Interview with Chris Anderson

Chris Anderson's latest opus has made waves throughout the blogosphere, and not just because his book is "free." Despite accusations of plagiarism of Wikipedia content—which Anderson apologizes for and says opens up an important discussion about attribution—the thesis of his new book could be a game changer. In Free: The Future of a Radical Price, Anderson argues that digital businesses have much to gain by offering free products in a novel way. The former physicist and current editor-in-chief of Wired magazine has a track record of Internet forecasting. His first book, The Long Tail, encouraged Web entrepreneurs to focus on niche markets. Goodreads founder Otis Chandler talked shop with Anderson and learned why there is hope for the book industry.

Otis Chandler: Your new book, Free, is available for free, right?

Chris Anderson: Absolutely. But first you need to know that the economic theory of free is that there are basically two types of free.

There's 20th century free, which is about real stuff. Typically, that type of free is a marketing gimmick. For example, "Buy one get one free," "Free gift inside," that sort of thing. That is still effective, but you need to get paid pretty quickly because it drives up real cost.

Absolutely—21st century free is about digital products, which have no cost or no marginal costs of production, and that can be really free. Most people can get it for free on the hopes that some will buy the "superior form" that they pay for.

So what does that mean for my book? Well, you've got the physical book (Atoms version), which is the hardcover and softcover. You also have the digital book (Bits version), which is the audio book, the e-book, the Web book, and PDF. Our plan is to give away the Bits version of Free for free in any way possible— in order to sell the Atoms version. By spreading the book as far and wide as possible, so the maximum number of people can sample it, experience it, and hear about it, we hope some of them will want what we believe is the superior form of the book. The classic hardcover will be $26.95. (Enter to win a copy!)

OC: How can authors gain a following or build a platform from which to distribute free samples of their work?

CA: I think all authors already use free to one extent. Free books are given to the people who can drive demand: book reviewers, retailers, and influential people of various sorts. Increasingly it's conventional to give sample chapters on your Web site. On a book tour you'll give free book readings, things like that. So I think most authors are already giving away some of their books in certain circumstances.

A small number of authors are going further and giving away their whole book in digital editions, whether it's a PDF or individual chapters. There's the hope that sampling books in digital form will drive demand up in physical form, and that has tended to be quite successful. Of course, every book and audience is different, so you can't say that one model suits all, but it does seem clear that giving people instantaneous digital access to a book is an advantage. When people really love a book, when they feel a book is right for them, enough people still want the physical form, the classic form of the book on their shelf. They are inspired enough by the digital sample to buy the real thing, and that will increase demand, not suppress it.

OC: So giving away the digital sample works. What is your strategy for getting the word out? Blogging, Twitter, Facebook, Goodreads, and what else?

CA: Here is what we're doing. Let's start with the e-book. The Kindle version of the book will be exclusively free one week prior to publication. It will then be free on all e-book readers (Kindle, iPhone, etc.) for one week postproduction. So that's two weeks of free e-books. After that, you have to pay.

The audio book comes in two forms: abridged and unabridged. The abridged is three hours, and the unabridged is six hours. If you buy the hardcover, there is a URL inside that will allow you to download the abridged form of the audio book for free. So if you buy the hardcover, you can basically get all the other editions for free—on the argument that you are my best customer and you can have it any way you want.

The unabridged audio version is going to be free on iTunes and audible as a podcast and as a downloadable audio book forever. Why are we giving away the unabridged version to everybody while we are reserving the abridged form to the buyers fee of the hardcover edition? That's because we think that the abridged version is the superior form. We think time is money. An audio book isn't something you can flip through. It's something you have to consume linearly. We think that people will actually value the three-hour version more highly than they value the six-hour version. So we are in a paradoxical position of charging more for less. We're selling half the book but giving it away as the full audio book.

Then we have the Web version: a Google book that is a classic page-view model. We also suspect that people will not want to read the whole book that way since it's a sampling experience, but that will be free for one-month postproduction.

OC: The idea that "time is money" is a significant theme in your new book. You talk about reputation and attention economies. Can you elaborate on what those are and how they are influencing things?

CA: The book is inspired by the realization that somehow in the last ten years we've built a country-sized economy online based on the price of zero. Pretty much everything online is free, and yet it creates companies like Google that are some of the most profitable companies in the world. We've basically created an economic model by which you can make money by giving things away before we created a theory or economic framework for how that works.

There are other economies than the monetary economy. There is the reputation economy and the attention economy, which are concepts that we use as metaphors. We recognize that reputation and attention are sometimes as motivating as money is. Wikipedia was created for no pay, yet the contributors feel compensated in some way. They are sufficiently incentivized to do things that you would normally have to pay them for. It is getting easier and easier to quantify those attention and reputation economies. The reputation economy is quantified in terms of page rank, incoming links, Technorati ranking, Facebook friends, Twitter followers, etc. In social networks like Goodreads, it is quite easy to see how influential someone is. So we are getting lots and lots of different reputation economies, and each is quantifiable.

