Wednesday, 5 June 2013

The value-of-free, a seeming paradox but a powerful business model in an internet economy

   “Facebook gave me the opportunity to do things literally for free” – Nook Flowers

We use Google, LinkedIn and perhaps NationBuilder.  They are all information-based businesses and depend on user-generated content through crowdsourcing, an internet technique.  If Henry Ford’s moving assembly lines created the modern factory and increasing productivity 10 times, crowdsourcing is the equivalent, creating an information age factory, using data as raw material, culled from us consumers as factory hands and manufacturing informational, quasi-informational and information-linked products increasing productivity more.  Since most crowdsourced content is free, ‘free’ now has value.  The largest new companies, Facebook, Baidu are based on this business model.  In time, crowdsourcing will be recognised as equal with Ford’s invention, as impactful.  It will be one of the most significant tools of the information age.

Online, most content and consumer services are free.  Yes even HBO’s Game of Thrones, the most pirated show in television and no matter what lawmakers say!  Anything that can be datarised over the internet will be similarly affected.  The next post will explain datarisation, briefly it is how content is made into data packets before being transported around the internet.  When datarised, content becomes either free or drops in value.  Photo albums online are free as are road maps.  One day, all paid software will go the way of the dodo.  Material goods cannot be free but costs are reduced.  You can buy cheaper books and hotel rooms online.  These have to do with how things work in an internet economy.

As an aside, will movies ever be free?  No says conventional wisdom.  Plausible says the internet.  If you ask anyone walking on the street 20 years ago if telephone calls will ever be free, conventional wisdom then will say no.  Then it was unthinkable.  A lot of free calls are being made now and this trend is increasing (the next post on the impact of the internet on the telco industry makes a case that it is only a matter of time before all calls become free and within 10 to 20 years).  The internet economy changes values.  Of course teenagers have been feasting on ‘free’ movies through the internet for yonks.  But this is not conventional, not yet!  This is not the place to discuss this topic but I intend to ponder this question in a future blog by applying ‘internet rules’.  Off the top of my head now, I’ll say no but it’ll be very much cheaper.

How did ‘free’ become a business model?

‘Free’, hardly unique in its use for business (until the web, used only sparingly) is today a key business driver for the iconic online companies.  Free search (Google), free news (Yahoo), free email, free sms have made billions for these innovative companies.  There must be something with ‘free’.

A short history on ‘free’.  Commercially, the first to catch the eye was Netscape, offering their browser free before their IPO.  This IPO also set off the boom.  But of course, the internet service providers (ISP) were already using free software for their operations.  There were already free content (newsgroups), free services before the Netscape IPO.  The culture of free was already firming below the iceberg.  ‘Free’ started almost as soon as the internet became.  Newsgroups appeared quickly.  They are discussion groups displacing the electronic bulletin boards popular in the 1980’s.  From these newsgroups, you can get advice by posting questions and more.  This was how the technical team at Technet, the first ISP in Singapore built new services when expertise on the internet was almost non-existent in the region then.  I was pleased with the free consultancy and was amazed at the quality.  Then in IT, as is now, you pay for services or consultancy which is often disappointing.  ‘Free’ continued with the early search ‘gopher’ to ‘wais’ to email.  Later many did not want to pay for music and thus the invention of peer-to-peer music sites, much maligned but may proof to be inspirational in future.  Free video came along with YouTube and the list goes on.  The business of ‘free’ was forming.

How does ‘free’ create value?  Nothing is really free.  The services are provided gratis in return for data.

Crowdsourcing induces consumers to do things, out of their free will mostly with no expectation of remuneration (but gives them social value).  A service is rendered in the process and through this, value is created.  LinkedIn’s data is crowdsourced as we supply its plant merely by posting our details and making pronouncements.  The data is ‘mined’ and refined into nuggets of informational products or services.  Most web 2.0 companies utilise crowdsourcing in one form or another.  It works because we get something in return.  Will you stop using social media or email?  This is an age where society (and websites) compels people to do things that are useful without being paid for it.  Society does derive value from it, just that they are not necessarily monetary.

