Como funciona um diferencial

Não subestime os mais velhos...

Procurando uma imagem sobre o funcionamento de um diferencial, acabei encontrando esse vídeo, de 1937. Não se deixe surpreender pela data. O vídeo é sensacional, incrivelmente didático. Fico imaginando o que os criadores dele fariam com os recursos de hoje.

Alguns acharam ridículas as sequências com as motos e as pessoas correndo no final, mas pense nisso no contexto da época, sem animações computadorizadas ou coisa do tipo, e o criador conseguiu ilustrar muito bem a necessidade e o funcionamento do diferencial com ele.

“Single?” Lawn Signs Conquer the American Landscape

“Single?” Lawn Signs Conquer the American Landscape

Over the past two years, I have developed a growing fascination with lawn signs.  Not the ones advertising politicians or plumbers, but the ones advertising websites.  Dating websites.
These signs are so prevalent in my area that I decided to launch a private investigation into who was behind them and just how far they stretched.  What I found started in my small home town and led me all the way to the secret guerilla marketing infrastructure of a multimillion-dollar company…

Background: 

In the fall of 2007, I was about a year into an Analyst gig at a large web-focused private equity firm.  My job description was simple: do whatever it takes to find interesting companies who are making lots of money on the internet.
During this time, every radio commercial, billboard, and t-shirt bearing a domain name held a special meaning: it represented an opportunity to find the next big deal.  As you can imagine, the same names kept popping up again and again.  I was looking for new deals everywhere.
One weekend, I trekked down to South Jersey to visit my parents in my hometown of Glassboro.  The town sits about 30 minutes southeast of Philadelphia and has a population of less than 20,000.  As I drove past my old high school, my deal-hunting subconscious noticed something bizarre.  Stuck in the grass by the curb was a white lawn sign about a foot tall with a very simple message in black Times New Roman: “Single? www.GlassboroSingles.ORG”
It looked like something the local contractor would ask to stick in your front yard while he replaced your roof.  Except… well, it was plugging a dating website.  I had about a million questions, but two immediately simmered to the top:

• Glassboro is a tiny market of nominal interest to even local advertisers.  Who would register a domain, let alone build a website, to target our tiny population?
• Who in their right mind advertises websites with lawn signs?

By the time I pulled into my parents’ driveway, I had convinced myself that the site was the product of some overzealous local entrepreneur.  I wrote off the lawn sign as an amateurish stab at guerilla marketing.  When I drove out of town the next day, the sign was gone.
Fast forward a few weeks.  I was back in New York, rushing up 5^th Avenue on my way to work in Midtown.  As I wedged myself through the usual crowd, something stopped me in my tracks.  Eight feet in the air, tied to a lamp post, was a white sign with black Times New Roman: “Single? www.FifthAvenueSingles.COM”
I promptly morphed into one of those sidewalk-obstructing idiots who stares up into the sky and infuriates the people who actually have to be somewhere.  Aside from the URL, this sign was identical to the one I had seen in Glassboro.  By the time I got to my work, I decided that there were four possibilities:

• This was a complete coincidence and these were the efforts of two completely separate businesses with identically unorthodox advertising methods (unlikely).
• The overzealous Glassboro entrepreneur had loaded up his car with lawn signs and decided to extend his guerilla marketing scheme to the Big Apple (less likely).
• Some NY-based business had done some marketing in the tri-state area and decided Glassboro was a ripe market (even less likely).
• There was something bigger going on.  This struck me as the most likely case, but raised a question that made my head hurt: if whoever is doing this has the ability to target New York City but somehow made their way down to Glassboro, how many of the towns in between have also been hit?

Not long after, I stumbled onto another clue.  I was in Central New Jersey on my way to give a guest lecture at Princeton University, which is about the geographical midpoint between New York and Glassboro.  As my cab rolled through neighboring West Windsor Township, I saw a familiar-looking lawn sign wedged in the grass alongside the road: “Single? www.WindsorSingles.ORG”.
That one did it for me.  At the absolute least, I was now convinced that this lawn sign business had its tentacles stretched into almost every town in the state of New Jersey. It was worth spending some time to learn more.

Industry Research:

In talking to a few colleagues about this fascinating business, I learned that most private equity shops shy away from dating sites for a number of reasons:

• Dating sites are known for tremendously high churn rates (if your product works, your customers never have to come back; if it doesn’t they see no reason to come back).  This means dating sites have to keep a steady flow of new customers coming into the top of the funnel in order to survive, let alone grow revenue and profit.
• High churn rates mean new customers have low, volatile expected lifetime values.  This has a negative impact on the equity value of each customer, making it difficult to justify the valuation multiples seen by membership-driven websites in other verticals.
• The need to keep more and more new customers coming in creates a necessity for massive marketing budgets that often involve aggressive affiliate marketing (i.e. paying third parties to bring you new customers).  This further damages the perceived value of the user base to a potential investor or acquirer.
• Like social networking, “online dating” is a natural monopoly (or, at best, a natural oligopoly).  A dating site’s quality is determined by the number and quality of matches it can provide a new user, which is directly tied to the size of its membership base.  This makes it extremely difficult to enter the market. 

