Bill Gurley on the “Free” Business Model

Posted on July 15, 2009. Filed under: advertising, Internet, online video, Uncategorized, Venture Capital, video, Web/Tech | Tags: |

get_free_wiredI have been intrigued by the back and forth between Chris Anderson, Malcolm Gladwell, and Mark Cuban on the topic of “Free” as a strategy and business model. For those that haven’t read the articles and posts, I highly reccomend them all. Here they are in a list:

1) Back in February of 2008, Chris Anderson wrote the original cover story for Wired Magazine, title “Free! Why $0.00 Is the Future of Business.” Recently he has expanded this into an entire book. I have felt for the  past year or so, that Chris’ first article is quintessential reading for the entrepreneurial set.  More on why later.

2) In the July 6, 2009 edition of the New Yorker, one of my favorite authors, Malcolm Gladwell, took issue with Chris’s book in an article titled “PRICED TO SELL“. In this article, Malcolm does a good job of disputing some of the core pillars of Anderson’s thesis. Basically, there is always a cost to delivery, even if its really low on a marginal basis, and in volume it can get quite expensive on the cost side. He also, appropriately highlights that “Free” is not a panacea of a business model. It doesn’t always work.

3) Mark Cuban then chimed in with not one but four posts: “Free vs Freely Distributed,” “When You Succeed with Free, You are Going to Die By Free,” “Google Is Learning the Reality of Free,” and “A Quick Ditty on Free.” Mark, like Malcolm highlights many of the dark elements of the Free model. Namely, it is risky, it can be costly, and that the “freemium upgrade model” may be create a lead that is temporary.


Here is where I come down on all of this. First and foremost, Free is a disruptive force. This does not mean that if you deploy a free business model you will be successful. In many (perhaps even most) cases you will not. However, if a disruptive competitor can offer a product or service similar to yours for “free,” and if they can make enough money to keep the lights on, then you likely have a problem. To me this is the essence of Free and why no one can ignore it. It’s less about offense and more about defense. Plain and simple, Craig’s List is a massive problem for the newspapers. When Photobucket offered unlimited photo-hosting, and survived by showing ads in the admin console, the management teams at other photo hosting sites must have been at least slightly concerned. Prior to Zillow, charged anyone that wanted to post a house for sale on their web site. Zillow offers this for free, and as a result, the executives at have something to ponder. I would argue the same issue exists for Webex (there are about five free Webex competitors), and SlideRocket certainly must be on the mind of the GM at Microsoft that is responsible for PowerPoint revenue. So basically, Free is an incumbent competitive threat.

Because Free is a disruptive way to compete, it is a great choice for an entrepreneur to use to break into a new industry. Coming in with a disruptive price (in this case Free), is simply a form of the  Innovator’s Dilemma innovator strategy. It’s not guaranteed to succeed, and depending on the category, the number of page views needed to generate substantial advertising revenue is amazingly high.  However, it is a great way to quickly steal share in a category, and it has the added benefit that most incumbents have no legitimate way to react. In some cases, like the one outlined in the famous New York Times article on, the incumbents become the key revenue partner for the new entrant – all at once acquiescing, legitimizing, and ensuring the long-term success of the Free player.  Such was also true of TripAdvisor.

Lastly, agreeing with Mark and Malcolm, I do not believe that free is a universal truth. I don’t think that content has some kind of destiny to be offered for free. Even though the marginal cost may be zero, if you have highly differentiated content, there is no reason to adopt a free business model (assuming the government will stand behind your intellectual property protection). HBO’s hit shows should not be free. The NFL has no need to offer free access to all games. The Wall Street Journal is doing the exact right thing, and I find it peculiar that the New York Times is not executing the same strategy. I would also suggest that over the next two years you will see the majority of high-quality video content move behind a subscription wall, even at sites like Hulu.

The key question for anyone in business is, “Can someone do what you do for free?”.  If the answer is “yes” you have a problem.

