Chris Anderson is editor-in-chief of Wired magazine, which has won a National Magazine Award under his tenure. He coined the phrase The Long Tail in an acclaimed Wired article, which he expanded upon in the book The Long Tail: Why the Future of Business Is Selling Less of More. His most recent book is Free: The Future of a Radical Price.
Before joining Wired in 2001, he worked at The Economist, where he launched their coverage of the Internet. He also has a degree in physics from George Washington University and did research at Los Alamos National Laboratory. He has also worked at the journals Nature and Science.
Question: How did you arrive at this concept of free?
Chris Anderson: I talk a lot about my youth. Growing up as a kid in the 70s you come home from school and you watch TV. Right? Gilligan’s Island like you probably did. You probably didn’t. You’re a little younger than me. But in the 70s that’s what you did. And had you measured that Neilson statistics would be pretty clear. 60 percent of American households watch Gilligan’s Island. You would have concluded that this was, sort of, a Darwinian perfection. We had reached the optimal form of programming for 12 year old boys. Then move it forward a little bit. Add cable TV, digital cable, hi capacity to Hulu, YouTube, the internet, etcetera, and now you realize that we, of course, had confused supply with demand.
I watched Gilligan’s Island because it was the only thing on. There were four channels: three soap operas and Gilligan’s Island. I watched what was on. We had a distorted sense of who we are, who we were and we now measure who we really are. We’re more diverse. There’s more concepts out there. Our tastes are more refined than the mass market approach reveals. That led to that first book which was sort of quantifying the true shape of demand unencumbered by distribution scarcity and then that changed the culture. It created some business opportunities, but it was a cultural phenomenon. As I was reflecting on some of the cultural changes that had come from The Long Tail and this infinite shelf space, I was reflecting on the reality that we could only have infinite shelf space if the shelf space costs nothing, if it’s free. Only if it’s free, you can be indiscriminate about what gets out there. Only if you have free video distribution, can you have YouTube.
You know, where it’s YouTube and not guy in suit tube which, by the way, defines the previous era of television. As you think more about free, you realize this word free is both the underlying economics of free. In other words, free distribution, free productions are driving this explosion of productivity. This explosion of a range of what we make and who makes it as well as the price of what these products cost. Then you think more about it and you realize that we built a country sized economy, like a Germany size economy online, with a base price of zero. This is kind of a big deal. And that, no doubt, there should be economic theories to explain it or books about it and there was nothing, so I felt I needed to fill that gap.
Question: What are examples of businesses built on the notion of free?
Chris Anderson: The cathedral of free, the poster child, is Google. Now Google is an interesting form of free. We all use Google yet it doesn’t show up in our credit card statements unless you happen to be an advertiser. Google has 300 plus products and counting and almost all of them are free to consumers. This is possible for two reasons. The first is that Google uses the classic – there are two forms of 20th century free: one was fake free; buy one get one free. Free gift inside: razors and blades. Not really free. You are paying sooner or later but you can invoke the word free.
The other was the real free, but the media model where radio was free to air. TV was free, much of the media was free, but it was supported by a third party: the advertisers, so that we the producers create content, give it free to consumers. This creates a pool of attention. We give this pool to advertisers. Economists call that a two sided market. One side, the advertiser, supports the other side. Google invented a new form of advertising designed for the internet: small to small. You know, focused ads against focused content and it’s incredibly measurable. That created this economic engine that was so profitable that they could then create all these other products with no monetization what so ever.
Google maps and calendar and chain mail and Google Earth and docs and spreadsheets, all these kind of things do is offer consumers products that are free to them that are created with almost no marginal cost to Google but increased your attachment to the Google network. Someday, somehow, they will make money from you even though they are able to offer you these products for free right now. This ability to create products for free recognizing that the connection between the usage of the product and payment for the product is incredibly diffuse. The old model was, you’re paying, sooner or later. The new model is somebody’s paying but it’s probably not you. That’s what’s unique about digital products and that’s what defines new 21st century free versus 20th.
