How Free Undermines Enterprise Written By: Ron Franke

Ron Franke

Free, as a business model, should be banned to save business and markets. The notion of free as a business model is relatively new in commerce. I'm not talking about loss leaders, promotional giveaways, or buy 2 and get a third free types of enticements. These promotions have an underlying expectation of a consumer purchase either in the future or on the spot. The free I'm talking about is the now and in the future ownership, access to, and use of a product (or service) requiring the consumer to spend no money. This type of free is bad for consumers, bad for the business provider, and bad for the overall economy.

The advent of this type of free came about with the invention or radio broadcasting. Due to the nature of broadcasting across the airwaves at the time there was no way to block the access by radio listeners of the broadcasted material. To pay for the radio service advertising was the solution. This solution migrated to early television broadcasts for the same reason. With the advent of cable broadcast distribution, the model had an opportunity to revert to the traditional pay per service model, as was the norm in print media, augmented with advertisements.

When the internet came along it was like the early days of radio and TV in many respects. Content was being invented as was the business model. A key difference from radio and TV was that access was limited since, initially, a physical connection was required. Content providers such as AOL provided access to information, entertainment, and applications for a subscription fee. In this model, businesses that created content made money and benefited from this arrangement, consumers had access to content and benefited, and service providers such as AOL benefited as the agent to bring content developers and consumers together. In this type of system, prices could additionally be reduced for consumers with the addition of advertising thereby providing additional benefits for both business and consumers. This business model was very much like the print media model. But, fundamental to the model was the expectation that consumers paid for the consumed product, at least in part.

At some point, many in the internet content development world started to promote the business model based on the early days of radio and TV - free to consumers. Internet content providers would live on a combination of advertising, data mining of user activities, and selling of user information to advertisers, among other revenue opportunities. Consumers naturally adjusted to this model.

At this point you may be thinking, what's bad here? Consumers don't spend money to use the products offered, internet content providers are creating content, and advertisers have access to consumers. The infrastructure is paid for through internet access subscriptions. Seems like all is well. Or, is it?

One key difference between the free internet content and free radio and TV content is the scope of the content itself. That is free radio and TV has content narrowed to a listening and viewing audience. In both cases the content is essentially a single product. That is, radio provides listening entertainment as a product and TV provides visual entertainment as it's product. They provide no other products. Competition in both radio and TV is over content. Since the market is reasonably open, new companies can be formed and new radio and TV content created which increases competition and choice for consumers. Within reason, it's hard to form a monopoly within the radio and television industries, especially with the introduction of cable and satellite distribution.

The internet on the other hand and the nature of internet related content has much less restriction on the content within it's medium than does radio and TV. Anything that's provided on the internet can in theory, be provided by any internet company. Rather than a single type of product in the case of radio and TV entertainment, the internet can be used to provide vastly different kinds of products. Here's where the problem with free comes into play.

Let's posit there's an internet company that provides a service that people find of value and they use that service regularly. That service is paid for, not by the consumer, but through advertising and other above board revenue generating schemes. Immediately, any competitor of that service, must themselves adopt that same free model in order to survive. So far not so bad. There are still competitors and still a market for that type of service with consumer choices. Naturally, as with many markets the competition stratifies into one dominant player and smaller competitors. The type of product - the service - provided so far remains largely the same.

As the dominant player grows, money becomes available for investment. The dominant player looks for other internet products to provide to current and future customers. These other products, currently provided by other companies that may have a different business model. That is, they charge for the use of the product. When the dominant internet player decides to offer that new product they use their existing free model and just absorb the cost of the new product and presume new advertising revenue generated by that new product will more than make up for the cost of the new line.

The other company, the one previously charging for the service, now is faced with three choices, carry on, adopt the free model, or try and add the service provided by the dominant player in effect now competing in a different market, and as a minor player. Chances are good the other company looses and is absorbed by a competitor to the dominant player or goes out of business. Either way, competition is lessened, jobs, are lost, and the market place is less robust.

Initially, consumers see more "free" goods and don't notice the diminishing choices available. They initially also miss the subtle affects to the market and the economy as companies are eliminated either through acquisition or loss of revenue.

As the dominant player grows and adds even more free products, more competition is eliminated. As the dominant player commands more consumers, advertisers drive more advertisement content to the dominant player placing more pressure on their original competitors.

Now consumers begin to notice that things are changing. There are fewer choices for consumers. The overall quality of the products diminish relative to once, but now gone, independent single product companies. Innovation slows down as reduced or eliminated competition no longer drives the need for new features and capabilities.

The economy is impacted as companies and jobs are lost. Tax revenue is reduced. The flow of money from those companies and employees no longer courses through communities affecting other businesses relying on those revenue sources. Other businesses begin to falter, such as retail stores, restaurants, and professional service providers. Infrastructure is impacted as tax revenues decline and the money for needed maintenance and repair is no longer available.

Ultimately free as a business model is bad for the economy and bad for consumers. It's a feel good short term benefit with long term repercussions. Free as a short term promotion to introduce new companies, products, and services is a fine and normal business strategy. It can bring new innovation and competition into the marketplace and provide new choice for consumers. But, free as a promotion should not be either the strategy of driving existing business out of the marketplace or a business model.

So, here's the idea. A business regulation should be enacted that disallows free as a business model and mandates that consumers pay some reasonable price for received goods and services from a business, with the allowance of loss leaders or short term promotional giveaways and similar free types of enticements.

© 2009 R.D. Franke. All rights reserved.