Above the Crowd

Bill Gurley on the “Free” Business Model

July 15, 2009:

get_free_wiredI have been intrigued by the back and forth between Chris Anderson, Malcolm Gladwell, and Mark Cuban on the topic of “Free” as a strategy and business model. For those that haven’t read the articles and posts, I highly reccomend them all. Here they are in a list:

1) Back in February of 2008, Chris Anderson wrote the original cover story for Wired Magazine, title “Free! Why $0.00 Is the Future of Business.” Recently he has expanded this into an entire book. I have felt for the  past year or so, that Chris’ first article is quintessential reading for the entrepreneurial set.  More on why later.

2) In the July 6, 2009 edition of the New Yorker, one of my favorite authors, Malcolm Gladwell, took issue with Chris’s book in an article titled “PRICED TO SELL“. In this article, Malcolm does a good job of disputing some of the core pillars of Anderson’s thesis. Basically, there is always a cost to delivery, even if its really low on a marginal basis, and in volume it can get quite expensive on the cost side. He also, appropriately highlights that “Free” is not a panacea of a business model. It doesn’t always work.

3) Mark Cuban then chimed in with not one but four posts: “Free vs Freely Distributed,” “When You Succeed with Free, You are Going to Die By Free,” “Google Is Learning the Reality of Free,” and “A Quick Ditty on Free.” Mark, like Malcolm highlights many of the dark elements of the Free model. Namely, it is risky, it can be costly, and that the “freemium upgrade model” may be create a lead that is temporary.

guillotine

Here is where I come down on all of this. First and foremost, Free is a disruptive force. This does not mean that if you deploy a free business model you will be successful. In many (perhaps even most) cases you will not. However, if a disruptive competitor can offer a product or service similar to yours for “free,” and if they can make enough money to keep the lights on, then you likely have a problem. To me this is the essence of Free and why no one can ignore it. It’s less about offense and more about defense. Plain and simple, Craig’s List is a massive problem for the newspapers. When Photobucket offered unlimited photo-hosting, and survived by showing ads in the admin console, the management teams at other photo hosting sites must have been at least slightly concerned. Prior to Zillow, Realtor.com charged anyone that wanted to post a house for sale on their web site. Zillow offers this for free, and as a result, the executives at Realtor.com have something to ponder. I would argue the same issue exists for Webex (there are about five free Webex competitors), and SlideRocket certainly must be on the mind of the GM at Microsoft that is responsible for PowerPoint revenue. So basically, Free is an incumbent competitive threat.

Because Free is a disruptive way to compete, it is a great choice for an entrepreneur to use to break into a new industry. Coming in with a disruptive price (in this case Free), is simply a form of the  Innovator’s Dilemma innovator strategy. It’s not guaranteed to succeed, and depending on the category, the number of page views needed to generate substantial advertising revenue is amazingly high.  However, it is a great way to quickly steal share in a category, and it has the added benefit that most incumbents have no legitimate way to react. In some cases, like the one outlined in the famous New York Times article on PlentyofFish.com, the incumbents become the key revenue partner for the new entrant – all at once acquiescing, legitimizing, and ensuring the long-term success of the Free player.  Such was also true of TripAdvisor.

Lastly, agreeing with Mark and Malcolm, I do not believe that free is a universal truth. I don’t think that content has some kind of destiny to be offered for free. Even though the marginal cost may be zero, if you have highly differentiated content, there is no reason to adopt a free business model (assuming the government will stand behind your intellectual property protection). HBO’s hit shows should not be free. The NFL has no need to offer free access to all games. The Wall Street Journal is doing the exact right thing, and I find it peculiar that the New York Times is not executing the same strategy. I would also suggest that over the next two years you will see the majority of high-quality video content move behind a subscription wall, even at sites like Hulu.

The key question for anyone in business is, “Can someone do what you do for free?”.  If the answer is “yes” you have a problem.

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