However, just because something isn’t a great investment prospect doesn’t mean it’s a bad business.  Many, many people have become obscenely wealthy in this industry (both online and offline).  The technology required to connect two people is trivial, meaning your only real expense is the cost of customer acquisition.  If you are part of the natural oligopoly, your product quality will be high and people will seek you out.  This cycle lowers your costs and sends your margins skyrocketing.
Furthermore, the online dating industry has made a lot of secondary players wealthy thanks to affiliate marketing.  At times, online dating sites have paid as much as $100 per head for new paying customers, and routinely pay out at least a few dollars for new “free trial” users or other prospects.  This means anyone with the power to herd single internet users can potentially tap into a strong monetization engine.
With this information in-hand, I started to see some beauty in the lawn sign model.  Since virtually all dating sites are national, even ones with millions of members can under-serve certain geographic regions.  The “YourTownSingles.com” approach leads potential members to believe their area will be extremely well represented in the site’s population.  This creates the perception of high-quality matches, even if the total user base is small.
I had visited each of the URLs I saw on the lawn signs, and each contained a multi-step form asking for a bunch of personal contact information.  This led me to suspect that the business wasn’t running its own site, but was acting as an affiliate marketer.  Often times, an affiliate’s commission is tiered based on the level of pre-qualification of their referrals.  This means that an affiliate can make a lot more money selling my information to a third-party dating site if they have my name, e-mail, phone number, age and gender than if they simply have my e-mail address.
Given the large amount of information these pages required, I became fairly confident that I had figured out what was going on (for the most part).  The business makes a small investment ($50-100) in buying a domain name and a few dozen lawn signs for a given town.  Then they put up a form landing page at the URL, plant the signs, and see what kind of return they generate by luring the townsfolk to their site and then passing their information on to user-hungry dating websites.  If the ROI is positive, they keep at it.  If not, they try another town.
After reaching these unverified conclusions, the lawn sign business slipped out of my mind for quite some time.  When I quit my private equity job to found RJMetrics this past July, however, my interest was reignited.  The reason: I still see these signs everywhere.

Relapse

I seriously can’t take a ten minute drive without passing one of these signs.  What fascinates me more, however, is that they never seem to last more than a few days in one spot.  In most cases, I’ll see a “Single?” sign somewhere and the next time I drive by it will be gone.  I can only assume that these signs are being taken down by whomever maintains the property where they are placed (they are almost always stuck in the lawn of a public park or building).
The fact that these signs are still so prevalent today, more than a year after I saw the first, means two amazing things:

• Despite their short shelf-life (or, lawn-life), sticking these plastic signs into the ground in small towns has proven financially viable (I can’t imagine that a year’s worth of data to the contrary would result in the business continuing to print and plant these signs).
• Someone must be monitoring and replacing these signs as they are taken down.  When you consider the number of towns likely involved in this system, it’s clear that this is far from a one-man show.

Then, just this past Friday, I saw the most amazing sign yet.  A town not far from my house is called Haddon Heights, NJ.  It is a miniscule town that occupies just 1.6 square miles of land and has a population of barely 7,000 people.  Furthermore, 56% of the population is married and 25% is under the age of 18 (thanks Wikipedia!). Not exactly a ripe market for a dating business.  Nonetheless, as I drove through the town, I saw (no exaggeration) twenty signs that read “Single? www.HaddonHeightsDating.COM”
Since the town seemed to have such a surplus, I decided to pull over and pick up a souvenir:

My new souvenir on the RJMetrics couch

Stealing a lawn sign brought me to a realization: these signs are driving me insane and I have figure out who is behind them, how big this system is, and whether they are actually making any money by doing this.  It was time to do some real digging.

How Big Is It? 

First stop: Google.  Dozens and dozens of crafted queries designed to find the slightest mention of one of these yard signs anywhere on the internet turned up dry.  Absolutely no one out there seemed to be aware of these things (and those that were didn’t seem to care).
Maybe this was a smaller operation than I thought.  To answer that question, I set out to discover just how many of these websites were actually out there.  Since these sites are all just basic lead-gen landing pages, I speculated that the infrastructure of this system was a lot like a domain parking business, where a single web application feeds different content to a large number of domains based on which domain is accessed.  If this was the case, all of the domains would likely correspond to the same IP address.
I pinged each of the four websites I could recall to see what IP addresses were serving them.  Here are the results:

• GlassboroSingles.com: 200.46.241.132
• HaddonHeightsDating.com: 66.252.239.220
• FifthAvenueSingles.com: 69.41.228.6
• WindsorSingles.org: 66.252.239.220 

Four domains and three different IPs.  It appeared I might be wrong about the parking servers, but the fact that one of them showed up twice gave me some hope.  It was still possible that these domains were parked in massive batches on various servers.  However, they weren’t all in the exact same place.  To get a sense of where the servers are actually sitting, I used an IP lookup and traceroute tool.  As it turns out, here is where these servers reside:

• 69.41.228.6 is in Dallas, Texas
• 66.252.239.220 is in Miami, Florida
• 200.46.241.132 is in Panama 

Why the scattered infrastructure?  Is it possible these identical road signs that all appeared within 100 miles of each other are actually operated by different companies?
Regardless, I had the data I needed to size up the operation.  With the IPs in hand, I turned to the “Reverse IP” tool at domaintools.com.  The tool is simple: you provide an IP address and they tell you how many websites reside there.  If you want, you can buy a complete list for a few bucks.
The results:

• 66.252.239.220 hosts about 5,100 domains
• 200.46.241.132 hosts about 3,800 domains
• 69.41.228.6 hosts about 500 domains

