KEY POINTS:
Quiz time
1. You're standing in front of a hot-drink vending machine with a hankering for a coffee. If you had the choice would you pay:
(a) $2?
(b) Nothing, in exchange for watching a 30 second commercial on a screen in the machine?
2. You're flying to Australia.
Would you pay:
(a) About $300 one-way?
(b) Nothing, in exchange for being tempted into a bit of seat-back gambling?
3. You want a new mobile phone provider. Would you pay:
(a) The going rate for rental and calls?
(b) Nothing, in exchange for receiving text and video ads?
4. You want an album. Would you pay:
(a) About $30 at your local store?
(b) Nothing, knowing the artist is hoping you'll fork out hundreds to see him live, and buy the T-shirt?
5. You need to get something photocopied. Would you pay:
(a) The usual 20c a sheet?
(b) Nothing, though the paper has ads printed on the back?
6. You want to hire a car. Would you pay:
(a) About $70 a day?
(b) About $2 a day, for a car that's plastered with ads - basically a moving billboard?
7. You want to buy an electric car. Would you pay:
(a) About $30,000?
(b) Nothing, in exchange for being hooked into a contract for the electricity to power it?
If you scored mostly As, then you believe in paying your way. You work hard for your money and you choose carefully how to spend it, with no catches or gimmicks. You loathe ads, you're suspicious of change and are most likely to be a baby boomer or older.
If you got mostly Bs, then you are a "freek". You're probably Generation Y and have grown up with the internet and its expectation of getting things for free. You don't mind advertising, as long as it's entertaining and relevant - or there's something in it for you. Welcome to the world of freeconomics.
The word "freeconomics" was coined earlier this year by Chris Anderson, editor-in-chief of US technology magazine Wired, to explain a business model that developed on the internet but is now moving into the real world.
Anderson has a knack for identifying trends. His 2006 book The Long Tail: Why the Future of Business is Selling Less of More has already become something of a business classic, with its argument that niche markets are the way of the future.
His latest theory boils down to this: if something costs next to nothing to produce, or the market is so competitive that your selling price is battered down until your margins are negligible, you might as well give away your product for free and figure out another way to make money on it. If you can't beat 'em, outwit 'em.
The software and music industries were the first to be walloped with this logic; once broadband became cheap enough that programmes and songs could be distributed for free, they effectively did become free, whether their creators liked it or not. Other intellectual property has since been dragged into this free world: books, newspapers, magazines, photos. And now this expectation of free stuff is heading for other industries.
The music industry teaches us that there may be little hope in fighting the pressure to become free. Those who are merely lobbying against piracy are losing, while those who have accepted it and moved on are winning. In the latter category is Prince, who gave away three million copies of his album Planet Earth free with Britain's Mail on Sunday last year as a promotion for a 21-concert run in London. The concert sold 14 million ($36.8 million) worth of tickets. He also was paid a reputed 250,000 by the paper. His previous album, 3121, sold just 80,000 copies in Britain.
He said at the time: "It's direct marketing, which proves I don't have to be in the speculation business of the record industry, which is going through tumultuous times right now."
Dunedin economist Brent Wheeler - a fan of Anderson's theory - says one of the most obvious examples of freeconomics at work in New Zealand is the "huge" number of big-name bands and artists we've seen touring the country in the past few years. The Rolling Stones, the Beach Boys, Justin Timberlake and - next year - Kylie Minogue are all being forced to diversify into a portfolio of product offerings, including merchandising and concerts, because recorded music no longer has the monetary value.
"[Chris Anderson is] probably documenting the biggest change I would think in markets and in economic thinking in 40 years," says Wheeler.
Anderson says "free" was once a marketing gimmick but has now emerged as a fully fledged economy. "It's now clear that practically everything web technology touches starts down the path to gratis, at least as far as we consumers are concerned. Storage now joins bandwidth (YouTube: free) and processing power (Google: free) in the race to the bottom. Basic economics tells us that in a competitive market, price falls to the marginal cost. There's never been a more competitive market than the internet, and every day the marginal cost of digital information comes closer to nothing. The moment a company's primary expenses become things [based] in silicon, free becomes not just an option but the inevitable destination.
