When you succeed with Free, you are going to die by Free

The problem with companies who have built their business around free is that it is far from free to remain successful.

The more success you have in delivering free, the more expensive it is to stay at the top. The more success you have, the more important it is to management to remain successful.  The more important remaining successful is to management, the more money they will spend, the more chances they will take, the more infrastructure they will build, the more people they will hire.  All of the things that will prevent them from staying lean , mean and flexible. All of the things that distract them from innovating within their core competency.

Lets look at the rule that eventually KILLS all freemium based content plays:

There will always be a company that replaces you. At some point your BlackSwan competitor will appear and they will kick  your ass. Their product will be better or more interesting or just better marketed than yours, and it also will be free.  They will be Facebook to your Myspace, or Myspace to your Friendster or Google to your Yahoo.  You get the point.  Someone out there with a better idea will raise a bunch of money, give it away for free, build scale and charge less to reach the audience. Or will be differentiated enough, and important enough to the audience to maybe even charge more. Who knows. But they will kick your ass and you will be in trouble.

For Google, who lives and dies by free, we dont know who their BlackSwan company will be. But we all know it will happen don’t we ? The only question is when. Of course Google knows it as well. Which is exactly why they invest in everything and anything they possibly can that they believe can create another business they can depend on in the future.  They are spending incredible amounts of money in search of the “next big Google thing”.  When their BlackSwan competitor appears, they won’t be in a position to compete with the newly presented model, particularly if its free based because their ecosystem has bloated to the point where they can no longer create anything for free.

Google is not unique. The same happens to all companies based on free.

The same will happen to Facebook, Twitter, pick any company who lives off of free.

Its not that they can’t make money offering free. They can , have and will. The problem is that they know that its literally  impossible  to be the king of the mountain forever. But that won’t stop them from trying. And that is exactly what will kill them.

Their better choice would be to run the company as profitably as possible, focusing only on those things that generate revenue and put cash in the bank.  More importantly, when you see your BlackSwan company appear and you know they will kick your ass, rather than ramping up to try to compete, get out. Sell. Or maximize cash and pay your shareholders every penny you have.

Like every company in the free space, your lifecycle has come to its conclusion. Don’t fight it. Admit it.  Profit from it.

Which is exactly what MySpace should do.  Rather than trying to reinvent itself to compete better with Facebook, they should do the exact opposite. They should try to optimize whatever monetization opportunities it has. Cut costs to the bone. Maximize revenue per user. Think purely in terms of business.  Squeeze every nickel out of it that they possibly can, knowing its going to die a long, slow death.  Meanwhile, they have the opportunity to take that money and invest it where they think some young company is preparing to become Google/Facebook/Whoever’s black swan.  They can invest alone, or along side others. It doesnt matter.  What does matter is recognizing that they have a better chance of beating Facebook by investing in a company they think can pre empt Facebook than by trying to reconfigure MySpace to be that company.

When you succeed with Free, you are going to die by Free. Your best bet is to recognize where you are in your company’s lifecycle and maximize your profits rather than try to extend your stay at the top.

133 thoughts on “When you succeed with Free, you are going to die by Free

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  11. “You can also launch a premium version once you are established with your free version.”

    But converting people to paying customers to a premium version hasn’t worked all that well. Usually by the time you are ready to do that, someone else comes along with a free version that equals your premium version and everyone migrates over there.

    Comment by slainson -

  12. Free is usually a powerful way to hit a saturated market and make and impact very quickly especially of you have a different angel on things. You can also launch a premium version once you are established with your free version.

    Comment by temitope7 -

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  14. Almost makes you want to re-name your tech startup “Black Swan”…

    Comment by oryxorange -

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  18. I agree that the FREE model should be used with limits. If it is used to allow for “introductory” services and then you establish a revenue generating model that enables your user to get enhanced services; this is what I see as the way to do. Constantly giving your user FREE things, lessens the value of what you are giving to them. The time, effort and money you are putting in to help them, should have a value. In a lot of cases, your best contact may never want to join you, because they feel that if you do not “value” your services, then why should they spend their “valuable” time in joining something that everyone can join?

    Comment by bizexpress -

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  21. Free only works if it has an agenda.