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66 Responses to “Bill Gurley on the “Free” Business Model”

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[…] successful business movements like SAAS (Software as a Service), open source software, and a much-discussed Freemium Internet model.  And while any of these disruptions are considerable in their possess right, when I examination […]

Giving stuff away for can only succeed as a marketing tool. It’s simple – if you’re loosing money when giving stuff away, well, then you’ll soon be out of it.

For example, Google does not make money off search. But since it’s such a great tool, everyone uses it and hears the name “Google”. That’s what made them famous. Pure marketing. They make money off advertising other companies. Their prime targets are other companies, not consumers.

Facebook is free too. For the consumer. Companies love paying for adds on Facebook because it’s so popular.

No one gives away free products and lives if it’s not for marketing.

Also, I am not talking about promotional items, key chains, coffee cups etc…. I am talking about our actual product…….

What are the legalities of this, as we would like to try giving away our product……. I keep coming up with the predatory pricing laws????

I have a product that I want to give away free, the customer just pays shipping, next to this free item we will offer different sizes/colors etc. The “FREE” we hope will drive traffic virally, saving us the PPC $$$$ and overall the cost to do this will be less than a PPC campaign…..

So, what legal issues may keep me from trying this???

Thanks for any advise!


The key to free is value. Water is free; but put it in a bottle and it becomes something of real value. If your free product or service can be improved upon or provide improvements to another product or service – whether its a better distribution channel or something as simple as perception – then people will pay.

In the fraught atmosphere surrounding the Arizona State Legislature’s consideration of Senate Bill 1070 in early 2010, two incidents occurred in Prescott

Nothing is free nowadays.

What’s the saying about “Free” again? Seems to me like the free business model is the one learned from the Internet which isn’t really that free anymore.

[…] Gurley has some intriguing arguments about the Free Pricing Model. Share/Save blog comments powered by Disqus var disqus_url = […]

Really enjoyed this post. Something I think about often and plan to do some scholarly work on soon. All the best.

[…] what? Google will give it to them for free. As we noted in our take on the free business model, “if a disruptive competitor can offer a product or service similar to yours for ‘free,’ and if th….” It would be one thing if this were merely a mean-spirited play by Google to put an end to the […]

[…] Bill Gurley on the “Free” Business Model « I have been intrigued by the back and forth between Chris Anderson, Malcolm Gladwell, and Mark Cuban on the topic of “Free” as a strategy and business model. For those that haven’t read the articles and posts, I highly reccomend them all. Here they are in a list via […]

[…] successful business movements like SAAS (Software as a Service), open source software, and the much-discussed Freemium Internet model.  And while each of these disruptions are impressive in their own right, when I read this week […]

[…] successful business movements like SAAS (Software as a Service), open source software, and the much-discussed Freemium Internet model.  And while each of these disruptions are impressive in their own right, when I read this week […]

Interesting comments here…

“the negative impacts of their activism on the macro global economy…. now everyone seems to understand that systemic issues cannot be ignored, even for those with very short fuses.”

With these two comments I see the narrow view of this freeism and I quite agree about the negative impact of the global economics and systemic issues. In fact I do not see any financial value that has accrued to takers of this freeism.

I don’t use Craigslist. But I will pay to use a Craigslist look-a-like that gave me real value, such as tradable equity in an IPO where my free equity is worth 3, 5, 11, 20, and over 40 times more because of well-formulated ratios of owner’s equity to paying customers equity?

I see nowhere on these blogs and quotes the important numbers where the serious conclusion to this freeism is replaced by combining the pure financial needs of social media participants with the pure financial needs of start-ups in an exact new public company ratio. This ratio is the new Free Business Model that will produce the next crop of needed billionaires’ activists.

So lets elevate this freeism negative to the positive opportunity of introducing a certain amount of onetime micro cash say $30 bucks per members, and then permit free. Lets find the optimal macro social media numbers based on using the macro USA capitalist and free enterprise evolved data of 306 million citizens 18,600 public traded companies with a market value of $19.95 trillion. This macro view and solution is better from here where nothing is missed.

It is by the standard accounting formula for public companies that always 100% of the time creates 3, 5, 11, 20, and over 40 times revenue when annual revenue is greater than a constant.

