Why the Net Rewards Generosity
The very best gets cheaper each year. This principle is so
ingrained in our lifestyle that we bank on it without marveling at it.
But marvel we should, because this paradox is a major engine of the new
Before the industrial age, consumers could expect only
slight improvements in quality for slight increases in price. Over the
years the improved cost more. But with the arrival of automation and
cheap energy in the industrial age, manufacturers could invert the
equation: They offered lower costs and increased quality. Between 1906,
when autos were first being made, and 1910, only four years later, the
cost of the average car had dropped 24%, while its quality rose by 31%.
By 1918, the average car was 53% cheaper than its 1906 counterpart, and
100% better in performance quality. The better-gets-cheaper magic had
The arrival of the microprocessor accelerated this wizardry.
In the information age, consumers quickly have come to count on
drastically superior quality for drastically reduced price over time. A
sensible recommendation to anyone asking for shopping advice today is
that they should delay buying a consumer good until about 60 seconds
before they actually need it. Indeed, a transportation specialist told
me that almost nothing in the information industry is shipped by sea
anymore; it all goes by air, so the price wont have a chance to
drop while the product is in transit.
So certain is the plummet of prices that economists have
mapped the curve of their fall. The cost of making
somethingwhether it is steel, light bulbs, airplanes, flower pots,
insurance policies, or breadwill drop over time as a function of
the cumulative number of units produced. The more an industry makes, the
better it learns how to make them, the more the cost drops. The downward
price curve, propelled by organizational learning, is sometimes called
the learning curve. Although it varies slightly in each industry,
generally doubling the total output of something will reduce the unit
cost on average by 20%.
Smart companies will anticipate this learning curve. Very
smart companies will accelerate it by increasing volumes, one way or
another. Since increasing returns can exponentially expand the demand of
itemsdoubling their totals in monthsnetwork effects speed
the steep fall of prices.
Computer chips further compound the learning curve. Better
chips lower the cost of all manufactured goods, including new chips.
Engineers use the virtues of computers to directly and indirectly create
the next improved version of computers, quickening the rate at which
chips are made, and their prices drop, which speed the rate at which all
goods become cheaper. Around a circle the virtues go.
Feedback loops saturate networks. Since so many people and
machines are interlinked in overlapping feedback loops, virtuous circles
form. One, two, three, four, it all adds up to more.
- Expanding knowledge makes computers smarter.
- As computers get smarter we transfer some of that
intelligence to the production line, lowering costs of goods and raising
their perfectionincluding chips.
- Cheaper chips lower the cost of setting up a competing
enterprise, so competition and spreading knowledge lowers the prices yet
- The know-how of cheapness spreads throughout industry
quickly and makes its way back to the creation of better/cheaper chip
and communication tools.
That virtuous circle feeds itself voraciously. So potent is
compounding chip power that everything it touchescars, clothes,
foodfalls under its spell. Prices dip and quality rises in all
goods; not mildly, but precipitously. For example, between 1971 and 1989
a standard 17-cubic foot refrigerator declined in price by a third (in
real dollars) while becoming 27% more energy efficient and sporting more
features, such as ice-making. In 1988 Radio Shack listed a cellular
phone for $1,500. Ten years later they list a better one for $200.
Most of the increase in value weve seen in products
comes from the power of the chip. But in the network economy, shrinking
chip meets exploding net to create wealth. Just as we leveraged
compounded learning in creating the microprocessor revolution, we are
leveraging the same amplifying loops in creating the global
communications revolution. We can now harness the virtues of networked
communications to directly and indirectly create better versions of
networked communications. When quality feeds on itself in such a manner,
we witness discontinuous change: in this case, a new economy.
Almost from their birth in 1971, microprocessors experienced
steep inverted pricing. The chips pricing plunge is called
Moores Law, after Gordon Moore, the Intel engineer who first
observed the amazing, steady increase in computer power per dollar.
Moores Law states that computer chips are halving in price, or
doubling in power every 18 months. Now, telecommunications is about to
experience the kind of plunge that microprocessor chips have
takenbut even more drastically. The nets curve is called
Gilders Law, for George Gilder, a radical technotheorist, who
forecasts that for the foreseeable future (the next 10 years), the total
bandwidth of communication systems will triple every 12 months.