    That agenda should always be to lead to profit. I read Atlas Shrugged a couple years ago…and wished I would have read it 20 years earlier. It changed my life, mainly by giving validation to the fact that free does not work. Except for the moochers.

    Having learned this lesson the hard way while wasting quite a bit of money and time, I will never enter a venture again offering only “free”. It is not a sustainable business model.

    Hobby? Yes. Business that pays you and covers expenses? No way.

    Comment by sophiemwt -

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  42. Mark, Using Craigslist as an example of FREE working brings up another interesting point. 42% of the stuff on Craigslist is stolen, does FREE not also incorporate cheap, unreliable, theft, scam, and many other negative descriptions? Free seems to now equate to lower quality. FREE listings websites allow for the scammers and spammers of the world to market products and services that are not of value. Free to me equates to “Watches, Watches, I have Watches!” -while opening up a trench coat full of stolen watches! lol.

    Mike Stewart the Dallas SEO Guru twitter.com/dallasseoguru

    Comment by dallasgoogleguru -

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  45. So true Mark.

    For those that dont get it– nobody has remained profitable enough offering free content and so many companies went out of business, or lost tons of money trying to figure it out. (i.e.: just recently Yahoo! announced they have scrapped their plans for video distribution platform and all the while wasted $180m).

    Essentialluy all of these companies employing “free” are able to pay the content owners and there’s squat left to remain profitable. The main reason they are broke is they are employing dull advertisement platforms or biz models that dont have value nor do they command top dollar. But this has gone on for a while. Even the in the past with P2P companies. Napster, Kaaza and others could never find away to monetize content. Dumbasses.

    This has also caused content owners to share their content with numerous networks in an effort to diversify their content in the hopes they can make extra $$$. For example, ABC just gave content to NBC’s Hulu.. Who would have ever thought?

    Rumor has it a company called Funn Networks is on the way. From what I hear Funn Networks has been working in stealth for several years and promises to break this barrier of profitability with an incredibly unique business model that many in the entertainment industry are calling the “Holy Grail for content distribution…” Rumor has it they are even going to have the content owners pay users for content use.


    Could “FREE” actually have a face?

    Comment by nypbbob -

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  59. Mark,
    Thanks for this thought-provoking post. Free can be confusing, depending on which side you are at. Sure social networking sites are free for consumers, however it costs more for big brands to manage because of media fragmentation. Mass marketing used to have captive audience with singular message while social media marketing allows more precision targeting to much smaller audience. Free, to me, is really a cost re-distribution between brand and consumer.


    Comment by arisey -

  60. I love ya Cuban, but this particular post is too simplistic. We’re thinking about this all wrong. I could care less whether it’s a paid, free or freemium model. Two areas should be the real focus of this discussion: innovation and operations. The threat of better mouse traps must drive market leaders to innovate without abandon in order to maintain their position. A one-trick pony is best off with a quick exit; while Google and Apple have proven that the innovation within their DNA sustains their market leadership. On the opposite side of the spectrum is operations. Companies that can provide a basic service, however commodity it may be, at the lowest possible cost will sustain an advantage and withstand threats from new entrants. Craigslist is the best example I can think of. It’s the only web 1.0 site that I use today and I often long for better functionality. But it has audience thanks to its low cost to the user (typically free) and low operating costs thanks to its simplicity.

    Comment by maltschul -

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  75. As a software developer, I do know that it is possible to be knocked off the pedestal. You are definitely making sense that free is really no way to money, but I would have to argue with another comment I read on here and that is that they key is to focus on the changing nature of your users, I feel like google does that pretty well. Myspace failed because they did not change with their users until it was too late, they did not keep up with the latest advances in Web 2.0 technology which is why they got knocked off. Same with a lot of other companies. One thing you are right about is that if you offer a free service you have to simply be the best because there are smart kids in their basements waiting to develop the same product but better, this is where good marketing has to come in along with other streams of business. Google has successfully made itself synonymous with search, people no longer say I searched the web for something..they say I googled it. Its kind of like how Microsoft has become synonmous with the PC, do they have the best product? absolutely not, but they have a crazy market share. Being able to monetize your product is plus and google has that down as well, the power the search engines for most federal government agencies, and a lot of corporate intranets, it was easy to knock off yahoo, because when yahoo was in its prime, they weren’t the only game in town, you had alta vista, lycos, etc, now you have google, period. So I think google is a bad example for free being bad, because they have done exactly what you said, made a free product and figured out ways to make money off of other things, I am currious how something like twitter, and facebook Time will tell. Great Article.

