You may have missed the news that FriendFeed, a free online aggregator that lets you manage updates from multiple social networks, was purchased recently by Facebook. Ad industry observer Bob Knorpp pondered what the acquisition meant for free business models in general, so we responded:
Regarding free, all this hyperbole is really just ornamentation on the basic “cross-subsidy” economic model. Television and radio have done this for decades giving away content in return for advertisers funding access to eyeballs (3-party exchange). Google gives away search to attract an audience to attract advertising bids (another 3-party exchange). USPS delivers mail to Alaska for 44 cents because it is subsidized by more profitable routes in urban cities. It’s all so simple — if you draw a circle around all the parties involved in any supposedly free business, someone pays to offset the costs for a profit. People get confused by free because they often only look at 2 of the 3 parties directly involved.
A is free to B as long as B attracts dollars from C that are paid to A.
Cross-subsidies can also pull payment from the future. So any startup — Facebook, Twitter, FriendFeed — can burn in the red and be “free” when really it is pulling payment from a future IPO or acquisition. Sure, burn $20 million today, but if you’re bought for $50 million next year, that’s cool. The funding model is simply tied to confidence in the exit strategy.
One future form of cross subsidy is also new products or services. Twitter, for example, could be building up to 1 billion users in hopes of creating the world’s largest database of the now, in which that data could be sold to marketers. The exit strategy could be replacing Experian. Advertising may never rear its head in that Twitter model, because the third-party subsidy comes from an entirely new business. Marketers could use that data to serve you addressable TV ads or send direct mail to your home. But again, A is free to B because B will attract dollars from C that are paid to A.
Free doesn’t exist. Chris Anderson’s elegant argument is really just an articulation of cross-subsidies. His idea that falling data costs will make everything free is false, because as Porter has explained, three things flow in any economic exchange — information, value, and products. Information may get cheap, but products still come in three dimensions and have costs. And while information could approach free, the ideation of that information still costs money. Trust me, I do this for a living 😉
Now, finally, re FriendFeed — hey, that was a nice portal play for all of social media. I could aggregate my content from everywhere else and make FriendFeed the center of my universe. If I were Facebook, I’d be messing my pants. “Those guys are stealing our social graph!” Facebook bought it for several reasons, but if nothing else, to take a social media portal competitor off the table.
Nicely played, FriendFeed. Looks like your cross-subsidy from the future finally arrived.
Image: Ana Cotta