The conjunction of escalating communication power with
shrinking size of jelly bean nodes at collapsing prices leads Gilder to
speak of bandwidth becoming free. What he means is that the price per
bit transmitted drops down toward the free. What he does not mean is
that telecom bills drop to zero. Telecom payments are likely to remain
steady per month in real dollars as we consume more bits, just as those
bits sink in cost.
The cost per bit sinks so low, however, that the per unit
cost to the consumer closes in on the free. The cost follows what is
called an asymptotic curve. In an asymptotic curve the price point
forever nears zero without ever reaching it. It is like Zenos
tortoise: with each step forward, the tortoise gets halfway closer to
the limit but never actually crosses it. The trajectory of an asymptotic
curve is similar. It so closely parallels the bottom limit of free that
it behaves as if it is free.
Because prices move inexorably toward the free, the best
move in the network economy is to anticipate this cheapness.
So reliable is the arrival of cheapness in the new economy
that a person can make a fortune anticipating it. One of the classic
tales of counting on the cheap comes from the information eras Big
Bangwhen the semiconductor transistor was born.
In the early 1960s Robert Noyce and his partner Jerry
Sandersfounders of Fairchild Semiconductorwere selling an
early transistor, called the 1211, to the military. Each transistor cost
Noyce $100 to make. Fairchild wanted to sell the transistor to RCA for
use in their UHF tuner. At the time RCA was using fancy vacuum tubes,
which cost only $1.05 each. Noyce and Sanders put their faith in the
inverted pricing of the learning curve. They knew that as the volume of
production increased, the cost of the transistor would go down, even a
hundredfold. But to make their first commercial sale they need to get
the price down immediately, with zero volume. So they boldly anticipated
the cheap by cutting the price of the 1211 to $1.05, right from the
start, before they knew how to do it. "We were going to make the
chips in a factory we hadnt built, using a process we hadnt
yet developed, but the bottom line: We were out there the next week
quoting $1.05," Sanders later recalled. "We were selling into
the future." And they succeeded. By anticipating the cheap, they
made their goal of $1.05, took 90% of the UHF market share, and then
within two years cut the price of the 1211 to 50 cents, and still made a
In the network economy, chips and bandwidth are not the only
things headed toward the asymptotic free. Calculation is too. The cost
of computationas measured by the millions of calculations per
second per dollaris headed toward the free. Transaction costs also
dive toward the free. Information itselfheadlines and stock
quotesplunges toward the free, too. Real-time stock quotes, for
instance, were once high-priced insider information. Lately they have
become so widely available that they must conform to a stock quote
"spec" so that generic web browsers can read them
Indeed, all items that can be copied, both tangible and
intangible, adhere to the law of inverted pricing and become cheaper as
While it is true that automobiles will never be free, the
cost per mile of driving will dip toward the free. It is the function
(moving the body) per dollar that continues to drop. This distinction is
important. Because while the function costs head toward zero, the
expenditure share can remain steady, or even balloon. With cheaper costs
we travel more, way more. With cheaper computation we consume billions
of more calculations. Yet for vendors to make a profit, they must
anticipate this cheapening per unit.
Gilder's Law says that the cost per communication bit will begin to
sink farther than it has fallen previously. Eventually the cost of a
telephone call, or of a bit transmitted, will be
Lets take communications. All-you-can-use plain old
telephone service with no frills will soon be essentially free. But as
customers use more of this nearly free service, they quickly add options
and deluxe services. First, every room gets a phone line. Then your car
gets a line, or two. Then you get a mobile line. Then everyone in the
family gets a mobile. Then answering service. Then call forwarding, call
waiting, caller ID. Then fax and modem lines. Then all appliances and
objects get a line. Then continuous open lines to cash registers, and
credit card readers. Then security lines. Then ISDN and ADSL lines. Then
caller ID blocking. Then junk call blocking. Then vanity phone numbers.
Then portable personal numbers. Then voice mail sorting.
The outer boundaries of telephony keep expanding. When the
phone was first invented, there was much confusion about what in the
world it was good for commercially. Some thought it would be used to
transmit music into homes. But even the most ambitious booster
didnt envision having five phones lines in their home (as I do).
The desire to have a phone in a car and to have caller ID was
manufactured, indirectly, by the technology itself.
Technology creates an opportunity for a demand, and
then fills it.