    Comment by M.Wanzer -

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  77. Very, Very interesting. I am fairly new to the business world, but have grown up suffocated in it and in January of this year started a crime scene cleanup company. I completely agree with Mark, but I also don’t think there is much that can be done. I internet is evolving at such a rate that I would think for it to be impossible to stay on top forever. I would have to think that these free-based companies don’t look at the BlackSwans in the rear view mirror. Much like our government…Spend Spend Spend…

    Comment by crimecleaner -

  78. Companies in digital media do seem to have shorter lifespans than in other industries. Many former big guys are gone (e.g., Lycos, Excite) and many are long in the tooth (e.g., Yahoo!, eBay, MySpace). In my opinion, the issue is not “free.”

    The more fundamental issues are: (1) low switching costs; and (2) low technology barriers.

    Low switching cost (or the “hot restaurant” effect). Consumers can easily jump to the next cool thing (Friendster > MySpace > Facebook > Twitter…) We like the next new thing, and, in digital media, there will always be one.

    Lower technology barriers are an even bigger issue. With today’s technology tools, interesting websites and applications are ever more easily created. A team of four can, today, build what it would take a team of 20 to build several years ago.

    The ultimate conclusion of all of this is clear (and agreed upon): make hay while the sun shines (and it won’t shine long).

    From MC> Isnt free part and parcel to a low switching cost ? While a team of 4 has the productivity of last decades 20, the number of users that team is expected to support is much higher, as are the expectations to continually improve the product – because of the low switching costs. Shouldnt You have a better way to pay for it all other than advertising if you want to succeed ?

    Comment by Tom Turnbull -

  79. Impressive. I always thought guys like Cuban were *% heads. I’d like to spend 30 seconds inside his head. I’m a shade less skeptical after reading the article. Intuitive stuff. Jibs with my thinking… I believe the information revolution will replace 80% of lawyers. And I’m a lawyer. Bully for the consumer. Thanks Mark. http://www.SuffolkCountyCriminalLawyer.Com

    From MC> So im a shit head unless i agree with you 🙂

    Comment by rtoad22 -

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  83. I definitely agree with all the Social Media apps out there. You look at Friendster and MySpace, the both only lasted 4 or so years, and then got replaced by another Social Media app. Now You like at World of Warcraft even though they are a video game, there is a community behind it which pays to be part of that community.

    As for Google, I believe Google has found a revenue model with Adwords, but to be viable for years to come they need to find another profit model.

    Comment by rmercader -

  84. I’ve been writing a bit about this lately on my blog.

    The underlying problem is that there are (currently) only a small number of functional revenue models on the internet, and most companies aren’t really trying to move beyond them.

    I think the critical thing that you keyed in here – and that most of the readers don’t seem to be agreeing with – is that the freemium model lends itself to rapid / explosive user growth, while the underlying business model of the site may not scale on the same level.

    Apart from Amazon and PayPal, I think all of the other large websites are based on free or ad supported models. The scalability issue combined with inevitable competition makes freemium websites much more susceptible being overtaken, which in turn implies a shorter and more defined life cycle.

    With “brick and mortar” companies (sorry, I’ve been in this business too long), the life cycle can usually be extended with the introduction of new products, or by rebranding or whatever. Its harder to do with a website.

    Comment by jeremylichtman -

  85. Mark,

    I have three comments about your article:

    First, I agree that we should monetize when we can, and to the greatest extent possible. This approach creates the monetary flexibility needed to enhance the survival of the firm. But, “game space” can also be created by using “free” as a seduction. Such an approach is neither inherently inferior nor superior—it’s just another strategy option. It is a bad strategy if it’s all you have for a strategy.

    Second, you mentioned that “it’s literally impossible to be the king of the mountain forever.” But isn’t this true of any endeavor. “Free” has no monopoly in this department. All businesses go through cycles. All static models require an acceleration of inputs to remain constant in a world of change. That is why W. Clement Stone suggested that for one to maintain even a constant rate of growth, one should continuously look for new business models and approaches that accelerate revenue as well. I’m certain you know this. Your own history suggests that you know this.

