An interesting discussion happened earlier this week, on the merits of free, when it comes to web-based (some say: “cloud”) software products. It started off with Fred Wilson’s In Defense of Free and immediately got countered by Dave Winer’s For-pay Services.
Both articles are worth reading. But what struck me was the very different view on the economics of business they have, and this strikes me as a continual source of frustration between hacker/engineer/designer-types working on the web, and business people on the other hand.
The first group likes to see, and favours, business models like Instapaper’s, of which Marco Arment says:
I sell an app for money, then I spend less than I make.
This is what I’d like to call the cost-driven thinking in economics. It’s intuitive and easy to understand.
But it doesn’t get you very far when discussing value-creation. And of course, Fred is right when he asks why users should pay for a service for which they are the primary value creators. And it’s value where most of the traditional economic theory takes it’s origin. Value, even just perceived value (some might argue: most importantly the perceived value) dictates all other subsequent mechanisms. Value is what makes the demand curve work. For a quick primer on this, please check out Chris Dixon’s recent piece.
So why am I blogging this? I think it’s important to point out that people, although they think to talk about the same thing, don’t really do that.
People without a background in economics tend to fall into the camp of “cost driven economics,” and argue along those lines. However, as Chris observed:
Situations where cost and price have zero or negative correlation are far more common than most people assume.
People with a background in economics, obviously, think more along the lines of market segmentation, value creation and capture, and if they’re of the good, web-friendly kind, they’ll try to “create more value than they capture.”
Of course even web based software is incurring costs, but just thinking in those terms will lead to under-adoption. Just thinking in terms of value generation and capture, however, under-accounts for the very real, and growing, concerns about ownership and longevity of services.