Small business needs 'free' thinking, Wired editor says

Wired magazine editor Chris Anderson has made waves with his book Free: The Future of a Radical Price, by suggesting that companies need to start thinking about how to attract customers by giving away some of their products and services for nothing.  

It's a message he delivered in a speech to Canadian entrepreneurs in Toronto on Wednesday, as part of Small Business Week. Anderson discussed his keynote, the book and some of the misconceptions of his idea of "free" with CBCNews.ca.

Can you summarize the focus of your speech?

One of the messages of Free is that [free] is an incredible accelerator of small business formation. We think of "free" a lot in terms of producers offering free products, but also as consumers, we take advantage of free products. For businesses starting up today, the availability of free software like open source or hosted solutions — the fact that you don't need hardware because there's so much available in the cloud — this has basically lowered the cost of starting a business to the point where you can do it on a credit card.

The internet has a set of tools for where we work, and the fact that it is increasingly free has made it the golden age of the small company. It's a great time to start companies right now. It's never been cheaper. If you can do the company increasingly online, you can take advantage of "free" as a way to start your company, but also as a way to sell and market your products.

There are a lot of misconceptions about your book. You've mentioned situations where companies such as Gillette essentially give razors away but make their money on selling blades. That's not really what you mean by "free," right?

That is the traditional form of free, which is that it's not really free. You end up paying for it later. That continues to be a totally viable business model, and some of the book is about that. That's not really why I wrote the book or what it focuses on. Instead, the book focuses on the unique characteristics of digital markets. The reason that free is a bit of a trick in the traditional sense is that products can't really be free. The razor has a real cost and it gets paid back really quickly. The thing about digital goods is that there are no real costs. When you open a document in Google Docs or when you use Google Maps or Gmail, the cost of serving you as a customer is so close to zero that they can effectively round down. As a result, you can have a viable, profitable business model by having one per cent of your customers paying and the rest getting it for free. That allows the first real kind of free, where someone's paying and money is being made, but it's certainly not you.

One of Google's top executives was in town a few weeks ago and said that Canadian businesses have done a poor job of using the web to expand to a global level. It sounds like what you're saying is that in order to take advantage of the idea of "free," you essentially have to be addressing a global market. The bigger the market, the better, right?

Exactly. Converting a small percentage of a large number.

So in the context of Canadian small businesses, do you agree with Google's assessment, that Canadian companies aren't doing as well at that?

We have to make a distinction between physical goods and digital goods. With physical goods, not much has changed. It's a little easier to sell them online — you have distribution channels like Amazon and eBay — but you're still somewhat constrained by the economics of the real world. For digital goods, there is no reason for every digital company not to be a global digital company, unless you're selling tax services for one particular Canadian province [for example]. In general, if you're a software company offering software as a service, of course it's global. Not only should you be offering it globally, which is innate in the internet, you should also be thinking about global demand and marketing and using a free version to propagate a sample of your product to the widest possible audience. Every web company is a global company, whether they know it or not. The question is, are they thinking like a global company?

But aren't things like geoblocking and licensing a constraint to getting your digital goods to a global audience? Something like Hulu, the website that streams television shows for free, is largely constrained to the United States because of these issues.

There are legacy issues, but that has nothing to do with the infrastructure or Hulu's own business, it's that they get the content from companies who are locked into geographic restrictions. It's the same for Amazon with books and music and games. You have to unwind these geographic contracts and exclusivities and sometimes this takes decades. But there's nothing intrinsic about this; it's a hangover from 20th-century distribution models and it's just a matter of time before it goes away.

How much of an effect has Google had on this idea of free? They offer a large number of products, many of which are free. Was the rise of Google a watershed in this whole idea?

I think so. Google is the poster child for free. They have more than 300 products and almost all of them are free to consumers. Some are advertising-supported, some are not. Some are just plain, old free. Each one of them has its own sort of industrial logic, but what they all do is take advantage of digital economics — it costs very little for Google to offer these products to you. Every one that you use sort of reinforces your attachment to Google, the brand, the network. Some day they'll make money from you. If you click on one ad a week, you're profitable for Google, even if you're using every one of their services. It just takes so little to pay back the cost of doing this. So yes, they are the canonical company based on a free business model.

What they've done is taken the media model of advertising-supported and extended it across the board to products and services of all sorts, from word processing and spreadsheets to email to applications software to hosting. They showed just how far the media business model could extend and how much a powerful advertising engine could subsidize in the form of other products and services.

That's great and inspiring, but it has also created what many people worry is an emerging monopoly. I'll just point out the irony — Microsoft took its monopoly on operating systems and applications software to subsidize its entry into the online world and search. Google is taking its monopoly on search and using it to subsidize its entry into operating systems and word processing and spreadsheets. They're absolute mirror images of each other, and it's just fascinating to watch it play out.

So if Google is the poster child of free, is Microsoft the counter-poster child of not-free?

Microsoft has been competing with free for 30 years. They had to get people to pay for software in the first place. Software used to be something that you got free with a computer, with the mainframe. Then they had to compete with piracy. Then they had to compete with software that came bundled with the computer, so they released Microsoft Works that came with it. Then they had to compete with open source, then software as a service, now they have to compete online with Google. Microsoft has had more history with competing with free than any company in the world. They've done so very effectively so far, but it's only getting harder. In the next year, you'll see Word and Office become free online services. Right now they offer a service to small businesses called BizSmart by which all their enterprise software is free to companies that are less than three years old and have less then $1 million in revenue. They're definitely using free, but they're not as successful at it as Google. But nobody is.

I'm sure you get asked this a lot, but what's the solution for news organizations and newspapers? How do the media make "free" work?

I do get asked this a lot. This is one of the most misunderstood things around. The book doesn't argue that everything should be free or that newspapers should be 100 per cent free. The book argues instead for something called "freemium," which is a combination of free and paid. The book goes out of its way to identify the Wall Street Journal and WSJ.com as the best model. That is, it's a hybrid. The most popular content is free and advertising-supported, but as you dig deeper, the niche content — or maybe if you just read more stories in the case of the Financial Times and FT.com, where after 10 stories a month you have to pay — as the importance to you of this publication becomes more clear, they switch you from a free to a paid user. That is 90 per cent free, 10 per cent paid.

The problem is what's free and what's paid is an equation that every publication has to answer for itself. You can't just say, "We'll do what the Wall Street Journal is doing," because you may not be the No. 1 business publication in the United States or have a commodities trading desk that people will pay for. That model works well for the Wall Street Journal, but would it work for the Globe [and Mail]? I don't know, and that's why we're all stumbling our way toward figuring out which freemium model works for us.