Topic: The three horseman of the zero sphere
Chris Anderson: I’m saying nothing that Nicholas Negroponte didn’t sort of touch on and Gilder as well, but it’s worth saying again because this is so profound it’s going to take a generation to really understand. There’s the world of atoms and the world of bits. The world of atoms is the world we live in most of the time. It’s the world where things have real cost and the costs tend to grow over time. It’s an inflationary world. Limited land, limited resources, limited people, etcetera, so things tend to get more expensive over time. The world of bits is deflationary. Everything tends to get cheaper. On one level, this is nothing new. It’s Moore’s law. It’s been running for 50 years. Moore’s law was really about processing and we saw Moore’s law on our desktop but we didn’t see Moore’s law anywhere else.
What happened with the Internet is that it took computers and storage and bandwidth, silicone chips, spinning metal platters, and fiber optics and put them together. It turns out that Moore’s law falls in price 50 percent every 18 months. Storage and bandwidth fall in price every 14 and 12 months, each by 50 percent and they’re accelerating their race to zero even faster than Moore’s law. You put all three together and you have this general rule that anything you do on the internet, whatever it costs today, it will cost half as much a year from now. This has relatively profound consequences. First, it makes zero – It makes free not really a marketing gimmick but kind of an inevitable price. Not to say that everything is going to be free. The greatest misunderstanding of free is that everything’s going to be free. What it says is that everything’s going to be available in a free version. You will have free and paid coexisting. The music industry obviously experienced this. We went from silver discs, which were atoms, well in fact they’re digital but coded on atoms, to MP3s which are bits, we saw the industry essentially – that part of the industry, demonetize. Music became free. The companies that just sold silver discs were in trouble. Those were the labels. A huge ecosystem grew up around that, which thrived. Apple. I mean, what is Apple but a company that has built a huge business, with iPods and such, around free music. You know, 10,000 songs – They’re built around 10,000 songs which is fantastic unless you have to pay for 10,000 songs.
You know, the only way we can utilize this vast capacity is with free music. At the same time, they have iTunes, a very successful way to sell music. In that case, what they’re selling is convenience, not music. Yes, music is free yet we are able to exist in a world – We are able to compete with free by offering ease of use, reliability, security, and all of that kind of stuff. What we are seeing is a huge incentive to move things from the atoms business to the bits business because then free becomes an option. You can use free for what its best at, which is reach, exposure, virility, you know, form of marketing in a sense. People can sample the product, then build businesses around converting a fraction of the samplers into paying customers.
Question: How will we decide what is free and what isn’t?
Chris Anderson: I think the most profound thing about turning products into digital products from my prospective is that price becomes arbitrary. In the traditional world, there’s a pretty strong correlation between the cost of a product to make and the price you can charge for it. You charge something that's slightly above the cost and the more competition there is, the less you can charge. It tends to drive prices down to the marginal cost. In digital products where the marginal cost is zero, the price can be anywhere from zero to infinity. There is a complete disconnect between the price of production and the price you charge. What this means is not that everything goes to zero, you get a range. You get a much wider dynamic range of pricing from zero to higher. Now how is that possible?
The way it’s possible is that you’re using free to reach the broadest possible audience, then you segment that audience into different ability and willingness to pay, which means you’re doing different products. You’ve got Flicker and then you’ve got Flicker Pro. What you’ve done is you’ve sort of said, here’s a service and utility to all people who’ve got photographs. However, if you’re really keen, if you’re a super enthusiastic photographer, at some point you’re going to want more space. You’re going to want better features, etcetera. At that point, we convert you to paid and because you’re so invested in the service, because you care so much about it, you are kind of the alpha user; price is almost immaterial to you. You value the service so much that you are willing to pay almost anything. You’re willing to pay more than you might have if they had a one size fits all product for almost anybody. That one would have to be relatively cheap. Zero is the one that fits everyone. And 9.95, 19.95, 29.95, whatever, becomes the one for the segment of enthusiasts. You can build a good business where you charge more to some customers and less for others.
Question: Is market segmentation the answer?