The formula is x=(a*b)/c with ‘y’ shares where X is stock price B is earnings; C is rate of return with 61 million shares outstanding where 364 new billionaires are made in 2010. Because quite frankly it seems that only those destined to be billionaires have the intelligence and the ability to act on this formula under the right conditions.

The right three conditions are:

1. Assemble 14 million social media participants vote on 364 start ups that they will buy from
2. 14 million participants buy from these 364 new public companies in exchange for 46% or 2 shares each given free after an average purchase of $33 where the start up owners retain 31%.

The 364+ billionaires that these three conditions create are thrown alway! These 364 throw always are the mere catalyst to glue the network in non-competitive ways. It is the pure financial needs of 14+ million participants, to be exact 3.6 billion humans at $318 per day that are driving this global social network revolution.

When 14 million times $33 times (+ or -) $.63 divided by 61 million shares divider by (+ or -) .03 for a stock price of $159 is provided for 14 million participants daily then we have free equity driving the global economy replacing the negative free credit.

Yes! 14 million participants are happy with $318 per day and 364 new billionaires with $3 billion each!

Anyone with the vision, intelligence and the ability is encouraged to help make this happen…it is ‘the first open source Free Business Model’ with a pre-calculated structure.

Paul Katchings

I believe Cuban was a member of our Virtual Franchise when we were debating this and related issues in 1996. Not much has changed since then other than the largest price war in history due only to massive injections of subsidies into the medium.

I don’t agree Bill that even a majority looks at free as defensive– I am quite confident that many look at it as an offensive weapon.

Free justifies the existence of too much investment capital, but as you touch on Bill– it’s a risky game. For one thing Craigslist didn’t need a huge amount of capital, and for another there is no guarantee at all that follow on investment will emerge when one needs it, even when justified.

Unfortunately I am confident that almost all idealistic (and VC and every other type embracing freeism) are not capable of understanding the negative impacts of their activism on the macro global economy. Until a few years ago no one seemed to care– now everyone seems to understand that systemic issues cannot be ignored, even for those with very short fuses.

Cuban has it right I think — he’s looking at through the proper lens — an entrepreneur who has a longer term view of sustainable recurring/ profitable revenue, aka a real economist.

Prior to the massive over-investment of VC and IPO capital in the past decade, a very strong and lasting global e-commerce medium was emerging in a very healthy manner– built on the solid foundation of organic growth, complete with subscription models like we enjoyed with Virtual Franchise. That medium required growth capital in the many billions of dollars…. it did not need, nor could support investment in the many hundreds of billions (when including government, non-profit, corporate, and small business the number likely exceeded T).

My concern is for the macro global economy. Advertising will only support a small fraction of the current ecosystem online, and we surely cannot afford another bubble made of financial engineering, meaning something must give in a big way. The U.S. venture community may have started the global cold war online, but I’m not sure at all that it can afford to win the model.

The true entrepreneur’s perspective is still essential (like you I rather like the view from the sage of Omaha), despite conventional wisdom. Thanks, MM

Anderson makes the point that free only works in a few scenarios. The free product is really a loss leader to a priced product and has low marginal costs, or the product is free to the consumer, but not to a third party such as an advertiser for whom the product is anything but free. I think Anderson points out the limits of free quite accurately in his book.

[…] you read our previous thoughts on the free business model, we made one key point. Free is not necessarily a game plan, or a guaranteed model for success, but […]

[…] a great writeup on free pricing in enterprise software. Bill Gurley from Benchmark Capital has a nice writeup on pricing-related opinions of several notables including Malcolm Gladwell (author of Outliers, […]

Free is powerful tool and is sledom what it appears to be.

#WHAT_THE of course FREE can be a powerful tool for a nanosecond. FREE has been the business model since radio was introduced. It is the traditional model. All the companies who have operated on this b’ness model have experienced shrinking margins FOR DECADES and now are fundamentally re-thinking their futures. Going to a paid model is a huge RISK for them. It opens the door to smaller competitors who can compete for consumer dollars on a level playing field. FREE closed the door to those players.

