Malcom Gladwell's blink on Showtime's WeedsBlink on Weeds by DanMelinger*

Running a low-capital web startup forces a different perspective on the Anderson|Gladwell “Free” dustup. In general, I’m glad Anderson brought attention to the topic, but web startups must take a more parochial and nuanced view of the issue — though not Gladwell’s. Masnick pithily sums up how most of the world views Free business:

The answer to Gladwell’s question is simply one of economic efficiency. You can pay people to write — just as Encyclopaedia Britannica does. Or you can get other people to write for non-monetary rewards — as Wikipedia does. The latter is a lot more efficient a solution, and the difference in productivity and output is quite evident. It’s not saying that there is no business in paying people to write, but it’s a very different business than the indirect business model, and it’s the economic efficiencies that come into play.

I haven’t read Free, and I’m unlikely to get to it. Free, freemium, and similar issues are subsets of Gift Economics, and Anderson’s book isn’t be actionable enough for what I need. His audience doesn’t care about capital consumption in building Free businesses, so he doesn’t address it deeply.

Startups need to see Free economics as two mutually exclusive options — the Really Free and the Artificially Free. In this context, Really Free offerings pair some kind of loss-leader service with simultaneous, concrete value creation, and Artificially Free offerings do not. Artificially Free goods are competitive giveaways with little or no current benefit to the vendor other than lowering the competition’s market share or soaking up distribution in a new market where the revenue model isn’t clear, per all the YouTube discussion. Companies with lots of cash have always done this sort of thing to push competitors out of the market. Other than anti-coMpetitive scenario$, it’s a completely valid approach.

The social web brings a new wrinkle to the Artificially Free competitive giveway — sometimes it masquerades as Really Free. There are four versions of the masquerade:

  1. Big companies who have jumped on the social bandwagon and either don’t know or don’t care whether their giveaways are Free or Artificial;
  2. VC-backed startups where both management and investors know that the giveaway is Artificially Free, though not scarce;
  3. VC-backed startups where the investors (and maybe also management) don’t know that the giveaway is Artificially Free (but not scarce again); and
  4. Startups of whatever size that represent that an inexpensive but scarce good as Free, trying to finesse the scarcity issue later.

To act, startup managers first need to figure out whether their own services are Really Free or Artificially Free. You must not fool yourself about whether your good is Really or Artificially Free. If your good is Really Free, then do the same analysis for your competition. If your good is Artificially Free, still analyze the competition next but with any eye to how much capital it will take to fight them. Endurance won’t be enough. If you are Artificially Free, and they are Really Free — bail. That’s not a situation in which founders make money.**

Once you know everyone’s Free status, set your course. By the numbers above, numbers 1 and 2 are a pure endurance or fundraising game. You will need to simply outlast their ability to lose money and make sure they don’t move from Artificial to Real without you in the interim. It’s important to note that VCs often choose to ignore the difference between Really Free and Artificially Free. I would too in their shoes. VCs achieve better investment returns when startups spend their way to Really Free than when it’s the starting point.

Number 3 eventually devolves into Number 2, a point at which point I’ve been fired at least once. Hit the competition hard at this moment, no matter how much money they’ve got. Number 4, competition that is giving away a scarce good as Free, almost always means you are dealing in a scarce good too. That’s beyond the scope of this analysis and is only listed for completeness. The most obvious examples are Pandora, imeem, et al, who gained distribution by giving away what the music companies have the [increasingly bizarre] legal right to charge for.

*Thank you, Zemanta, for the “Lordie, are you high!?!?” photo.
**My normal VC fundraising proviso also applies — don’t do it unless you are already rich.

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