Chris Anderson: Absolutely. What digital allows you to do is to have a range of prices. What digital requires you to do is a have a range of products. One of the examples I give a lot is the video game industry, which may seem trivial but is a fascinating experiment. Watching an industry shift from silver discs, online, on their own terms. The music industry had it sort of happen to them. Software is kind of doing it as it shifts from discs to software as a service. But the video game industry is doing it driven by consumer demand. Starting in China and Korea, [it's] is doing it to sort of reinvent what they do. And as games become single player to massively multiplayer, they start to follow the World of Warcraft model. It’s a bit fascinating to watch them to figure out as they go on they tend to be free to play and then to convert five percent, ten percent, to paid customers. One of the best examples that may be familiar to many people watching is Club Penguin. Club Penguin is a game for kids, an online game for kids. My kids play it. Probably many people in the audience, their kids play it. It’s free to play, owned by Disney. Bought by, if I’m not mistaken, four or seven hundred million, lots, hundreds of millions. Free to play but at a certain point, you know, your kid is going to want a pet for their penguin, called puffle. Now to get a pink puffle for your penguin, you’re going to have to subscribe. At that point, they come to the parents and they say, Mom, Dad, can I have your credit card? Will you get your credit card out and subscribe for me? What’s interesting about this is that our kids come to us all the time saying, I saw this ad on TV, can I have it? And the answer is no. Right? You know, you trust me, it’s not as good as it looks in the ad.
You won’t play with it for long. You don’t really want it. And it’s easy to say no. But when your kid comes to you and says, I’ve been playing Club Penguin for two weeks. I built my igloo. I populated the igloo. I made these friends. I’ve done all this stuff. Now I want more, the play utility already ascertained, the value to the kid, the importance in their life, already established. You’re much more inclined to pay and they get something like 20 to 30 percent conversion rates. What’s cool about that, once you’re willing to convert on those terms, is that you’re willing to pay more. You’re more likely to be happy and your turn rates go down. That is an example of segmentation. Within the game, they’ve found all these different ways to charge you for more in a way that felt totally natural. It’s like, I get it. I want more. I hardly mind paying.
Question: What does free allow you to do?
Chris Anderson: What free allows you to do – not everyone has figured this out, the kind of terrifying reality of free for the advertising industry-- is that it’s an alternative to advertising. Rather than telling people about a product, you can let them try the product. The nice thing about – if you can try the product, you don’t’ have to take out ads. You can just let the product sell itself, speak for itself, let it go viral. People will recommend a product that’s free because there’s no risk to the people they recommend it to that they’ll be unhappy using it. At least they wouldn’t have wasted their money. The potential there is that free products can go wide. Free products can become viral.
They can end up marketing themselves. And you can end up converting ten percent of a very big number at very low customer acquisition costs. That’s good. However, there [are] a couple problems. First of all, there’s the what if you convert one percent? Or .1 percent? Or .01 percent? At a certain point, the conversion rate is going to be so low that it almost doesn’t matter how big your number is, you’re still not converting enough people. The second point is that, let’s say that your conversion rate is one percent but it’s out there being used by millions of people. Well, I talk about near zero marginal cost.
There is a difference between near zero marginal cost and zero marginal cost. Even if the product only costs ten cents per user for you to storage, etcetera. It’s ten cents times ten million people. It starts to add up to real money. So Facebook and Twitter are two companies that are free to users. They got so popular and so big that those tiny marginal costs started to add up to some very significant real costs. They had to raise hundreds of millions of dollars to pay. Now neither of them in their first form really worked hard on that conversion, on making money, but as they now have real costs, they’re starting to do it.
You’re seeing a real time experiment in the premium model. Of course, Facebook may use advertising but Twitter is probably going to try to avoid advertising and go for premium models. It’ll be very interesting to see what happens. What does a one percent conversion rate to paid look like at Twitter? What would a five percent conversion rate look like? You know, a ten percent conversion rate to Twitter would be the best business you could ever imagine. In the regular world, if you’re selling muffins and you’ve got a ten percent conversion rate, you’re going out of business. But in a digital space, a ten percent conversion rate can be incredibly lucrative because it’s, again, ten percent of a very big number.
