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This is a blog from the Internet Development Team at ILRT, Bristol. We build websites and web applications for a wide variety of customers, many in the UK higher education sector. Continue reading…

The internet free lunch

The idea of free as in zero price, along with free as in openness and freedom, has long been integral to the nature of the internet and hence to its economics and business models. Essentially the internet provides a means for virtually zero cost reproduction and distribution of digital products, e.g. books, music, films, software, etc. Along with having no full proof technical, or global legal, means to enforce censorship or prevent pirates making any digital product available for free. This posting explains how the internet free lunch can benefit you, the charging models behind it, and their consequences.

Of course just because something is free to end users, or even free to all doesn’t mean it generates no capital for its provider. This briefing was inspired by the book Free by Chris Anderson which estimates the annual revenue generated by free services, software and content on the internet at $500 billion. Leaving aside the external cost savings, and social, professional and other priceless capital that free suppliers may get in return.

  1. Cross-Subsidies
    The original free lunch arose in American bars before 1900. In New Orleans every bar provided free food just as casinos do today, the patrons paid for it by purchasing drinks. A rather notorious example of this would be Microsoft giving away Internet Explorer whilst charging for Windows.
  2. Three-party markets
    One of the most common models, it describes the Advertising funded model used by Google, taken from Commercial TV etc. But here its more your personal data for the service, advertiser’s money for Google’s data, Google service for money.
  3. Freemium
    A fraction of the customer base pays for an enhanced version of the product, and funds it for the rest. With negligible delivery cost the percentage who pay can be very small and still generate large revenues.
  4. Gift
    The non-monetary reward cultureĀ also plays an enormous part. Examples include Wikipedia and all its unpaid contributors. Another example is the Free Software Foundation, a large section of the open source movement, who believe that software should be zero priced.

What is the effect of the free lunch?

The use of free pricing often raises strong feelings. A heady mixture of often contradictory associations. Anti-competitive practices, freedom, piracy, open access, valueless, priceless, marketing trick, charity, theft. But one thing is undeniable, with the internet, there is such a thing as a free lunch for end users. So business and culture have to evolve to work with it. A core issue with free is how it shakes up established payment models for industries such as journalism, recorded music and software. Microsoft has historically applied terms such as ‘total cost of ownership’ to justify pricing of hundreds of dollars, but the pressure of free alternatives such as linux for entry level hardware have squeezed Windows 7 Starter’s cost to just a few dollars. Yet there are still media moguls willing to fight it, Rupert Murdoch has set out his stall with a subscription only access model, equating free with low quality.

Where is my free lunch?

As a client of Internet Development, you are essentially in the three party model, paying us to create and host your sites or services so that the end user can access them for free. However you get to move to the free consumer role too. Since we use free open source software components for much of those services, you get those as part of the gift model, without licensing costs. You may also integrate third party free services with your systems, e.g. YouTube for hosting videos.

Ed Crewe – Senior Technical Officer

This entry was posted on 9th April 2010 at 9:00 am and is filed under Briefings. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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