THE FREE WAY

12 December 2007

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Giving products to consumers for free will become even more fashionable in 2008, says Matthew Lynn

Plenty of people will scoff that it is just a bubble. Then again, they said the same thing about the early websites. But the last time I checked, Google, which has never charged the end-user anything, had a market value of $218bn (£105.7bn, e148.7bn). Free doesn’t have to mean profitless.

Three things are happening. One, a few products have always been free, in as much as anything ever is: terrestrial television, for example. We are seeing an extension of that model. But as Milton Friedman used to say, there is no such thing as a free lunch; free goods and services must be paid for by somebody and this traditionally has been advertising and those who use some of their time looking at it.

Two, technology and deregulation are making some products so much cheaper to produce there isn’t much point in charging for them any more. Distributing music digitally has a zero marginal cost, so why charge for it?

Three, innovative entrepreneurs have seen different ways of making money. Google has opened up global advertising to even small niche businesses through its AdWords software. Free newspapers have discovered they can make enough from advertisers by delivering the right audience, there is no need to deter readers with a cover price.

It is not just about advertising. Often it is the relationship that creates value. Ryanair might give away flights, but it can make money from commissions on hotel or car bookings, or from selling coffee during the flight. In the music business, you might give away the songs, but you can make even more money from selling concert tickets.

What’s really happening is that entrepreneurs are reinventing business models, which is what the market is all about. Sometimes they’ll get it wrong. But if they get it right they’ll make a fortune: in marketing, “free” is an even more powerful word than “new”. There are dangers. Customers might just take the free products and ignore the add-ons and upgrades you were planning to sell them. But then all business is risky – and that piece of advice really is free.