The perils of “free” in a declining economy

A little bird forwarded this article to me a moment ago. It’s one of the most interesting discourses on the web freenomenon (yes, I just coined that phrase) since Chris Anderson’s The Long Tail.

This could be because Anderson’s brains are behind many of the theories expounded in this piece…

Here’s an excerpt to whet your appetite, but please toddle along to and read the whole thing. It’s pretty comprehensive.

"Free online docs to work on, free news online via Google, newspapers, or blogs, free Facebook to organise your social life, free Skype to talk to your mates on, free Wikipedia to write your articles with, free Twitter to trill random epiphanies at fellow Tweet Geeks…

Free, free, free – the language of the web, and the business model that’s taking over the world.

But that was in the pre-September 2008 boom period, when advertising money and VC riches flowed like nectar on Mount Olympus. Now a harsher economic climate is taking hold, and the old ‘free’ model needs to adapt, as Wired editor and author of seminal Internet business book The Long Tail Chris Anderson noted in the Wall Street Journal on Saturday.

‘All this worked well in a rising economy, where non-monetary riches such as attention (Web traffic) and reputation (Google PageRank, which determines how high your site will appear in a search) could be turned into cash with the wave of a venture capitalist’s wand or a well-timed acquisition. But this year, for the first time since 2001, the overall tide of investment and advertising won’t rise. Indeed, it will almost certainly fall. Venture capital has dried up, Google is killing products rather than buying them, and Yahoo can barely support itself, much less look for others to fund. What does that do to Free as an economic model?’

Well, it makes it trickier. In the past, impressive levels of traffic + media hype = easy money. Web entrepreneurs would take a savvy idea to venture capitalists, and exchange it for equity and large bundles of cash. They would then scale up, perhaps become hugely popular, and then sell out to a bigger company, walking away from their iffy business with unimaginable riches.

Recent beneficiaries of such largesse include Twitter – which raised US $22m from VCs including the Jeff Bezos-backed Union Partners, despite having no incoming revenue stream; Skype, which was acquired by eBay for $2.6 billion in 2005; and Facebook, to whom Microsoft paid a ridiculous $240 million for 1.6% of the company in 2007. There are many others.

For Anderson, these companies represent the old way of doing business, and will have to figure out how to justify their capital investment with a bottom line if they want to grow and survive in the coming years. The popular refrain of “we’ll raise money by selling advertising” won’t cut it any more either, as investors wise up to a contracting ad market that’s being guzzled by Google…"

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