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The Economics of Giving It AwayBy Chris Anderson Group 10: Lucas Witt, BD Zheng, Keith Wilkerson, Alyssa Wintersteller
Introduction • In the last decade, we have become more used to free online services. • Digital goods have become more popular. Since they can be produced for almost nothing, their price level has gone to zero. • The use of the internet has spurred the invention of a new business model known as “Freemium”.
Examples of Free Online Services • Facebook • Google • Hypem.com-lets users listen to songs posted on music-related blogs for free. • Kayak.com-lets users compare traveling fares from multiple vendors.
More Examples • Picnik.com-free photo-editing site which requires no registration or downloads. • Pogo.com-free online gaming site. • Shopittome.com-compares prices of major clothing designers and alerts you via email when the best price is found.
Future Trends • Shift towards free open source software and Web-based productivity tools like Google Docs • The cheapest computers on the market on “Netbooks”, which sell for $250. • They come equipped with either a free version of Linux or a very cheap old version of Windows. • They don’t load Office at all. They load usually free online equivalents.
Free Business Model • Have a great idea. • Raise money to bring it to market, ideally free to reach the largest possible market. • If it proves popular, raise more money to scale it up. • Repeat until you’re bought by a bigger company. Steps 2-4 are no longer available, so online businesses have to find a new business model.
Advertising • Popular services can get by with only a few ads. • Two problems have arisen with this model: the price of the ads and the click-through rates. • Facebook is extremely popular, but extremely ineffective at advertising. • No one is clicking on the ads, therefore Facebook is generating less than $1 per 1,000 views, compared to $20 on big media websites.
Competition • Already successful businesses, such as Microsoft, are trying to find ways to compete with the free online businesses. • Microsoft has created web versions of its business software and now offers them to small businesses for free. • Microsoft is betting that once these businesses grow, they will continue to use the products even when they have to pay.
Conclusion • Even with the current economic recession, free online businesses are not likely to recede. • “Free” is still too enticing a term for people to pass up. • Free may be the best price, but it can’t be the only one.