Wow-is it really possible this lawn sign network includes so many domain names?  I whipped out my credit card and purchased the answer.  I stared in disbelief at an Excel file containing every domain name hosted across these three servers: 8,870 of them.  They all fit the formula: a town name and a dating keyword.
I wrote some Macros in Excel to pull out each domain’s TLD (i.e. .com, .net, .org), name scheme, and the name of the town it represented.  Here are the results:

• Unique Domains: 8,870
• Unique Town Names: 5,902  
• Top Level Domains:
  
  • .COM: 65.7%
  • .ORG: 29.6%
  • .NET: 4.4%
  • .US: 0.3%
  • .INFO: <0.1%
• Sign Text Patterns (____ is the name of a town or city):
  
  • ____SINGLES: 78.0%
  • ____DATING: 12.2%
  • ____MATCH: 3.0%
  • ____DATES: 2.0%
  • ____PERSONALS: 1.8%
  • SINGLEIN____: 1.0%
  • ____SINGLE: 0.5%
  • ____CHRISTIANSINGLES: 0.5%
  • ____GREATEXPECTATIONS: 0.4%
  • DATING____: 0.2%
  • SINGLES____: 0.2%
  • ____PERSONAL: <0.1%
  • ____ASIANS: <0.1%

It’s important to note that this massive list is almost certainly not the list in full.  I remembered four signs I had seen and they turned up three servers full of domains.  It’s extremely likely that more signs might yield more servers.
I remembered originally thinking that this business was something homegrown to South Jersey- clearly I was wrong.  However, now I had the information I needed to determine just how far these yard signs stretched.
I loaded a master list of every city in the country and wrote an algorithm to link each domain to a specific state.  Naturally, there are some town names that appear in multiple states (which are a jackpot to these guys, since one landing page can serve multiple markets), so in those cases I assigned the domain’s state as “multiple.”  Also some domains contained city nicknames or abbreviations, making it tricky to classify them in a quick batch process.  Despite these issues, I was able to classify over 80% of the domains.
As it turns out, there were domains corresponding to all 50 states and Puerto Rico.  Additionally, the names were distributed surprisingly evenly across the states.  No single state represented more than 8.4% of the domain population, and the top 20% of states only represented 54% of the domains (I would have guessed an 80/20 distribution or worse). The top ten most referenced states are listed below:

• Texas: 8.4%
• Wisconsin: 7.8%
• West Virginia: 5.7%
• Pennsylvania: 5.7%
• California: 5.6%
• New Jersey: 5.0%
• Virginia: 4.7%
• New York: 4.7%
• Washington: 3.3%
• Tennessee: 3.2%

Clearly, this effort isn’t isolated to my tri-state area (in fact it appears to be even more prevalent in states like Texas and Wisconsin).
Let’s take a moment to consider the potential scale of this operation.  Given the number of domains registered and the frequency with which signs appear to be replaced, I don’t think it’s unreasonable to speculate that whoever is responsible may have placed literally hundreds of thousands of signs into American soil over the past two years.

Who Is Behind It?

As I mentioned before, I was intrigued by the fact that these domains live on three separate web servers from separate hosting providers in separate geographic locations (Florida, Texas, and Panama).  In order to find out who is behind this operation, I first needed to confirm that these domains and servers were in fact managed by the same company.
I visited several of the landing pages across the separate servers searching for clues that could tie back to an owner.  I found nothing by way of contact information, but I did see enough to conclude that all three servers are related.  While the designs vary slightly from domain to domain, all of the sites end up asking you the same exact questions about yourself and offering the same exact drop-down lists of answer choices.

Every Site Asks the Same Questions

Since I couldn’t find contact information on the webpages themselves, I decided to go find it on my own.
My first stop: WHOIS.  The WHOIS database is designed to serve as a master directory of all domain name owners, although in my experience there are no controls enforcing the submission of valid information.  Moreover, most domain name registrars now allow registrants to register anonymously by serving as a proxy for the registrant.  Despite these shortcomings, it’s always a good place to start.
I looked up a random domain from my list and was disappointed to see it registered to “Domains by Proxy, Inc”-which is basically GoDaddy’s anonymous domain name registration service.  Disappointed, I decided to try a few more just in case.  Most were by Proxy, but eventually found some variations.
Many of the domains on the Panama server turned out to be registered to NuStar Solutions, S.A. of Panama City.  On the other servers, those that weren’t registered by proxy were registered to IMAT Group of Vadodara, India.
The records didn’t provide domain names for these companies (their e-mail addresses were Yahoo or Gmail).  However, Google was able to come to the rescue and turn up their sites: www.imatgroup.com and www.nustarsolutions.com.
The sites revealed that both companies are offshore development shops.  Both are centered around web design services, but offer additional services as well.  NuStar mentions “Sign/Banner Advertising,” while IMAT mentions a more exhaustive list that includes “Guerilla Marketing Services,” “Sign/Banner Marketing,” “Localized Campaigns,” and “Direct Response Lead Generation.”  Sound familiar?
At this point, I came to the realization that every question I answered seemed to introduce two more.  In this case, they were “did someone hire these firms or are they acting on their own?” and, more confusingly, “how did a web design firm in Panama or India get a lawn sign physically planted in the front lawn of my high school in South Jersey?”
To find the answer, I decided that I wasn’t done with my WHOIS search.  Back when I was cracking into companies in New York, I discovered a tried and true trick for getting a CEO’s cell phone number: historical WHOIS records.  Often, the original registrant of a company’s domain name is its founder.  As such, it’s common for the founder’s personal contact information to exist at some point in the WHOIS database.  As the company grows, they change the record, but by that time (often unbeknownst to them) companies like domaintools have already saved the old information in their archive.
I went back to the list of domains and did an exhaustive search of WHOIS records looking for domains with WHOIS record changes.  I quickly noticed that all of the Panama domains were registered in 2006, whereas the India names were registered from about the Summer of 2007 onward.  This might explain the different servers; if a company hired these firms to register the names and administer the websites, perhaps they switched providers in 2007, leaving their infrastructure split in half.
Pretty soon, I hit the jackpot.
CLINTONDATING.ORG, which sits on the Panama server, was not registered to NuStar Solutions or by proxy-instead, it was registered to Terry Fitzpatrick at a company called “The Right One” in Norwell, Massachusetts.   At long last, I had a company name.  A closer look revealed another little present: Terry’s email contained a company website: therightone.com.
I visited the site and began to find some answers.  “The Right One” is a matchmaking service.  You provide them with basic information about yourself and they use it to match you up with a prospective mate.  Clicking the “Get Started” link on their website leads you to a familiar sight: a web form asking you the same exact questions that appear on the domain landing pages.  These were definitely our guys.
With one more click, I learn that The Right One has franchise offices across the country.  Check out this map from the “Locations” page on their website:

