Inside ASI-AP

One of the themes of the book is untangling the confusion over different kinds of free,which can range from a simple marketing gimmick to a radically new economic model. I've taken a quick pass at doing this visually, but we'll really have to pretty these diagrams up (perhaps with cute restroom-style figures for the various parties, rather than the Ps and Cs below?)

Here's the first, which dates back more than a century. It's the razors-and-blades model, as well as loss leaders of all sorts, from "free gift inside" to "free toaster for opening an account":

The second is the media business model, ranging from free-to-air broadcast radio and television to all ad-supported content online today:

The third is the new one, enabled by digital markets where the marginal cost of production and distribution is close to zero. This is the one that allows the "freemium" business model, where 90% of the users get the basic product for free and 10% chose to pay for a premium version. In economics this is called "versioning" and is a form of using price discrimination (where the main price is zero) to maximize both the consumer utility and the profit in a market. In this model, charging a small percentage of a large user base beats charging a large percentage of a small user base.  Obviously best for consumer products with potentially large appeal, it's the main Web 2.0 business model and can be found everywhere from Flickr and Flickr Pro to open source's "support included" commercial versions of Linux.

Any ideas on how to improve these or otherwise present them more clearly and engagingly in the book?

Cory Doctrow writes: My latest Locus Magazine column is live: "Macropayments" explains why I don't have a tipjar: Two columns back, in "Think Like a Dandelion," I talked about the reproductive strategies employed in species where reproduction is cheap, like dandelions. Unlike humans, dandelions don’t worry about the disposition of each of their children — they only want to be sure that every opportunity for success is fulfilled, that every crack in every sidewalk has a dandelion growing out of it. It’s a damned successful strategy, for dandelions at least. You’d be hard pressed to find a lawn, no matter how carefully tended and how thoroughly poisoned, that doesn’t have a dandelion or two sprouting on it.

To concretize the metaphor: I don’t care about making sure that everyone who gets a copy of my books pays me for them — what I care about is ensuring that the everyone who would pay me decent money for a book has the opportunity to do so. I don’t want to hold 13-year-olds by the ankles and shake them until their allowance falls out of their pockets, but I do want to be sure that when their parents are thinking about a gift for them, the first thing that springs to mind is my latest $20-$25 hardcover.

[My take: I'm not so sure that Moore is giving up tens of millions of box office revenues on this one, as AP suggests. Getting theatrical distribution for a documentary is hard, even for Moore, and it maybe this one just didn't look like it was going to sell well enough to justify that. So it may really be a case of free online vs straight to DVD. And for Moore, for whom political impact is as important as cash, the mass reach enabled by free could mean more than whatever DVD revenues he'll forgo during the online distribution window. ]

NEW YORK (AP) — Inspired by Neil Young and Radiohead, Michael Moore will release his new film online and for free.

The film, "Slacker Uprising," follows Moore's 62-city tour during the 2004 election to rally young voters. It will be available for three weeks as a free download to North American residents, beginning Sept. 23. An official announcement of the film is planned for Friday.

Moore said he considered releasing "Slacker Uprising" theatrically as "Michael Moore's big election year movie" as he did with 2004's "Fahrenheit 9/11," which was highly critical of President Bush.

Instead, Moore opted for a symbol of gratitude to his fans as he approaches the 20th anniversary of his first film, 1989's "Roger & Me."

"I thought it'd be a nice way to celebrate my 20th year of doing this," Moore said. "And also help get out the vote for November. I've been thinking about what I want to do to help with the election this year."

The 97-minute long "Slacker Uprising" will be the first major film to be released in such a way. Last December, "Jackass 2.5" was streamed online and for free, but that was only a collection of left over material from "Jackass 2." Companies like ClickStar, which Morgan Freeman co-founded, have made films still in theaters — such as 2006's "10 Items or Less" — digitally available for purchase or rental.

If history is any measure, "Slacker Uprising" could have made a decent sum in theaters. His last two films, "Sicko" ($24 million) and "Fahrenheit 9/11" ($119 million) are two of the three highest grossing documentaries ever.

Read more here.

