Freeconomics? It's just a shell game

Chris Anderson of The Long Tail fame, noted recently that the cost of a million instructions per second of computing has fallen below one cent:

Intel's Core Duo running at 2.13 GHz now costs around $200 at retail (it's around $180 at volume), but can do about 20,000 MIPS. I remember my first 6 MHz 286 PC in 1982 that did 0.9 MIPS. I have no idea what the CPU cost then, but the PC it came in cost nearly $3,000 so it couldn't have been cheap. Say it was around $1,000/MIPS back then. Now it's $0.01/MIPS. I know I shouldn't be astounded by Moore's Law anymore, but that really is something.

If I've done my math right, the decline in price/performance (please note: that's price divided by performance; most people incorrectly use the term price/performance to indicate performance divided by price) is about a factor of 100,000 over 24 years, and that averages out to a decline of 38% per year.

In the process, he's coined a lovely new term to describe businesses that thrive on this type of abundance: Freeconomics. But despite the cute name, all these free services are anything but free -- they are supported by what Michael Schrage at the Financial Times calls "creative subsidies" that pose serious regulatory and oversight conundrums for those who need to follow the money for tax or other regulatory purposes. And while Freeconomics is a terrific sound bite, an economy of abundance still has real costs and money changing hands. Advertising on Google is practically free -- but Google pulls in nearly a billion dollars a quarter by adding up a lot of "practically free" fees. Similarly, The Core Duo that Chris notes in his example still costs about a tenth of what that 80286 in his PC 24 years ago, and that's why Intel receives revenue of $3 billion a month instead of becoming a Web 2.0 company looking for venture backing.

There's one other cost buried in here that isn't immediately evident: the time required to choose among the zillions of choices created by free products. With 70 million blogs online today and growing, no one has time to look through them all. And while services like Google are a big help, they have limitations; for example, have you ever tried to find a specific blog written by John Smith? Good luck. Google creates its own form of scarcity through its search algorithms. After all, only ten sites can be listed on the first page of results, and we now have an entire industry of Search Engine Marketers who make quite a lot of money trying to get you to the top of that free service.

Bottom line: I'm as big a fan of cool, new business models as the next analyst. But we've heard this Freeconomics story before, except last time it was George Gilder claiming that the bandwidth glut would cause broadband to be free; I think that will be news to both Comcast and Verizon who are investing billions in networks to deliver that "free" broadband, and will spend millions to preserve their customer's monthly fees.

I always say it's easy to give away product, but hard to sell one. Businesses that last are those that make customers eager to give them money, and do so at a profit. Businesses that pretend that everything is free usually have trouble with the second half of that equation. And when the shell game stops, their creditors rarely are quite so free thinking.

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