The Right One Office/Franchise Locations

Look familiar?  If you need a hint, scroll up and look at the top 10 domains by state that I listed above.  It’s a perfect match.  Even more telling to my personal story are these particular franchise locations:

• Cherry Hill, NJ: Neighbors Haddon Heights, NJ and is a 20 minute drive from Glassboro, NJ
• Lawrenceville, NJ: Neighbors West Windsor Township in Central NJ
• New York, NY (420 Lexington): Midtown Manhattan, two blocks from my subway stop 

Some quick research on the company itself yields a pretty complex business structure. The Right One is owned by a company called PAFCO International, which is itself a subsidiary of Together Management Group, Inc, which goes by the aliases TD Management Group and Together Dating Services.  The combined company employs over 500 people in over 80 offices across the United States.  If you assume the headquarters has at least a few dozen employees, that implies that any given satellite office is just a handful of people.
A January Inc. article mentions Together Dating as a client of Texas-based Instinct Marketing, a response-based marketing company that specializes in “vertically-focused websites.”  Texas, as you may recall, is the home of one of the company’s three web servers.  However, while Instinct Marketing may be Together Dating’s partner on the technology side, I find it hard to believe they’re the ones putting the signs in the ground.  The geographic correlation between sign spottings and franchise offices is simply too strong.

Does Yard Sign Marketing Work?

Remember when I said that certain dating businesses can print money?  This is one of them.  A 2006 press release reveals that the company was then bringing in about $45 Million of revenue a year.  I also found an unverified claim from a disgruntled ex-employee on ripoffreport.com that claims the company charges their customers from $3,000 to over $15,000 for their matchmaking services.
At those prices, the economics of the yard sign strategy start to make sense.  Yard signs like those cost about $1 apiece to print and if franchise office has a slow day they can send out their extra “relationships experts” to plant lawn signs within a 50-mile radius.  One successful new lead can bankroll thousands of new signs.

Some Closure (and a Shameless Plug) 

In the end, I consider this mystery solved.  My years-long fascination with these bizarre signs that seemed to follow me up and down the east coast is over.  As a bonus, I discovered an interesting company with an even more interesting marketing strategy.
Regardless of how you feel about Together Dating’s industry or its methods, you have to appreciate their tremendous, low-profile marketing machine and the data-driven technological infrastructure that supports it.  This company brings in 8 solid figures of revenue every year using nothing but yard signs, some parked domains, and a firm grasp of the data that drives their growth.  CEO Paul Falzone explained the importance of such data in a recent interview.
Even in this offbeat corner of the business world, success is a function of intelligence, strategy, and analytical decision-making. The online business intelligence tools we provide here at RJMetrics are designed to empower all online businesses with these strengths.  Our tools provide new echelons of accessibility to your existing data, allowing your business to measure, manage, and monetize better. If you’re interested in learning more, contact us for a free discussion about how we can drive growth in your online business (no lawn signs required).

This entry was written by robertjmoore and posted on November 6, 2008 at 10:26 am and filed under Business Profiles with tags affiliate marketing, dating, dating websites, guerilla marketing, investigation, lawn signs, local advertising, marketing, response marketing, signs, single, street spam, together dating, yard signs. Bookmark the permalink. Follow any comments here with the RSS feed for this post. Post a comment or leave a trackback: 

Technology Wants To Be Free - "Commodities prices tend to zero"

Technology Wants To Be Free

Last February during a break at the most recent TED conference I was speaking to Chris Anderson, current editor in chief at Wired about his planned next book, called FREE. (While we were talking, we were photographed and posted on Flickr by the co-founder of Flickr himself! How cool is that?) Nearly 10 years ago I had written a chapter in my thin New Rules for the New Economy book that focused on the role of the free and the economics of plentitude. I called that chapter “Follow the Free.” Almost nothing I’ve written has been as misunderstood as this short chapter. I’ve not had a Q+A session since then without this question coming up: “You say we should embrace the free. How can everything be free?”