Attention economies are measured in terms of time, which is also highly quantifiable. Now we are finding effective ways to convert attention to cash. Advertising is the most obvious one. That is what the media industry does. They take attention and turn that into cash by advertising.

So now we are starting to ask this question: What is most valuable online? Sometimes time, attention, and reputation are more valuable than money because people will do certain things for a reputation that they won't do for cash. We see that quite often with even some of our own bloggers at Wired. We find it more motivating to give them prominence and help promote their stories than it is to pay them whatever the underlying economic worth is. Sometimes they are insulted by the offer that we would pay, because they don't do it for the money. They do it for those reputation credits.

We are realizing that in the online space, time and reputation are finite sums, and people value them so much that they will pay for them. Take online games, for example. You can play the game free, but it's kind of slow. If you want to advance, you have to go into the woods, chop a lot of blood, kill bunnies, earn gold, or whatever the end game credits are. It takes a long time. Or you can just buy those currencies and advance that way. Typically young people have more time than money, so they'll grind their way through the game and earn their credits that way. Older people might have more money than time. They'd rather buy those credits and advance immediately. You pay the game for its time-saving tools and techniques that allow you to enjoy the game faster and advance more quickly.

OC: What do you think of virtual economies like World of Warcraft or virtual goods sold on Facebook, etc.? What economic principle keeps these systems afloat?

CA: In those instances, we are creating real currencies that are starting to look more and more like fiscal currencies in that they are tradeable and convertible. They have real value. If you ask my children what their worth is, they will tell you how many Zune points or RuneScape gold they have. Maybe fifth or sixth on their list, they'll tell you what is in their bank account—but they can tell you the Zune-to-dollar exchange rate to two decimal points. To them, Zune points or Xbox LIVE points are real currencies that they understand certainly better than the euro.

I'm fascinated by the game space because that is where the most interesting experiments in business models around free are happening. The big "silver disc" businesses have abandoned the silver disc. The first was the music industry. It's gone from buying the CD to downloading something. They never really figured out how to sell music effectively. Then there was software, which turned from a software disc you got at the store to a service. Twenty years ago Goodreads would have been a CD-rom, and today it's a Web site.

The last silver disc business to leave the plastic behind is games. Games to date have had a buy-in-a-box model. Now the game industry is moving to free-to-play online games, starting with multi-player games like Second Life or World of Warcraft. It's abandoning its pay-up-front model for a subscription or virtual goods model. In some cases like Second Life, the game is free, and if you really like it, you can buy land. You put down roots. In the case of World of Warcraft, there is a basic subscription model like a magazine. Most people play the free form, and a minority of people will pay for the superior form. It's kind of a "freemium" model: a free and premium combination.

Each one of these games is getting quite clever at figuring out what people will pay for. They will pay for reputation and status. You pay for a penguin or get a carpet for your igloo. If you get killed, you can avoid getting respawned in the wrong world. Things like that. Other people are finding ways to find exclusive spaces. There has been an extraordinary explosion of business creativity. I really recommend watching that space, whether you are a gamer or not, just to look at the thinking on the psychology of free and paid.

OC: So let's talk about how this book got started. Following the success of your first book, The Long Tail, what inspired you to write Free?

CA: You and I grew up in the 20th century—we watched Gilligan's Island and listened to Top 40 radio because that is what was on. Our choices were defined by scarcity: limited distribution of television and radio. The big cultural effect of the Internet was to create unlimited distribution. Anyone could distribute anything, and as a result you saw this explosion of a variety of things that otherwise failed the traditional test of economic distribution. The only way you can get that explosion of variety in the niches and subcultures that come with it is if the distribution costs nothing—if the shelf space is free—which created the incredibly diverse, rich culture that we now celebrate online.

So I was thinking: Free can change the world. Free can change culture. I then realized that we have created an online economy the size of Germany's. It's an economy where the default price is zero. So I thought that I should go study economic research on free—and I couldn't find anything. There literally was no economic theory on free. So I thought, "God, someone has got to do that. It should be me."

Then by titling the book with a single word, "free," it wasn't a book about economics anymore but a book about semantics. It's a book about the meaning of this word that is deeply misunderstood. Its meaning has changed from the 20th to the 21st century. It has two meanings: "free" as in freedom and "free" as in no price. We have convoluted psychology that we should mistrust "free," because we've been tricked by it so many times. Yet we are drawn to it. "There's no such thing as a free lunch," yet Google doesn't show up in your credit card statement. There are all these paradoxes about the word. In a sense, untangling the mysteries of free and the changing meaning of the word drove the book. It starts in 1896 and ends in the near future.

OC: The book's central observation is that since things have come online, they've gotten cheaper and are approaching free. We've seen a number of industries (software, music, news, books, and film) transitioning. What else is converting? What else is going to happen?