Question: What are your thoughts on cloud computing?
Chris Anderson: We’ve always had this question of platform ownership, remember Microsoft? Remember Windows? How we used to worry about Microsoft’s hold on this platform that we all had to build on. In that case, you had a singular platform, right? It was a Windows world. We just lived in it. The good news of that is it was pretty clear when there was undue restrictions on access to the platform, then we knew who to blame. Right? Straight to Redmond, go for it. Now there’s multiple platforms. I mean, there are all the ones you mentioned. You know, the Twitters, the Facebooks, the browsers are in some sense are a platform, then you have the devices, Apple, iPhone, many other devices, they might make their own platforms, you see this kind of massive platform battle. Each one of them is trying to establish some sense of proprietary, ownership of a platform for all the reasons you state. Yet, because there are so many platforms, consumers do have choice. If you are Facebook and you decide to build a platform that really locks people in, there’s a strong incentive for people to look elsewhere. You do see these kind of forces in opposition. There’s the one force, the very natural, company force [whose] instinct is to close things up and to own them. Then, you have the consumers whose sort of natural force is to demand openness, demand portability, demand the ability to exit as easily as they enter. We talk about lowering the barriers to entry but you also want to lower the barriers to exit so that people don’t feel like they’re risking everything.
Open ID and open apps are two examples. I think we’re seeing these two battles play out and although Jonathon is absolutely right, that this is a risk, I perhaps have more confidence in the power of the marketplace to sort this out. I think that the one thing we’re sure about in this era is that we have choice, lots and lots of choice. If Facebook gets it wrong or if Twitter gets it wrong, there are a thousand other companies in the wings just waiting to get it righter. Knowing that, I believe --and so true for Google the elephant in the room on this-- I think knowing that their hold on the consumer is not permanent, it’s not cast in stone and is only permitted as long as they serve the consumer better than the obvious alternatives, I believe, will keep them doing the right thing.
Question: What’s your view on monopolies?
Chris Anderson: I can answer this two ways: my observations of the world and then I could answer it with a little bit of my own personal philosophy. I’ll try not to let my own personal philosophy enter this at all. It is absolutely true that monopolies can arise in this era. I mean, let’s face it, Google has a monopoly on things like a pay per click search. Monopolies are not illegal. Monopolistic abuse is illegal. What defines monopolistic abuse? When we can’t even define the market today is a question that’s going to be sort of pondered and debated and possibly decided over this administration, all eight years of it and the next, etcetera. How long did it take us to figure out AT&T’s monopoly?
It was maybe a decade. You know, Microsoft. That was, sort of, the new communications structure. Microsoft was the new computing infrastructure. IBM, how long did it take us to do that? That was about a decade as well. Each one of these faced changes: industrial structure, communications, computing, personal computing, the internet, [each] requires an entirely new sense of definition. Definitions of what is a monopoly? What is monopolistic abuse? What is the market? You know, what is the barrier to entry? What are the barriers to exit? What is time? What is lock in? How much concentration is too much? These are all new questions in an Internet space and I can only hope that the regulators move slowly because I don't think the answers are clear and any answer we give today will be wrong tomorrow. I mean, today, isn't it sort of absurd the fuss we made over Microsoft, now, in retrospect? Now Microsoft looks like the underdog right? We were so worried about their monologist abuse of the desktop. I mean, desktop, when was the last time you even saw your desktop?
Question: How is the Internet changing the face of manufacturing?
Chris Anderson: We have learned a lot on the Web. We've learned a lot about sort of what happens when you democratize the tools of production. In the case of the Web, democratizing the tools, the publishing, the broadcasting and communications. We saw what happens. First of all, more things are made and more people make them. You end up with a long tail of products and different ways to engage and we learn a lot about who we are and what we want.
