The Upcoming "Free-economics" Era

After my unsuccessful prediction regarding whether Meneame.net is a profitable business (answer: it is not), our Information System professor asked us to write about an article written by Chris Anderson. The article and references about the author are here.

In very basic terms, the article reflects the power of internet and how it is changing the way different industries are starting to communicate with customers. The term "free" reflects the tendency that many internet companies are following: give free things to people and earn very good money.

The best example of the "free" era is this. To provide you with just some figures: Google revenues were up 20.92 billion US dollars and the company value as of January 22, 2009 is 80.92 billion US dollars. Now, how much do you pay to use Google? I am sure you will say nothing (0); otherwise someone is stealing from you and it is not Google (and not me either).

Who is paying Google then? Following what the article says, there are three parties interacting: customers like you and me that go around different websites, the medium (Google) and, finally, advertisers. The first two agents participate in a free market whereas advertisers pay the bill. Something similar to what occurs in the media industry where you pay nothing to listen to the radio or watch TV (till cable providers show up) but advertisers do.

According to Andersen, what is going on in this internet era is what economists call "cross-subsidies": you give away something for free knowing that you will get something in return...for a profit, of course. The best example, also cited in the article, is Gillette: they almost give razors for free knowing that you will later need to pay for blades and shaving cream.

Andersen claims that the Friedman proposition of "there is no such thing as a free lunch" is vanishing. Andersen, we have to talk...do not discredit such an economist in front of other economist (with lower knowdledge though). There is always someone who have to pay the bill and, at the end, it is either advertisers or customers who pay it.