The truth is that the concept of the free is easily misunderstood. Thus I applaud Chris’ brilliance in devoting a whole book to unraveling the mess. There’s much to be said about it, and even then we’ll just be at the beginning of understanding what free means. I originally thought I was done with the subject 10 years ago, but the continual questions, as well as the continual evolution of the commons, new social dynamics, new technological disruptions, and further research in the decade since have surfaced some new ideas. In particular I’ve concluded the free is deeply entwined into the very foundation of technology. I was sharing some of those emerging half-baked thoughts with Chris in the lobby of TED. Since that conversation I’ve discovered that the tie between technology and the free goes even further than I thought. My current conclusion can be summarized simply: Technology wants to be free.

Let me state it more precisely: Over time the cost per fixed technological function will decrease. If that function persists long enough its costs begin to approach (but never reach) zero. In the goodness of time any particular technological function will exist as if it were free.

This seems to be true for almost anything we make: basic things like food stuffs and materials (often called commodities), and complicated stuff like appliances, as well as services and intangibles. The costs of all these (per fixed unit) has been dropping over time, particularly since the industrial revolution. According to a 2002 paper published by the International Monetary Fund (“The Long-Run Behavior of Commodity Prices” by Paul Cashin and C. John McDermott, PDF), “there has been a downward trend in real commodity prices of about 1 percent per year over the last 140 years.” For a century and half prices have been headed toward zero.

Real Price of Industrial Commodities, 1862-1999 (Cashin and McDermott)

Let’s take just one example, the dropping cost of copper. Plotted over time, the graph of its price drifts toward the free (in the chart below the real price is pink). While it will keep heading toward zero, the curve follows a mathematical pattern. Assuming the functions remain the same the price will never reach its limit of the absolutely free. Instead it steadily creeps closer and closer to the limit, in an infinite series of narrowing gaps. This pattern of paralleling the limit but never crossing it is called approaching the asymptote. The price here is not zero, but effectively zero. In the vernacular it is known as “too cheap to meter” -- too close to zero to even keep track of.

As skeptics like to ask, “Well, if this is the destiny of everything we make how come my laptop is not free?”

So a couple of caveats. The first detail to keep in mind is that the cost over time (particularly over long periods of time) have to be normalized to account for inflation or depreciation. With inflation increasing the price of everything in the economy some 4% a year, an item could be headed toward the free at 3% a year and you would never notice it by looking at the dollar price. It would still rise 1% a year. So we need to readjust the dollar amounts each year to dial back the effects of inflation and other changes in the value of money itself. This is usually done in economics by calculating the inflation-adjusted prices relative to a designated year. It’s as if the old prices are quoted in a foreign currency and need to be converted to today’s US dollar. The new series of recalculated prices are known as “constant” dollars. In theory these prices should reflect the “real price.” Of course in everyday life we work with current dollars, and so in many cases a slow decline towards the free may not be as visible.

The more important detail is that the unit of function must remain fixed to be visible. It is relatively easy to track the real price of a ton of copper over time because a ton of copper 50 years ago is almost (I’ll explain that almost in a minute) the same as a ton of copper today. A chunk of this metal may be more (or may be less) desirable now, but its function, its service, its essence remains the same. Incidentally, the real price of copper is headed toward the free.

However the functions of stuff changes over time. Even commodities, which seem stable, can change over time. The purity of copper and other metals has been increasing. The nutrient levels of corn rise. The quality of basic commodities 50 years ago would simply be rejected today. In consumer goods, the evolution is revolutionary. Your laptop today may seem like the same laptop you had several years ago, but it ain’t. We still call it a laptop, but it is essentially an entirely new species of technology. The track of its price over time is thereby disrupted by the fact that its performance has changed while its name remained the same. If we wanted to track the real price of the laptop you owned three years ago a better approach would be to track the price of used versions of it on eBay. After deducting a penalty for it being used versus new, it is very clear that the cost of that generation of laptop – even if we could buy a brand new copy of it today -- is headed toward zero. And fast.

Brad Delong, economist at Berkeley, has studied the long-term shift in utility of goods. He writes:

“The wholesale city price of raw foodstuffs today amounts to four percent of consumer expenditure. It amounted to 20 percent a century ago.”

So at first glance, the fixed unit of “foodstuffs” is headed in real dollars down and down. But then he adds,

“Yet the share of food in household budgets has shrunk not by a factor of five but by a factor of two.”

What gives? The usual problem: even something as simple as modern foodstuffs have extra value that we ordinarily don’t perceive.

“The difference is that today much preparation is done outside the household: mixing, chopping, pre-cooking, combining, freezing, and processing all make cooking a meal a much less time-consuming process today than it was a century ago. Our food bill today seems so large because we count a very large share of the meal production process as a market expenditure. A century ago, much of this process was hidden inside the household and was never registered through a market exchange. To a large extent, Americans today are like rich Edwardian Britons in that they do have cooks. But today the counterparts of the last century's domestic servant cooks work outside the household, for companies like Nabisco, using very capital- and machine-intensive production processes.”

In other words, any service or product that can be easily defined will become a commodity and drop towards zero. The definition of a commodity is partly that which is a fundamental ingredient for other goods and partly that which is fixed in utility. The simplicity or complexity of a good is not really central to whether it is a commodity. If its utility function has become fixed by use, its price will head toward zero. A one minute voice phone call is an incredibly sophisticated, technically complex good, but its utility is fixed (one minute of okay sounding conversation) so it is quickly headed to being free.