This is a very different notion of supply and demand from
the one diagrammed in the introductory chapters of any economics
textbook. The traditional supply and demand curve conveys a simple
lesson: As a resource is consumed, it becomes more expensive to produce.
For instance, as gold is mined, the easy (cheap) nuggets are found
first; but to mine little particles of gold out of 25 tons of rock
requires a higher gold price to make the effort worthwhile. Therefore,
the supply curve slopes up, with the potential supply increasing as the
price goes up. In contrast, the traditional understanding of demand says
that demand slacks off the more supply there is. If you have lobster on
Monday, Tuesday, and Wednesday, youll be less interested in having
it again and more inclined to pay less for lobster on Thursday.
Therefore, the demand curve slopes down, with prices dropping as a
product becomes abundant.
In textbook economics the supply of products would only increase if
their price went up; in the new economics the supply increases as price
In the new order, as the law of plentitude kicks in and the
nearly free take over, both of these curves are turned upside down. Paul
Krugman, an economist at MIT, says that you can reduce the entire idea
of the network economy down to the observation that "in the Network
Economy, supply curves slope down instead of up and demand curves slope
up instead of down." The more a resource is used, the more demand
there is for it. A similar inversion happens on the supply side. Because
of compounded learning, the more we create something, the easier it
becomes to create more of it. The classic textbook graph is
As the supply curve rockets upward exponentially and the
demand curve plunges further, the new Supply/Demand Flip suggests the
two curves will cross each other at lower and lower price points. We see
this already as the prices of goods and services keep heading toward the
free. But hidden between the curves is a momentous surprise. Supply and
demand are no longer driven by resource scarcity and human desire. Now
both are driven by one, single exploding force: technology.
The accelerating expansion of knowledge and technology
simultaneously pushes up the demand curve while pushing down the supply
curve. One very potent force shifts both sides.
The effectiveness of technology in driving down prices is
easy to appreciate. As stated at the beginning of this chapter, price
drops have been going on for a while, although now it is accelerating.
We know the outcome of this trend: lower prices everywhere. Consumers
rejoice. But how are companies to make a profit in a world of constantly
sinking prices? In the supply. Technology and knowledge are driving up
demand faster than it is driving down prices. And demand, unlike prices,
has no asymptote to limit it. The extent of human needs and desires is
limited only by human imagination, which means, in practical terms,
there is no limit.
Anything that can be replicated will have a price that will tend
toward zero, or free. While the cost may never reach free, it approaches
the free in a curve called an asymptote.
The quicker the price of transportation drops, the more
quality and services and innovation are embedded into cars, planes, and
trains, lifting the quality of the "wants" they satisfy.
Over time, any product is on a one-way trip over the cliff
of inverted pricing and down the curve toward the free. As the network
economy catches up to all manufactured itemsfrom cell phones to
sofasthey will all slide down this slope of decreasing price more
rapidly than ever.
The task, then, is to create new things to send down the
slidein short, to invent items and services faster than they are
This is easier to do in a network-based economy because the
crisscrossing of ideas, the hyperlinking of relationships, the agility
of alliances, and the nimble quickness with which new nodes are created
all support the constant generation of new goods and services.
We will create artifacts and services rapidly, as if they
were short-lived bubbles. Since we cant hold back a bubbles
drift toward popping, we can only learn to make more bubbles,
If goods and services become more valuable as they become
more plentiful, and if they become cheaper as they become valuable, then
the natural extension of this logic says that the most valuable things
of all should be those that are ubiquitous and free.
Ubiquity drives increasing returns in the network economy.
The question becomes, What is the most cost-effective way to achieve
ubiquity? And the answer is: give things away. Make them free.
Indeed, we see many innovative companies in the new economy
following the free. Microsoft gives away its Internet Explorer web
browser. Netscape also gives away its browser, as well as its valuable
source code. Qualcomm, which produces Eudora, the popular email program,
is given away as freeware in order to sell upgraded versions. Thomson,
the $8 billion-a-year publisher, is giving away its precious high-priced
financial data to investors on the web. Some one million copies of
McAfees antivirus software are distributed free each month. And,
of course, Sun passed Java out gratis, sending its stock up and
launching a mini-industry of Java application developers.
Can you imagine a young executive in the 1940s telling the
board that his latest idea is to give away the first 40 million copies
of his only product? (Fifty years later thats what Netscape did.)
