Free 2.0: Don’t blame the VCs

by Mathew on April 4, 2008 · 24 comments

A New York-based entrepreneur named Hank Williams has a guest post over at Silicon Alley Insider about how the tech economy is being ruined by the “freetards” (although he doesn’t use that term). In a nutshell, Hank believes all the venture-backed startups that are littering the Web with their free apps are ruining it for hard-working guys like him, who just want to make an honest dollar by providing a quality service in return for actual money.

This is an appealing story — but is it true? There’s no question that a lot of Web-based services are going the free route, and there is a certain segment of the VC world that believes you need to build something up to a large enough scale first, and then find ways to monetize it. But is this really something that VC’s invented and have forced onto the tech startup market? Hardly. If anything, it is a phenomenon that has grown out of the reality of what it costs to run a Web business.

Why are so many things free? Henry Blodget suggests an answer in his comment on Hank’s post at SIA: because they can be. In other words, things — primarily services, information and so on — used to cost a lot because of the nature of those businesses, embedded costs, etc. Now, a large proportion of those costs have been removed. Does that mean everything can be free? No. But many things can come pretty darn close. And once the value of that service or content has been established, then it’s a lot easier to start either advertising around it or charging money for it.

This is the essence of the “freemium” approach. Give people some of what you have for nothing, and see if they like it. If they do, then offer them more for a fee. It works for SmugMug.com, it works for 37Signals.com and other companies. Did Craigslist choose to offer its services for free because its VC backers forced it to? No. It did so because Craig wanted to do it that way — and because he could do it that way. Only when it had become obvious how valuable it was did he start to charge for certain things, and then only in a limited way, and still the company makes close to $100-million a year with virtually no more effort than when it was free.

That is the power of the “free” model — it’s not some kind of snake-oil trick that VCs desperate for an exit have foisted on Web startups. While that may be happening, it certainly isn’t to blame for the entire Web-based freemium approach, and it has nothing to do with whether Hank Williams gets paid an honest wage for an honest day’s work.

Update: See Hank’s comment below. Don MacAskill of SmugMug also has a thoughtful response, in which he notes that lots of industries have a stratification between commodity (i.e. free) and premium brands — and also notes that SmugMug actually benefits from the free services that compete with it. For what it’s worth, I think Alan’s “Freetardis” offer at Broadstuff is hilarious.

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