[Thanks to Brandon Buck for the heads up]

[Housekeeping:] I've been trying to figure out how to integrate my urge to microblog interesting free examples here without cluttering the central column too much and otherwise mixing thoughtful posts with thoughtless ones. In the current blog design I've got a Typelist on the left, but it's a pain to create and manage Typelists (which is why I let it go fallow). What I want is a microblogging widget that will let me write longer posts than than Twitter and Del.icio.us do but still be quick, easy and flexible. I've settled on Tumblr, so we'll be postponing the site redesign for a week or so while we create a left column that will be my Tumblr feed. 

Why does it take a week to tweak a template? Because I'm actually writing the freakin' book, and in a rare act of discipline I've asked some colleagues to do it for me. And they're busy.

[File under respected opposition] David Heinemeier Hansson, Jason Fried’s business partner at 37signals, begs to differ with the notion that Web companies shouldn't charge for their products. In a very entertaining speech (video below), he makes his case:

Forget using free to go mass and hope you'll become Facebook (or be bought by them). Instead, he says, focus on a small market and charge money. There are many ways to have a price in web software, he says, and he gives a few examples:

• Subscriptions (37Signals)
• Charge per use (Campaign Monitor email campaigns)
• Simply selling the software (Fogbugz)
• Flat fee for tiered service (Faxitnice)

He says that 37Signal's secret is not to target consumers (who don't like to pay) or big companies (that's a crowded space). Instead, they target the "Fortune 5 Million"--small companies with specific needs that are underserved (AKA the Long Tail).

I had a great interview today with Google's economist-in-residence Hal Varian on the economics of free. He pointed me to a 2004 paper he wrote on the changing economics of content and copyright in a digital world. It includes 14 business models that allow content creators to make money even if they cannot stop the content from being distributed for free. Here they are:

"Most information is born digital and that digital information is typically very easy to copy and distribute, it is conceivable that copyright laws may become almost impossible to enforce. Are there ways for sellers to support themselves in such an environment? It is worth considering some of the options. Here is a brief list of business models that might work in a world without effective copyright.

Make original cheaper than copy. This is basically the limit pricing model described earlier. If there is a transaction cost for a copy-a direct cost of copying, an inconvenience cost, or the copy is inferior to the original in some way-then the seller can set the price low enough that it is not attractive to copy.

Make copy more expensive than original. The "cost of copying" is partially under the control of the seller, who could use a "digital rights management system," some anticopying technology, or threats of legal action which would increase the cost of copying and, therefore, increase the price that it could charge for its product.

Sell physical complements. When you buy a physical CD you get liner notes, photos, and so on. Perhaps you could get a poster, a membership in a fan club, a lottery ticket, a free T-shirt, as well. These items might not be available to someone who simply downloaded an illicit copy of a song.

Sell information complements. One can give away the product (e.g., Red Hat Linux) and sell support contracts. One can give away a cheap, low-powered version of some software and sell a high-powered version.

Subscriptions. In this case, consumers purchases the information as a bundle over time, with the motivation presumably being convenience and perhaps timeliness of the information delivery. Even if all back issues are (eventually) posted online, the value of timely availability of current issues is sufficient to support production costs.

Sell personalized version. One can sell a highly personalized version of a product so that copies made available to others would not be valuable. Imagine, for example, a personalized newspaper with only the items that you would wish to read. Those with different tastes may not find such a newspaper attractive. Selling works with digital fingerprints (encoding the identity of the purchaser) is an extreme form of this. (Playboy has allegedly put digital fingerprints in online images.)

Advertise yourself. A downloaded song can be an advertisement for a personal appearance. Similarly, an online textbook (particularly if it is inconvenient to use online) can be an advertisement for a physical copy. There are many examples of materials that are freely published on the Internet that are also available in various physical forms for a fee, such as US Government publications (e.g., The 9/11 Commission Report, or the National Academy of Sciences reports.

Advertise other things. Broadcast TV and radio give away content in order to sell advertisements. Similarly, most magazines and newspapers use the per copy price to cover printing and distribution, while editorial costs are covered by advertising. Advertising is particularly valuable when it is closely tied to information about prospective buyers, so personalization can be quite important. In an extreme form, the advertisement can be completely integrated into the content via product placement.

Monitoring. ASCAP monitors the playing of music in public places, collects a flat fee, which it then divvies up among its members. The shares are determined by a statistical algorithm. The Copyright Clearance Center uses a similar system for photocopying-a flat fee based on an initial period of statistical monitoring.

Site licenses. An organization can pay for all of its members to have preferred access to some particular kinds of content. University site licenses to JSTOR content, Elsevier content, or Microsoft software are examples. This is particularly relevant when there are strong network effects from adopting a common standard, such as in the Microsoft example.