He would not have lasted a New York minute.
But now, giving away a product is a tested, level-headed
strategy that banks on the networks new rules. Because compounding
network knowledge inverts prices, the marginal cost of an additional
copy (intangible or tangible) is near zero. It cost Netscape $30 million
to ship the first copy of Navigator out the door, but it cost them only
$1 to ship the second one. Yet because each additional copy of Navigator
sold increases the value of all the previous copies, and because the
more value the copies accrue, the more desirable they become, it makes a
weird kind of economic sense to give them away at first. Once the
products worth and indispensability is established, the company
sells auxiliary services or upgrades, continuing its generosity to
involve more customers in a virtuous circle.
One might argue that this frightening dynamic works only
with software, since the marginal cost of an additional copy is already
near zero (now that software can be distributed online). But
"following the free" is a universal law. Hardware, when
networked, also follows this mandate. Cellular phones are given away in
order to sell cell phone services. We can expect DirecTV dishes to be
given away for the same reasons. This principle applies to any object
whose diminishing cost of replication is exceeded by the advantages of
being plugged in.
As crackpot as it sounds, in the distant future nearly
everything we make will (at least for a short while) be given away
freerefrigerators, skis, laser projectors, clothes, you name it.
This will only make sense when these items are pumped full of chips and
network nodes, and thus capable of delivering network value.
The natural question is how companies are to survive in a
world of such generosity? Three points will help.
First, think of "free" as a design goal for
pricing. There is a drive toward the freethe asymptotic
freethat, even if not reached, makes the system behave as if it
has been reached. A very cheap rate can have an effect equivalent to
being outright free.
Second, pricing a core product as free positions other
services to be expensive. Thus, Sun gives Java away to help sell
servers, and Netscape hands out consumer browsers to help sell
commercial server software.
Third, and most important, following the free is a way to
rehearse a services or a goods eventual fall to free. You
structure your business as if the thing that you are creating is free in
anticipation of where its price is going. Thus, while Sega game consoles
are not free to consumers, they are sold as loss leaders to accelerate
their journey toward their eventual destinyto be given away in a
Another way to view this effect is in terms of
The only factor becoming scarce in a world of abundance is
As Nobel-winning economist Herbert Simon puts it: "What
information consumes is rather obvious: It consumes the attention of its
recipients. Hence a wealth of information creates a poverty of
attention." Each human has an absolute limit of 24 hours per day to
provide attention to the millions of innovations and opportunities
thrown up by the economy. Giving stuff away captures human attention, or
mind share, which then leads to market share.
Following the free also works in the other direction. If one
way to increase product value is to make products free, then many things
now free may contain potential value not yet perceived. We can
anticipate the eruption of new wealth on the frontier by tracking down
In the webs early days, the first indexes to this
uncharted territory were written by students and given away. The indexes
helped people focus their attention on a few sites out of the thousands
available. Webmasters, hoping to draw attention to their sites, aided
the indexers efforts. Because they were free, indexes became
ubiquitous. Their ubiquity quickly made them valuable (and their
stockholders rich) and enabled many other web services to flourish.
What is free now that may later lead to extreme value? Where
today is generosity preceding wealth? A short list of online candidates
would be digesters, guides, catalogers, FAQs, remote live cameras, front
page web splashes, and numerous bots. Free for now, each of these will
someday have profitable companies built around them selling auxiliary
services. Digesting, guiding and cataloging are not fringe functions,
either. In the industrial age, a digest, Readers Digest,
was the worlds most widely read magazine; a guide, TV
Guide, was more profitable than the three major networks it guided
viewers to; and a catalog of answers, the Encyclopaedia
Britannica, began as a compendium of articles written by
amateurssomething like online FAQs (Frequently Asked
But the migration from ad hoc use to commercialization
cannot be rushed. To reach ubiquity you need to pass through
Increasingly we see technologies pass through a
protocommercial stage. Huge numbers of people, exerting millions of
hours of collective effort, will jointly craft hundreds of thousands of
creations, but without the exchange of money. An entire society
following the free! Author Lewis Hyde long ago called this arrangement a
gift economy. The central task in a gift economy is to keep the gifts
moving. By social debt, barter, and pure charity, gifts circulate and
generate happiness and wealth.