CA: Atoms (physical stuff) have an inflationary economy. Everything costs more. In an inflationary economy, "free" can only be cross-subsidized. Now people are getting cleverer about cross subsidies. For example, Ryan Air, the low-cost European airline, sells seats for 5 euros, and they occasionally bring it down to zero euros. That is because they are selling this broad spectrum of travel services: car and hotel reservations, expensive sandwiches, advertising, and luggage fees. They get subsidies from the out-of-the-way destinations that they go to. By expanding the definition of travel, they can make the core product free by subsidizing the others. So that is basically razors and blades taken to the nth degree, and we are going to see more of that.

Online you have a deflationary economy. Everything online will cost 50% less next year than it did this year. There is a general 50% deflation rate because of Moore's law and the storage of bandwidth. What that creates is a huge incentive to turn things into software. Once something becomes software, it can become free. Ten years ago I had a stockbroker who was a person, a tax accountant who was a person, and a travel agent who was a person. Now, because of the attractive economics of software, all of them got turned into code and became free.

What other services can be turned from people businesses into software businesses? That is what entrepreneurs do. That is what you and I have done. Entrepreneurs look for things that can be turned into software and do it because they realize that once you turn things into software you can use "free" to build huge markets. So ask, what other services are out there? I don't have all the answers, but I would point to outsourcing as a leading indicator. If call centers or technical-support services can be outsourced to India, which means training someone who isn't necessarily an expert, then turning it into software is not much harder. So I would look at the industries that are now being outsourced to India and say that those are the next industries to be turned into software and thus become free.

OC: What do you think of Scribd and Google's announcement that they are selling e-books? Do you think publishers will change their requirement of selling things on DRM?

CA: I think it is a very natural, intermediate stage. As I did more research on the economics of free I found there had been some early work that anticipated this. The work was in the 1800s in France by an economist named Francoise Bertrand. He proposed that in a competitive market, price falls to the marginal cost. So if there are lots of companies competing, they will tend to drive the price down to the cost of production. Now fast-forward to the Internet age, where you have the most competitive market the world has ever seen. This is because the barrier to entry is zero, and the marginal cost of products and services is also close to zero (and falling by 50% every year). Suddenly "free" becomes not just a possibility but also an inevitability. It's like gravity. The price is going to drop to zero because the costs are falling to zero, and if you don't do it, your competitor will. What's the marginal cost of production for an e-book? Zero.

OC: Well, there is a little cost of production.

CA: It's reasonably small, but the marginal cost is close to zero. But the fixed cost of that e-book is not zero. There is the advance to the author, the time of the author, publisher, etc.

Typically you try to use free to spread your fixed costs across the largest possible audience on the hope that you will make up for it in volume. Now, I realize it sounds like the old joke, but you really aren't losing much money on each one. If you can make a little money on each one over a large volume, you can pay those fixed costs effectively. So I think what you are going to see is basically pricing pressure on e-books. The price is arbitrary.

OC: The publishers are setting the price, right?

CA: The publishers are not discounting significantly from their hardcover price. They're trying to keep the price the same. I'm going to throw out some imaginary numbers. Let's say the wholesale price of the e-book is $13 and Amazon sells it for $9.99. They are going to lose money on that deal. That is simply because the publisher chose the arbitrary price of $13. It's not because it cost the publisher $13; it costs the publisher $0. It's simply a license that they are granting Amazon to reproduce this book and distribute it. This raises the question: Is this a competitive market? Will people buy more e-books if the books are cheaper?

Say you have two publishers: publisher A and publisher B. Publisher A holds the prices and their books are all $13, and publisher B tries to lower their prices to $4.99. Will they have the advantage? Will price outweigh other factors, such as the reputation of the author or the brand of the publishing house? This experiment has been done occasionally with things like pulp fiction back in the '50s. All they had to do with the underlying marginal cost was produce more cheap books. That's why they were called pulp. They were pulped afterwards because they were pretty poor stock. But digital books, on the other hand, are perfect quality. The quality of a free digital book is exactly the same as the quality of a paid one. Now you have opened the price flexibility. The publishers can pick any price they want. They can try the $4.99 experiment, the $2.99 experiment, the $0.99 experiment, or the "free" experiment. So what you are going to see is an experiment in pricing in order to find out what the price sensitivity of the audience is. That experiment is going to tend to drive prices down, because that is how you drive volume up. I would be very, very surprised if ten years from now we see e-books at $10. I expect the average price of e-books to fall. We see the price of iPhone apps and games falling. The corollary is that the volume of e-books is going to go way up, and ultimately the book industry and authors are going to be better off.

OC: We can all hope so. Last question for you: What are you reading now? What are some of your favorite books?

CA: I have to confess that I only read nonfiction. I just got Atul Gawande's book, Better. I just started reading that, and it looks excellent. I also just ordered Michael Lewis's new book on parenting. He is a friend and neighbor; I see him every weekend at the pool, so I'm keen to see how this corresponds. I also have Stewart Brand's book called Whole Earth Discipline in my bag to read on my flight tomorrow.

OC: Thanks so much for your time.

CA: Terrific. Thank you.