Media tax. This a tax on some physical good that is complementary to the information product (i.e., audio tape, video tape, CDs, TVs, hard drives, etc.) The proceeds from this tax are used to compensate producers of content. For example, the Audio Home Recording Act of 1992 imposes a media tax of 3 percent of the tape price.

Ransom. Allow potential readers to bid for content. If the sum of the bids is sufficiently high, the information content is provided. Various mechanisms for provision of public goods could be used, such as the celebrated Vickrey-Clarke-Groves mechanism. This could be used in conjunction with the subscription model. For example, Stephen King offered installments of his book The Plant on his web site. At one point he indicated he would continue positing installments if the number of payments received divided by the number of downloads from his site exceeded 75.6 percent. His experiment did not succeed, perhaps due to the poorly chosen incentive scheme.

Pure public provision. Artists and other creators of intellectual property are paid by the state, financed out of general revenues. This is not so different from public universities where research and publication is considered integral to the job.

Prizes, awards and commissions. Wealthy individuals, businesses or countries could commission works. The patronage system achieved some notable results in Europe for several centuries. The National Science Foundation or the National Endowment for the Humanities are examples of modern day state agencies that fund creative works using prizelike systems."

From Silicon Alley Insider:

Next month Nokia will launch its "Comes With Music" subscription service in the U.K., ahead of 2009 launches in Europe and Asia. Your new Nokia phone comes with a "free" year's worth of music -- an all-you-can-eat selection of 2.1 million songs, which is about 25% of Apple's iTunes library. After that, you can pay to keep using the service, or cut it off and keep your original song files.

Unanswered questions: How much will the phone cost? Will this come to the US? Will Apple do the same with the iPhone?

I'm back from the family vacation (the beach at Stinson was perfect aside from the 12ft Great White) and am now entering the last two months of crunch book writing. We'll be launching a blog redesign tomorrow, and the focus will shift to mostly FREE material (although the name of the blog will remain the same--there's too much Googlejuice there to give it up).

To replace the sidebar in current blog, I'll be microblogging random interesting examples of free as I come across them. Here's today's, from Marginal Revolution:

A Danish chain of gyms is now offering membership free of charge, with the only caveat that you have to show up, in order for the membership to be free. If you fail to show up once per week you will be billed the normal monthly membership fee for that month. This should solve the problem with incentives that gym-membership normally carries - there is suddenly a very large (membership is around 85$ per month) incentive to show up each week.

I have a piece in the Aug 11th issue of Newsweek International, but Newsweek's website does such a poor job with magazine content that it's practically unfindable (it's actually on the seventh screen of this series of perspectives from economists and other experts). So here it is:

Unleash The World's Engineers
Chris Anderson believes that the price-cutting power of technology can still bring nations relief if only bureaucrats will allow it to.

Technology can be a powerful deflationary force. Thanks to Moore's Law (the remarkable ability of computer technology to double in power for the same price, or halve in price for the same power, every 18 months) if you want a 50 percent discount on an electronic gadget, just wait 18 months. Or turn a service into software, and it's just a matter of time before it is free.

But technology has been unable to offset some of the crucial supply issues around energy and food, both of which are at the core of today's inflationary quandary. Nuclear power was supposed to bring electricity too cheap to meter, but our electricity bills have never been higher. The green revolution was supposed to bring an endlessly bountiful harvest, making hunger a thing of the past, but we now have rice shortages and corn nearly tripled in price over the past year. And for all of our virtual connection via cell phones, video-conferencing and e-mail, we've increased our driving and flying to such an extent that we've outstripped global oil-production capacity, driving energy prices to all-time highs.

What happened? Were we wrong to think that technology would deliver us from rising prices? Well, yes, but it's not technology's fault. We mostly have ourselves to blame for standing in its way.

Why are agricultural yields not keeping up with population growth? In large part because the European Union essentially banned genetically modified crops both on its own soil and in imports, thus exporting its technology-blocking regulations to trade partners in Africa and elsewhere.

Another reason food is so expensive is that fertilizer prices are also near all-time highs. That's because the feedstock for much fertilizer is natural gas, and we don't have enough of that, either. Not because we can't get it out of the ground using high-tech tools, but because we can't get it where it's needed. Of the last 53 applications to build liquefied natural gas (LNG) ports and processing facilities in the United States, 50 were denied because of objections from the communities near where they would be located. Meanwhile we haven't built a natural-gas pipeline from Alaska in part because of similar environmental concerns.

