This session was Guy Kawasaki interviewing Chris Anderson, Wired Editor and author of The Long Tail, on the economics of FREE!, Anderson’s new book.

It was Chris Anderson’s first book, The Long Tail, that got me started down the path of how to tackle providing customer technical support using Web 2.0 principles, and I have no doubt that FREE! will be similarly influence. (I also had the privledge of interviewing Chris Anderson in 2007 on how The Long Tail relates to the printing industry.)

Pardon the raw notes format. I needed to get these notes online before my next trip.

• Two big questions: How would Twitter create a business model? How would Chris fix the NY Times?
• Twitter
• The old way was: advertising, raising more money, exit strategy
• The new way is to make money now
• Is it going to be consumers who pay for Twitter, or advertisers who pay?
• Pay for visibility…
• Twitter has decided to be open, and let other companies create value added clients, which means those other companies are monetizing Twitter, but twitter doesn’t.
• Free and premium product?
• You don’t want to cripple the free product too much
• You don’t want to charge too much for premium
• 5% will become premium users
• How do you create that premium version of the product without crippling the free one?
• It’s hard to do this free/premium when there are lots of competitors: Facebook would love to steal microblogging away from Twitter.

• If you could redo anything about Wired, how would you do it over?
• Wired was launched in 1993
• The question at the time was “if you are so wired, why is this magazine on paper”
• Paper can sometimes add value. For long form, well design formats, the print medium adds value. There is an online version for instant access.
• Books have value
• Guy: Are you going to have a free version of your book FREE?
• So many versions…web version of book, ebook, audio book (unabridged and abridged), the paper book (hardcover and softcover). Stuff with no marginal cost should be free: the digital versions. The stuff with marginal cost, costs something.
• So you give away the digital stuff for free, to increase your reach.
• Some percentage of the people who love the free one will buy the paper one, because the paper one adds value.
• Chris’s publisher is Hyperion, who is a subsidery of Disney. They are allowing him to publish some stuff for free.

• Which is harder: to achieve popularity or to monetize popularity?
• To monetize
• Each one of us has to figure out our own way to monetize popularity.
• If you are a speaker, you may want a speaking gig. If you are a professor, maybe you want tenure. If you are an engineer, you want to establish reputation so you can get a job.
• The music industry is thriving in all regards except the publishing part: the selling of disks. The problem is a misalignment of what the artist and publisher needs. The artist is agnostic about where they make money.
• Publishers want to sell books, and authors want to sell themselves. The publisher needs to be aligned with what the author needs. Could you do a 360 for book? Could the publisher represent you as a speaker, take an equity stake in any spinoffs.

• 20th century free was the razor and the blades, the
• The products have real cost, and you need to find a way to cover that cost
• This is essentially a marketing gimmick

• 21st century free is digital bits
• There is no marginal cost. It is truly free.
• When they introduce radio, they tried to figure out how to pay for it.
• The British had a tax on radios to pay for the stations.
• The U.S. ended up with advertising
• The media advertising model is what has been extended to most of the internet: it’s google adsense.
• Freemium is the new model: you give away 90, 95, 99% of your product, and charge for only the most premium features.
• If you can convert 5% of your users to paid, then you can make a profit. If you get to 10%, you’re making a lot.
• 37signals talked a lot about the benefits of charging your customer. Read what they have written. They have free products, and they have premium products. You need to start up with these two different things, not start only with the free model. If you do that, and introduce a paid version two years later, then you violate a social contract with your users.

• What can we learn from China on capitalism. They have no intellectual property.
• We can learn a lot from china.
• If you do not make your product free, then piracy will.
• Competitive markets will drive price down to marginal cost.
• The chinese pop star will release a CD, with the expectation that it will be pirated. Piracy creates distribution and celebrity, and celebrity allows the pop star to get singing gigs, advertising gigs, etc.
• Wall’s Drug gives away free ice water. People would go out of the way to get the free ice water.  Starbucks could potentially give away free coffee – if they could get the right conversion rate.

• Why is free so much more powerful than one penny or 25 cents?
• “The penny gap”
• When we see a price, then we go through a cognitive “is it worth it?” flag. The transaction cost of the evaluation is what becomes the blocking thing. When something is free, then we don’t go through the valuation process at all.
• In the physical world, you don’t want to waste physical resources like food or hospital beds, so you do want to charge a nickel to stop the waste. In the digital world, waste is fine, so free is good.

• Upcoming generation…
• A 5 year old will internalize neutonian physics when they learn how to catch a baseball.  When a 10 year old goes online, they quickly internalize the free economics: of course it is free.

• Does anyone think less of something because it is free?
• No one thinks less of Twitter or Facebook. They evaluate based on utility, not price.
• But comparing Office versus Google Docs: utility comes first, and Office can do a lot that Google Docs can’t. the decision is primarily a utility one, and not a price one.

• Are people more motivated by loosing something they have or not getting something they want?
• People are more motived by negative things on general.
• But what you want will loom large.
• Marketing is all about getting you to want something, but before you can try it, you have to buy it.
• For free, the marketing is that you’ll probably like it, so why not give it a try, and if you love it, then maybe later you can buy. And you’ll be happy paying.

• Questions
• We have an online survey product, it is a freemium model, and all of our competitors have freemium models. We did a survey of customers, and when they come to the site, they have a negative connotation: it is fishy that it is free.
• You are too similar to something that people are using to paying for. So people have an expectation, and cognitive dissonance.
• We have an economic crisis here. Do you have any suggestions for our country?
• From a consumer perspective, when you have no money, free is a very good price.
• It’s broken the advertising model, because CPM have dropped off. It is driving more companies toward freemium model.
• In Latin America, they are used to companies vanishing, banks failing, governments toppling, but it isn’t threatening to them. You focus on your family, you have a house, and food, and it’s all good.
• Luxury brands…
• You can get Guy Kawasaki for free on Twitter, or you can pay $50,000 to get the custom talk.
• You can’t get the high premium without the mass popularity
• China is the largest market for pirated luxury items, and the largest market for true luxury items.
• How can you compete with free?
• It depends on user expectation: if they expect to pay $5,000, then free will not meet their expectations.
• Microsoft has been competing with free for 30 years.
• They had to convince people to pay for software in the first place.
• They had to compete with unix, with linux, with open source.
• They are not selling a product, they are selling support, and security, and confidence.