What is not fixed – and not free – is telecommunications. Consumers and manufacturers want increasing voice quality, additional features (call forwarding), and all kinds of things that were never imagined paired with telephones before. So while the commodity of one minute of basic voice becomes free, your telephone bill continues to rise. Over time, every successful luxury becomes defined by its use and the other goods that piggyback on it. It then becomes a commodity.

GPS was a novelty luxury only a few years ago. It was expensive. As its technical standards spread into mapping services and hand helds, it becomes essential, and the basic service (where am I?) will become a commodity and free. But as it drops toward the free, hundreds of additional advance GPS functions will be added to the fixed function so that more people will pay ever more for location services than anyone pays now. Where-am-I information will be free and ubiquitous, but new services will be expensive at first.

No one finds this very radical; it’s almost econ 101. But when you start to point out that everything we make – including very physical and material goods, like airplanes and skyscrapers – are susceptible to becoming commodities, and very quickly, doubt sets in.

Sometime around 1998, shortly after my New Rules for the New Economy article appeared in Wired I was invited to speak to KLM executives in Amsterdam. I guess someone in middle management at the Dutch airline had seen my piece and thought that the rest of the staff needed to hear the full story. I wasn’t sure what I was going to tell an old-Europe industrial airline company but the gig was in Amsterdam so naturally I accepted. My speaking slot was an after dinner talk. The KLMers had a tour around the canals of Amsterdam, some drinks and then me. I spent a lot of time explaining the dynamics of the new free in the context of an intangible economy. I was quoting from my own book:

As crackpot as it sounds, in the distant future nearly everything we make will (at least for a short while) be given away free—refrigerators, skis, laser projectors, clothes, you name it. This will only make sense when these items are pumped full of chips and network nodes, and thus capable of delivering network value.

And then I ended with a custom prediction and what I thought was a very helpful model of how they could explore the free. Imagine, I said, if you made your airline seats free. Getting on a particular flight would be free, or almost free, or “as if” free. A customer would pay for everything else around that flight: the meal, hauling their luggage, movies, taxes, and maybe even the reservation. A person who walked up with no reservation, no luggage, didn’t want a meal, or rent headphones, might be able to fly for the cost of the taxes and airport fees if there was room. The cost of air transport per mile was headed toward the free, anyway, I explained. They should get used to the idea. Look, I said, Even if you find this prospect too radical, you have to begin to think in these terms because your certainly competitors will.

After some polite applause, a silver haired gentleman draped his arm around my shoulder and introduced himself. You could tell he was powerful. Charming and persuasive even before he said anything. He was the CEO, or chairman of KLM, or some bigwig, I can’t quite remember exactly. “Young man,” he whispered into my ear, “that was the most ridiculous talk I’ve ever heard.” He was serious in that Dutch way. I gulped. I wasn’t trying to be ridiculous -- provocative, perhaps -- but maybe my imagination had finally just gone too far. I mean the idea does sound pretty extreme. I didn’t have any evidence of it really happening. Maybe I had been living in California too long and need to get out of the country more. I thanked him for his honesty as politely as I could, and packed up my stuff and left.

However that encounter didn’t cure me of my habit of pushing the limits of the free. A little bit later I gave a talk to some automobile folks. Most of cost in making an automobile these days lies in the silicon electronics, computer chips, and in the work of assembly, and not in the actual steel and rubber needed to make its body. All the added premium values -- like GPS navigation, sound system, security, smart brakes – are certainly in the silicon. This makes a car primarily a “chip with wheels.” Automobiles, like air travel, are headed in direction where all software and digital devices are headed: toward the free. Imagine, I said, if you could give away a very basic no-frills car for free. It would be free to customers who agreed to buy all the fuel, insurance, maintenance and repairs to keep it going, as well as add ons, upgrades, and services like navigation, music and satellite radio from the maker. Sort of like getting a free cell phone for a five year contract from the carrier. But now you get a car for free with a five year contract. Not all cars would be free, of course, but at least one would be, and that one would redefine the competitive landscape for all car makers. No one came up afterwards to tell me I was ridiculous, but no one said my vision was inevitable either.

A few weeks ago, a Silicon Valley entrepreneur announced he has secured funding to build electric cars that will be given away to customers who buy the electricity from his company. We’ll see how well that works. But we know the principle of the free works in airplanes. Several years after my KLM talk, Ryanair took Europe by storm. Selling some tickets for a little as $36, Ryanair offered seats on planes within Europe “as if” they were for free. Riders paid essentially just the airport taxes. In fact many travelers complain that the bus fare to and from the often remote airports was more than the cost of the international plane ticket. In the context of the former monopolies exercised by nationalized airlines, of which KLM was one, double-digit airline seats were made “free.” Although Ryanair was launched in 1985, it wasn’t until the late 90s that it morphed into an industry disrupter. Inspired by Southwest Airlines and liberated by European airline deregulation, it remade itself into a low-cost airbus. Its real rocket to growth began in 2000 when it boldly moved its reservation system on to the web, allowing it to bypass the cost and time lag of travel agents and market directly to mobile young flyers. (It’s hard to remember that until very recently we all had to hire travel agents to book our flights.) Ryanair grasped the “free” approach. First they turned their customers into their own unpaid travel agents, and then they provided only basic seats and charged for the rest. A traveler got an almost free seat, but no free anything else. In a sign of things to come, in 2006 Ryanair began charging to check luggage. The result: their passenger-miles-flown have increased 25% annually for the past decade. And KLM? They had to merge with Air-France.