The shortage of natural-gas-transportation infrastructure is also in part responsible for our high electricity prices, as is the multidecade virtual moratorium on new nuclear power plants after Three Mile Island. Meanwhile, policies putting high import tariffs on foreign ethanol (to protect American corn farmers) have raised the price of gas, while a refusal to follow California's lead on car efficiency standards has allowed national gas demand to grow faster than supply.

All this said, I believe today's inflation will ultimately speed the adoption of technologies that can fight it. The higher prices get in the atoms economy, where things get more expensive every year, the more incentive there is to move goods and services to the bits economy, where things get cheaper. How high will airfares have to get (think they're high now? Just wait for new carbon taxes to kick in) before you invest in good videoconference gear and skip the flight altogether? How high will gas prices get before you decide to work a few more days a week from your fully wired home office, or skip the mall and shop online from home? The best way to lower energy prices is to cut demand.

In a world where seemingly everything is getting more expensive, the price of digital technology continues to fall and the differences between those two economies are growing. If getting rich was the incentive to go digital a decade ago, saving money may be an even stronger motivation this time.

In English the word "free" is fraught with ambiguous meaning, which is why the open source world has to make the distinction between free as in speech vs. free as in beer. In Romance languages, such as Spanish, French or Italian, the twin meanings munged into the English word "free" are split between two words, one derived from the Latin "liber" (freedom) and the other from the Latin "gratis" (contraction of gratiis "for thanks," hence, "without recompense”, or zero price).

In these languages, "libre" is usually an alloyed good, while "gratis" is often considered a marketing gimmick.In English, marketers take advantage of the ambiguity to use the positive connotations of freedom to help past suspicions over the truth of the pricing meaning.

But that still leaves the question: what's the derivation of the English word "free"?It's actually fascinating: "free" comes from the same Old English root as "friend".

The path is this:

[They both come] from the Old English freon, freogan "to free, love." The primary sense seems to have been "beloved, friend, to love;" which in some languages (notably Gmc. and Celtic) developed also a sense of "free," perhaps from the terms "beloved" or "friend" being applied to the free members of one's clan (as opposed to slaves).

The sense of "given without cost" is from 1585, from notion of "free of cost."

[A fun example of freedom and free combined is in the poster shown above, which Larry Lessig found at an open source conference. The Free Beer this refers to is a recipe that is free to all. But if you want the version someone has already made, you've got to pay for it. This is another example of the time/money business model of free.]

When you think about it, a lot of the English language is really about ratios within a finite set. So you can say "most Americans" and that's meaningful, because the number of Americans is approximately known and relatively static. Likewise for "few" or "many"--these words are implicitly ratios, and they assume some common agreement on what the denominator is.

The world we grew up in was full of bounded sets--relatively well known and static populations that we could compare. But now we're entering a world of unbounded sets, and it's messing up our language habits. What is the number of "writers" in the world in an age of blogs, the number of "photographers" in an age of Flickr and cameraphone or "videographers" in the age of YouTube?  Today there are perhaps a trillion pages on the Web; tomorrow it will be a quintillion. How many "publications" are there in the age of Twitter?

From a semantic perspective, all these unbound populations are examples of denominators in fractions that no longer make any sense. And that means that the words we use that are based on such ratios are themselves becoming meaningless. So while "most Americans" has meaning, "most bloggers" does not (what's a blogger? How many are there? How do they define themselves? Who's counting?).

This was at the core of the confusion over the definition of the Long Tail (absolute numbers are still meaningful in marketplaces where the number of products grows by orders of magnitude overnight, but percentages are not) and it continues to come up in conversation every day. People want to generalize--"most Wikipedia pages are wrong"; "most YouTube videos are crap"--but the first rule of open systems is that you can't generalize about open systems.

