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...