    Third, because your history suggests that you know this, I suspect that there is some other issue you have with the strategy of “free” that I am not quite getting.

    Posted by Bill Churchill

    Comment by billchurchill -

  86. As a die hard digital advertising proponent, having worked for the better part of the last decade on purely free-ad supported online and mobile plays, I would normally have scoffed at this. However, I have recently seen the error of my previous ways as I left my biz dev post at a growing mobile ad network and joined a premium people search website – I was astounded when I started to see the revenues that were being generated each day by the products being sold directly on the site, as I am seeing monetization per impression rates that were 10x what I had been accustomed to in the free, ad supported world.

    On a related note, I’m also the co-founder of a online sports portal called ProjectFranchise (basic site is up at http://www.projectfranchise.org) that is designed to take in revenues from premium subscription sales, licesnsing/merchandise sales, and sponsorships/advertising. The plan is to buy a minor league sports team and let the premium site subscribers run the show through easy online voting ($10/yr = 1 vote). We are actually getting very close to purchasing a team, which just so happens to be in the Dallas area – so we’ll see if we can be the ‘BlackSwan’ to another local sports franchise, who’s owner likes providing free, digital content to their fans. Of course, if he wants to be well positioned to compete and survive, he may have to invest in the BlackSwan – and maybe finally get himself a baseball team 😉

    Comment by g4cohen -

  87. from mc > “survive on advertising built around free”

    heh. thanks for helping to make my point. free != advertising. free is a price, not a synonym of advertising. not even a kind of business model.

    free is a price. $10 is a price. $1,000,000 is a price. same price, better product wins. period.

    there’s nothing special about “free.” your competitors can even undercut your price by paying users to user their product.


    Comment by m3mnoch -

  88. The broadcast networks have been doing free content since the late 1920s. It seems silly to think they had a black swan stalking them for the first 70 years. Now they do, but my what a long run they had.

    Comment by dougferguson -

  89. I think free is dangerous. People value what they pay for, so when you give something for free “it must be worth less than something I would pay for” thinks the consumer.

    A product that is not free cuts through the clutter of all the free crap. While more consumers may take the free product than the paid product, the more valuable consumers will take the paid product. Plus, once somebody pays for something, they immediately take its use more seriously. Just how you eat more once you’ve paid for an all-you-can-eat buffet.

    Free may play a big part in building lists and sending people through your marketing funnel, but any business model that offers all free products is one that’s on shaky ground.

    I guess what I’m saying is “Mark, I agree.”

    Comment by Jeff Nabers -

  90. Um, MySpace is going after the music niche, so it is reinventing itself instead of trying to compete with Facebook.

    Facebook isn’t good in that it is free. It is good because it is incredibly useful. So is Google for that matter.

    So, whether you charge the front end user or the advertiser looking to get access to your numbers, just don’t suck. Don’t be wasteful. Don’t lose sight of what your customer wants. I’m not sure why this debate is still going. It’s really not that revolutionary–it’s just loud.

    Comment by michellegreer -

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  93. Thanks for the clarifications, Mark. It does sound like your point is more about companies getting lazy and losing the lean startup mentality than it is about business models that incorporate free. Fair enough.

    But I’m not convinced that focusing on free-to-consumers somehow causes any of the issues you discuss. Plenty of for-pay companies have had the same problems of ego and vanity leading to laziness and poor business decisions. Heck, look at Microsoft: a lot of there dominance in the 90’s can be traced to their embrace of free, both in their (at the time) free development tools that expanded the Windows app ecosystem and their blind-eye piracy policies (“we’d rather have you steal our product than buy our competitor’s”).

    Yes, relying on advertising is dangerous and undesirable, but plenty of old media operations did pretty well with it, and I expect some internet companies will as well. Sure, they have to not make stupid mistakes, but that’s true of any business.

    On the whole, I still think that what you’ve got here is a “beware hubris, make good decisions, be aware of changing markets” post which is relevant to all businesses, and has nothing to do with freemium. Google’s doing just fine, and if someone is going to come along and eat their lunch, well, the same is true for Genentech or General Mills, eventually.

