Open Access News

Chris Anderson, Free! Why $0.00 Is the Future of Business, Wired Magazine, February 25, 2008.  Anderson doesn't talk about digital scholarly publishing, though he does talk about other kinds of digital publishing.  How far does his analysis carry over?  Excerpt:

Thanks to Gillette, the idea that you can make money by giving something away [razor blades] is no longer radical. But until recently, practically everything "free" was really just the result of what economists would call a cross-subsidy: You'd get one thing free if you bought another, or you'd get a product free only if you paid for a service.

Over the past decade, however, a different sort of free has emerged. The new model is based not on cross-subsidies — the shifting of costs from one product to another — but on the fact that the cost of products themselves is falling fast....

You know this freaky land of free as the Web....

[T]ake one example. Last year, Yahoo announced that Yahoo Mail, its free webmail service, would provide unlimited storage. Just in case that wasn't totally clear, that's "unlimited" as in "infinite." So the market price of online storage, at least for email, has now fallen to zero (see "Webmail Windfall"). And the stunning thing is that nobody was surprised; many had assumed infinite free storage was already the case.

For good reason: It's now clear that practically everything Web technology touches starts down the path to gratis, at least as far as we consumers are concerned. Storage now joins bandwidth (YouTube: free) and processing power (Google: free) in the race to the bottom. Basic economics tells us that in a competitive market, price falls to the marginal cost. There's never been a more competitive market than the Internet, and every day the marginal cost of digital information comes closer to nothing....

[The] difference between cheap and free is what venture capitalist Josh Kopelman calls the "penny gap." People think demand is elastic and that volume falls in a straight line as price rises, but the truth is that zero is one market and any other price is another. In many cases, that's the difference between a great market and none at all.

The huge psychological gap between "almost zero" and "zero" is why micropayments failed. It's why Google doesn't show up on your credit card. It's why modern Web companies don't charge their users anything. And it's why Yahoo gives away disk drive space. The question of infinite storage was not if but when. The winners made their stuff free first....

The most common of the economies built around free is the three-party system. Here a third party pays to participate in a market created by a free exchange between the first two parties....It's the basis of virtually all media.

In the traditional media model, a publisher provides a product free (or nearly free) to consumers, and advertisers pay to ride along. Radio is "free to air," and so is much of television. Likewise, newspaper and magazine publishers don't charge readers anything close to the actual cost of creating, printing, and distributing their products. They're not selling papers and magazines to readers, they're selling readers to advertisers. It's a three-way market....

There are dozens of ways [beyond advertising] that media companies make money around free content, from selling information about consumers to brand licensing, "value-added" subscriptions, and direct ecommerce (see wired.com/extras for a complete list). Now an entire ecosystem of Web companies is growing up around the same set of models....