So here are five words that I would suggest are usually meaningless in a world where the populations we're talking about are limitless in size and diversity and doubling overnight (just add the word "blogs" after any of them and you'll see what I mean):

1. "Most"
2. "Average"
3. "Typical"
4. "All"
5. "None/No"

And here are eight more words that are not quite meaningless but tend to obscure more than they reveal:

1. "Majority" (Is this really measurable?)
2. "Minority" (ditto)
3. "Many" (What does that mean?)
4. "Few" (ditto)
5. "Leading" (In what domain? When? To whom?)
6. "Top" (ditto)
7. Almost any declarative about a class, such as "is" or "are" (as in "open source software is..." or "Wikipedia editors are...")
8. Implicit ratios such as "Virtually all..." or "Practically no..."

My advice: try to avoid these words when talking about open systems. Generalizations are always dangerous, but never more so than today. And yes, I know that is itself a generalization. See, it can happen to anyone!

Economists use incentives to explain human behavior. In traditional economics these are mainly monetary incentives, but the expansion of the field to behavioral economics in the 1970s introduced other factors, such as risk minimization and social rewards, that weren't directly tied to money but could influence actions all the same. The current vogue for all things economic has encouraged the Freakonomics crowd to use the same language to explain the emerging online world: today we use the sweeping terms "attention economy", the "reputation economy" and "gift economy" to explain the extraordinary rise of non-monetary phenomena such as open source or Wikipedia.

There is only one problem with that use of "economy"--I'm not sure what it means, and I don't think most of the people who use it do either, since they rarely bother trying to take it any further than a metaphor. But if attention and reputation really are economies, shouldn't we able to quantify them, using economic equations?

What is the money supply of reputation? What is the currency conversation rate from of one form of attention into another? How would you measure wuffie inflation?  

Don't look to academics for the answers. Late last year Yale held a two-day conference on "Reputation Economies in Cyberspace".  I suppose the cringe-making term "cyberspace" should have warned me off, but I've just spent an hour reading all the papers submitted by the 30 academics who spoke, but there isn't a proper economic analysis amongst them. (Another tip-off: most of the participants were lawyers).

There have been some clever attempts to use the language of economics to describe attention markets, such as this nifty pirouette from 1999:

If the attention I pay to others is valued in proportion to the amount of attention earned by me, then an accounting system is set in motion which quotes something like the social share prices of individual attention. 

It is in this secondary market that social ambition thrives. It is this stock exchange of attentive capital that gives precise meaning to the expression "vanity fair" .

But when it came time to quantify it back then, the author had only "a person's presence in the media" to measure. A 2001 book called The Attention Economy didn't get much further. 

I think we can do much better today. Now we have a NASDAQ of reputation--it's Google. What is the currency of reputation online other than PageRank, which measures the incoming links that define the network of opinion that is the Web? And what better measure of attention is there than Web traffic? 

In economic terms, we convert from the Reputation Economy to the Attention Economy to cash by using this formula: The economic value of your site is the traffic your PageRank brings from Google's search results for any given term, times the keyword value for that term. (Higher PageRank means more traffic, since you'll appear earlier in the search results). And you can convert that traffic into plain old cash by simply running AdSense ads. 

For example, my UAV site, DIY Drones, has PageRank 6 (out of 10). That means it appears on the first page of results for the search term "UAV" (albeit low on that page). Right now that gets me about 60,000 pages views a month from Google (which is about a third of my total traffic).  The search term "UAV" is currently worth about $0.20 per click. 

So let's express this in economic terms [note: the following are totally back-of-the-envelope calculations. I'm hoping that they're within the right order of magnitude, but I'm not promising anything better than that]. 

• My reputational wealth is 6 out 10. [Note: this is just for DIY Drones. The Long Tail site has higher PageRank (7) and Wired has higher yet (9), but for the sake of this analysis I'm pretending that there is no reputational transfer between these different parts of my life.] Assuming that reputation wealth is distributed like monetary wealth, which it to say a Pareto distribution, my equivalent net wealth in dollars would be around $200,000. That's comfortably middle class. 
• My income is my share of the attention economy. There are, estimates Kevin Kelly, 100 billion clicks per day on the Web. The US represents about 20% of global web traffic, so we'll call that 20 billion clicks a day or 7.3 trillion clicks per year. I get 2 million of them, or 2.74x10^-7 of US web traffic 
• To make an analogous leap to the monetary economy, the US GPD is around $14 trillion. If I had the same share of that as I do of the Web, my annual income would be around $3.8 million. Which means that I'm richer in attention than I am in reputation for some reason (or, more plausibly, that PageRank is somehow undercounting my reputation). 
• But I'm not making $3.8 million. The conversion rate between these non-monetary currencies and real money reflects the size differences between the online economy and the offline economy. In reality, my 2m annual page views will only make me about $3,800 in Google AdSense revenues per year, so the conversion rate from real dollars to attention dollars in my world is 1,000 "Web credits" to the dollar.