    From MC> Except MicroSoft struggles and still generates billions in profits because they actually sell their products. Same with Genetech and Gen Mills. Symantec/McAfee have competed with free for years, and continue to do well. The companies that offered free virus protection, many have come and gone. Facebook is doing well right now. They are the hot kid on the block. But they need to keep on raising money in order to continue to try to fulfill their “missions”. If someone steps on their toes competitively, what do they do ? They do like MySpace, layoff a ton of people and try to recalibrate, or they do like Friendster, they do anything to survive, or they do like Joost and start over every few months.

    Sure it happens to companies who sell products, but if you have a product that you sell, and you are doing it profitably, your chances of long term survival are far better than if you lived on the leverage of free.

    Comment by Brooks Talley -

  94. It is an issue of risk/return. Freemium requires lots of cash and bets on a huge but very unlikely return. Paid makes sure that you have a business from the start, which might reduce your growth and upside, but lower the risk of loosing a lot of money.

    But be carefull with Freemium ! it is easy to get critical mass if you subsidize a product. Look at imeem, who gave for free songs that cost them money and now are struggling to survive.

    Comment by bernardojrodriguez -

  95. The first commenter writes: “It seems no one has learned how to really make money over the internet.”

    Maybe this should say it seems no content provider has learned how to really make money over the internet.

    Your local cable company is making an avalanche of money by selling access to the internet, and to date they haven’t had to share it with anyone.

    Eventually, major content providers have to get paid by ISPs.

    Comment by mikeynyc -

  96. I find it difficult to see the insight in this post. This post is just a restating of the innovator’s dilemma (incumbent companies will be trumped by upstarts with an innovative product without the baggage of the incumbent’s) then somehow implying that only companies that give away products for free are affected.

    I guess no one informed the upstarts that have obsoleted companies like Polaroid, Sony (specifically the Walkman) and General Motors that the innovator’s dilemma only applies to companies that make “free” products. 🙂

    Comment by carnage4life -

  97. Companies with defensible intellectual property (e.g. Priceline.com) can thrive with a free Web services model.

    But the “me-too-free-too” sites won’t last.

    – – Tim

    Comment by timtracey -

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  100. mark – thanks for the reply. i think we are in complete agreement. companies must have profits, and the bigger they are the better, in order to be able to continue to innovate. i think google is the prime example in this regard. i am blown away by how well they continue to innovate in areas like maps, apps, and now wave.


    Comment by fredwilson -

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  103. Mark,

    I really think the title of the article should have been “Staying Lean”. And based off your latest comment you would probably agree. Free and not free just depends on your situation. If you want to be the largest social network out there, you can’t charge money. No one will pay for it. If you want to fill a niche and be the best at it, then you should charge money. I think Myspace at the top had something like 1200-1500 employees. Why would a social network need that many employees is beyond me. Facebook is already following the same path.

    Twitter is doing a pretty good job by letting all the app developers show them which apps are the best and saving a ton of money. People don’t understand why Twitter isn’t building out their site more but I do. Its too expensive to do product enhancements in house and you don’t even know if those enhancements will be any good.

    Comment by sportstechnow -

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  105. Mark,
    You could have skipped right to the last paragraph of this post, which cuts through the BS and says what you have to say – maximize your peaks and try to make them last. Someone in sports team business, in response to how he would maintain ticket sales with a rebuilding season imminent, said teams bigger problem is maximizing revenue when its good. Extracting everything it can when it can.

    That’s the point here, free or not, it won’t last, so while you’re on top maximize it. On that note though, free never works, its the first business to go down in any industry. Look at TV now, broadcast is dying, cable is still thriving. Free local newspapers the first to die out, paid one’s are still hanging on. Music, same business.

