August 22, 2014

The Tyranny of Free

FreeAs human beings, we have an irrational desire for all things free. We enter contests over and over again to try and win some free prize. We drive miles to get free products from stores, restaurants, etc. We click PPC ads that use the word “free” at a higher rate than ads without. We love free, but is free really free?

There Ain’t No Such Thing as a Free Lunch

I heard this phrase over and over from my Economics 110 professor and I thought I had a pretty good grasp on the idea. He would explain that even though a consumer might get a free widget, the company still had to pay for the labor & materials to produce the widget, transportation of the widget and distribution. That “free” widget cost the company and most smart companies aren’t just giving stuff away out of benevolence. They are in the business of making money and that “free” widget serves a purpose. Gillette is famous for giving away razors to teenage boys for free; because they know that replacement razor purchases will make up for it. Stores offer coupons for “free” items because they know you won’t walk out with just the freebie (nobody wants to look that cheap). But how does this relate to the internet?

The Internet & Free: A Match Made in Heaven

As my economics professor pointed out, “free” items in the physical world have numerous costs that can add up quickly, like manufacturing, shipping, storage, customer service, etc. But somehow the internet changed our perception. Content is only produced once (incurring all the costs) but can be shared an infinite number of times on the internet for free. It’s like the perfect cloning machine and we’ve been expanding its cloning ability. Don’t believe me? Ask the newspaper classified industry or the music business how they feel about the internet.

Though some businesses and industries have fought the internet tooth and nail to protect their revenue sources, other companies have embraced the internet of free to become multi-billion dollar international behemoths. Probably the most visible today would be Google and Facebook. Whether it’s free email, free analytics, free image hosting, or free event planning, we got our fix and we’re hooked on free.

Free at What Cost?

With Google it started small enough. It was just a couple ads on your search engine results. After awhile we got used to them and started ignoring them. Then Google added some more. We learned to ignore them even better. Google added different formats. You get the picture. There is a constant arms race between Google and search users to make sure we notice ads, we click ads and we have a good experience in the process.

Facebook is a similar story. At first you could happily poke, post and message to your little heart’s delight without any of those ugly ads cluttering up your social experience. Then Facebook started showing an ad on certain pages. Then another and another. Pretty soon there wasn’t a page in Facebook without ads on it. But we were used to it, so we didn’t complain much. We were too busy checking out that hot girl from the party last night.

What’s In It For Google/Facebook?

If you haven’t checked the stock market lately, Google is worth $204.45 billion as of December 13th, 2011 at 3:10 pm MST. Just one share of GOOG stock is worth over $630. Though Facebook stock isn’t publicly traded, in recent IPO rumors the company is estimated to be worth $100 billion. So how do companies that make their business out of giving away stuff for free (search results, email, video, analytics, etc.) turn into multi-billion dollar businesses? As we often hear, follow the money.

While Google does have a handful of paid products, the vast majority of their revenue is generated through AdWords, their self-serve advertising platform. And Facebook was hemorrhaging cash until they launched their advertising platform. So why does Google and Facebook provide all these cool features for free?

Advertising Space!

It seems pretty straightforward and fairly simple, but I feel like sometimes we forget that advertising revenue is the main motivation for many of the decisions being made at Google and Facebook. Two examples come to mind.

First, I read a post on the Dragon Search blog titled “Bursting Google’s New Bubble Ads: the Good, the Bad & the Ugly” by Cassie Allinger. The post does a great job of explaining a new ad placement that Google released without so much as a blog post announcing it. She makes the point that because of this new ad placement inside the info bubble on Google Maps SMBs should now consider advertising here to protect their brand/prevent other brands from advertising inside their info bubble.

I agree with her entirely and as a PPC professional I would also advise an SMB to advertise here (and advertise on their competitors if possible). I just don’t agree that SMBs can complain when Google shows an ad next to their FREE Google local business listing. Ads are how Google makes money. That money funds all the freebies.

Second, I was participating in #ppcchat (a weekly Twitter chat about the PPC industry) and this question came up “What is are some things about AdWords that just F’n piss you off?” The next few minutes featured a laundry list of complaints from AdWords professionals. We were getting it all off our chest. But as I contrasted it with the first example above, I realized a critical difference – AdWords advertisers are paying Google. They are Google’s real customers. They are the ones that drive profits and keep shareholders happy. They have paid for the right to complain.

Remember – Nothing Is Truly Free, Even on the Internet

Altruism is exceedingly rare. Therefore, anything offered to you as “free” has some component or angle that allows the offering party to make money. Here are a handful of examples:

  • Free email from Gmail – Ads alongside your emails
  • Free video hosting from YouTube – Ads before, after or overlaid on your videos
  • Free image hosting from Facebook – Anyone viewing your photos sees ads
  • Free relationship management tool (aka Facebook) – Ads when you’re catching up with your friends
  • Free analytics from Google – Seamless integration with AdWords (and a regular email with a coupon for $100 of free advertising in AdWords for new accounts)
  • Free directions & maps from Google – Ads again
  • Free business listing from Google – Ads on your page, potentially from competitors
  • Free fan page on Facebook – Ads

Hopefully you see the pattern here. Many freebies on the internet are driven by advertising revenue. News sites write articles to sell ad impressions. Google will index the entire internet and offer you the best results for your search query so they can show ads. Facebook gives you a platform to stay in touch with friends or promote your business so they can serve ads. This is how these companies pay the bills and until you start paying, stop complaining.

About Robert

Conversion rate optimization and PPC wizard. If I'm not out playing ultimate frisbee or golf you may find me hiking, skiing or mountain biking.

Comments

  1. My wheels are turning now wondering how I can make the “freemium” model work for my businesses, and my clients businesses as well.

    You gotta love when people complain about something they don’t pay anything for. One more reason why no one on welfare should be allowed to vote! Sorry, I shouldn’t get political, but I just can’t resist. If you pay for a meal, and it sucks. Complain to the waiter that you need him to make it up to you. You deserve to be treated fairly, you paid for it. If you don’t like the way the city maintains the roads, then first ask yourself how much you paid for that road yourself!

    Great post Robert!

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