just want to talk about the free credit report thing. Of course you can get an actually-free once-per-year credit report, and this would not be practical without the internet. Furthermore, the reason I know that annualcreditreport.com is okay and all the rest are not okay is also because of how freely information is available on the internet.

    This doesn’t change the reality of how many people have been swindled by the scams, of course, so viewing “free” as a societal phenomenon, the argument perhaps still stands. But the internet does change the equation. If it weren’t for the internet, the legitimate free credit report could not be made as widely available, and it would take far more effort on the part of individuals to separate the frauds from the real deal.

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