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Reality Check
June 2000

Robert Vahid Hashemian

Free Lunch? You Bet!


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 for free.

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 check.

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.

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 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.

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