Networks: A Fundamentally Different Exchange

Last month, Brad Burnham of Union Square Ventures wrote this about ‘free’ Web services:

Free is not a pricing strategy, a marketing strategy, or the inevitable consequence of a market with low variable costs…

Services are not offered for free at all. There is an exchange of value between users, the creators of the raw material – data, content, and meta-data, and the network where that data is converted into insight.

I’ve written before that ‘free’ a marketing strategy rather than a business model but that is quite clearly inaccurate or at least incomplete (and I’ve realized my error). Brad sees beyond our traditional understanding of sellers providing services to individual buyers, individually.

Lots of Web services connect users to one another to create networked services. In these cases, the relationship between buyers and sellers has been fundamentally changed to something more like infrastructure/context providers and data contributors.

It means that not all ‘free’ is created equal. Free trials, cross-subsidies, free content and even free Web services targeted at individuals, individually, are completely different to free services that result in networks. Without a network, free is just marketing. It’s an expense incurred by a company in order to generate revenue some other way within the existing framework of buyers and sellers.

In contrast, free services that are designed to connect users to one another and build networks do not operate within that existing framework. Users contribute data for their own utility but also, and perhaps more importantly, in exchange for access to the network – the data provided by other users.

For every additional user that joins a network, the value of the service increases for everyone else. A byproduct of networks is that they also seem to produce something new, interesting and hopefully valuable at the center, often based on aggregated user data, actions, gestures or behaviors.

In these cases, free is clearly not an enticement to use a service. It is marketing in the sense that it involves a price – free – but I think free is the market price for contribution, probably because it creates the least friction. I’m not sure it has anything to do with falling marginal costs.

The difference between free networks and free stuff may offer a fresh perspective on the turbulence in content industries like music and news. For example, it could be argued that users want ‘free’ as in networks but publishers only see ‘free’ as in stuff.

Within the traditional framework of buyers and sellers, free content is a giveaway and unlicensed use of content is piracy. But, I’d argue that users don’t expect to get ‘free stuff’ online. Instead, with all the social tools now at their disposal, they want to alter the exchange altogether.

If there is a problem with offering free content online it’s that publishers are not capturing the other side of the exchange, which in this case, is providing an infrastructure and a context around which networks can form.

Posted on September 10, 2009