Okay, this is admittedly a very poor attempt to quantify the Attention Economy and the Reputation Economy in real economic terms. But that's only because I don't have enough data and skill to do it properly. Inside Google, two offices down from CEO Eric Schmidt, sits former Berkeley economist Hal Varian, who has both the data and skill to do this right. And trust me, he has. 

It is possible to move beyond the woolly metaphors and treat Attention and Reputation like real economies. So when are we going to stop using the word "economy" as rhetorical smoke when we describe non-monetary markets and start measuring them like the economy they really are? If there's is a secret formula to Google's success, it's in doing exactly that.

At some point in your life, you will wake up and discover that you have more money than time. And you will then realize that you should start doing things differently, which means not walking four blocks to find an ATM that doesn't charge a fee, driving for miles to find cheaper gas, or painting your own house.

This same calculus is the foundation of a big part of the "freemium" economy. We see it a lot in free-to-play online games, such as Maple Story, where you can buy things like "teleportation stones" to let you get from one place to another without a long slog or wait for a bus. Most of these paid digital assets don't make you a better player, but they do allow you to become a better player faster.

If you're a kid, you probably have more time than money. That's the force behind MP3 file trading, which is kind of a hassle and but is free (albeit illegal, of course!).  As Steve Jobs famously pointed out, if you download music from peer-to-peer services, fixing the messy metadata as you go, the time it takes to avoid paying means you're working for less than minimum wage. Nevertheless, that works if you you're time-rich and money-poor. Free is the right price for you.

But as you get older, the equation reverses and $0.99 here and there no longer seems like a big deal. You migrate into a paying customer, the premium user in the freemium equation.

As some of you may know, one of my other side projects is an open source hardware company (developing and selling aerial robotics technology), and so I've been following the emergence of the open source hardware world closely. It's a really interesting example of how to make money from free, one that adds a new dimension to the open source software world because it's about atoms (which have real marginal costs), not just bits.

The way most open source hardware companies work is this: all the plans, printed-circuit board files, software and instructions are free and available to all. If you want to build your own (or, even better, improve on a design), you're encouraged to do so. But if you don't want the hassle/risk of doing it yourself, you can buy a pre-made version that's guaranteed to work.

For instance, take the great Arduino open source microprocessor that our autopilots are based on. You can build your own, with full instructions. Or buy one. Most people do the latter. The Arduino team make their money from a certification license fee they charge the companies and retailers that make and sell the boards.

You can build a good business on this model, as Limor Fried (AKA LadyAda, picture above), has shown with her electronics kit retail/design/community AdaFruit Industries. She and her business partner, Philip Torrone, explain the economics and tactics in a presentation here (good summary here).

Short form:

1. Build a community around free information and advice on a particular topic.
2. With that community's help, design some products that people want, and return the favor by making the products free in raw form.
3. Let those with more money than time/skill/risk-tolerance buy the more polished version of those products. (That may turn out to be almost everyone)
4. Do it again and again, building a 40% margin into the products to pay the bills.

As Torrone said in an email, "I can't imagine doing a book, a video, a magazine unless I had a community that would rally along the way. In the end it always seemed to be about a story, people like to see the beginning, middle, end and plot of something -- and if there's a buy button somewhere, they sometimes click it and reward us for working hard."

Presto: a free business model that scales neatly from bits to atoms. It's exactly what we'll be doing at DIY Drones, too. Not just because it's free, but because it works better than anything else out there. It's not a bad way to think about writing a book, either ;-)

Here's a question I get all the time: how big is the free economy? That's harder to answer than you might think, for both definition and measurement reasons. But here's a first pass at doing it anyway.

(Note: I'm just using US figures below, unless marked otherwise)

There are at least three classes of free:

The first is the use of "free" as a marketing gimmick: "buy one, get one free", "free with purchase", "free phone if you commit to the two-year service plan", etc. All basically cross-subsidies or loss leaders--sooner or later you'll pay. I suspect that there isn't an industry that doesn't use this one way or another. There's no new economic model there and it's totally impossible to quantify, but arguably it touches every bit of the entire consumer economy itself, which is to say trillions of dollars a year. And thus it's a meaningless number. So I'll move on....

