Free software is priced to sell

Well, the product we are introducing tonight is Internet Explorer 3.0. And there's a lot of neat new things about Internet Explorer 3.0. The product is priced to sell. -- Bill Gates

Free software is indeed priced to sell. But this isn't a post about open-source or the freemium business model that is notably a meme these days. Nor is this a ringing endorsement for or against free software. In this post I attempt to take a hopefully un-cynical look at the disruptive influence of free software in a marketplace, not in itself, but as a tool complementing a profitable strategy. In doing so I will use a recent announcement as case study.

The case for Chrome OS

Google recently announced Chrome OS, which at this stage is a blog post about vaporware involving a browser on a locked down Linux kernel. Sometime next year it is to be reality. To me the biggest feature of Chrome OS is that it will be free and therefore priced to sell. Just like Android. And Google's myriad web services from email to mapping.

Now you may be wondering what the point of introducing Chrome OS is when there's already Android positioned to do nearly the same kinds of things. That's a fair question but not important. If a company can keep a lean team executing on several such things, all of them free, when its competition sells their wares for real money, then it has disruptive potential in the marketplace. Even if the overall product line-up make no coherent sense.

Getting your competition playing defense

Now I don't for a moment think that Chrome OS or even Android are serious offerings that uniquely solve end user needs or problems yet unsolved. Or even pushing the envelope on what an OS should do. They aren't meant to be. They're meant to be "good enough" offerings priced to sell. This has a twofold effect, both disruptive.

One, the competition is on guard and is forced to revisit their strategy, incurring costs and opportunity costs in the bargain.

Two, it causes customers (in this case PC OEMs, device manufacturers and carriers) to introspect on their offerings. It also gives them leverage to talk their other vendors to price down. It's not like lack of choice is a problem in the operating systems space across PCs, netbooks and phones. But reducing the bargaining power of one's suppliers is an old standby of successful strategy. The past year has seen PC OEMs across the board introduce so-called netbooks - low priced computers that drive down margins for all involved. A veritable race to the bottom.

Google's fervent hope is that their competition Apple, RIM and Microsoft spend cycles playing defense.

Fragmentation of the marketplace

Google thrives in a fragmented market. If there are a hundred different ways you connect to the web, then native clients and rich clients are at an inherent disadvantage for developer mindshare. This mindshare drifts towards least common denominator solutions like standards-based commodity technologies (e.g. HTML/JavaScript) to address the breadth of clients devices. In such a world, the back end remains the only common entity: the old faithful. And Google has a gusher of web services for you - which they will tell you work consistently regardless of your device or browser or OS.

I don't have existence proof of a singular focus on free software being a clear determinant of a winning strategy. In fact most evidence - e.g. time, resource and treasure spent by the likes of Sun and IBM pawning free software where Microsoft made most of its revenues (and profits) - points to the opposite conclusion. That an obsessive focus on disrupting your opponents isn't going to win you anything.

Positive feedback loops in a "winner take all" market

Google's motivation seems slightly different though, in one key way. Regardless of what offerings come out from its various development teams, they are all aligned toward carving the search/ads business a bigger moat. Of making their web services the common theme across apps. Resources you should truly rely on. This engenders a postive feedback loop to their central search and ad businesses.

Search is a "winner take all" market. With demand side economies of scale, the strong get stronger and the weak get weaker. So it should be no surprise that Google's strategy is to get people to search more and to make their ads more relevant, so there's a good chance you will click on them on a search engine results page. Still, winner-take-all markets tend to attract entrants. Just look at the US Presidential races.

To ensure is remains the winner, Google spends a lot of money in traffic acquisition costs paying the likes of AOL, Firefox (Mozilla), Dell etc. to send users its way, say via the search bars or by making the default home page. Once the users are past that gate, Google keeps them in the party with a staple of free web services.

Chrome OS and Android will play both roles. They will be gateways to get users to, and pricing them free will ensure incentives exist to keep users there. This has the potential of creating substantial switching costs, making it a long stay indeed for the users.

In conclusion

A strategy based purely on purveying free software is doomed to failure. However pricing to sell can be a great complement to an existing profitable business model.
Chrome OS and Android do not so much compete with other operating systems as they play a role in increasing the positive feedback loop for Google. With the deftness of an artist proficient in his craft, Google recognizes how multi-sided markets function. It subsidizes its consumer audience using the profits it generates from the advertiser audience. Everything else in the middle is a series of delicate brush stokes that earn your rapt attention.

More on multi-sided markets soon...

A toast to Semantic Web

Not really. Semantic Web is one of those things that have a grain of a great idea but fail miserably in execution. Its failings arise from asking its constituency - content authors and publishers - to do something unnatural with little incentive or help by way of tools that fit into existing workflows.

A good idea is a necessary but not sufficient condition for a successful platform. You need to line up the incentives for your target audience; make it worth their while. And as importantly, you need to provide tools, patterns etc. to get your platform into people's natural development processes and habits.

Semantic Web has therefore been supplanted by lesser powerful but good enough technologies, namely your friendly neighborhood search engines. They do a reasonably good job locating names, places, reviews, etc. Of courses there's room for improvement, but the latent demand isn't nearly enough to warrant unnatural actions such as Semantic Web requires. This is notwithstanding tireless advocates.

Moral of the story? Any platform/framework/pattern that:

  1. requires you to do something unnatural,
  2. doesn’t fit into your workflow / tools,
  3. provides you little incentive to change status quo
is toast. Even if it is borne out of a great idea.

Notice the "...and drops a coin..."? More about the Notificator here and a web version here.

The only business model I see in Twitter (and its ilk) is of being bought by one of the big fish, perhaps for their data. This is probably why they're in no hurry to reveal how they're going to monetize the site. They're perfectly willing to ride the current wave of buzz in the mass media until some sucker shows up with wads of cash.

