There’s no such thing
If you make regular use of the Internet (the Web in particular) you would be forgiven for thinking that there’s an amazing amount of stuff that’s completely free. It would seem that you can do almost anything on the Internet without spending any of your hard earned cash.
This is, of course, merely a false perception. We all know there’s no such thing as a free lunch. Yet the perception is very compelling. We can search the Web (for free), we can send and receive emails (for free), have voice and video calls (for free), arrange meetings and events (for free), read the news (for free), show our photos and videos (for free), compare retail prices (for free), get medical advice (for free), send electronic greeting cards (for free), play games (for free), get an almost unlimited supply of amazing software (for free), protect your computer against viral attack (for free), and so on.
It’s certainly understandable that many people would conclude that the Internet is the ultimate free lunch. So, if we also believe that there’s no such thing as a free lunch, then how is it that all this free stuff exists?
Every one of these free products or services fits some business model, and like all good business models there’s some kind of profit involved. It just might not be so obvious to the customer, especially if you assume that they only way to pay for something is with money, and that profit is only measured in money.
In the Internet business models you will find many other forms of payment for goods or services:
• Your willingness to consider the purchase of goods or services.
• Information about yourself as a consumer of other (paid-for) goods and services.
• Your opinion on some topic.
• Your qualified evaluation of a product.
• The use of your time as an expert.
• Your trust.
• Your loyalty.
• Your desire for more, even if more will cost you money.
All of these, and more, are very valuable to many businesses and the Internet provides the means of making these forms of payment part of viable business ecosystems. With the help of examples, let’s see how it works.
Market Research and Advertising
Crucial to all business models is the identification and creation of demand. It is important to find out what customers want so you can fulfil that need in return for profit. Better still, it is hugely beneficial to be able to create that desire in the first place. Search engines are perfectly positioned to do market research and to direct advertising based on that research. Google makes its money through advertising. When you search for something via Google Search, Google assumes you are a customer for that search term and will select adverts that have a good chance of getting your attention. These adverts are presented along with the search results in a way that does not distract you too much, mainly because they want you to return next time. Too much advertising would deter return visits.
Since the Google ads are targeted, there’s a much higher success rate compared to random advertising. Businesses pay for this targeting ability. Since the variety of search terms is amazingly huge, there is a correspondingly amazing amount of advertising that can be done. Google even encourages other site to embed their ads, in return for a share of the revenue generated. Popular search terms can attract high prices and a lot of obscure search terms can also be a great source of income. In the Internet, every niche is viable.
All the big search engines (Yahoo!, Bing, Ask.com etc.) operate along similar lines. As a user you are being helped to find things you are interested in, and you are also sharing that information with businesses who are interested in selling things to you. Businesses learn about how effective (or ineffective) their advertising is, what other things you might be searching for (co-selling potential?) and much more.
Companies like BizRate and PriceGrabber provide extensive comparison shopping solutions. They look for the current advertised prices of thousands of products and present you with the results. It’s a free service to the consumer, but (like eBay) they make their money from successful sellers through commissions. Comparison sites also sell customer feedback to the retailers, and statistics to many others.
Topic of conversation
Nothing makes a company feel good like knowing that customers are talking about its products; assuming of course that the chatter is positive. Product reviews attract comments, and comments attract more comments. Potential customers will visit review sites ahead of a purchase in order to evaluate the potential purchase. Review and comparison sites exist to facilitate this interaction, and will generate revenue through paid advertising and even share in some of the revenue through direct purchasing facilities. Amazon reviews, for example, are written (mainly) by Amazon customers and are there to encourage more traffic to the site, which encourages more purchasing, which encourages more reviews and so on.
Opinions expressed in these feedback mechanisms also influence future product development, help identify flaws in current products and inspire new ideas. At first, companies would read these opinions carefully, but as the volume of responses grew, it became necessary to find a better way to filter the wheat from the chaff. Once again, they opted for using the customers themselves with the introduction of up/down or plus/minus ratings that enable other customers to rate comments. This way the companies only need to read those comments that percolate through.
Free customer support is increasingly popular, but if you spend any time in the support blogs you will soon find that most of the contributions are from people like yourselves. Every now and then a real support person will throw in a nugget of information that is quickly disseminated. Customers readily share their experience through the support pages for numerous reasons, though primarily to strengthen a reputation or out of a sense obligation for some earlier assistance received. In this way, a company can establish an army of support personnel who work for free!
The occasional free update for older software products may seem like good customer support, but it is also a good way to assess potential demand for new products. Regular free updates are a way to condition customers to expect change, which then translates to more purchases once the current product line is ended.
Almost every free online service generates some revenue from advertising. This includes the free image/video hosting services and the free email services. For many, this is their only source of income. However, online advertising brings in very little per ad, so sites were becoming overwhelmed by ads to the point that users were either dissuaded from returning or resorted to ad blocking technology. Adblock Plus is a very popular (free) tool that makes online advertising disappear. To counter the ad blocking technology, sites are finding different and more subtle ways to embed the ads. With consumer profiling, these ads can be better targeted and therefore can generate more revenue per ad. Sites that resemble Las Vegas in full blink are a thing of the past.