The second form of free is the "three-party market", which is to say the world of advertising-supported free media. That's most radio and broadcast television, most web media, and the proliferation of free print publications, from newspapers to "controlled circulation" magazines. For the top 100 US media firms alone, in 2006 radio and TV (not including cable) advertising revenues were $45 billion.

Online, almost all media companies make their offerings free and ad-supported, as do many non-media companies such as Google, so I'll include the entire online ad market in the "paying for content to be free to consumers" category. That's another $21-$25 billion.  Free paper newspapers and magazine are probably a billion more, and there are no doubt some other smaller categories I'm omitting and a lot of independents not included in the numbers above. Let's call the total of offline and online ad-driven content and services $80-$100 billion.

Finally, there is what I call "real free".  Products and services that don't cost most consumers anything at all, either in cash or ad clutter. (Most of this is online, where the marginal costs are near zero). This includes companies that use the "freemium" model (where a minority of paying customers support a majority of non-paying customers, as in Flickr and Flickr Pro or the growing world of online games), all those companies that are in the pre-revenue part of their evolution, and the entire "gift economy", from Wikipedia to the blogosphere. 

This last category is impossible to properly quantify, especially since much of it has no dollar figure attached at all, but I'll break out some interesting subcategories that do have some numbers attached:

Open source software (service and support around free software):

• The "Linux ecosystem" (everything from RedHat to IBM's open source consulting business) is around $30 billion today.
• Other companies built around open source, such as MySQL ($50m annual revenues) and Sugar CRM ($15m), probably add up to less than $1 billion.

Free-to-play videogames:

• These are mostly online massively multiplayer games, which are free to play but make money by charging the most dedicated gamers for digital assets (upgrades, clothing, new levels, etc). They started in South Korea and China (where they're now a $1 billion business) and have now come to the US, with games like Runescape and NeoPets.
• The "casual games market" (think everything from online card games to flash games) is now at nearly $3 billion.

Free music:

• How much of Apple's iPod $4 billion in annual sales should be credited to the libraries of "free" MP3 that created demand for gigabyte storage devices? How much of MySpace's $65 billion estimated value is due to the free music bands put there? How much of the $2 billion concert business is driven by P2P file sharing?

So what's the bottom line? By a strict definition of free (just the third category), it's pretty easy to get to $50 billion total revenues. Include the next most interesting free market, online ad-driven content and services, and you're around $75 billion. Expand that to the traditional ad-supported media, and you can get to $150 billion. Go worldwide, and you can easily double all those figures.

Whichever definition you like, there's a lot of money to be made around free.

If I wait long enough, all the smart things about the Long Tail will be said by other people and I can just quote them here. Today's installment is by none other than Kevin Kelly. If he will forgive me reprinting his post in its entirety below, I will forgive him the cringe-making term "long tail of the Dragon of Love" ;-)

Over to Kevin:

"Seth Godin recently posted a dissection of the three "profit pockets" within the Long Tail, which he illustrated like this:

There's a blatant switcheroo that Seth (and almost everyone else) makes when explaining the Long Tail. In pocket #1 of the curve, Seth talks in terms of a creator of a work. In pocket #2 of the curve, he also talks in terms of the creator. But then when he gets to the long tail, he switches away from a creator, to talk in terms of an aggregator of other creators' work. Why is that? What happens to the creator? The creator is dropped when we get to the long tail "pocket of profit" because the long tail is not profitable for the creator. It's profitable only for the audience and aggregators.

I'm not really sure the "fractal long tail which operates within a long tail" (every subject has its own long tail) mentioned in Seth's previous post helps a whole lot either, other than to say you want to be as close to the head as possible even in your niche.  That is a no brainer. Being an aggregator is not an option either for a creator. Almost no creators I know are productive enough to create sufficient quantity of new things to aggregate their own work. Aggregators are by definition not creators.

So as one crosses the sections -- going from the short head to the long tail -- one should be consistent and view it from the aggregator's point of view or the creator's point of view. I think it is a mistake to conflate the two view points.

I've been wrestling with this for a while and I think the only advantage to the creator that I can see in the long tail is that aggregators can invent or produce a long tail domain that was not present before.  Like Seth's Squidoo does. Before Squidoo or Amazon or Netflix came along there was no market at all for many of the creations they now distribute. The proposition that long tail aggregators can offer to creators is profound, but simple: you have a choice between a itsy bitsy niche audience (with nano profits) or no audience at all. Before the LT was expanded your masterpiece on breeding salt water aquarium fishes from the Red Sea would have no paying fans. Now you have maybe 100.