    Comment by mjsenno -

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  107. mark

    i’ve been writing a lot about this topic over the years and posted my thoughts on gladwell and anderson’s recent efforts yesterday


    i’m a big fan of free, freemium, and business models based on some form of free access to web services.

    i agree with you that technology is a fast moving industry and there is always a company around the corner who is going to take you down.

    but i don’t think that free makes you more vulnerable.

    in fact, i think paid makes you more vulnerable.

    craigslist hasn’t done much in the history of the company on its platform and UI and yet it continues to beat all comers in internet classifieds. why? because its mostly free.

    if it was mostly a paid service, i think it would be way more vulnerable to new entrants.

    i’m a big clayton christensen fan and he talks about how the companies that are going to take you down always come up from below. there isn’t much below free


    Comment by fredwilson -

    • Big fan of your blog Fred. I agree there isnt much below free. And that Craigslist, for now, is a stellar example of free working. In fact, i think it works for the very reason that they stay lean and mean with what, 17 employees ? The key point of the free to die post was that few will follow the Craigslist example. The bigger they get, the bigger they want to get. Which in turn makes them bloated, which in turn makes it very difficult to surviven when the Black Swan competitor comes.

      Of course this can happen with for pay competitors as well, but for companies built on free, its nearly impossible to recover from

      Im a big fan of give them a free taste, then make them pay for upgrades. It is why I am still involved in a nicely profitable company, Filesanywhere.com, which competes with a company I used to be involved with, Box.net. Both offer online backups. One charges and uses that revenue to differentiate with upgraded services and customized services. The other used to charge (which is why i got involved), but now is facing the challenges of being primarily free.

      There are companies on both side of the argument, but I would rather be invested in a company that can afford to continue to invest in their products without depending on advertising, incredible volumes of traffic or raising more money.


      Comment by markcuban -

  108. Pingback: Would You Want It If It Were Free?

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  110. I work in music, and yes, free is the reality. There are so many people creating music who are just looking for an audience that they are happy to give away their music. I think people who want to make money at music will quit the industry, leaving music to those who love it and will do it for free or nearly free. People will have day jobs that pay the bills. Most of music will revert to something shared among family and friends.

    Similarly, I’ve been a freelance writer. The Internet has enabled lots of people to be published writers, and fewer are making a living at it. That’s just the way it is. That doesn’t mean there is a profitable model from free.

    Advertising used to be the way content could be delivered for free to the masses. But there is so much content available right now that it’s an advertisers market. So most of those free efforts are going to be under-subsidized.

    Comment by slainson -

  111. Mark, excellent post. I completely agree. Yet I do somewhat also agree with the comment later posted about free social media content and free media entertainment in all its forms. Although it will be difficult to monetize a free based model, I believe the general shift in advertising from printed media and influential television to video games, product placements (such as GameStop ads in games), TIVO, and mobile devices will change the industry (partially thanks to GenX and GenY). Check me later for a opinionated forward-thinking blog post on the subject. – Mike Stewart the Dallas SEO Guru http://twitter.com/DallasSEOguru

    Folks like me don’t use printed formats and anyone thinking that PRINT will be around is seriously mistaken. BTW, I work in the print Yellow Pages industry as well. It has a good 3-5 prosperous years left if the competition will quit hurting the value proposition. Too many fingers in the chocolate icing! Now who is stealing my Kool-Aid!

    Comment by dallasgoogleguru -

  112. Mark,

    The billion dollar question is how can anyone stop “free?” The music, newspaper, movie, television, and social network industries would love to know. Media industries that charge for their services will quickly be replaced by free sites. To adapt these sites must learn how to profit in this new environment.

    Comment by darryl3 -

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  114. Going against the grain of “free” and “low priced” is precisely what has made our little niche-targeted iPhone app company successful. We sell the most expensive products in the app store for pilots, and we have been in the top 20 paid apps for almost one year. We have avoided every gravitational force and act of peer pressure encouraging us to go free and make it up on the back end somehow. We are thankful we stuck to our guns.

    What has happened to our free or low priced competitors? Their user interfaces languish and their update frequency has slowed (or evaporated). Translation: they can’t make enough money selling development-intensive apps priced at $1.99 (close enough to round down to free if you believe Chris Anderson) that get to and pass the competitive bar, so they quit. Our customers consistently write in “you are the most expensive aviation apps in the app store, but they are the best; we spend more money to fire up our engines than this app costs, so it’s “free” in comparison to the cost of an hour of flight time”. The high quality strategy is working.

    If we charged nothing for our apps, who knows when we’d figure out their actual worth. We’d rather know sooner than later that we should hit the eject handle. There are only two models in business: low cost or high quality. Take the high road or no road, in our humble opinion. Maybe you end up a facebook or myspace or twitter if you build a slick free app or site, but the chances of that are the same as your kid ending up playing pro sports. Nice if it happens, but the odds are against you. So, have fun playing club ball, and if you get to the majors, enjoy the gravy.