We are now starting to democratize the tools of manufacturing as well. That was true for bits and we're now starting to do it for atoms. One of my side [jobs] -- my wife calls it a hobby because I don't make money, so let's call it a hobby -- I have a Robotics company and we make autopilots, we make unmanned aerial vehicles, open source ones. To look at us, we look like an Internet company. We're a couple guys with -- four guys with laptops, right? No manufacturing facilities to speak of. No warehousing, and yet we make really sophisticated electronics that look like the kind of stuff you'd get from Sony minus the packaging.
How are we able to do that? Because the global supply chains of electronics are now impedance match to the individual. I can push buttons -- so what happened to the music industry when you could push buttons and make music? We saw the sort of fragmentation, balkanization in the music industry. On your laptop, you can make music, mix music, distribute music, and market music. It was all sort of digital. You are starting to do the same thing with stuff. I can design products. I can push buttons. Factories in China will ramp up and make them. I can make them in units of 10, 100, 1,000. And we now have the ability to target markets that are small.
Sony will not make a product for 1,000 people. But 1,000 people is perfect for us. And there are a lot of 1,000 people markets out there. Because the global supply chains and manufacturing are now on the Web, are now easy to access, are now willing to scale down to our level, you see this explosion of amateurs and professionals and people who are moonlighting and sort of saying, "Well, you know, this isn't a big product, but it is a product and I can make it happen." The garage is now has global impact.
This plays out in a lot of ways. You talked about the ratio of intellectual property versus atoms. The old model stuff is that the raw materials cost a lot and then manufacturing cost a little bit on top of that and that was the price. The new one is that the raw materials cost like almost nothing. Silicon and various sorts. And all the value in Intel chip, for example, is an intellectual property in that chip. What happens if you choose to give away the intellectual property? We saw what happened in software.
If all the value in a Microsoft product is the intellectual property went in to coating it and not the reproduction of the bits, then -- and you choose not to charge for that -- you end with Linux, you end up with my MySQL, you end up with Apache, you end up with Open Source software. We're doing the same thing with hardware, Open Source hardware. If we don't charge for the intellectual property in a product, settling the private **** fallen price by ten-fold or more. You're seeing not only explosion of niche products but niche products incredibly low prices because they're driven by businesses that don't require those high margins to survive; they're being done for other reasons, for other incentive[s], these non-monetary incentives like reputation and attention and expression and fun, doing it for your own purposes and sharing it with the world.
All those things that made Open Source software such a disruptive force are now starting to play out with the real stuff.
Question: What advice do you give businesses who want to test these waters, but not risk driving off the cliff?
Chris Anderson: There are a lot of businesses that are scaled for a million unit or more in markets and if they release a product that sells in the 10,000 units and they pushed it out in their supply chain, that's really costly. I'm not sure that, Intel for example, always looks for billion dollar markets. If I offer Intel a million dollar market, that's huge for me, but it does not move the needle for them. I understand that and I'm not suggesting they should build a factory only to discover that's only a million dollar market, but what I am thinking is that the R&D cost, the product development cost -- the reality is all of us who do product development are guessing. You can focus group and you can whiteboard and you can think all you want, but we're fundamentally guessing and until the product gets in the marketplace we can't know.
Let me tell you a little story, if you'll indulge me. There was a movie a couple years ago called Flash of Genius about a guy who invented the intermittent windshield wiper in this garage, as one does. He then goes to the big car companies and says, "Are you interested?" And they said, "Maybe, yeah." And he said, "Okay. I want to make it and sell it to you." And they're like, "Dude, you don't have a company or a factory." But he says, "I want to do it." So he has to build a factory, build the production lines and hire work force and by the time he's halfway through, they steal his idea and he's driven out of business and insane. The story then gets very dramatic and that's how it comes into a movie. But you look at the same thing today and you say, "What would that inventor do today?" That inventor would come up with the idea, he would then push a couple buttons and then some factories in China that already exist would start making this. And he could say, "Do you want this?" And the company would say, "Yes." He says, "I can sell to you right now. How many do you need?" And they [say], "Well, we're start with 1,000 and we'll scale up," and it would all work brilliantly. And he wouldn't be driven out of business.