While Ryanair prospers giving away seats as if they were free, it is crucial to keep in mind that premium-priced executive jet taxis are booming at the same time. For many times more than you would pay for a commercial flight (it may set you back $100,000 a year), you can hire a jet service fly you to the same destination in a much smaller cramped plane on your own schedule. Private jet travel is now the fastest growing sector of aviation. As the free expands, so does the expensive.

This is an important point. There is more than one service being offered by an airplane, or a cell phone, or a car. The pure locomotive aspect of a car or plane is only one commodity. A car will move you from A to B, but it also offers privacy, immediacy of travel, a portable office, an entertainment center, status, and design joy. As a consumer you can balance those qualities you want for free and those you want to pay for. You can get a car that moves you for free, but you may have to pay for the sound and navigation system. Or you may pay for the car and the sound and navigation system free. How about either a free flight, and pay for luggage, or a paid flight and free luggage? All these options make the consumer king, because you pick and choose where you want your free.

We should expect to see the same range of zero-price options in cell phones and other electronic gizmos. You can get a free phone, and pay for connect time. Or someday we’ll be able to choose an expensive paid phone with free connect time. Or free phone and free connect time, but expensive social/location functions.

Almost any product or service can be unbundled into various combos of functions, where one of the strands is priced as free, while the others remain expensive. Razors and razor blades, printers and ink cartridges, banks and checking accounts are some of the ones we already have. But the promise of the network economy is that the zero price option is now – or soon to be -- available in every realm we can imagine. Food, clothes, medicine, shelter, transportation, as well as media. Even “impossible-to-be-free” areas like space travel, medical care, and real estate will all exhibit zero-price options. I will gladly wager that the cost per kilogram to launch material into orbit will eventually be “as if” zero, that custom medicines per dose will head toward the free (but you’ll pay for your DNA profile), and that even some rental properties will display the zero-price option.

But while we can expect the zero-price option (ZPO) in all industries and all major products and services, the corresponding counter price for the bundled functions will vary all over the place, often expensively. Somewhere refrigerators will be free, but the conditional functions (either buy all your food from Whole Foods, or pre-pay for electricity, or subscribe to a meal inventory program) definitely will not be zero. I like to think of it as the Zero-Price Uncertainty Principle. If you fix the price of one facet to zero, you can’t fix any of the other facets to zero. Only one function at a time can be fixed at zero.

To be clear, the ubiquity of the ZPO is within the domain of the commodity; it is an option for the consumer. It doesn’t mean the ZPO is available everywhere, only that some company somewhere will offer the ZPO for each function.

So what about Google? One after another of their products are free. Free email, free calendar, free docs, free design tool, free maps, and of course free search. Is it breaking the ZPO Uncertainty Principle? Well, each of these products has its own dynamic and zero-point options. Google has the same opportunities with them that all producers have. They offer free commodities and charge for premium services. Search is free; yet they charge enterprises for custom Google search. Or they shift their customer from reader to advertiser; in Google’s eyes the chief audience for search is advertising companies, whom they charge. Or they develop additional functions and services, like desktop versions, which they can sell. At least for a while, until they too become commodities.

The zero-price option, which was once very rare, is now being driven to ubiquity by network effects. In the last century ZPO could usually be ignored because the needed conditions for it to play out were unusual and specialized. ZPO plays off the ability of networks to scale up explosively, increasing value towards infinity overnight. As members are added to a network linearly the value of the network increases exponentially, which charted looks “as if” it were headed toward infinity. The compounding numbers of members made commoditization possible, fluid, and fast. In fact the curve toward the asymptotic free and the exponential infinite are essentially the same curve on different axis. This pairing lead to a joke during the dot come boom that “the two most important numbers in new economy are zero and infinity.” Zero price, infinite upside. There is some truth to this.

If technology wants to be free, where does this compulsion reside? I believe it emanates from the networks of communication within the technium which surrounds each good. Orthodox economics teaches that every producer is trying to maximize price but will “minimize the maximum” in response to competition. The more “perfect” the competition, the stronger the drive to lower prices. The major inventions in the last 20 years have been vast improvements in communication and market mechanisms, which have accelerated the ‘perfection” of the market. Innovations such as easy reverse auctions, ubiquitous small-price auctions, searchable discounts, price aggregators, outsourcing clearinghouses, real time quotes, instant always on connection – all conditions these squeeze fluff out of the system all along the creation chain and push prices downward relentlessly. In this flat world there’s no harbor from the natural pressure toward free.

Additionally, this same network of communications spreads learning fast and furious. The news of how to make something more efficient travels almost instantly from the inventor to the entire technium. Tools such as online patents and reverse engineering techniques as well as great mobility among workers all contribute to promiscuous exchange of learning. Further, advanced technologies that encourage cooperation and collaboration permit faster invention and distribution of those inventions, which in turn permit the competitive pressure for lower prices to take effect quicker and deeper. Finally, the market for the finished goods is boosted by easily assembled networks which can gain members quickly. The more units produced or consumed, the faster the learning cycle for efficiency and price reduction. These five traits of networked technology – perfect market competition, price transparency, innovation sharing, collaboration, and expanding markets – ceaselessly push technology toward the free.

