In Defense of Free

Stewart Brand's famous qoute "Information wants to be free" has been the rallying cry of the open source software movement for years.

And I basically think Stewart was right.

So how do you reconcile the desire for free code and data with capitalism and its derivative - venture capitalism?

That is a question that we have been struggling with for the past ten years and it is a question that Brad and I have spent countless hours analyzing and debating.

Our mentiors and guiding lights are people like Bob Young of Red Hat and Craig Newmark of CraigsList who have shown that free software and data can co-exist with the profit motive.

Red Hat is so instructive.  It's business model was making free software, specifically Linux, available to enterprise customers.  It made money packaging and providing support.  The code was free, the expertise on how to use the free code was not.

CraigsList is even more instructive.  Craig built an open utility - a classifieds listing service in San Francisco that anyone could use for free.  And he lovingly cultivated it into a community that had values and feelings. And people used it and got results.  He has kept it mostly free with the exception of certain categories, Jobs to start, and soon Real Estate, where a paid model turned out to be a benefit to the community.

That last point, that a paid model can actually be beneficial, is really interesting and needs to be better understood.  But this post is intended to be the beginning of this discussion, so I'll move on.

What about Google?  They give away an incredibly powerful Internet search service every day millions of times a day.  They get paid by advertisers who also get to run their text ads for free.  The only time an advertiser pays is when the ad is clicked on.  Free to use, pay for performance.  It doesn't sound that different from the Red Hat model, does it?

And take Flickr.  It's the best photo site on the Internet by a long shot.  And its free.  For about a day.  My friend Mark Ghuniem said something to me last month which I have used a lot since then.  Mark said, "it took me about a day to turn pro on Flickr".  Turn pro means becoming a paying customer.

You can get a really great free experience uploading and sharing photos on Flickr. But if you are like many of us who love taking and sharing photos, you'll turn pro in about a day.

So I was working with one of our portfolio companies earlier this month.  They have an enterprise software/service that customers pay for.  But there are huge network effects in the deployment of their service.  The more users they have, the more value accrues to each user.  They are thinking about the role of free code and data in their business.  And well they should.

Because free is a great way to make money.  You just have to know how you are going to get paid for being free.

Comments

[charlie crystle]

I struggle with free every day. We sell our software and lots of it, but I'd rather have 10,000 non-paying customers than 1,000 paying customers. Why? Because some of the 10,000 customers will pay for something sometime, and 10,000 gets to 30,000 faster than 1,000 does. Except that without funding we need to sell software to pay the bills.

So then we talk about GiftWorks Lite, or Start Edition, but we want to charge for that too, because nobody likes to work really hard and then give away that hard work. Plus we have families to feed.

So then we talk about adding advertising to the software, which we could do, but I really hate the idea of adding ugly advertising to our beautifully designed software.

Then we talk about the online services we are going to offer soon through our web-enabled rich client platform like mass emailing, blogging, online print services (all 3rd party provided) and then the model starts to make sense, because we can offer a subscription to what people want, and they something useful either way, and they talk about it and word spreads. We hope.

And then the bill show up and we get back on the phones and sell software. Because it's really great software and people love it and we need to pay the bills.

Free is a hook. It's an important hook to lots of models. There's lots we can do to offer value for free, and lots we can do to create a network effect, but in our case--and the cases of many who aren't going to raise venture capital (for lots of good reasons) so they can subsidize the free, no-revenue phase that hopefully bridges to the free, huge revenue phase--it's a difficult jump to make.

[Ramit Sethi]

This is easier said than done, and it's especially easy in a post-hoc analysis like this. Fred, you forget the many, many started-free-but-failed-trying-to-go-pro services that have gone away--some because they weren't that good, but some because of bad luck and cheap customers. And because they failed, they're not in your mind or examples here, leading to your seemingly tenable argument of "built it well and they'll pay."

We're working on a free Wiki service called PBWiki, which lets you set up a Wiki in about 4 seconds and is free (premium version available). We chose to go along this route because we wanted the network effects and, frankly, people should be able to collaborate more easily these days. Growth has been huge since we launched a couple weeks ago, but converting customers to the paid version--no matter how fast you build features (and we have) and improve the customer experience--is extremely tough. Bottom line: Free is an excellent way to get exposure and trial customers and to remove barriers from customers using your product. But when the average entrepreneur is trying to figure how to price his product, it's just not an apples-to-apples comparison to use Google or Craigslist or Flickr. They succeeded. But many did not.