The future is open to many possibilities and those who pretend to know the answer are censoring the creativity and imagination which will open those doors and the revenue and profit possibilities this industry needs.

Well I think all of this can be expressed (a little over simply) with an equation.

If a pure paid business model has a particular cost of customer acquisition (PGA), and a particular gross profit per customer. The per customer profit (PCP) =


When evaluating a freemium + upsell model, you have to look at more variables:

UGM = the per customer gross profit on the upsell
CVR = the percentage of your free users that you convert to your upsell or cross-sell offering
FCD = the cost to serve a free user
FCA = the average cost of user acquisition (SEO etc. isn’t free)

Here the freemium per customer profit (FPCP) is something like:

FPCP = UGM – FCD x (1/CVR) – FCA x ((1/CVR)+1)

Compare PCP to FPCP, and you have your answer. This doesn’t capture value erosion, etc. and other concerns laid out above, but it’s the essence of whether a freemium model works for you or not. If your cost of delivery per free customer is too high, or your upsell/cross-sell rate is too low then “Free” is not the future of business, it’s a fast ticket to bankruptcy.

[…] Bill Gurley on the “Free” Business Model « […]

[…] Gurley weighed in recently with his thoughts on freemium. He argues that if a competitor can do what you do and offer it for free, then you have a problem. […]

[…] The “Free” Business Model: by Bill Gurley. “If a disruptive competitor can offer a product or service similar to yours for ‘free,’ and if they can make enough money to keep the lights on, then you likely have a problem.” […]

Nicely done. You added a pragmatic perspective to the debate.

Yes, Gladwell suceeds in showing that Anderson’s argument does not meet the standard of universal truth or law. But who cares?

Free is not always better. In fact it often creates lots of problems (i.e. SPAM exists cause email is free).

But the underlying insight that customers of almost every information rich business will have more and more opportunities to substitute to free alternatives is one that people would be wise to think about.


Great post by Bill. The market is showing that the free business model works. Examples are Craigslist, Google. These companies have used the free business model to delink value creation from value extraction. Vendor A (e.g., Google) creates a great search capability. Vendor A gives it away for free. Customer B, example you or I, “buys” search for free. Customer C, an advertiser, pays vendor A. So, A creates value for B and C. C pays.

While the internet enables free pricing for some offerings, when value is created someone will pay.

I can’t agree with you more. I have recently brought into a new MLM company that distributes adult entertainment. The hole idea behind the company is that adult entertainment sell, but with the onslaught of free adult entertainment out their I can see and hear from my potential customers that adult entertainment is free so why should I pay for it. I have been having marginal success with the notion how much are you making from adult entertainment. This seems to spark a new interest because truly it does sell. I also seem to notice that some of the sights that seem to give it away for free are selling some sort of premium service. So the free adult entertainment is just a lost liter leading to the pay adult entertainment. So like you said my associates and I have a problem. One that is solvable though.

Another example might be, which had a paid model and was effectively rendered irrelevant by the free Facebook.

Payment is expected for Chris Anderson’s book about the power of free. Hmmm. I doubt that he would or could do such groundbreaking work on the income of a typical blogger. And that’s the dilemma.

Being able to “do” for free is not always the hurdle.
If a competitor can create a correlated
[sufficiently attractive] monetization
opportunity, by giving away what you do for
free [somewhat irrespective of their delivery
cost], then you really have a problem as well
since they can hijack the customer base that
you’ve already built.

[…] Bill Gurley gives Chris Anderson’s Freeconomics book a tentative thumbs up. […]

I agree the free model is disruptive, but too often manages to “keep the lights on” only when supported by outside financing, which kind of negates the viability… like most subsidiesy or government support

obviously not true with,,

[…] Gurley on the “Free” Business Model (Very fresh: July 15, 2009!) Bill offers interesting commentary on the dynamics of “free” as part of a business […]

I think that we are only scratching the surface of this free, and when it comes as a standard business model then it will look nothing like what has been written about and discussed thus far…

Excellent post and discussion!

