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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[…]

It’s Google. Surprised? Wired’s Chris Anderson describes what the universe would look like in this new way of doing business.

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.

Recorded on September 30, 2009