Posts tagged ‘Scarcity’

Where is the Free Lunch on the Internet?

I begin working on this post with the image of a waiter dressed up as a pirate playing a snappy little tune on his guitar touting “freecreditreport.com… I should have seen it coming at me like…” Fantastic commercial, but what does “free” really mean?* During the first week or so of my economics classes I usually get around to writing the acronym TANSTAAFL on the board. TANSTAAFL means “There ain’t no such thing as a free lunch.” That is when occasionally someone points to all the “freebies” on the Internet. So what does it mean to be “free” on the Internet? Is that any different from “free” in the non-Internet world? When is something really “free”? And why do I keep putting the word “free” in quotation marks? Economic principles hold even on the Internet and this post will explain a few reasons why.

What Does It Mean to Be Free?

Type in the word “free” into the “free” Google search engine and you’ll get an estimate of 4.5 million sites. Who gets the top honors? FREE –Federal Resources for Education Excellence (http://free.ed.gov/) FREE is a site that “makes it easier to find teaching and learning resources from the federal government” with “More than 1,500 federally supported teaching and learning resources are included from dozens of federal agencies”. Who pays for this “free” service? The taxpayer.

Next is TheFreeSite.com (http://thefreesite.com), a site dedicated to listing “all the top free products, services and offers available on the Web.” This is actually a great resource, and I’ll recommend it to my students. Who pays? The site itself seems to be supported by revenue from Google’s AdSense. There are also some hand-coded links to other “free” sites like the Freebiedirectory.com, which may be paid advertising.

A little further down the page is the Free Software Foundation http://www.fsf.org/licensing/essays/free-sw.html. According to the Free Software Foundation, free software has the characteristics found on http://www.fsf.org/licensing/essays/free-sw.html. Essentially, they suggest that free software gives you, the user, the right to use, adapt, redistribute, and improve the software. They assert that the purpose of free software is to enhance learning and knowledge in the area, and that using it constitutes a “political and ethical choice asserting the right to learn and share what we learn” (http://www.fsf.org/about/what-is-free-software). If there is any case where the developer has the right to revoke the software, then it isn’t truly free software (as is the case with nearly all of the free resources that I may recommend). Since real resources go into its production, it must be funded in some way. Often funding is initially by the developer who later accepts donations for his/her time, and then may even begin charging for the final, stable version of the product. Funding could be indirect through the universities or corporations employing the services of those experimenting at your risk (note the warnings when you download betas) and profiting from the knowledge learned or shared. Unfortunately, most software distributed on the web isn’t truly free.

So what does “free” mean? First, the economics explanation. Something that is free is available in unlimited quantities. In other words, supply exceeds demand which produces a price equal to zero. Is this saying that information and goods offered for “free” on the Internet are essentially worthless? No. Read on… Resources have value, so anytime these resources are used in the production of a good, whether offered for “free” or not, an opportunity cost is incurred. For example, I am offering this explanation at some cost to myself (i.e., my time that could be spent doing something else – perhaps earning income selling web design); however, as an academic, part of my job is to impart knowledge on the waiting world, so my compensation is my salary. I could attempt to put this information under a password allowing only paying members to read it, but there is plenty of competition willing to provide the information for “free” or, perhaps, this information really is worthless.

What is “Free” on the Internet?

So in what other ways is the concept “free” used on the Internet? I will discuss these briefly so as to leave something to talk about later! (This is by no means an exhaustive list.)

(1) “Free” but with strings attached – e.g., product “bundling” or “tying”. You agree to sign up for something (maybe a trial period) or it accompanies the purchase of another good (free paper with purchase of printer ink) or it requires the subsequent purchase of a tied product (a “free” printer that uses only a specific kind of ink cartridge). Or perhaps you are giving up personal information, such as your e-mail address or phone number.

(2) “Free” as in information sharing - Perhaps you simply agree to a link back to the copyright holder for use of information. This raises page rank – perhaps necessary for higher advertising revenue - or increases the goodwill (reputation) of the writer. Or perhaps this information is shared alongside non-free services or products. I find this to be the case on FreeLunch.com – a self-proclaimed “free” resource for economic data. The actual “free” service here is being a central place to find both “free” data (that can also be accessed directly freely from its original source) and plenty of non-free services and products. It is essentially a form of advertising.