I agree, you cannot ignore the free model, but I think it is being driven more by high-risk, speculative capital investment than by permanent structural change in marginal costs on the Internet. Cheap capital over the last decade enabled highly speculative investing, and consumers are all to happy to take advantage! I have to wonder though weather this will this continue in the new era of scarce / expensive capital.

If you go back to your basic micro-econ…

Marginal cost is only part of the way a business should think about pricing models–AVERAGE prices also matter, especially in the long-run.
True: a competitive industry will see prices = marginal cost, which are near zero for digital media. But a _company_ that is forced to price below AVERAGE cost will have to shut-down eventually. Average cost includes fixed costs (staff, equipment, rent, marketing, etc) + marginal delivery costs. Even where marginal cost is zero, AVERAGE cost is NEVER zero in the real world.

(Also, all these cost numbers include the concept of “opportunity cost”, which as I recall, essentially boils down to cost-of-capital concept, and in a competitive industry should about equal profits.)

So, how are the “free” sites doing it?

First, many are not profitable (e.g. Youtube). They can support pricing below-average cost by spending invested capital, which will eventually dry up and the company will shut down. This is where value-destruction occurs as a result of marginal-cost based pricing in the software/web industry. It is unsustainable, no matter what your revenue model is, and efficient capital markets should in theory avoid systematically funding this type of value destruction.

The “free” companies that are profitable have found some consistent revenue source that exceeds their AVERAGE costs. Sure, this is a bit easier if marginal costs are near zero, but to me it doesn’t fundamentally change the problem of creating a successful business.

It seems to me that ‘free’ in the sense here is simply another sales tool to open up the opportunity for a cash revenue later. It’s like some mutant offspring from sales and marketing!

Certainly worth considering if it gets you attention but obviously it’s only every going to be a vehicle for some other cash revenue. The first response from Howard Liptzin nailed it – 2: Make money in a different way. . .

thats the key.

Good blog

Stephen Hart

Excellent post as usual.

I have a simple set of 3 declarative sentences that sum up the free business model succinctly for those who have trouble grokking it — and for those who get too lost in theories that obscure the vision.

1: Give away something that used to cost money. 2: Make money in a different way *as a result of the disruption*. 3: Have happier customers and higher profits.

If you can’t figure out #2, don’t give it away of find another business!


Yes, I completely agree with Howard. Great way to summarize.

[…] New York Times actually has a pretty balanced summation that you can read here. Bill Gurley and Bijan Sabet have also written good […]

[…] Read the rest of this post on the original site […]

Someone has come up with a free operating system (Linux) and yet less than 2% of the public at large uses it. It meets the needs of the vast majority of people on the planet.

The key to focus on is “can you afford to keep the lights on?” I work in the software industry, and generally the rule of thumb there is, don’t suck. It doesn’t matter if it’s free, proprietary, or open source.

Different products have different models. Products that are already established and whose price has been determined by the market place via demand are different than emerging products. When products that have an relatively established monetary value are given away free as an incentive to purchase other goods, it alters the marketplaces ability to establish it’s worth.
Culturally established products such as fashion, music, video that have values placed on them that are much higher than their intrinsic worth,can easily fail in the freely delivered market. There is a psychology involved that makes the consumer who is making a statement via purchase feel validated by the relinquishment of funds that is an integral part of the equation. If given away freely, it’s uniqueness and statement get diminished and become merely threads or computer bytes because everyone can get them. They lose the mystique that holds much of it’s intrinsic value.
I once tried to give away a used set of tires. I placed them in my driveway with a sign that said “Free”…they sat there for 3 days. I replaced the sign with one that said $100….they were gone in an hour.

[…] July 16th: A nuanced take on “free” by Bill Gurley (thanks to Tom Armstrong for the […]

[…] Business model Here’s a good brief discussion of “free” as a business model (with lots of good […]

I have very strong opinions on why he is right about disruption but not correct around the long-term paid model. Investment in technology and filtered content is important. Not everything can be done on the cheap. If you do not add value to what you charge for then you are doomed by a free model as well as any competitor. But remember free is funded by someone who sees a business model in the future. (one would hope)

The core issue is one of value and evolution. What was paid for may become free but if you innovate on what was paid for in the past (to make it free) and create new value then you will should be able compete with free and get paid for it.