The early internet and the early web sported amazingly
robust gift economies. Text and expertise (FAQs, for example) and
services (page designs) were swapped, shared generously, or donated
outright. Information was bartered, content was given away, code was
exchanged. For a long while the gift economy was the only way to
acquire things online. In the first 1,000 days of the webs life,
several hundred thousand webmasters created over 450,000 web sites,
thousands of virtual communities, and 150 million pages of intellectual
property, primarily for free. And these protocommercial sites were
visited by 30 million people around the world, with 50% of them visiting
daily, staying for an average of 10 minutes per day. This is a raging
success by almost any measure youd want to use. No other emerging
media in the past experienced such glory so early in its growth.
Talk of generosity, of information that wants to be free,
and of virtual communities is often dismissed by businesspeople as
youthful new age idealism. It may be idealistic but it is also the only
sane way to launch a commercial economy in the emerging space. "The
webs lack of an obvious business model right now is actually its
main event," says Stewart Brand, of the Global Business
When a sector of the new economy passes through the
protocommercial phase, it is the opposite of the "tragedy of the
commons." The tragedy of the commons was that nobody took
responsibility for maintaining the communal pastures that were the
livelihood for the entire community. In the follow-the-free economy that
seems to precede commercial activity on the net, everyone keeps
the commons up because nobody is able to make a living from it on their
own. Sophisticated software, as good as anything you can purchase, is
written, debugged, supported, and revised for free in this "triumph
of the commons."
The most popular software used to run web sites is called
Apache. It is not sold by Netscape, or Microsoft, or anyone. Apache,
which has 47% of the server market (Microsoft has 22% and Netscape 10%),
was written (and is maintained) by a network of volunteers. It is given
away free. Apache, which is used by the developers of such commercial
sites as McDonalds, keeps getting better because the triumph of
the commons rewards a completely open product: Anyone has access to
Apaches software source code and can improve it. "If you give
everyone source code, everyone becomes your engineer," says John
Gage, chief scientist at Sun Microsystems.
The most popular operating system for web server
workstations is not sold by anyone. It is a product called Linux, a
Unix-compatible program that was originally written by Linus Torvalds,
and given away for free. In the manner of building medieval cathedrals,
hundreds of software engineers volunteer their time and expertise to
refine and improve Linux, and to keep it free. Beside Apache and Linux,
there are many other free software suites, such as Perl and X-Windows,
maintained by a network of programmers. The engineers dont get
paid in money; rather they get better tools than they can buy, tools
that can be easily tweaked by them for maximum performance, tools
superior to what they can make alone, and tools that increase in network
value, since they are given away.
Tens of thousands of software programs written for almost
every imaginable use are available on the net for free. Called
shareware, the model is simple. Download whatever software you want for
free, try it out, and if you like it, send some money to the author.
Dozens of entrepreneurs have made their million dollars selling goods by
this protocommercial method. More and more, the triumph of the commons
overrides orthodox business models.
As Stewart Brand says, the main event of the emerging
World Wide Web is its current absence of a business model in the midst
of astounding abundance. The gift economy is one way players in the net
rehearse for a life of following the free and anticipating the cheap.
This is also a way for entirely new business models to shake out.
Furthermore the protocommercial stage is a way for innovation to
fast-forward into hyperdrive. Temporarily unhinged from the constraints
of having to make a profit by next quarter, the greater network can
explore a universe of never-before-tried ideas. Some ideas will even
survive the transplantation to a working business.
Its a rare (and foolish) software outfit these days
that does not introduce its wares into the free economy as a beta
version in some fashion. Fifty years ago the notion of releasing a
product unfinishedwith the intention that the users would help
complete itwould have been considered either cowardly, cheap, or
inept. But in the new regime, this precommercial stage is brave,
prudent, and vital.
Releasing incomplete "buggy" products is not
cost-cutting desperation; it is the shrewdest way to complete a product
when your customers are smarter than you are.
The protocommercial state and the triumph of the commons is
in ascendance. It is no coincidence that increasing numbers of internet
companies take themselves public before they are profitable. Investors
are purchasing shares in a firm with protocommercial value. The old
guard reads this as a signal of greed, speculation, and hype. But it
also signals that many of the components of the gift
economyattention, community, standards, and shared
intelligencehave to be in place before cold-cash commercialization
can kick in. The gift economy is a rehearsal for the radical dynamics of
the network economy.