Open Platform as the term implies is a mode of an organisation to openly allow outside access to its content.  It deliberately taps into crowds of consumers, partners and customers.  The Guardian newspaper in Britain allows access to their articles and applications.  They organise their data, build engagement platform, make tools available to access the data and provide training.  By providing basic data, they get enhanced data back; processed information, different interpretation of data, enhancing the newspaper without spending much.  Like money generating more money, the Open Platform begets more data from data, from which you monetise.  The model that works in the old world, of closely guarding its property, is changing as power shifts to the consumers.

Other value creating models include open source, co-creation and web services.

All these methods are generated mostly from human behaviour, of us being social creatures sharing, conversing, showing off, being busybodies, being community spirited and transferring these activities online.  They are all greased in part by the open culture of the internet which provokes a sense of freedom to do things.  Or simply to be entertained, anytime (unless you are working), in anonymity or authenticated that is so liberating, fuelling creativity, a high value activity.  Clever websites then induces you to do more.  Volunteerism was the bedrock during the formative years of the internet, now this culture pervades the online consumers.  The internet (and the clever websites) makes it very simple to do so.  This convenience factor made taking part a cinch even for couch potatoes.  It is also enabled by what I call the 0.001% effect.  You only need a very small percentage of the like minded from the massive number of internet users to kick it off.  Even crazy ideas can have an interest group!.  Natural selection does its part.  Then the networking effect takes over, accelerating content build.  From this, value is extracted via data mining and orchestrating the data to attract viewers (portals), users (social games), subscribers (media), consumers (eBay), find things (search).

Another way to look at the value-of-free is the monetisation of unwanted or excess things like personal belongings (eBay), spare rooms (AirBrb), unused resources ( find buyers for underutilised patents).  Yet another example is un-information, that is, information that has value if it can be found.  InnoCentive and Eureka Medical locates expertise.  MMC identifies music talents. 

Finally, the ‘free’ model has variations.  Wikipedia is an example of unconditional free while others do so with monetisation plans.  Both provide value.  In between, open source software is free but with a commercial model around it.

Physical products cannot be free but prices of many goods have been reduced.  How did this happen? The traditional trading system relies on layers of middlemen to make goods or services available for the populace.  Each layer adds a cost. The direct model of the internet reduces the layers, lowering the final consumer price.  Ultimately it is the easy availability of information (farmers in rural India for example now know market prices when previously the layers of middlemen hid it from them), ease of connectivity (and low cost) enabled by the internet say for product producers to talk to buyers, and the speed of relaying information.

It is interesting to compare the differing B2C (online retailers) model between and (Taobao division) to lower prices.  The business model of both reduces the number of layers of middlemen and decreases the number of them. Amazon owns warehouses (thus higher costs) and forces suppliers to sell at lower margins and thus works more like a traditional trader, buying, stocking, resell.  Most of the suppliers are the original product producers though some products are from middlemen. uses a direct seller-buyer model ie. does not take a cut from the products sold unlike  Instead uses a subscription model, having the suppliers pay an annual fixed fee.  The buyer buys directly from the sellers and although some of them may be middlemen, this model reduces them, continuously over time. in fact adheres to the direct model of the internet.’s is a variation acting as one giant online middleman.  Both are direct (or to be more exact - more direct than the past) in that the number of layers are reduced.  Both forces prices down.  For central bankers, this direct model as it takes hold will reduce inflation.

In the industrial age, factories produced the most value for the global economy.  Crowdsourcing will be a contender in the information age but unlike factories, crowdsourcing does not create value directly.  One cannot sell crowdsourced data.  The internet business models create value from this raw data indirectly.  Because we are in the early stage of the new age, industries must be transformed.  Businesses with goods that can be data-rised will be most affected.  This includes telco (subject of the next post), media and software industries.  The value-of-free will be used by the others to remain competitive in an internet-enabled economy.

Ultimately, the internet economy brings out new values.  ‘Free’, one of them is now significant.

Now, would any business not too long ago give us anything for free as Nook Flowers at present enjoy?

See who else is using 'free...

LinkedIn – dr tommi chen (goggle + profile incompleted)

©Chen Thet Ngian, (2012, 2013).  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Chen Thet Ngian and with appropriate and specific direction to the original content.

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