Yes, if someone can do what you do for free, you have a problem. But the solution is not a self-destructive price-dropping tactic. Offer more value – be more service-oriented – make your price worth it. And I don’t mean create the perception that you offer more value.

I also agree with the comment above that there is no “free.” Someone is paying for it, for example advertisers. Do consumers intuit that they pay in the form of higher prices for advertised products or what about the cable, internet, and wireless fees? The answer is yes. These complex financial relationships make media more difficult to control and manage. Selling a premium media property to consumers is a much simpler.

This Free debate just doesn’t address the problem the industry needs to solve to restore profitability: create value for the customer.

Bill: Your commentary and responses so far dovetail nicely with a series of posts on “lifestyle companies” that I have been pondering. It has seemed to me for some time that the primary financial force that the internet exerted was to lower margins for all players in a space until they approached zero. So physical oligopolies like soda companies, beer companies, and cereal companies could all compete like crazy – but all make good money, whereas providers of undifferentiated (or not sufficiently differentiated) news or services (music streaming services) were doomed to have their margins eroded. This ties in well with the concept of the “lifestyle company” where profit maximization might not be first on the list of goals at a company. When a competitor is in business simply to survive and do something the owner loves then ultimately margins in that industry have to go down. All of the examples you mention above are perfect examples of monopolies or great uses of early internet technology to shift a business model and make it more profitable only to have that same force ultimately drive its margins down. Another great example is the evolution of Getty Images. They spent a lot of $ aggregating the stock photo business and putting it online a decade ago. This made perfect sense and they took a ton of share and margins exploded. Of course this decade, as photo sharing took off and photo search became easier, their margins shrunk and they have continued to fight a rear guard action against sites offering a product that is, in the words of Clayton Christensen from Innovators Dilema and Innovators Solution, “good enough.” Free may not ultimately be a business model – but damn close to free is going to be a reality in almost every industry where the good or service can be delivered by the Internet.

Well said Harry.

Free may be disruptive but it doesn’t bring anything new to the table. The new free product isn’t better or faster it’s just free. And if you’re not gaining revenue (through advertising, venture capital, etc) then you’ve built a house of cards. The other big problem I see with the freemium model is that it erodes the perception of value and so when faced with a choice between now having to pay for a product that was free and allocating resources (money elsewhere) it’s quite possible that I will choose to spend the money in other ways. That’s why people willingly pay $4 for a Starbucks but wouldn’t fork over $1 a week to read quality news.

I wonder too what the return on many of these free offering are. I’d bet most of them are in the losers column for investors.

I entirely disagree that free doesn’t bring anything new to the table. It’s what you do with your market share once you’ve introduced the free product. “Free” implies that one leverages this market share into something new.

Yes, free can erode the perception of value in select cases. However, last time I checked, the NYTimes online was quite similar to the printed version. Under your premise, websites like Yelp and Amazon aren’t doing well because we would prefer to hear the vaulted opinion of newspaper columnists over random “free” opinions?

You’ve taken an intricate idea and over-simplified it.

Excellent post. ‘Free’ is just a different price and has been used as an element of business strategy for a long time. Examples: samples in super markets or bars. Or bundling of new products with existing ones. Besides it’s not really free. The user invests time in a product or service. That can be quite valuable.

“The key question for anyone in business is, “Can someone do what you do for free?”. If the answer is “yes” you have a problem.”

As you identify, this doesn’t hold with the WSJ and NYT. This concept of “free” might not hold is a market that’s only dominated by a few, an oligopoly. It’s certainly possible that an oligopoly allows for there to be paid and unpaid material because the products are very highly differentiated. In nearly all oligopolies, huge amounts of money are spent differentiating your goods from your competitors. Good examples would be Nike/Adidas/Reebok/Puma, Coke/Pepsi, Borders/B&N. If a consumer believes the product they’re consuming – a newspaper in this example – is signficantly different from its competitors, then it’s possible to believe that the consumer would willingly and continually pay for the newspaper.

