If there is one medium that has shattered the old adage, "there are no
free lunches," it is perhaps the Internet. Free PCs, free phone calls,
free content, free information managers, free ISP, free fax, free DSL, free
e-mail, free Web hosting, free shipping... the list goes on and on. Not to
mention the countless number of promotions and deep discounts that can be
had online on any given day. Welcome to the new paradigm of running a
business, in which the consumer (you and me) gets the products and services
THE ECONOMICS OF FREE LUNCH
OK, this approach is not entirely "fresh." Businesses have always
relied on giveaways and discounts to attract customers and build market
share. But such tactics have never before been carried out to such a degree.
Some people contend that such practices cannot possibly be maintained over
the long haul, and without meaningful profits, companies and many of their
shareholders would be faced with a rapid demise. Others claim that we are
just at the beginning of a new phase in which more and more products and
services will be given away to consumers. I believe that both statements
have merit but before I give you my reasons let's conduct a quick background
Our free market society has always fostered an environment of
competition. By shifting the control of business from the government to the
private sector, America and many industrialized nations have reaped vast
benefits in economic prosperity, staying competitive on a global scale. Even
though some of us hold capitalism in contempt, the reality is that through
capitalism our society has been able to progress in leaps and bounds. Sure
there are dark offshoots (e.g., pornography, investor scams, etc.) but in
those cases minimal government regulation can effectively intervene and
curtail their activities. The Internet and the World Wide Web are just
natural extensions of free market society.
WHAT'LL IT BE?
Many of the early players recognized the two basic tenets of expanding a
business, online or offline: Offering free or low cost products, and
advertising. Netscape, Yahoo, Microsoft, and many early adopters of the
Internet are classic examples of online businesses that gave away (and
continue to give away) products and services for free. This model continues
to be the driving force behind many Internet companies who continue to pop
up like mushrooms. The recent stock market debacle, which sliced the market
caps of many of these companies, has been a wake-up call for many investors
who poured billions of dollars into them.
But is it so wrong for a company to go into red before it sees black? I'd
say no. Many successful blue chip companies have had to deal with negative
cash flow at times in order to carry out their objectives, many of which
have had to do with expanding market share. Sure, investors got too greedy
when they drove up the share prices of many Internet startups, but that is
hardly the fault of these companies. I am willing to bet that had these
companies' stock prices stayed at sane levels, the market correction and the
backlash would not have been as severe.
There is no argument that startups eventually have to show profits, and
with the investors' patience on the wane, this had better be sooner than
later. So how will they be able to achieve that? Interestingly enough, this
takes us back to the two aforementioned rules of online business expansion.
They can give away their products and services for free but they must
also have a solid plan to begin reaping revenues from their market share
expansions. This has proven to be more difficult to show in the real world
than on paper. When customers have been accustomed to getting free phone
calls or free faxes, it becomes extremely difficult to turn them into paying
customers with the same basic services, especially when they are led to
believe that these services will remain free indefinitely. A few years ago
when wsj.com (a service of the Wall Street
Journal) went online for free, I became an avid subscriber. A few months
later when it transitioned into a paid service, I decided not to re-up my
commitment, as I couldn't justify paying for a service that I was getting
for free. A better approach would have been to provide readers with paid
enhanced services and in so doing they would have realized a wider
readership with possibly higher revenues drawn from their enhanced services.
The trick, of course is to make these services valuable, enticing free
members to become paying customers.
More than any other online revenue generation model, online advertising has
proven itself to be the driving force behind the businesses that operate
online. After all, it is mainly advertising that keeps the biggest online
company of them all -- Yahoo -- profitable. It's simple to see why. The Web
has become a regular hangout for the masses and advertisers cannot afford to
ignore such a tremendous media. In fact, forecasts predict that by 2004
online advertising will overshadow television advertising. A bold claim for
sure, but not so surprising considering the convergence factor. As all types
of media converge onto the Internet, advertising will follow suit, and those
companies that are well positioned in this sector will handsomely benefit
from such growth.
SO, WHAT'S THE DAMAGE?
So is your free Internet phone or fax truly a "free lunch?"
Well, that depends how you look at it. If you can put up with a few
marketing messages and some advertising with the obligatory cookies, then
these services are indeed great deals. For the rest of us there is always
the paid route. I for one will continue to use JFAX.COM, Hotmail, Yahoo, and
Alta Vista ISP services as long as they continue to remain free, even if
that means an occasional unsightly banner or an e-mail or two. How do you
feel about free online phone service? E-mail me your comments, preferably
from your free online e-mail account.
Robert Vahid Hashemian provides us with a monthly dose of reality in
his own inimitable style. Like what you've read? Check out past columns
online at www.tmcnet.com/it.