Liveblog: Wired's Chris Anderson explains his new 'Free' theory

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chris-anderson-freeExciting stuff at Nokia World, with Wired head honcho Chris Anderson taking to the stage for his keynote, entitled ‘Free’. It’s his new Big Idea following up the long tail, and he’s giving us a preview of it, in advance of a book due out next year. Liveblog follows, in chronological order.

He’s kicking off with some thoughts – what if nuclear power had delivered on its initial promise, delivering free electricity for, well, everything. “It would have changed the world. And we’re realising that there are other industries that touch the economy in ways as important as electricity, which are free.”

Now he’s talking about older theories from Carver Mead and Alan Kay, talking about what would happen if computing was, essentially, free. Kay was writing when computing was hugely expensive – huge mainframes behind locked doors, “controlled by a priesthood, the IT guys, and they determined what was worth running on the computers.”

These IT guys also made sure computers didn’t waste processing power – running things as quickly as possible before freeing up the system for something else. Hence the command line interface, which was simple, but unintelligible to non-geeks.

But later, along came GUIs and eventually the Macintosh – a graphical interface that made your computer easier to use, democratising the technology and putting it in the hands of people other than the IT guys (who would have seen GUIs as wasteful in terms of their demands on the processors).

If any of this comes out garbled or idiotic, bear with me. He’s talking quite fast.

So, ‘Waste Storage’. The price of storing a megabyte of data is now closing in on zero, which Anderson says “changes the way you think about storage”. He cites Yahoo’s plans to give unlimited storage to email users. “We need to start wasting storage, which is when you treat something that was expensive as free, and changes happen because of that.”

Anderson is now highlighting the irony of Yahoo offering unlimited storage, when his own company email inbox can get full, because the IT guys are “trying to preserve the costs of the infrastructure”. They should be buying storage as quickly as Yahoo can, “to avoid this echo of a long-gone day, when storage was expensive.”

Now bandwidth. The old broadcasting model – a handful of channels with infinite reach – everyone can see them, but there’s only space to transmit a few channels. Yet with the internet now, it discourages this kind of mass distribution – which “clumps up traffic too much”, but encourages other forms of broadcasting.

He’s giving US sitcom Everybody Loves Raymond, which is inoffensive to appeal to as many people as possible. And he compares it to Lonelygirl15’s three-minute webcam videos – “the sort of thing that no network in the world would have greenlighted”, but which became possible because its distribution channel (YouTube) was free.

“We are wasting bandwidth, because it allows us to do what we want. We’ve democratised the technology of mass media, and put it in the hands of people who never would have been trusted with a broadcast tower before.”

(In case you’re wondering, Anderson isn’t using ‘waste’ as a negative word. We should be wasting all these things…)

Now, er, 3D printers, which “makes complexity free”. When making physical products, every bit of complexity costs more to do – but for 3D printing, there’s no extra cost – “you can print a watch for the price of a block of plastic”. Anderson thinks we’ll see an era of “impossibly detailed and fantastically complex products that would have never have happened under traditional manufacturing.”

So as 3D printers come into the hands of individuals, who knows what they’ll create?

Now, Anderson’s relating this back to his earlier long tail theory. Mass media only has room for the stuff at the top of the tail – the hits. But thanks to the internet, we now have infinite ‘shelf space’ for the other stuff – the long tail. “The demand for products of minority taste turns out to be much larger than we anticipated”. You know this.

But yes, that infinite shelf space is a direct result of this free storage, bandwidth and processing – they’re the crucial ingredients in the long tail. “That’s what’s changing our culture,” says Anderson. He’s dutifully praising Nokia’s new Comes with Music service here, which will offer two million tracks “from just one label”, compared to what’s storable in a high-street music retailer.

So, he’s going through the basic three rules of the long tail. If you lower the cost of distribution, you can offer more stuff. More stuff means you can satisfy more minoritty tastes. And there’s a lot of room at the bottom – all the most interesting things come from the most unexpected places.

Now he’s got a chart showing the cost of storage on a dollar-per-GB basis. It’s gone from $100,000 down to $0.50. And this cost has driven new services – when the cost became $100 per GB, Hotmail launched with 2MB of space for emails.

When it reached $1 per GB, Google launched Gmail with 1GB of space – competing against all the companies who’d been stuck on the 2MB model. And now Yahoo is giving away an infinite amount of storage to webmail users. So, if I’m correct, the point he’s making is that as stuff becomes free, it drives new and innovative services. “As cost falls, the value rises”.

So prices fall to “close to zero”, but not actually zero. But it’s close enough that you can treat it as zero, and sell something else. So with webmail, they didn’t sell storage, but they sold advertising (the Gmail model). “Technology hugely expands the number of industries that lend themselves to this cross-subsidy”. Find something else you can sell, to make your core product free.

Example one: cross-subsidy. Give away razors, sell the blades. Give away mobile phones, sell the monthly contract. Example two: ad-supported. Every media company, TV, and internet sites. Even when you pay for magazines – Wired costs $10 for a year’s subscription, but it costs $100 to actually make and send out (per reader). The only reason they charge at all is to get an element of selection – people who will pay are by definition interested in the content (and so the ads).