That model distributed innovation. Letting the community sort of invent products, try them out at small scale, figure out the bugs, whether there is real demand, and then use the big company's power to scale them up to mass markets. That feels about right. I talk a lot about Lego; that's a company -- I'm on one of their Advisory Boards and Lego has been very good at tapping their sort of passionate enthusiast community to develop products and then use that experience to help create official Lego products, to help create evangelism for official Lego products and to ensure that an official Lego products are better at no cost to Lego.
I mean, there clearly are limits, but we've just scratched the surface. Right now we're in an era in America where a couple things are clear. First of all, we need to create jobs. Second of all, Detroit's model is in decline. So here's a test. This is the way I think about something: if this is real, if this is big, if this is sort of a real game-changer, then it should work not just on the Internet, but in Detroit. Can you rebuild the car industry along these lines? Obviously the answer is not clear yet, but it's been interesting to watch the experiments. On some level, you've got the Silicon Valley entrepreneurial model with Tesla and Fisker, etc., but you're now starting to see really long tail -- a company called Local Motors out of Boston, which is exactly this model. They're creating units of one, two, etc. You build your own car but they make it so easy for you that you don't need a welding torch or anything much more than a wrench. They Open Source the platform so you can get a car, you can build a car -- it's easy -- you can maintain the car. You can say here’s a feature I’d like this car to have. You can develop it. They’ll find ways to produce it for you to sell to other people who have these cars. Again, it’s not going to replace Detroit but it’s interesting to see that there does seem to have some application model even to the most traditional big manufacturing industries as cars.
Question: What’s an upcoming technology that will disrupt the industry?
The simple answer to your question is the most disruptive thing I can see right now is the fact that you and I are carrying GPS chips in our pocket. If you have an iPhone in your pocket or any other smart phone, you’ve got a GPS chip.
Now we’re not doing much with them right now but we have, for the first time in history, the capacity to link our physical world, the world we live in, to the virtual world. You have not just a GPS chip, but an internet connection in your pocket; a broadband internet connection. We have not quite figured out what to do with that yet. There’s a little alternative reality. There [are] these location aware – augmented reality was the phrase I meant. I think that is a game changer and it’s very rare, by the way, that the enabling infrastructure would be put in place before application to use it, but that day has happened.
I think GPS and the internet combined is a game changer. Now I’ll add just one thing on top of that. The fact that your phone is not just GPS and internet connection, but also other sensors, accelerometers, it has proximity sensors, light sensors, things like that. It could have other sensors. You know, we’ll see what we do with that. To what extent could that be used for health care? To what extent can that be used for, sort of, environmental monitoring? I don’t know but we now have nodes. We have smart nodes in people’s pockets, in their hands, spread all around the world, connected to each other and the internet that know where they are. I think that’s a big deal.
Question: Which CEO is using technology the most successfully in this new normal economy?
Chris Anderson: I’m a huge fan of what Twitter – What Biz Stone and Williams have done with Twitter and I’m also going to use 37signals as my other example. I could name hundreds but those are just two sides of the coin. What I like about Twitter is that they didn’t over think it. They built a core platform, pretty open, and then let the ecosystem develop the clients and the iPhone apps. They let the community develop the hash tags and the conventions, etcetera. They were incredibly, I think, humble and open minded to where this was going. They didn’t have this sort of doctrinaire vision of this is where it’s going and you do it our way. It was more, sort of, like here’s something useful, you’re free to find even more useful ways to use it. Over time as these become accepted, maybe we’ll enhance that. I think that particular openness, that sort of default openness, is a very smart technological way to go. Because what you’re saying is you have the capacity to make us better and we’ll learn from you.
37signals is a different approach in that they are relatively lean and targeted. They are not trying to become Microsoft. They know who they are. They were kind of born on the web and, as a result, the products sort of feel organically web centric.
They use a charge model so they’re not really free. I think they have free trials but they quickly convert you. It’s based on organic growth. They had a revenue model from day one. It’s sustainable. That’s a business where they create a product that consumers want. They know who their consumers are. Their cost base isn’t too high, and they make money. End of story. It’s like the way God intended it. Those two models, both very web centric, one sort of saying we’re not going to let monetary issues get in the way of openness, we’re going to let the product evolve. The other’s saying, we’re going to be organically focused on making money from day one and not overbuild. The two effective strategies today.
