There is an interesting trend taking place in the marketplace that involves getting something for nothing, better known as “free.” This trend is being driven by the downward spiral in the cost of computer processing, storage and Internet bandwidth. In 1961, a single transistor cost 10 dollars. Now you can get two billion transistors from Intel for around $1100 or about .000055 cents per transistor. That’s about as close to zero as you are going to get.
This trend of a falling cost for computing power is commonly called “Mead’s Law” named after a Caltech professor who identified it as a corollary to “Moore’s Law” which says that technological capacity doubles about every two years. Combined, the two trends mean we will see an ever increasing growth in computing power at an ever decreasing cost. That is one of the major supporting concepts behind the “Cloud Computing” that we are hearing a lot about lately.
And it is also the driver behind a lot of new business activity that has developed over the past decade or so. If you would like a more in-depth discussion on this topic, I suggest you read an interesting book by Chris Anderson called Free: The Future of a Radical Price. Anderson is the editor of Wired and a true believer in the idea that in the future nearly all economic activity will be based on the “free” model. He discusses as examples Google, Yahoo, YouTube, and others as new players that do not charge customers for their services. Rather, they get advertisers to pay to have access to their customers’ eyes. So he feels that as a generation raised on a free Internet matures, they will demand that pretty much everything be free.
I don’t know about you, but the idea that everything will become free sort of strikes me as odd. I remember Milton Friedman telling me that there is no free lunch. Someone has to pay the tab. And while computing costs are being significantly reduced, they really aren’t free. Not everyone agrees with Anderson that “free” will become a new economic law. Malcom Gladwell critiqued Anderson’s book and pointed out that YouTube was expected to lose close to a half billion dollars in 2009 because its bandwidth costs aren’t free and as people use its services, it actually does cost them money. And they have not been able to offset it with advertising revenue thus far. So the free concept is not working everywhere.
Gladwell also discusses the difference between “free” and “cheap” and cites a study conducted by an M.I.T. behavioral economist who offered subjects a choice between two kinds of chocolate – Hershey’s Kisses for one cent and Lindt truffles for fifteen cents; 75 percent of the subjects chose the truffles under that scenario. Then he repeated the experiment with another group and reduced the price of each chocolate by a penny so now the Kisses were free. And viola – the order of preference reversed! Now, 69 percent of the subjects chose the Kisses. The point is that customers view free and cheap very differently. And Anderson agreed saying that “the truth is that zero is one market and any other price is another.”
My question is what happened to that law my father told me about many years ago – “you get what you pay for!”
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