One hundred readers/watchers/listeners is not economical. There is no business equation that can sustain profits for continual creation from so few buyers. (It can of course support the business of aggregation above the level of creation.) But the long tail niche creation operates perfectly well in the realm of passion, enthusiasm, obsession, curiosity, peerage, love, and the gift economy.  In the exchange of psychic energy, encouragement, meaning of life, and reasons to live, the long now is a boon.

That is not true about profits. Economically, the more the long tail expands, the more stuff there is to compete with our limited attention as an audience, the more difficult it is for a creator to sell profitably. Or, the longer the tail, the worse for sales. But if we view the long tail as a market of a different type, as a market of enthusiasm and connection, then as the long tail expands, this increases the chance of two enthusiasts meeting, and so the longer the tail, the better. The first two pockets of the curve are trying to maximize profits; the last pocket of the long tail is trying to maximize passion and connectivity.

There is one further indirect advantage to the long tail. Since your creation now exists in a market (where it would not have existed at all before) it can, if you are lucky, start to migrate uptail.  With creativity you may be able to move your creation out of the economic doldrums of the long tail up into section #2, where 1,000 true fans and other mid-level success lies. As I argue in 1,000 True Fans, this is where you want to be as a creator. Seth calls it the pocket of " the profitable, successful niche product" and I agree with him that this pocket #2 rather than pocket #1 is where you want to aim for.

But if you fairly evaluate section #3 according to the same metrics as section #1 and #2 -- the dollar value to  the creator -- then the long tail is a desert for profits. It makes sense to pursue this pocket only if you switch. You must switch in pocket  #3 either to looking at it from the perspective of an overlord aggregator, OR, you need to switch to looking at this territory as an alternative economy, one that is not running on the dollar. A new region with its own dynamics.

In other words, Squidoo and Amazon and Netflix make the profitable long tail very happy. But happy long tail does not make happy creator.

I prefer to think of the Long Tail as being a tail to a different animal. We've misidentified the intangible being it belongs to. It is not the long tail of the Beast of Commercial Profits. Rather it is the long tail of the Dragon of Love. The love of creating, of making, of connecting, of unreasonable passion, or making a difference, or doing something that matters to ourselves, the love of connecting, giving, learning, producing, and sharing.

It is important to know which tail we are wagging."

As usual, Seth Godin puts something better than I could:

A lot of people don't seem to understand a key implication of the long tail: Given the choice, it's better to make a hit.

If you have a choice of cutting a top 10 record or making a track of Jamaican polka music for iTunes, go for the hit.

If you have a choice between being on page 30 of the Google results for "Bolivian sushi" or the number one match for "buy life insurance", go for the latter. No brainer.

The problem, of course, is that you don't have a choice. You can give the hit a shot, but it's awfully crowded at that end of the curve.

The implications of the long tail have nothing to do with this false choice. What it explains in a powerful but subtle way is:

1. Collecting many many products among the tail permits you to amalgamate a market that may be just as big or bigger than the short head. But you need a lot of them. Squidoo is my proof--a profitable site with no real short head. So are eBay and YouTube and dozens of other places. Which is going to be worth more in ten years: the leaky boat of a network TV franchise or the relentlessly growing collection of long tail video at YouTube?
2. Within the long tail, there are micro long tails. The long tail permits entirely new micro-markets to emerge (exercise clothing, for example) and within that market there are hits and then the tail. It's sort of a fractal curve of new markets living within markets. (Simple example: Amazon enabled an entire eco-system of books on presentations and graphics to emerge).

The top baby names, like the top-selling records or most-watched TV shows or you-name-it, command less and less market share:

"The diversity in U.S. baby names has exploded since the 1950s. Back then, a quarter of all boys and girls got one of the top 10 baby names, according to Laura Wattenberg, author of "The Baby Name Wizard" (Broadway, 2005). In recent times, the top 10 names account for only one tenth of all baby names, Wattenberg writes. Her blog has an interactive tool [screenshot shown] that displays the historical popularity of thousands of names from the 1880s to now."

From LiveScience. Thanks to Barry Ritholtz for the tip