Television had a similar problem. Revenue per ad was dropping, but increasing the number of ads simply reduced the time for genuine content, which drove viewers away. This prompted more emphasis on sponsored programming and product placement, and (inevitably) more pay-TV. Undoubtedly we’re seeing a similar evolution in the Web, where many online news outlets are adopting payment models, though they still offer some free material. This brings me to my next point.
Free samples, trial periods and other tasters are common methods of attracting new customers. It’s not surprising to see services on the Web doing the same. Newspapers will often put some of their headline articles on their Web site for all to see, but anyone who spends any time on the site will soon face the “pay wall”. For an example, look for the keys on the WSJ home page. Good quality news will sometimes be enough to convince visitors to take out their credit cards to ensure the news stream continues. Others, however, will quite happily surf to alternative news sites to find the bits they are missing. News aggregators (e.g. Google News) make this quite easy. It seems that the aggregators are both benefit and bane, because on the one hand they drive traffic towards the news sites, but at the same time they facilitate the migration of that same traffic to competing news sites. The only way around this is for the news sites to agree what articles they will make free, and what they will keep behind the pay wall. That’s never going to happen, for a million reasons.
The taster is also a tactic adopted by software companies, who will give you a free version of their software, with the possibility of making a sale later. How does this work? In almost all cases, the paid-for version has additional capabilities (or fewer restrictions) compared to the free version. The free version is usually quite competent, because even if you don’t decide to pay you are more likely to be an advocate of the product if you have had a good experience with it. In a way, your advocacy is payment for the use of the free product.
In some cases, the free version is a preview of an impending product, so in reality you are a free beta tester. Feedback from you enables them to improve the product ahead of full launch. Some products need a critical mass of users in order to be viable, even if only a small percentage pay for it. Anti-virus solutions (e.g. AVG Free) fall into this category. By having a large user base, they get early warning of each new virus, thus keeping their virus database up to date, which attracts paying customers.
Commercial support is another reason for giving the product away free. Red Hat makes no money on the development of the source code of their variant of the free Linux operating system, yet the company recently reported earnings exceeding $250 million, much of this coming from the commercial support offered to users of the product. The prestige of the product attracts many contributors who will work on its development without payment, their reward being the recognition of their peers, visibility of their skills, a sense of achievement, the camaraderie of teams and other non-tangible benefits.
As mentioned earlier, sites that host your images and email for free make their money through advertising. In the case of images, if you are OK with other people seeing them, then the sites can make more revenue from the additional visitors your content will attract. This is how YouTube makes much of its money. Images can also be licensed for re-use by notable galleries such as Getty Images. Several of these image hosting providers started out as a free service to bloggers (Web log writers, to give them their full description) because images would consume more data than the text they were writing, and data traffic costs money. So the free image hosting was, and still is, quite attractive. The image hosts would be able to see which Web pages were using the images, and from this they could build up profiles of the interests of the people who would view such images. They could see when public images were re-used on other sites and much more. In effect, the image hosting sites understand a lot more about you than you might realise, and this information is valuable to the marketing industry.
The Web log concept was first formulated as a free service called Blogger by a company called Pyra, which was acquired by Google in 2003 about a year after Pyra’s resources had dried up and was living on support from another company. At that time the real significance of blogs was only just becoming apparent and Google could see how blogging was going to create much more content, which would lead to more searching and more advertising opportunities. Until blogging software became widespread, Web users were mainly readers, not authors. Today, companies will bend over backwards to encourage authoring, everything from whole Web sites down to individual tweets on Twitter.
Red Hat is not the only business to be based on essentially free open source products. In general, these companies make money by selling associated goods and services. Apache, one of the biggest foundations in the open source world, gives away all of its software. In fact, most of the world’s Web sites use free Apache software. Even big companies like IBM have taken Apache and, with some modifications, branded it as their own and sell it like any other product. Yet, an organisation like Apache can’t exist on hot air, it needs funding. So how does it get it? Apache is a not-for-profit organisation that relies on sponsorship to keep going. The Apache brand is highly trusted, so association through sponsorship is seen as beneficial, as evidenced by the fact that the foundation’s three biggest sponsors are Google, Yahoo! and Microsoft. Yes, once again this is a form of advertising. The combination of sponsorship and volunteer contributions means that thousands of people around the world can benefit from free software.
Not all free software is open source. A popular image viewing/editing package called IrfanView, which has always been free for non-commercial use, or can be embedded in commercial software for a fee, but the source code is secret. Like a lot of freeware, the programmer will accept donations. Even if a tiny proportion of users donate, this can still be a good source of income. However, many programmers will just give it all away for free without any suggestion of donations, simply for the pleasure of seeing their work being useful, like an artist who gives paintings to anyone who will appreciate them.
Is anything on the Internet free?
If by free you mean won’t cost you any money, then yes, there are many free things on the Internet. Most of these are attempting to get money from you indirectly, either through advertising or gathering information about you that can be used or sold to make money. In some cases, such as with free software (including open and closed source), there is no intended route to profit.
As a user of the Internet’s free bounty, you should be clear that most of what appears to be free is in fact getting something from you, and you have to be sure that you are willing to pay that price, regardless of the unusual currencies involved.