The issue might not be so much rooted in: “However, if a disruptive competitor can offer a product or service similar to yours for “free,” and if they can make enough money to keep the lights on, then you likely have a problem” but rather more an issue of market size and the number of competitors.

So yes, I would agree with you when you say that “free” isn’t a universal truth. In the tradional economist response, the answer lies more along the lines of “Kind of”.

I think its useful to compare the WSJ or the NYTimes with a regional newspaper. While it may not be possible to create the equivalent of one of these branded offerings, it is quite reasonable to get a very near equivalent of what is in a regional paper on the web for free.

There is always a cost for free. Even when the service is digital there is programming, bandwidth, marketing, etc. The MARGINAL cost per user may be VERY low, but the cost is not free.

I am very interested in another variant of free. Free physical goods. Ebay and CL are very good turning your physical goods into cash. But under a certain cash threshold, the VALUE of that cash is offset by the friction in the market (flaky buyers, time waiting around, shipping cost, etc.) Under that threshold, people should GIVE stuff away instead of selling it.

People do give away goods, when the marginal cost of your described friction is higher than the marginal benefit (cash) of selling the item. For example, the marginal cost to storing a bicycle in your garage is fairly low, which is why they’re so many cluttered garages.

Now let’s think about a college student going home for the summer and coming back to school in the fall. The marginal cost for him to store some of the same exact goods that you would store in your garage is much higher. He has to rent a storage unit, find time to store it, and obtain transportation to store it. In some cases, he’s better off giving away these very same items. This is why stores such as Goodwill and Savers exist.

I presume that many of the sellers in the CL and Ebay markets have higher thresholds for your described friction. Otherwise, they’d be down at pawn shops, instead of waiting for the auction to end (or the buyer to call).

“…it is a great way to quickly steal share in a category, and it has the added benefit that most incumbents have no legitimate way to react…”

Historically, incumbent players in other industries have had to “react” to similar competitive dynamics. One that I am intimately familiar with is the Generic Pharmaceuticals industry. The reaction and response of the branded pharma incumbents to the onslaught of agile generic pharma startups was to “eventually” launch their own generic brands selling the same product for less. I call this “auto-cannibalizing”. Lot’s of parallels here to what’s going on in the current tech freemium ecosystem. Unfortunately, many of the big pharma co’s delayed deploying this strategy as they were living in denial that this paradigm shift was actually taking place! I suspect this is a similar situation to ills the newspaper industry at the moment.

MSFT’s recent Office web apps announcement is their inevitable reaction to Google apps and Zoho’s generic-like attack on their incumbent position.

The message to any dominant incumbent: Auto-Cannibalize your product/market position to avoid getting eaten!

Excellent point.

I believe that is what BILL meant when he intoned “you have a problem” but he should have said “you have to self-cannibalize”

And that is why the NYT has chosen to self-cannibalize”

The problem is you have to self-cannibalize and also shut down costs…

Too many companies change to free but don’t downsize. If craigslist can be run with 23 people why does McClatchy have thousands of people running its online classifieds

I would argue the larger question is, “what is the difference between an Economy of Abundance (aka “free”) and a Post-Scarcity Economy?” An Economy of Abundance disrupts other competitors’ business models. IMHO a Post-Scarcity Economy would disrupt the entire economic underpinning of our system.

As such, differentiating between the two is critical.

Great summary and analysis.

The part about free being a disruptive force and a great way to break into new markets really resonated with me. I’d extend that thought and say for new market entrants looking to disrupt, free is a great way to break in. Also, since volumes are relatively low in the early stages anyways, not too much money is lost, on a relative basis.

Even “free” advocates still tip-to around the subject. The fact is that when the cost to produce is near-zero, the price to the consumer will necessarily trend towards zero. Further, 0.00 is a magic price because it is friction-free. Even 0.01 adds a massive amount of friction.

While it’s possible to erect barriers, a la, WSJ, they are artificial and will crumble over time.

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    …focusing on the evolution and economics of high technology business and strategy. By day, I am a venture capitalist at Benchmark Capital.


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