    Comment by foreflight -

  115. so build what you can till its hopeless and find some sucker to buy it and watch it evaporate. wouldnt have to look to far for an example would you marky?

    Comment by substrate -

  116. Mark – great comments but I think there’s an angle that hasn’t been explored yet. Both Google and Facebook offer free services, but they both have revenue streams that provide them with the capital necessary to offer those free services. With Google, it’s AdSense, a truly revolutionary product that has truly separated Google from its competitors, such as Yahoo. Whereas Yahoo has never had a flagship revenue generator, Google does with AdSense, and that is what’s going to allow Google to stay afloat until they find the next big thing that will make them money. It’s their cushion. With Facebook, the real customers aren’t the individuals who create profile content, it’s the corporate partners who agree to team up with and finance Facebook an in return, are granted access to Facebook invaluable user (read: consumer) data which is absolutely PERFECT for data mining. Having these corporate partners allows Facebook to continue to provide their profile service for free, which in turn builds their data warehouse which is attractive enough for companies like Microsoft to pay billions of dollars for access. Again, this is something that their predecessors had not done.

    So yes, while I agree that free is a slow-working poison, I think we have to differentiate between companies who provide for free their primary product (such as Twitter) and companies that provide for free products that are either side products (Google) or whose free content is part of a larger revenue stream (Facebook).

    Comment by bozemblem -

  117. The current “free” discussion sounds a lot like the “eyeballs” discussions during the dotcom boom. A lot of companies never created a sustainable business then, and a lot of current companies won’t be able to do so now.

    Comment by slainson -

  118. I get the connection to free. A lot of companies offer free with the idea of building a bigger audience that they will then be able to make money from in some fashion. They lose money in the short term with the idea that there will be a long term. But Mark is saying that there probably won’t be a long term, so figure out how to be profitable as soon as possible, and then be prepared to get out of the business when your competition overwhelms you.

    Free is a faster way to lose money than to be charging for your product/service from the beginning. And the idea that you can offer free that will be supported by advertising isn’t likely since there isn’t enough advertising to go around.

    Comment by slainson -

  119. wait. what you’re telling me is that if some product that’s priced exactly like mine, but is better? it’ll own me?

    no noes! i have to compete?

    if your widget costs $100 and my widget is $100, but a lot better than yours? i win.

    if your widget is free and my widget is free, but a lot better than yours? i win.

    i don’t see the difference between free and not free.

    as mike masnick says “some people’s brains just shut off when they here the word free.” *click* yours is off, mark.


    From MC> Or maybe you never turned your brain on. Some people read something in opposition of free and their brains stay turned off. You should actually read what I wrote. The problem isnt so much the products being free as it is the aspirations and operations of the companies built on them.

    For those of you who couldnt comprehend, i should have written ” big user bases usually equal big egos , which translate into bloated companies, which make it hard to survive on advertising built around free when the tough competitor(s) comes.

    did that make it easier for you ?


    Comment by m3mnoch -

  120. Link to paper on FB & MySpace

    Comment by chetanchawla -

  121. Makes sense Mark. In addition to the unexpected disrupter (always a Black Swan event – difficult to predict but lots of post hoc explanations)another challenge for companies is to understand how and which customer segments will switch first. This is itself fraught with uncertainty due to so many socio-econ variables involved (see this talk on race based switching in favour of FB – The Not-So-Hidden Politics of Class Online: http://www.danah.org/papers/talks/PDF2009.html)

    I would argue that trying to come up with reductionist/ absolute theories (Info. wants to be free etc.) is misleading and a classic case of the induction problem. Unfortunately many in the tech media fall for it.

    Comment by chetanchawla -

  122. Be your own Black Swan.

    Use your position and resources to acquire young competitors, or to rapidly out develop and deploy them, instead of just trying to shelve or crush more evolved ideas.

    It may take giants with bank longer to die, but if they don’t adapt, they’ll still die. Evolution always wins.

    Comment by Mike Veytsel -

  123. Myspace is dead. Facebook will die. Google will be around for a while.

    Samskillz — no, we will not be an advertising and entertainment driven economy.

