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Is $0.00 the Future of Business?

“Information wants to be free.”

Those now-famous words were first spoken by Stewart Brand at the first Hackers’ Conference in 1984, in the following context:

“On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.”

Or, as Chris Anderson puts it in his latest book, Free! Why $0.00 Is the Future of Business…

“Abundant information wants to be free. Scarce information wants to be expensive.”

Such is the premise of the compelling new book by Wired Magazine’s Editor In Chief, Chris Anderson. But tell that to the poor CIO who just shelled out six figures to buy another rack of servers. And what of the notion that “anybody can make money on the web?”

Today, the underlying technologies that power the Web are fast becoming too cheap to meter. Just as Moore’s law dictates that a unit of processing power halves in price every 18 months, the price of bandwidth and storage is dropping even faster. Which is to say, the trend lines that determine the cost of doing business online all point the same way: to zero.

Every year, like some sort of magic clockwork, massive banks of servers churn out more and more data for less and less, bringing the marginal costs of technology in the units that we individuals consume closer to zero.

Just last year, Yahoo announced that Yahoo Mail, its free webmail service, would provide unlimited storage. (Just in case that wasn’t totally clear, that’s “unlimited” as in “infinite.”) So the market price of online storage, at least for email, has now fallen to zero. And the stunning thing is that nobody was surprised; many had assumed infinite free storage was already the case.

Virtually every product Google provides is free to consumers, from Gmail to Picasa to GOOG-411. And yet, somehow they have created a $220 BILLION dollar global empire around their “free” products.

A new kind of free…

The idea that you can make money by giving something away is nothing new. But until recently, practically everything “free” was really just the result of what economists would call a cross-subsidy: You’d get one thing free if you’d buy another, or you’d get a product free only if you’d paid for another service.

Over the past decade, however, a different sort of free has emerged. The new model is based not on cross-subsidies — the shifting of costs from one product to another — but on the fact that the cost of products themselves is falling fast. “It’s as if the price of steel had dropped so close to zero that King Gillette could give away both razor and blade, and make his money on something else entirely. (Shaving cream?)”

A taxonomy of free

This new kind of free is forcing companies to adopt new business models, leveraging opportunities around the falling cost of doing business in a digital age. Chris identifies six broad categories:

1. “Freemium” – Web software, content, and services, free to users of the basic version, made possible by the more expensive, premium “pro” version of the site or software, usually with more features than the free version (think Flickr and the $25-a-year Flickr Pro).
2. Advertising – Content, services, software, and more, free to everyone, due to pay-per-pageview banners, pay-per-click text ads, pay-per-transaction “affiliate ads,” and even site sponsorships.
3. Cross-subsidies – Free products that entice you to pay for something else, one way or another. “It’s a free second-gen Wiii! But only if you buy the deluxe version of Rock Band.”
4. Zero marginal cost – Free items that can be distributed without an appreciable cost to anyone, such as online music. Between digital reproduction and peer-to-peer distribution, the real cost of distributing music has truly hit bottom. Some artists give away their music online as a way of marketing concerts, merchandise, licensing, and other paid fare.
5. Labor exchange – Free web sites and services, if you rate stories on Digg, vote on Yahoo Answers, or solve a few CAPTCHA codes. Users knowingly (or not) create something of value, either improving the service itself or creating information that can be useful somewhere else.
6. Gift economy – Free, or “open source” software or user-generated content to everyone. From Freecycle to Wikipedia, we are discovering that money isn’t the only motivator.

The economics of abundance…

Forty years ago, the principal nutritional problem in America was hunger; now it’s obesity. Forty years ago, charity was dominated by clothing drives for the poor. Now you can get a T-shirt for less than the price of a cup of coffee, thanks to China and global sourcing. So too for toys, gadgets, and commodities of every sort. Enabled by the miracle of abundance, digital economics has turned traditional economics upside down.

But money and physical resources are no longer the only currency in the online world. “Attention” and “reputation” are now very real metrics for determining potential value. How many eyeballs are on your site? How many followers do you have on Twitter? What’s your PageRank? If you can consistently convert those metrics into cash, they become a form of currency itself, and Google plays the role of central banker for these new economies.

A new generational reality…

During the course of researching the material for his book, Chris shares that there were broadly two different camps of skeptics: those over the age of thirty and those below. The older critics, who had grown up with the 20th-century version of free, were suspicious: Surely “free” is nothing of the sort—we all pay sooner or later. Not only is it nothing new, but it’s the oldest marketing gimmick in the book. When you hear “free,” reach for your wallet!

But younger critics had a completely different response: “Duh!” This is the Google Generation, and they’ve grown up online, simply assuming that everything digital is free. As this generation comes of age, they will discover entirely new ways to convert zero-cost technologies into meaningful ventures, transforming the world in the process.

So what does it all mean?

There is both good news and bad to be found in these new realities. First of all, the cost of doing business online is dropping by the day. Last month, I provided streaming video tutorials to more than 3,000 visitors to my WordPress tutorial video site. All that bandwidth cost me just $2.58, thanks to Amazon’s S3 distributed storage network. The cost of delivering HD-quality streaming video to my clients has effectively become a no-brainer.

However, the expectations of readers are changing just as quickly as the falling costs. Because the average internet user comprehends the zero-cost margins involved in the delivery of this content, they expect to read content and even receive online services for free. The challenge now is to provide relevant, quality content and services online, while exploring — and possibly creating — new models for making money online.

What do you think?

If Chris Anderson (and many others) are correct, and $0.00 is really the future of online business, what does that say to you? How will your own business model need to adapt to leverage this new reality?

Do you offer any goods or services for free? If so, are they merely “bait and switch” techniques of yesterday, or are you genuinely providing value to your clients and customers? I’d love to hear your thoughts on this topic! Weigh in below…