Free as an Internet Business Model

Posted on February 6, 2006

A Financial Times article offers an interest look at the buzz surrounding business models that offer a "free" product. Nowhere is this model more obvious then the Internet where free email, IMs and blogging tools are plentiful.
Google charges users nothing to search the internet; neither does Yahoo nor Microsoft MSN. E-mail? Instant messaging? Blogging? Free. Skype, the Luxembourg-based company that is now a multibillion-dollar division of Ebay, offers free VOIP - Voice Over Internet Protocols - telephone calls worldwide. San Francisco-based Craigslist provides free online classified advertising around the world.

In America, the Progressive insurance group gives comparison-minded shoppers free vehicle insurance quotes from its competitors. Innumerable financial service companies offer clients free tax advice, online bill payments and investment research. Michael O'Leary, Ryanair's colourful founder, predicts his discount carrier may soon offer free tickets to his cost-conscious euro-flyers.

Of course, Milton Friedman, the Nobel economist, is right: just as "there's no such thing as a free lunch", there is also no such thing as a "free innovation". These "free" offerings are all creatures of creative subsidy. Free search engines have keyword-driven advertisers. Financial companies use cash flow from profitable core businesses to cost-effectively support alluringly "free" money management services. Ryanair counts on the lucrative introduction of in-flight gambling to make its "free tickets" scenario a commercial reality. Innovative companies increasingly recognise that innovative subsidy transforms the pace at which markets embrace innovation. "Free" inherently reduces customer risk in exploring the new or improved -- and bestows competitive advantage. To the extent that business models can be defined as the artful mix of "what companies profitably charge for" versus "what they give away free", successful innovators are branding and bundling ever-cleverer subsidies into their market offerings. The right "free" fuels growth and profit. Technology has successfully upgraded King Gillette's classic "razor & blades" business model.
We did see all this before with free homepage services like Geocities and Tripod and eventually the interest in communities died down. Now the free publishing software is back in the form of free blogs, newsletters and video publishing tools. However, this time the advertising technology and advertiser interest surrounding the Internet is a little stronger and that is keeping these new publishing tools alive and thriving.