"The dominant business model on the internet today is making money by giving things away. Much of that is merely the traditional media model of using free content to build audiences and selling access to them to advertisers. But an increasing amount of it falls into the free-sample model: because it is so cheap to offer digital services online, it doesn't matter if 99 per cent of your customers are using the free version of your services so long as 1 per cent are paying for the `premium version'. After all, 1 per cent of a big number can also be a big number."
And it's not just the cost of providing technology that's falling - look at the falling costs of manufacturing, thanks to China. Why charge someone for that mobile phone when you can lock them into a two-year contract? Why charge someone for that cap when you can give it away for free to draw attention to a more expensive and more profitable item? So perhaps the future of cheap goods is that they'll become free, as a conduit for selling something bigger.
"Free is not quite as simple - or as stupid - as it sounds," says Anderson. "Just because products are free doesn't mean that someone, somewhere, isn't making huge gobs of money. Google is the prime example of this. To follow the money, you have to shift from a basic view of a market as a matching of two parties - buyers and sellers - to a broader sense of an ecosystem with many parties, only some of which exchange cash."
This isn't a new concept - the media has operated this way for hundreds of years. Take this article. You might be reading it for free on the internet, or you might have paid your $1.70 for a paper copy (which doesn't come anything close to covering the true cost of creating the newspaper). Either way - and we journalists hate to admit this - it's just a conduit for advertising. The owners of the Herald aren't selling papers to readers; they're selling readers to advertisers. There's your three-way market. What's new is that the model is moving on to the web and other industries.
Say you have a simple photocopying operation. You can either charge your 20c per copy - and make a few cents profit after you've paid for your rent, your worker, your ink, your machine, your maintenance and your paper - or you could make it free, while selling the space on the back of the paper to advertisers. That's what a group of Japanese students did. Their company, Oceanize, now operates out of several of the country's universities. There are queues behind their photocopiers while the pay-per-copy ones lie largely dormant.
Or maybe you're in the rental car business. You could set up the same basic fee structure as every other rental car business in town and hope that people choose you - or you could hire out your cars for next to nothing and guarantee they'll move. Instead of making money on the hireage you make your money by wrapping them with client advertisements. Case in point: a rental car company in Germany and Austria called LaudaMotion hires out a fleet of advertisement-plastered Smart Cars for 1 ($2.15) a day.
And you thought our quiz was hypothetical? Each of the questions refers to a business that's already in operation somewhere in the world, or is being planned. Here are the others:
Japan's leading vending machine operator, Apex Corp, has announced a plan to turn some of its machines into conduits for advertising. Customers will watch a 30 second ad while they wait for the drink to be poured into a paper cup that also, naturally, will have an ad on it.
Dublin-based budget airline Ryanair is talking about installing on-board gambling to further subsidise its already cheap fares. Chief executive Michael O'Leary predicts that air travel in Europe, easily the most competitive market in the world, will eventually be free.
A car dealer in Israel is planning to give away electric cars, while locking buyers into a contract for the electricity to power them.
British mobile phone network Blyk gives 18- to 24-year-olds free text messaging and calls in return for receiving up to six ads on their phones each day.
There are versions of these businesses operating in New Zealand, though they're far less extreme. Wanganui-based HooHaa offers signed-up members mobile phone credits in return for receiving advertisements by text. Members - and there are close to 80,000 - get up to four messages a day, for 10c each.
CEO Brian Hawker says the maximum payout for a member per month is about $10, which can also be put in a PAGO wallet or donated to charity, but he says it's possible that in the future mobile phone contracts could become fully subsidised by advertising.
"There's scope for a lot of things to become free ... The freeconomics reign is just starting."