(3) “Free” as a carrot on a stick – e.g., product “crimping”. Some “free” software is distributed freely, but is actually “proprietary” software meaning that it is subject to limitations and you usually have none of the rights listed above by the Free Software Foundation. Certain features are turned off or not included unless you upgrade. This is called “crimping” the product. The idea is to provide just enough of a carrot on a stick to lead you to buy the whole product. An example is the NetObjects Fusion Essentials software. While you can build a decent simple site, you are enticed to want more, and the NetObjects Fusion 11 has it. For more examples of this, see http://www.venchar.com/2003/12/product_crimpin.html.

(4) “Free” to build a network – Goods or services that require network effects for success. For example, ebay.com, MySpace.com, CraigsList.com. For the network to reach what is known as a “critical mass”, the level where membership takes off, “free” membership may be critical (excuse the pun). A new fun rising network is called “Twitter” (at Twitter.com. See news story at http://www.youtube.com/watch?v=6kj6OGsfSG0&eurl=http://sfist.com/2008/06/30/would_you_pay_to_use_twitter.php). In many cases, building the network is essential to increase advertising revenues or increase the financial value of the network.

(5) “Free” as in the case of a “public good”– it is prohibitively expensive to collect fees from all individuals who receive and use the information or to exclude all individuals who do not pay. Examples include research findings, news reports, or weather reports. These sites are often paid through advertising or tax revenue.

(6) “Free” for the public interest – as in the case of net neutrality (see http://www.savetheinternet.com/). “Freedom of connection, with any application, to any party, is the fundamental social basis of the Internet, and, now, the society based on it.” (Read http://dig.csail.mit.edu/breadcrumbs/node/144 and http://dig.csail.mit.edu/2006/06/neutralnet.html by Daniel Weitzner. The term “free” here means equal access. “Free” is through legislation, but the cost is still born by users who pay to access it (ultimately, the consumer). In this case, legislation is limiting market power that might otherwise develop.

(7) “Free” for malicious purposes – as in the case of downloaded viruses or annoying adware (whether in the fine print or not) attached to items downloaded for “free” from the Internet. Your pursuit of the ability to avoid paying could lead to a much higher cost later.

With all this said, I am encouraging my students to build websites, and as a rule of thumb, I am using as many “free” resources as I can. I used a “free” site building software called NetObjects Fusion Essentials to build my own course website – even though I actually own NOF 10. I used a “free” blog on Blogger.com to build this blog. I used the “free” Google Analytics to record your visit to either site. And I am using my “free” server space at my university to host my campus website.

Is There Such Thing as a Free Lunch?

As an economist, I am still bound to my conviction that “there ain’t no such thing as a free lunch”. I am very skeptical whenever I even see or hear the word “free”. Read the fine print. Ask yourself, how is it that they can offer it for free? Post any truly free lunches in the comment section here – that is, something produced and consumed without using any valuable resources and with no strings attached. It must have value and yet it must not be scarce – i.e., it can’t be the case that some individuals will scoop it up and try to resell it for a price or provide it for some economic advantage of their own.

Perhaps the most useful “free” lunch I found on the Internet while researching this article can be found at www.freerice.com. Help this organization donate rice to hungry people for each word you get correct. Build your English vocabulary while helping to end world hunger. The site and donations are advertising supported.

Other Readings:
“Free! Why $0.00 Is the Future of Business”, Chris Anderson, Wired.com, http://www.wired.com/techbiz/it/magazine/16-03/ff_free?currentPage=all, posted 2/25/08.

“TANSTAAFL: In Search of the Free Lunch and No-Cost/Low-Cost Full-Text Archives”, Mary Ellen Bates, Searcher; Jun2000, Vol. 8 Issue 6, p 55-59.

*freecreditreport.com obtains a “free” credit report while offering a trial period for credit monitoring service. By law, everyone can receive a free credit report without signing up for any other products once per year. For more information on this topic, including the federal law suit against Consumerinfo.com regarding deceptive marketing practices, see http://www.ftc.gov/bcp/conline/edcams/freereports/index.html.