What can you give away? This is the most powerful
question in this book. You can approach this question in two ways: What
is the closest you can come to making something free, without actually
pricing it at zero? Or, in a true gesture of enlightened generosity, you
can figure out how to part with something very valuable for no monetary
return at all. If either strategy is pursued with intelligence, the
result will be the same. The network will magnify the value of the gift.
But giving something away is not usually easy. It must be the right
gift, given in the proper context. To figure out what to give away,
consider these questions:
- Is the freebie more than a silly premium, like the toy
in a cereal box? There is no power in the gift unless it is crucial to
- What virtuous circle will this freebie circulate in? Is
it the loop you most need to amplify?
- In the long run, the unbounded support of a customer is
more valuable than a fixed amount of their money. How will you
eventually capture the support of customers if there is initially no
flow of money?
Every organization harbors at least one creationor
potential creationthat can be liberated into
"freedom." This is often an idea with problems, particularly
with its price: Should it be $69.50 per minute or $6.50 per box? The
answer sometimes is: It should be free. Even if the idea is never
actualized, my experience is that the very act of contemplating the free
will inevitably illuminate all kinds of beneficial attributes that were
never visible before. "Free" has long been a taboo price
point. Perhaps because it has been forbidden, many low-hanging fruit are
waiting to be plucked by giving the free serious consideration.
Act as if your product or service is free.
Magazine publishers do this. The cover price on a magazine barely covers
the cost of printing it, so publishers act as if they were giving it
away (and some actually do). They make their money instead on
advertising. Says pundit Esther Dyson, "The creator who immediately
writes off the costs of developing contentas if it were
valuelessis always going to win over the creator who cant
figure out how to cover those costs." Memberships in serious
discounters such as Cendant are also "as if free." Cendant
"gives away" the merchandise very near the cost of
manufacturing, as if the stuff were free. They make the bulk of their
profits not from selling goods to its memberswho get fantastic
retail pricesbut from selling $40 per year membership fees.
Invest in the first copy. That is the only one that
will hurt. The second copy and all thereafter will head toward the
free, but the first will become increasingly more expensive and capital
intensive. Gordon Moore, of Moores Law fame, posed a second law:
that the costs of inventing chips (that are halving in cost every 18
months) is doubling every three to four years. The up-front investment
for research, design, and process invention for all complex endeavors
are commanding a larger share of the budget, while the capital costs of
subsequent copies diminishes.
Anticipate the cheap. What would you do if your
current offerings cost only one third what they cost today? They
will someday soon, so create models that recognize this
Turn off the meter, charge for joining. Flat or
monthly fixed pricing is one way of pricing "as if free." Fees
are paid, but there is no meter running. This tactic can be abused by
the company (a la cable TV) or can be abused by the consumer (a la AOL).
A flat fee is one type of subscription. Subscriptions are well-honed
tools used by the soft world of magazines and theater, among others.
Could subscriptions really apply to old order physical products, like
say, food? The idea of subscribing to food is not so outlandish. Forty
years ago subscriptions to milk were quite common. There were also
subscriptions to bread and beer and other staples. Subscriptions tend to
emphasize and charge for intangible values: regularity, reliability,
first to be served, and authenticity, and work well in the arena of
"as if free."
The ancillary market is the market. The software is
free, but the manual is $10,000. Thats no joke. Cygnus Solutions,
based in Sunnyvale, California, rakes in $20 million per year in
revenues selling support for free Unix-like software. Apache is free but
you can buy support and upgrades from C2Net. Although Novell, the
network provider, does sell network software, thats not what they
are really selling, says Esther Dyson: "What Novell Inc. really is
selling is its certified NetWare engineers, instructors, and
administrators, and the next release of NetWare." One educational
software exec admitted that his companys help line was actually an
important profit center. Their main market was the ancillary products
they sold for their flagship software, which they had a chance to do
while helping customers.
Pinpoint where value is being given out for free now, and
then follow up. The next netscape, the next yahoo, the next
microsoft is already up and running, and they are giving their stuff
away for free. Find them, and hitch your wagon to their star. Look for
the following tricks: charges only for ancillaries, as-if-free behavior,
memberships, and outright generosity. If they are using the free to play
off network effects, they are the real mccoys.