Smart Move Media offers young city professionals heavily subsidised leases on Smart Cars decked out with advertising. Instead of paying around $800 a month, Smart Car drivers pay $250 to $370, plus petrol. In return they are required to drive at least 1000km a month in their target areas, park the cars on the street, not in a garage, and turn up to the odd promotional event.
Co-owner Simon Soulsby says they have 42 of these cars on the road in Auckland, Wellington and Christchurch, and are looking to expand into other cities. But does he think there's potential to offer free cars, like his counterparts in Europe do?
"I'd love to say `yes' because it would make your story so much better," says Soulsby, generously. "But no, it's never going to be free."
That's partly because Smart Cars are more expensive to buy in New Zealand, partly because our comparatively small population means the ads don't reach as many people as they would in, say, Berlin, and partly because Soulsby is cautious about the message he'd be sending if he gave away a car for free.
"If you give a car to somebody, will they treat it as well as they would if they were paying for it? Probably not."
This is where it gets tricky - it's a damn sight easier to sell something if it's free but you don't want to devalue your product by implying that it's worthless.
Britain's music retail industry was furious when the Mail on Sunday announced its deal with Prince because, according to Paul Quirk, co-chairman of the Entertainment Retailers Association, it was "destroying any perception of value around recorded music". HMV chief executive Simon Fox said: "I can't believe the music industry would do it to itself."
A subscription to Anderson's own magazine, Wired, costs $10 a year - but he says that's just a psychological trick. "We charge $10 because we don't want to devalue the product, because that would be sending the wrong message. But from our perspective it's essentially free."
On the other hand, he says, charging even a token price for something ruins the psychological power of freeconomics. "Asking people to just think for one second, `Is this worth it?' or `How much is it worth?' is often too much. From the consumer's perspective, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you're in an entirely different business, one of clawing and scratching for every customer.
"People think demand is elastic and that volume falls in a straight line as price rises, but the truth is that zero is one market and any other price is another. In many cases, that's the difference between a great market and none at all."
Wellington-based brand strategist and writer Mark Di Somma - a freeconomics sceptic - cautions that "free" is a dangerous illusion because of the other messages it sends to consumers: that "we don't value it" or "it's worthless".
"It appeals to people's sense of bargain hunting but it also encourages a belief that unfeasible discounting is somehow justified. Or give it away and they will come. They will, for a while. Because they have nothing to lose. It's a great first-to-market approach in places, but not one that can be duplicated by everyone without losing effectiveness."
Di Somma says the Prince giveaway was smart marketing but is a model that's only sustainable as long as it's a novelty. "It worked because he was the first to do it. If everyone did it, it wouldn't be that effective. There's nothing wrong with using giveaways to establish scale and demand - perfume companies have done it forever - as long as you recognise those giveaways for what they are: marketing expenditure, not the start of a new way of doing things."
He agrees with Anderson that technology is changing the economic environment, and that the internet is driving consumers to expect things for free, but he doesn't see freeconomics as the economic model of the future, especially considering recent economic developments. "I'm too cynical now to believe in `new' economic models. New business models, absolutely, but not new economic models. Dot.com was a new economic model. So was sub-prime."
Anderson, meanwhile, has declared 2008 the Year of the Free, in which free webmail comes with unlimited storage, music is given away and more newspapers have published their content free on the internet.
"All this marks a pattern," he says. "When the cost of serving a single customer is trending to zero, smart companies will charge nothing.
"Today, the disrupter's motto is: `Be the first to give away what others charge for'. If you listen to the technology, it makes sense."
One more quiz question, to end: You want a book. Would you pay:
(a) About $30 at the bookshop?
(b) Nothing to read it online, though you'll consider paying to hear the author speak at a lunch when he's next in town?
Anderson is writing a book about Freeconomics called Free, which will be released next year as a free e-book, probably with advertising in it, as well as a conventional hardcover for sale.
"People have to recall that most books don't make money," he told the Guardian. "In so far as I will make money from the book, it'll probably be in terms of speaking engagements.
"My thing is to get my ideas out there. It's like when I was in a band; it was never to make money - it was to get girls."
