Change Agents in the New Age of FREE 93.0

New Free!

Reading Chris Anderson’s book, FREE, reinforces my belief that, at bottom, nothing is really new about business management and the language of business in the Internet age. Entrepreneurial change agents doing creative deal-making that satisfy all parties is still key!

In the past, these change agents, as emperors, tycoons and demagogues, became wealthy and powerful after catching the early insight and acting on them at the cusp of new technologies – the discovery of steel, the wheel, the steam engine, the modern bank, the railroad, telegraph, the public corporation, the R&D laboratory, and lately the Internet.

Of course, Chris Anderson’s real insights are in describing the impact of innovation and new technology on costs and changing cost behavior. Still, unlike Athena who sprung fully-grown from the forehead of Zeus, the new business models that came out of the Internet still grew from the usual interaction between new knowledge and competence-building by insightful change agents though at an accelerated burst of creativity.

In reading Chris Anderson’s FREE, I am helped by the number of times I have read my pricing bible over the years, The Strategy and Tactics of Pricing (1987) by Nagle and Holden.

My Favorite Picing Handbook

According to Mr. Anderson, the sea change in the Internet age came, at its core, from the resultant negligible cost of distribution especially of online information from innovations in the areas of “computing power, digital storage and bandwidth.” This low cost of information distribution also facilitates (i.e. enables in the Internet jargon) other business activities like physical distribution of goods and services.

By itself, this phenomenon of low distribution cost of information tends to lower the variable cost (the slope in the breakeven diagram) of doing business. As enabler, this low cost of distribution tends to lower the horizontal line representing fixed costs in the same diagram.

Given the spread of the Internet’s reach, the typical volumes lay way out to the right on the X-scale of the diagram. When goods are given away free of charge, this scale actually allows more profit even as the % margin is lowered by the freebee.

Which brings me to an epiphany I had in 1980s from the economic order quantity (EOQ) analysis used in by Joseph Schonberger in explaining why JIT manufacturing works. I morphed the EOQ into the break even analysis with setup cost becoming a fixed cost of filling an order. Thus, in implementing JIT, the proper approach is to lower set-up costs first, ie SMED or single minute exchange of dies then, when the technical issue of getting to SMED is resolved, to take advantage of the faster reaction time to lower investment, improve quality and response times and finding opportunities for more improvements.

Breakeven Diagram (C-V-P)

Lowering that fixed cost line even without changing the variable cost, already moves the breakeven point to the left and closer to zero. This benefit on the total cost can be used to pay for either lower prices or flexibility. For the Internet, the breakeven diagram can also be used to explain its own specific opportunities.

Finding the insight on the ground when executing a strategy, of course, was not easy. To read in the news one day - that Mr. Moore has lowered the transistors cost at the trajectory he projected, or that Mr. Grove has gone up the X86 ramp at the same rate, or Mr. Kay discovering the graphic user interface and Mr. Jobs picking up on it, or that Mr. Berners-Lee has introduced the hyperlink – and develop the insight that “processing power, digital storage and/or bandwidth” costs are dropping and thus invent a new business model is as easy as finding a way out when lost inside a forest.

It did take Mr. Gates a couple decades, according to Chris Anderson in FREE, to discover what Mr. Brin and Page, standing on the shoulders of these other giants, found out in a couple of years and out of the rubble of the dot.com bust.

Chris Anderson categorized what he calls Twenty-First-Century FREE into four categories. And here’s my attempt to explain them in the language of the older period not to reduce his insights but to give older folks an understanding of the concepts in the language they are familiar with. As they control the purse string for investments in the Philippines, my small effort may be of help.

Firstly, DIRECT CROSS SUBSIDIES works in the new and older economies. In the consumer and ingredients market, the simplest equivalent is 10 +1 where this category of FREE is that 1 unit premium given away in the sales wars.

Secondly, THE THREE-PARTY SYSTEM which economists also call two-sided market is when consumers get free from a second party what a third party pays for. Examples from older industries are mass media like TV where advertisers pay for content which consumers watch for free. From the book, “the costs are distributed and/or hidden enough to make the primary goods feel free to the consumers.”

Thirdly, FREEMIUM where a basic version is free while a premium version, which can be as low as 5% of total items distributed, pays for everything and profits. In software and even microprocessors, the free version that is the majority distributed can actually contribute to the fixed cost of production as the complete product is actually manufactured. The Free versions just have the Premium functions disabled outside the chip or on the shell/interface. Economists also call this approach “versioning” and in traditional products can be samplers given away, say for perfume, for trial.

Finally, NON-MONETARY MARKETS are “anything given away with no expectation of payment.” The Internet examples are Wikipedia or Craigslist. The older term would be “cost recovery” or “charity” that happens a lot in NGO work like Habitat or Gawad Kalinga where sweat equity is obtained for commitment. The Baptist missionaries of the MBLRC who research on SALT or sloping agricultural land technology to combat erosion, rejuvenate the hills and provide livelihood in our Post #90 is a 70s example of such non-monetary FREE.

Getting through the plethora of new technology jargon and getting to understand what is really going in instructs that nothing is really new in the guts of the Internet business. Getting ourselves to open up, analyze and conclude from data, and avoid resistance to change is half the battle …