Sunday, March 30, 2008

The Economy of Free

It is probably no surprise to anyone who has perused this blog even cursorily that I'm a big fan of Open Source software. I'm all about getting things for free.

Initially I saw open source as primarily an academic phenomenon - universities would innovate software and hardware using labor and resources provided for another reason (usually education), and eventually that free innovation would make its way to commercial companies who would bring it to market, for a price.

This was generally the model of Netscape, which came from the National Center for Supercomputing Applications at the University of Illinois, and my new favourite blogger, Marc Andreesen. Today, the 36-year-old billionaire venture capitalist Mr. Andreesen is keenly focused on information technology and internet business issues. His blog is literally chock-full of insightful commentary and helpful advice about making money and building successful businesses. Netscape? Not doing so well. I think they merged with AOL.

But the Open Source evangelists have been preaching the economic viability of free stuff for years. The story goes that technology, Moore's Law and all that, will reduce the effective cost of traditional commodities towards zero, so that economic value will be created in new and different ways: think the second derivative of the service economy. There is a very interesting recent article from Wired that discusses this trend in some detail.

I'd been noticing the trend for a while, and have started to take the "freeness" of most information technology and services for granted. (Such as this blog. I cannot imagine paying for a blog service. I have a feeling our old provider, Blog-City, made a huge mistake in eliminating free blogs, and will likely disappear entirely soon.) The internet is clogged with zillion dollar companies who give away their services: Google, Facebook, YouTube, etc etc etc - many of which, apparently, Marc Andreesen invested in, and made large sums of money on.

Similarly processing power and bandwidth is getting more free as well. In any well-developed area you can find plenty of legitimately (as opposed to inadvertantly) free wireless bandwidth. Is inadvertantly, or indeterminately, free bandwidth a function or byproduct of this phenomenon? Bandwidth is so plentiful and cheap that people don't have to worry about sharing it with strangers?

The tiny eee pc that I'm using to type this blog entry costs $350 in 2007 dollars, and replaced a Fujitsu mini-laptop that costs $1500 in 2000 dollars, and had less than 1/3 the capabilities. I do not doubt that there will be a real $100 laptop soon, and it will outperform this amazing little machine.

There are a whole range of new terms and concepts that address the falling costs of information, and the technologies that are emerging to take advantage of the trend. I'm particularly interested in "Cloud Computing" and the related "utility computing", and "software as a service". Google (with Google Docs and the Google Filesystem) and Amazon, with their Elastic Computing Cloud (EC2) are, as usual, leading the field. The idea behind Cloud Computing is virtualization - your computer, or your computer and 1000 other people's computers, can be my computer, for a marginal cost that approaches zero. Virtualization, of course, is a hot commodity - VMWare did well in the market, but they are under a lot of pressure from Xen - which is free and does the exact same thing.

One of the recent events that really made me sit up and start thinking about the economics of free was when I saw a web ad for the Pirate Bay. Pirate Bay is a site primarily devoted to illegal free sharing of copyrighted material, using BitTorrent. Somehow it is profitable to advertise illegal peer-to-peer file sharing. I get the feeling that soon those peer-to-peer services may be more profitable than the entertainment industry's failed effort to control content via coercion with DRM.

In fact, the near-total failure of the industry best prepared, motivated, and financed to protect their intellectual property rights - the entertainment and mass media industry, aka the MSM - suggests that intellectual property as a traditional legal concept may be heading rapidly towards obsolescence. I don't know exactly what this means - but I do notice, as does Marc Andreesen, that the MSM is economically and strategically in deep doo-doo.

So all this epidemic of freeness makes me think about my favourite form of free 1's and 0's, namely open source software. How can open source be profitable? I'm still not completely clear, but obviously it can. RedHat has become a billion dollar business (gross, anyway) selling something that you can download for free from their web site. The quality and diversity of open source systems and applications increases significantly every year, and most of that code is not coming from universities but from businesses who are in the business of selling free stuff.

Meanwhile, the General Motors of the old information economy, AKA Microsoft, looks more and more like, well, GM. They simply don't appear able to compete in the market for delivering usable software, which is why they reportedly planned to bet heavily on "controlling content", via DRM and partnerships with the MSM. In the context of the economy of free, that doesn't look like a very smart play.

Kevin Kelly, formerly the editor of Wired, has an excellent article in which he discusses the economy of free. He says there are approximately eight "generatives", which generate value associated with free stuff. These include immediacy - the ability to get the free stuff faster; personalization, aka "customization just for me"; interpretation, aka technical support, which seems to work for RedHat; authenticity; accessibility; embodiment (not exactly sure what that means, but I think it means old-fashioned human contact), patronage (aka altruism or charity), and findability (the ability to locate the scarce or elusive free stuff). Supposedly these qualities make people want to shell out money for stuff that they could have for nothing if they wanted. Clearly sometimes it works.

So all this makes me think about what I spend money on... mostly industrial-era commodities, it seems (mostly gasoline lately). This kind of pisses me off. Technology could provide me with vastly more efficient transportation, but the old-world industries have gotten very smart about fleecing us customers. I put lawyers into this group.

Not much of my money gets spent on technology or information, because so much of it is free. Energy, food, government (i.e. taxes), transportation, lawyers (i.e. insurance) and other old-fashioned stuff gets most of it. So am I an exception? Are most people spending hundreds of dollars per month on iTunes and NetFlix, and I'm just an anomaly? I do notice that I pay for bandwidth - approximately $250 per month for telephone, cell phones, internet, and cable TV - and I feel like that is a rip-off. Of that $250, I think nearly 15% (it might be over 20%) is taxes. I think nearly half of the bill for my obsolete POTS line is tax - I have no intention of ever buying another POTS line, unless I am forced to do so in order to get internet bandwidth (e.g. DSL).

So while I am optimistic that the economics of free will make us all richer, I am not sure how that new, and likely very different, kind of wealth we derive from free stuff will help us pay the bills to the old-world industries that still claim most of our hard currency. I look forward, however, to getting more and more stuff for free. I'm hoping that all this free stuff will mean that I don't have to get into my car, and continue to pay the old economy more and more real money to do stuff I didn't want to do in the first place.


John the Scientist said...
This comment has been removed by the author.
John the Scientist said...

Removed the typos.

Thanks for the link to Marc. He seems to have his head on straight most of the time.

A lot of how the economy of the free is going to be structured is going to be in reaction to the recording and movie studios' moves. Historically, setting up a new paradigm in reaction to an old one makes for huge inefficiencies that take years to work out of the system.

Are you sure that current technology can provide more efficient transportation?

Anonymous said...

I guess I can't be certain that technogy can provide more efficient transportation, but I'm pretty sure that there is already more efficient transportation availble using existing technology that we are not taking advantage of. Diesels, for example, are substantially more efficient, yet diesel fuel costs nearly a dollar more than regular unleaded gasoline. It doesn't cost more to refine diesel, of course - most of the extra costs are taxes. There is HUGE tax penalty for driving a more efficient vehicle. This makes me _furious_.

John the Scientist said...

Diesel is also denser than gasoline - how much of the added cost is transportation?