    Comment by josephwesley -

  124. Hey Mark, I would be very interested in a more general outlook on the U.S. economy from your perspective. Where do you think future job opportunities will come from? Can we survive on a seemingly advertising and entertainment driven economy?


    P.S. I know this is off topic, but your contact link was not working. Thank you!

    Comment by samskillz -

  125. I agree with the others here. Free has nothing to do with Mark’s fundamental point. IBM had its Microsoft. The horse and buggy had the automobile. There will always be an upstart that will come in and try to eat your lunch unless you stay lean, nimble, nurture fresh ideas and be willing to change with the times.

    As Mark points out, freemium busineses face the same risk. But there’s nothing special about the freemium model that makes them more susceptible to these risks.


    Comment by dajad -

    • Free makes all the difference. MicroSoft is the perfect example. It has a ton of products that it charges for, that have faced competition from all angles. While you can argue about the quality of the products, they have been able to take on all comers for the products they charge for. The free stuff, not so much. Companies with revenues outside of advertising, or free dependent sales have a chance to survive and thrive because their customers are used to paying for their products. Free is a threat, but its a threat you have some time to combat. Even the newspapers and record labels have been able to at least stay on life support because they have some level of revenue streams from product sales. Free puts a world of hurt on them, but revenue is cash, and revenue gives you a chance to survive. When you depend on advertising and have no product sales, the risks increase significantly

      Comment by markcuban -

  126. The freemium model isn’t what stalks Microsoft, nor IBM, nor Dell. Who is Microsoft’s Black Swan? Mozilla? Google? Apple?

    Warren Buffett famously argues that no technology company has a moat so wide it can’t be crossed in less than a decade – that’s what makes long term investment decisions difficult.

    I’m not sure why the tie here to the Freemium model. If anything, starting without a freemium model seems to make you more susceptible to competitors who enter with one.


    Comment by Adam Nash -

  127. @jessewaites, are you kidding me? there are a ton of examples. you have to see the internet beyond the web 2.0. i know of many sites with paywalls that are making money and subscribe to several. i also know of message boards (aka, social networks) that are private and subscription based.

    @brooks, you’ll eat those words, in all due respect.

    the internet is a PLATFORM. Platforms are monetized in specific ways and much of it is driven by the user not the business. Subscription content is always option — why do you think it is successful? because people are willing to pay for it.

    why would a market of any kind advocate taking an audience (society) backwards? i seriously don’t get it.


    Comment by dailypatricia -

  128. Mark —

    Points well taken, while I believe your example of myspace v facebook seems flawed.

    Myspace does many of the same things that facebook does, they seem to cater to a different audience. Facebook is more like the personal secure mailbox, while myspace is geared towards entertainment and a craigslist/everyone come and check it out appeal …

    While both will have black swans, in their particular realm, it is currently big enough and diverse enough that they both can prosper in parrallel….


    by the way cuban — you should go out and sign Varejao instead of acquiring chandler — minutes, freedom, and kidd will make him a stud —

    Comment by hoffjust -

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  130. I’m not sure I understand what free has to do with this article. What I get from it is:

    1) It is hard for companies to guarantee that they will keep market dominance forever

    2) Therefore, companies should maximize revenue

    3) In the face of inevitable loss of competitive position, an exit strategy is wise.

    Sure. Great. What does free have to do with it? And isn’t it a little weird to use hypotheticals for supporting evidence? Because someone will eventually unseat Google (probably), Google’s business model has these weaknesses?

    Free is not a business model. Nobody smart says it is. Free is a *component* of a business model, and everyone from IBM to HDNet uses free offerings as part of their model. And the concept that industries go through rapid growth, shakeout, stabilization, and gradual decline doesn’t have anything to do with the degree to which a company or industry use free offerings to generate revenue.

    I dunno, Mark — I love the work you’ve done, and you’re clearly an exceptionally smart guy. But I think your ties to old media are causing you to argue this backwards, starting from the “free is bad” conclusion and working towards the supporting evidence.

    Comment by Brooks Talley -

  131. It seems no one (with the exception of LinkedIn and PayPal) has learned how to really make money over the internet. Im interested to see what happens if internet advertising truly implodes.

    Comment by jessewaites -

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