Gradually... then suddenly

The silence at the demise of the Seattle PI - one of only 2 major dailies in this area - was deafening. Yes there were a few blog posts with "I told you so" or "bloggers are the new reporters" garbage. Yes there was that persistent refrain about Seattle being a "one newspaper town" on the way to a "no newspaper town". The media loves to talk about itself; but never in any breadth or depth that truly matters. Stop this cliched garbage, please. How about something a little more substantive - even analytical perhaps?

Tren Griffin - one of the characters that makes Microsoft such a great place to work - says that newspapers are doomed because news content is non-rival and non-excludable. He is right. The newspapers dug a good portion of their grave by conditioning us all into getting stuff for free; and deluding themselves that they can have high operating incomes from online ad sales. Craigslist and Google also played small parts in shovel duty.

But what about blogs? Did they play a role in killing newspapers? I don't think so. Bloggers with their large egos may choose to believe this. But they're kidding no one when they claim people get their news from blogs. That's like saying I get all my oxygen on my commutes from the car a/c. Please.

Regardless, now an institution that fosters transparency and further accountability is dying. The big fish will find a way to cobble together alliances, get investors to suspend disbelief and survive for some more time. Its the local rag that is toast. Sucks for us. No more oversight on our local officials, teachers, law breakers and enforcers.

But there are other consequences too. I'm curious how the public relations industry adjusts to this. Lefsetz gets what few recognize:

[there is a] SEA CHANGE in publicity/image-making. In other words, you can no longer spin the public. You can have friends in the press, but didn’t you hear that newspapers are dying?

So you have to ask yourself what you’re selling, and focus on THAT!

I don't think we've quite grasped what changes are in store for us. Having the luxury of newspapers for a century has conditioned us into not thinking of what its like to have a world without them. To paraphrase Hemingway, the demise of newspapers happened gradually... then suddenly.

Attention to Detail == Differentiation strategy

Michael Porter has argued that you need differentiation as much as you need operating efficiency for a sustainable competitive advantage. Most companies get the latter; in fact incorrectly associate good strategy with having a cost advantage against competitors, only to their detriment. They ignore the value of doing things differently than their competition.

I've noticed many cases where the central idea cited as differentiation isn't "moat"-grade but yet the company enjoys the fruits of the strategy unimpeded. [I am using "moat" as Warren Buffet likes to use it to indicate the economic moat of a company, similar to moats in medieval fortresses that made it difficult to penetrate.] This is likely due to things like core competence and corporate DNA at play. I think attention to detail is one example of such an elusive competence.

Mark Cuban talks about an epiphany with newspapers asking for a payment via envelope several times a year, each time giving you an opportunity to rethink this relationship, when they could just go the Amazon route and have your credit card on file. This is an area where Amazon does most of the things you're supposed to to: have low prices, low COGs etc. but also does what few others grok i.e. systematically remove all barriers in the way from desire to purchase.

Having your card on file is just one piece of the puzzle; lots of other online merchants do that. Most don't; especially the brick and mortar ones, likely because it is hard to get that level of customer trust. But customers trust their utilities with their cards. Most newspapers are currently consumed by thinking of ways to achieve operating efficiency. It is thought to be their only chance of survival. By paying attention to detail, Amazon removes the systemic hurdles that exist for a shopper from desire to purchase. It does things that keep it from being thought of as just another store. Perhaps not for the sake of differentiation, but because this is the outcome of having focused thought on carving out a niche.

Another example I recently stumbled upon was how each of the three big search engine players position their advertising solutions. Search engines are "free parking" for the cash cow that is advertising, much like malls and fast food joints have free parking for shoppers. One assumes that search engine providers are highly incentivized to put on their best face for what's effectively their store front. Here's what you see when you search for "google advertising":
And here's the "yahoo advertising" page:
and here's the "microsoft advertising" page:
The last one can do with a little more attention to detail. For one, as a multisided market, it needs to do a better job delineating the entry portals for each of its customers: the publishers and the advertisers. For another, there's a lot going on in that page that has no correlation to happier user experience.

What's Stephen Thinking Now?

A study by OSU threesome on what people thought of Stephen Colbert reveals:

[...] individual-level political ideology significantly predicted perceptions of Colbert's political ideology. Additionally, there was no significant difference between the groups in thinking Colbert was funny, but conservatives were more likely to report that Colbert only pretends to be joking and genuinely meant what he said while liberals were more likely to report that Colbert used satire and was not serious when offering political statements.

This is just comedy gold!

Zero-Infinity Dilemma

A zero-infinity dilemma is a situation where the probability of occurence is tiny while the consequences are enormous. It is typically used in cost-benefit and risk analysis, however in this case the "zero" refers to the risk and the "infinity" refers to the cost.

A common reference of this dilemma has been when characterizing the choice of nuclear power: the risk of a mishap is incredibly small (close to zero) but if one does occur, the cost and repurcussions are infinitely large.

How They Did by the Numbers

These numbers are from Budget of the United States Government: Historical Tables Fiscal Year 2008, specifically Table 1.3 — Summary of Receipts, Outlays, and Surpluses or Deficits (-) in Current Dollars, Constant (FY 2000) Dollars, and as Percentages of GDP: 1940–2012

Click on the image to see it bigger.

The conditional formatting and president names were my additions. The blue formatting shows the trend of budget surpluses and deficits for the past 5 presidents. The green formatting shows the top 10% and red the bottom 10% in the list.

A word of caution to the wise: these are mere statistics. As Disraeli once said, there are lies, damned lies and statistics. So look at this as one view; one piece of a jigsaw and no more.