It’s the meme that wouldn’t die, but die it should… Last week I attended the Chinwag Live ‘Freeconomics’ session in London, and not long before that I listened to Guy Kawasaki interviewing Chris Anderson at South by South West. While Chris dodged Guy’s low-ball questions out at SXSWi, and focussed on promoting his new book (which may or may not be free), the Chinwag Live panel got a bit more stuck in.

The whole ‘free’ thing is worth wrapping your head around. It is probably worth starting with Chris Anderson’s article from last year, but then reversing out a bit with Alan Patricks two great posts on Freeconomics: PART I and PART II and his notes from the panel: CHINWAGGING or the podcast). You can read a journal of the panel session on the Bluedoor blog, where Abigail has blogged her tweetage, as it were, and there is a full write up at Brandrepublic.

You see, ‘free’ isn’t really free at all. It’s been funded by the VCs and selling data, and the VCs aren’t playing anymore. The concept of Anderson’s free is that transactional costs (the price of ‘doing things’) tends to zero on-line and at scale. However, transactional costs tending to zero is very different then them being zero see… Someone’s got to pick up the tab, see Nic Brisbourne’s post, and I quote:

The other takeaway that I hadn’t considered fully is that for many services in reality the marginal cost of delivery is not zero.  This was made most forcefully by panelist Alan Patrick, but also by panelist Bruce Daisely of YouTube who made the point that the worlds favourite video service now accounts for 10% of total bandwidth consumption – which I’m sure costs Google a lot of money.  This point knocks a sizeable whole in the ‘free’ argument, although ‘free’ fans would argue that these costs are going down all the time.

So, I threw in a question at the end, on the basis of these three forces “Won’t free end up eating itself?”

1. Free Attracts The Freeloaders.

If you advertise your service as free, hoping to up sell people to a paying service later (the freemium model), you may well be attracting the wrong crowd. I don’t mean in the sense of bad people, but rather the people that want something for free. That leaves those who want to pay as potential customers for a competitor. More importantly, you have probably attracted ‘customers’ that choose on price (free), rather than features. I put the word customers in quotes there very deliberately. Since they aren’t paying you anything, they aren’t really customers. They are prospects. And that is where ‘free’ is interesting: As a marketing ploy. It is a good one. But wait up…

2. Free Drives Value Out of the Market.

Imagine there’s a nice bar. A really nice bar. They charge £10 per drink, but it’s nice and you like it there, so you pay your £10. Now, someone opens up a bar next door. The drinks are free. I mean £0 free. You’re going to check it out aren’t you? Seriously. At least once? The £10 bar is going to loose at least some revenue, if not customers. You’re running the £10 bar. What will you do? Drop prices? A buy-one-get-one-free offer?

Markets are elastic. If someone enters the market with a lower priced offer, it drags prices down. It’s called competition, and it’s generally a good thing. As customers, we like it. However, when someone enters the market at ‘free’ it isn’t the usual ‘more efficient competitor’ entering. No, it’s a value destroying monster. Value will disappear from the market. That inevitably means that companies will too, which will reduce competition in the long run – and that isn’t good. And the competition that’s left? Oh, it’s bad…

3. Free Spreads Across Markets.

Traditional competition focusses on price. As marketers, we try and combat price competition by introducing features that (in our minds at least) create value and preserve the price. Some choose to build more efficient businesses, so that they can compete on price, but maintain margins. In the world of ‘free’ you can’t compete on price. You have to compete on features (or quality, which I’d argue is a feature anyway). That means wherever two players are in the same market with a ‘free’ offer, the temptation, if not the action, will be to gradually add more and more features. Think about the value for the market. More and more of what was revenue, ends up as ‘free’. Remember those ‘freemium’ businesses, giving you free stuff, hoping to upgrade you? There is less and less to upgrade you to that isn’t free.

Free is a Short-Term Win and a Long-Term Lose

‘Free’ feels good, but it is really an inevitable race to the bottom, ensuring that markets are destroyed by low price expectations and poor (service) quality. Watch the providers of ‘free’ – as advertising revenues (and tolerance for advertising) falls, and VC money dries up, expect them to come asking for money or to start selling your data to the highest bidder. The end of ‘free’ might well come from the strangest of places: mobile e-commerce. The latest iPhone software let’s you make payments within iPhone apps themselves. That’s iPhone apps that you probably paid for in the first place too! Nokia, Microsoft and a host of others are planning similar offers.

The Way out of Free is Utility

As much as product marketers bang on about the latest much have feature, one thing that we do pay for is utility. I can make a local phone call very cheaply, if not for free – depending on where I am. That same phone call costs significantly more on a mobile/cell phone, and yet the technology took off. People were paying for utility: being able to make calls from anywhere, not just when they were stuck in the house or the office. It made great sense as people became more and more mobile. And, as the technology took off, people got more and more mobile in their work and social lives, driving the technology even faster.

So far, the Internet is just catching up with the whole mobility thing. Web browsers are improving in leaps and bounds, as is the provision of mobile-friendly websites and improved screens on phones. Mobile Internet is taking off. And do you know what? It probably isn’t going to be ‘free’.