Example three: “freemium”. Give away something small to sell something big. So a perfume sample is free, but then you pay for the big bottle. It’s a 1% to 99% ratio – you get 1% in the free sachet, but pay to get the other 99%. On the web, this is reversed though – Skype is free for most users, but a small percentage pays for the premium version – and because the underlying technology is close to zero cost, Skype can make money that way.

Example four: Digital economics. Music can be given away for free, to market something else – their gigs or other stuff (he’s going to cover this more in a bit.

Example five: Marketing. Give away free samples to generate word of mouth, which is popular on the internet at the moment, but also for physical products.

Last example: the gift economy. Wikipedia, blogs, MySpace, open-source, Craigslist. All these things are free (isn’t MySpace ad-funded)? People will write for free, code for free – their incentives aren’t monetary – they’re reputation etc.

Phew. Keeping up?

So, with processing, storage and bandwidth are all abundant now, and this is creating new services. But some things still are scarce: attention and reputation. “Think of attention as web traffic. We convert that into money via adverts. Reputation is a little trickier: it’s links which Google uses to measure the reputation of a page, and they then turn into traffic through the Google economy, which can be converted into money via ads.”

So, now he’s onto some examples of individuals and companies who’ve jumped on this free thing. Prince and the Daily Mail album giveaway. “He’s not in the selling music business, he’s in the performance business.” The Rolling Stones make 95% of their income from touring nowadays, “so why not give away the music for free?” Mick Jagger would NEVER go for that, I’m sure…

Now Ryanair. Anderson took a flight for 10 Euros the other week, and it made him think. These companies are subsidising the seats with other things – destinations pay them to bring tourists, they sell car rentals, hotel bookings, food on board… and this has transformed the industry by attracting a new class of traveller and reaching new destinations.

And in games. “The traditional model is you sell the software, the game. But online, it’s different. Second Life don’t sell games, they sell land. You can play for free, but if you want to build, you have to buy the land. And you’re seeing more games with business models around buying characters, items or land.”

So the cost of providing a game to someone is close to zero, so companies can be flexible with the business models in that way.

Finally, mobile phones. Apparently Intel is looking at this area, with a theory called ‘1 + 1’, where one part of the revenues come from hardware, and one part comes from software. But they’re exploring whether they could move to ‘0 + 2’. Could they put GPS chipsets in every phone for free, but turn them on for a price – “you only get a revenue stream when the consumer finds a way to use it”.

So giving away GPS chips would mean everyone has one in their phone, and new business models and services would emerge. He stresses, he doesn’t know if Intel is actually doing this.

Free stuff is already happening in mobile, of course, but there are consequences. Operators subsidise handsets, yet this means the operators only want features relevant to them, so innovation is held back. Now, free long-distance calls, which has had catastrophic consequences for the landline industry (this is a more US-centric example I think). And then free off-peak minutes are good on mobile, but can lead to confusion about pricing.

So what else could be free, on mobile? Apparently, storage and processing is less free than other IT sectors, and the bandwidth is “by no means free”, but the trends are the same – it’s all becoming cheaper.

Is the future for mobile like the web – with the carriers (operators) becoming dumb bit pipes, and the services being free? “There’s an open debate over whether the mobile market is going that way, but if it does, the same thing will happen”.

He cites US examples like Google’s 411 directory assistance service, full-featured web browsers that allow services to come via the web, rather than via the operator. Voicemail being stored on the phone, rather than on the operator’s network. And new SMS services like Twitter.

We’re going from a few products targeted at everybody, to millions of product targeted at a few people each. And Anderson ends with the thought that the mobile industry now is where the Web was at ten years ago.

Everyone’s head here is buzzing with ideas, rather than hangover, which is testament to Anderson’s fizzing speech. Now some questions from the audience. Anderson thinks operators may be able to shift from focusing on ARPU (average revenue per user) to AMPU (average mindshare per user). Get loads of users, and monetise them later through other means. Silicon Valley gold!

Does the long tail apply to mobile phones, where it’s harder to discover stuff? “On a PC screen, we have fantastic, rich discovery tools on music services, and that’s what drives demand down the tail. The problem with the mobile phone industry is it’s a poor way to discover new music, which is why people tend to cluster around the top of the tail. It’s simply an interface question – as we discover better ways of discovering music, filtering music, using social media and playlists, you’ll see distribution start to broaden.”

Someone asks the question: ISPs are going in the opposite direction – they want to charge Google carriage costs for distributing YouTube! “That is the tension that is going to define the next decade. You see two different philosophies. The model I’m describing is increasingly viable as an economic model, but it’s not the only one, and it’s experimental. I won’t criticise their model, I see where they’re coming from…”

Is this model going to extend to physical goods? Anderson thinks it will – people are getting into DIY and crafting, making things for themselves rather than buying them. Anderson’s off to Tel Aviv tonight to see a company that’s giving away cars for free – they’re electric cars, and the company is selling electricity. Cor, that’s an intriguing note to end on: free electric cars sold to you by your power company! And we’re done.

For the latest posts from the show, check our Nokia World 2007 category

Stuart Dredge

2 comments

  • Bravo, Stuart! Certainly food for thought…I’d like to hear more about ‘trust’. This is not the first time I’ve heard someone refer to it currency terms. In this mega-media world we are entering, reputation will mean everything. Can it be monetised? dunno? Certainly worth watching

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