[David Gibbons]

Fred and Charlie are spot on: not only Information, but Software too ... wants to be free. They are both comodities, that cannot be depleted, and whose supply is becoming increasingly abundant. Unlike other commodities, code & data can not be depleted - hence why a s/w company's IP is not as leveragable as we all thought it was in the '90's.

I'm wondering; If free is becoming the "entry point", what is the compelling offering that will differentiate Web 2.0 services as they proliferate? As Gordon muses, we are starting to be spoiled for Web 2.0 choices - http://gordon.blogsmith.com/2005/07/19/making-decisions-about-where-to-spend-time-in-a-web-2-0-world/

Let's face it - there's ony one thing better than "free" - and it's "for cash". I'm starting to think that paying for Web 2.0 community contributions is where (some of) this is all headed.

As a juxtaposition to the success of Flikr, check out istockphoto - also free to join but ... iStock (www.istockphoto.com) ... is also a serious imaging retail operation that will sell your high-res photo's to graphic designers.

Time will tell if Flickr moves into istock's space but I doubt they'll be able to create cache with buyers regarding quality etc. I also doubt whether iStock is interested in moving into Flickr's space - but I now which of the two I'd invest in ... its not Flickr

PS - you can now buy my stock photography (starting at only $1) here: http://www.istockphoto.com/file_search.php?action=file&filetypeID=0&s1=0&text=&userID=493027

[Dan Cornish]

I will never forget a customer of ours explaining to me the reason why they standardized on Outlook and Exchange was because Outlook was "free" with all the work stations. Of course we all know there is really a very high cost to this (MS Exchange server for 600 seats and the two full time people to manage it), but it is an example of this.

In many ways all but the largest companies are very cost sensitive to the price of software. The delivery of software over the web dramatically lowers the cost of sales. Now what would happen to traditional software vendors if core enterprise apps were made available over the web as web services for free or very low cost. A book comes to mind about the coming inflection point. "Innovators Dilemma"

[Nivi]

Fred, I think it is a mistake to throw RedHat into your mix of examples.

RedHat doesn't sell you free software and it would be deceptive for them to say so. They sell *open source* software.

It is like a lawyer telling you that the law is free: "Here's my copy of the civil code buddy. Good luck!". Lawyers sell you a service based on a set of laws and court system that you would rather not deal with yourself.

RedHat does the same thing.

A panelist at the Always On conference claimed that enterprise software is typically 30% license fees and 70% support fees. Free software just removes that 30% license fee.

Calling things "free" is wrong frame for discussion. I prefer to think of total cost, loss leaders, and marketing.

"Free" has never been free. (I don't know what that means but it sounds good!)

[anina.net]

i like the red hat approach. code free for those who know how to do it, tech support not for those who dont and want to learn. cool

[Ned]

The best! Thanks for another great post Fred!

[Darth]

Fred,

I've been lurking about your blog for some time and its time to chime in. While "free" can be a hook or chum, it appears another dynamic may be taking root. With the cost of information distribution and the cost of micro-transactions hitting the floor the two no longer need to be closely coupled to assure a profitable exchange. Consumers and suppliers can now make ad-hoc exchanges of value without the formality of closely linked distribution and transaction processes.

If the market deems it valuable, value will be exchanged. Too bad entertainment companies do not understand this simple dynamic of capitalism.

BTW, "Exile" takes top honors in the Stones discography.

[Ric]

Ramit - One thing I think you need to understand - with Red Hat and craigslist et al, the value wasn't what was being given away. With Red Hat the software may be free, but that's not what RH is selling - they are selling services around that. If you are giving away your software, you need to selling something else, because (as you seem to have noticed) people won't start paying for exactly the same thing they get for free. They WILL pay for support, expertise, etc.

[John Koetsier]

OK, time to chime in:

I'm starting up a division for Premier (premier.us/family) and do some marketing consulting for a start-up (thelinguist.com) so I read this article with interest.

I think that if you're considering free as a marketing strategy, there are three key question to ask ask and answer in a very hardcore way:

1) who's your customer?
2) how do you define your customer?
3) how will you attract that customer?

If you define your customer as the person who pays you, Google's customer base just shrunk 99% - their customer is the advertiser. Everything else is just honey to bring in the bees.

To me, the lesson that the guy above with the Wiki isn't getting is that giving the product away isn't a good way to sell it.

Google's product, from this perspective, is NOT search. It's audience. Attention. That's what Google manufactures. And then they sell it to their customer: the advertiser.

Fairly simple, really.

But it's based on a very hard-nosed no rose-tinted-glasses focus on answering the key questions.

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