But while there may be unending pressure toward free, is there anything inherent in technology that suggests it can actually reach close to free?

There is an unarticulated assumption held by many people that the natural state of any created thing is expensive. Technology is believed to be born dear and costly, and it is only through relentless hard work that things can be made cheap. Indeed, according to this perspective, everything is naturally expensive, and would remain so, but for genius and sweat. This natural level of expense and scarcity can only be lowered by applying constant energy, favorable legislation, and technological vigilance, otherwise the price of a good may spring back up to its natural elevated level. God forbid a disaster or calamity collapses the system and allows the prices of everything to revert to their true unattainable price.

The parallel analogy applies to our bodies, an analogy we intuitively understand. Without constant food and reasonable maintenance, our bodies would falter, succumb to disease and die. Energetically the natural state of our tissue-filled body is death. Left alone, it, like all complex things, will slide toward entropy, disorder, and extinction. To keep it elevated in life requires a constant stream of uplifted energy, food, care, repairs and attention.

Yet while that is true, it is also true that health is a natural state of our bodies. Our complex living system rebels against disease, flees from death, and seeks the persistent flux of good health. The many complex biological system of our bodies – lymph, nervous, gastric, skeletal, cardiac, mental – all conspire to keep us aimed in a self-sustaining state, way above the disorder of entropy. In many ways this self-sustaining state of good health is more natural, or at least as natural, as the state of death. Indeed it is a mark of an extropic system like a living body that the whole system is engineered to remain in this self-sustaining state as long as possible. In a very real sense, health, not death, is our true home.

Likewise with technology. Made things favor not the entropic regime of high prices, but the extropic realm of the free. Eternal expensive scarcity is unnatural and unsustainable, while the abundant free is the ideal home for all things created. The technium conspires to guide manufactured items toward the free, where they can unleash their maximum good. The free, not the costly, is the true home of technology.

Technology migrates in this direction because of the self-reinforcing, self-creating aspect of the free. I can best illustrate this force through an example of my own experience. Twenty five years ago search was very expensive. One company held a monopoly on access to online search, and their fees could run up to hundred of dollars per hour. In 1981 I enrolled in a short course to learn how to search online. It was so expensive you had to plan out your search in minute detail before you dared logged on. Like most searchers then I found searching while a clock was ticking off dollars every minute to be nerve wracking and debilitating. Because of the expense there was no room for frivolous questions, like searching for your own name, or for old classmates. Search was constipated, restricted to straight ahead library-like queries. You could not do anything with search because each one set you back many dollars.

Contrast that to today, when search is free. Not only can we use search to find anything, the free abundant search function is the basis for useful contextual advertising, annotated maps, incredibly useful shopping tools, and a legion of other consumer benefits, not to mention hundreds of business, if not an entire industry of novel inventions. Search has been liberated by becoming free. As its price reduced, it found its way into more of the technium, and it found more of its talents revealed. As search headed toward the free, it was used in more ways, ways that would neither work while it was expensive, and ways that were invisible while it was expensive. As it became free, it became more indispensable in the ecology of the technium, and more instrumental in unleashing other technologies. It also became a factor in driving other technologies toward the free. In this way it is like health; free technologies tend to enable other technologies toward the free, in a self-sustaining, self-creating loop.

George Gilder once noted there was a self-reinforcing positive feedback loop in miniaturization of technology. Smaller chips ran cooler, which allowed them to run faster, which allowed them to run cooler, which allowed them to be made smaller. And so on. There is a similar self-reinforcing positive feedback loop in the free-ization of technology. Nearly-free goods permit waste and experimentation, which breed new options for that good, which increase its abundance and lower its price, which generate more new options, which permit further novelty. And so on. These loops work on each other, compounding the effects between techniques and goods, and supercharging the entire ecology of technologies with an unstoppable momentum towards the free and towards unleashing new capabilities and possibilities.

The odd thing about free technology is that the “free as in beer” part is actually a distraction. As I have argued elsewhere (see my 2002 New York Times Magazine article on the future of music for example) the great attraction of “free” music is only partially that it does not cost anything. The chief importance of free music (and other free things) is held in the second English meaning of the word: free as in “freedom.” Free music is more than piracy because the freedom in the free digital downloads suddenly allowed music lovers to do all kinds of things with this music that they had longed to do but were unable to do before things were “free.” The “free” in digital music meant the audience could unbundled it from albums, sample it, create their own playlists, embed it, share it with love, bend it, graph it in colors, twist it, mash it, carry it, squeeze it, and enliven it with new ideas. The free-ization made it liquid and ‘free” to interact with other media. In the context of this freedom, the questionable legality of its free-ness was secondary. It didn’t really matter because music had been liberated by the free, almost made into a new media.

Technology wants to be free, as in free beer, because as it become free it also increases freedom. The inherent talents, capabilities and benefits of a technology cannot be released until it is almost free. The drive toward the free unleashes the constraints on each species in the technium, allowing it to interact with as many other species of technology as is possible, engendering new hybrids and deeper ecologies of tools, and permitting human users more choices and freedoms of use. As a technology grows in abundance and cheapness, it is more likely to find its appropriate niche which it can sustain itself and support other technologies in commodity mode. As technology heads toward the free it unleashes the only lasting thing it can: options and possibilities.

Posted on November 14, 2007 at 2:57 PM

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