Topic: Small is the new big
Chris Anderson: I do think this is the golden age of small business. It may not feel that way to a lot of small businesses, but I think time will show that in this current crucible that whether people started small business either because they could or they had to because they were being employed by big businesses, that we will see the seeds of a stronger economy going forward. To answer the question with a little historic context, Ronald Coase, the famous economist, prize winning economist, in the 50s and 60s came up with a theory to figure out why companies exist. It is kind of paradoxical on some level. Countries work best among democratic principles.
Markets work best among free market principles and yet companies work best among very dictatorial lines. Very top down, organizational lines. Why is it that companies exist? What is the purpose of us going to work every day to work in an office next to others? He came up with the concept of lowering transaction costs. That it was – The reason companies exist is to make it easier to get things done. That rather than sort of saying, well I need this thing made. Where can I find a guy that makes things? Instead I turn to the guy seated next to me whose job it is to make things and say do this. And he understands. He’s got tools. We have the conventions. We have the trust relationship. We’ve got [that] things can happen more quickly. What’s interesting is that era defined the 20th century. Lower transaction cost was the advantage of the firm. Now we’re in an era where it’s completely reversed. Now big companies have bureaucracy. They have red tape. They have long procedures. They have certain profit requirements. The transaction costs are actually higher inside the walls of a big company than they are outside. The reason that when Ronald Coase was talking about this that transaction costs were closer was that it’s hard to find that person that’s just the right person to work with you. Now it’s easy to find. The fact that I can – It’s often – Bill Joy famously said that the smarter people in the world for any given project don’t work for you. That’s a problem if you can only work with people that work with you. I mean, why are you working with this guy? Is he the best person in world?
No, he’s the closest person in the world. Now it’s incredible easy to find the best person in the world and to get them to work with you. The internet has provided a sort of global lowering of transaction and so we can now, it’s often more efficient to look outside your company and, you know, I’m joking on some level. The idea of finding the right person via Elance versus your internal HR is actually often easier to go outside and get things done. What that’s done is that it’s said we have a diseconomy of scale with big companies. The bigger they are, the harder it is to get things done. Small companies are nimble. They’re focused. The cost base is lower. They don’t need big markets so they can target more narrow opportunities. Not to say that it’s easy to raise capital or that all small companies will succeed but this is a great time because it’s never been cheaper to start a company with all this free stuff. I’ve been talking about free products, but they’re also consumers of these products. Open source software, hosted solutions, all this cloud stuff, those will lower the cost of starting a company. The internet has lowered the barrier of reaching products. These global markets of talent have lowered the cost of finding people the right people to work on your project. All of it is really creating an army of competitors to the large company model. Large companies are still great at mass but there is a long tail. And large companies are bad at the long tail. Small companies are perfect for the long tail. And we’re not going to see a battle between the two.
Let’s take a classic software – I have a company like that called BookTour.com. We are four guys with laptops, basically, no infrastructure. We have no office. We have no servers. Ten years ago we’d have some servers and rooftop parties and an office and no doubt t-shirts. Now we have nothing. The software’s on Amazon’s web services. The code is open source. We work out of our homes. I’ve worked off my iPhone in between meetings. It’s all on the credit cards. This a company that didn’t need to raise venture capital. Increasingly you’re seeing companies like this where you can start a company on a credit card. You can offer products for free to thousands of people. Once you reach tens of thousands and hundreds of thousands and millions, you start to deal with real costs and at that time, you probably do have to raise some money. We did in the end, when we got there. But what’s nice is you can sort of test your product. You can reach that sort of, is there really something here? You know, are my premises correct? You can do the reality check before you raise the money. When you do raise the money, if you do raise the money, you’re raising it from a position of strength. You’ve proven your utility and the question now is scaling money rather than creation money.
Recorded on September 30, 2009