Would You Want It If It Were Free?

The meme of “Free” is one again making the rounds.  I expect it reignited when Chris Anderson’s new book Free: The Future of a Radical Price (available on Amazon for $17.81) quickly followed by Malcolm Gladwell’s semi-scathing review in the New Yorker titled “Priced to Sell.  Is Free the future?”  (I kind of feel like Gladwell wimped out on the review, even though I like Anderson’s point of view better than Gladwell’s.)  This then created a predictable tussle in the blogosphere, the kind of which I find tedious and dull, so I avoided the rest of it.

Over the weekend I saw two more blog posts on this meme.  The first – by Fred Wilson titled Freemium and Freeconomicsis clear and well written (and free).  It’s then followed by an excellent comment thread.  The second – by Marc Cuban titled When you succeed with Free, you are going to die by Free (also free) is a muddy as Fred’s is clear (and the comments are much less interesting).  Nevertheless, both are relevant and insightful.

Whenever I see this meme rise its head, I think of a line I use whenever I consider an investment or an acquisition of another company.  “Would You Want It If It Were Free?”  I learned this from Len Fassler, one of my early mentors who acquired my first company (fortunately he decided it was worth more than free).  Before I make an investment, or support an acquisition, I sit quietly and ask myself “would I want this if it were free?”  By this, I don’t mean as a customer, but rather “would I invest in this at a $0m pre-money valuation” or “would I want 100% ownership of this company if it cost me $0.”

Over the past 15 years, I’ve found my answer to this question to be “no” more times than I can remember.  It often surprises me when I realize this, as up to that point in the conversation, investigation, or negotiation I’d been focusing on “the deal” rather than “whether or not I perceived any value in the company being discussed.”  When I reflect on some cases that I remember, I realize how my internal rationalization machine had kicked into high gear as I got excited about “a transaction”.  By taking the transaction out of my thought process, I could focus on the essence of value (or lack thereof).

Of course I’ve been wrong (both directions) plenty of times.  But I can think of a bunch of situations where asking myself this question saved my ass or that of the company I was involved with that was considering an acquisition.

I realize this is a different version of free than the one Anderson, Gladwell, Wilson, and Cuban are discussing.  But, if you step back and think hard about it from a customer perspective, it magically becomes relevant.  Certainly lots of people “would try it if it were free”, but do they actually want it?

  • it's not really any different. deciding to make an investment is not much different than deciding to part with cash to go to a movie, buy a record, or any other parting with cash. yes, we are expecting to get not only our cash back, but a return on our investment. but the ROI on a great movie or a piece of music is tangible too.

    we make this call every day on the web. someone sends me a link to a new website. i click on it. no change of money and yet I decide i'm not coming back. i don't want it even though its free.

    len is a smart guy.

  • I completely agree.  That’s the subtle (or maybe not so subtle) message – that “free” doesn’t equal “good” and – to be successful at “free”, you also have to be “good” (relevant / useful). 

  • I like this way of evaluating decisions. Scarcity of time also plays a huge part.

  • Hi Brad. It's nice to see another fresh perspective on this. I felt Cuban's post was pretty clear with regard to his basic central point: e.g. when you'r product is free your business isn't defensible from competitors as it matures. (or much less defensible that a business that initially sold it's offerings)

    Fred made the following statement in his post regarding facebook:

    "…revenue per monthly active user of $0.25. Low for sure, but enough to operate at breakeven. And I expect the self service ads and the virtual goods revenues to grow strongly in the next year, more than making up for the likely loss of some of the $150mm from the ad deal with Microsoft."

    Fred's a professional at this stuff, so far be it from me to question him, but what the hay? Facebook is likely at the apex of existence right now…these are the good old days for the network, atm. I would argue that revenues may continue to grow a little going forward, but likely will flatten or shrink very soon -in a similar fashion to what has happened at Myspace. It might might not happen this year, but it will happen.

    Again, I'm no VC and you fellas are the pros…I just can't see how if a company ain't making it on 'free' at the height of it's popularity, novelty, and growth -how it ever will when it matures and doesn't have those things going for it. If it is successful into corporate adulthood, it's likely no longer the same business it was to begin with.

    • I agree with Fred (and disagree with you) on Facebook.  There are so many vectors on which they can make incremental money for every user, especially in ways that enhance the user experience.  I don’t view them anywhere near their apex as a business.

      The premise that you have to shift you model to “charge users” isn’t valid.  Just look at the long arc of television programming.  There are endless indirect revenue approaches that survive for a very long time and – in many cases – disrupt existing approaches.

      While I don’t buy Cuban’s premise, it’s an important one to ponder.  If you dominate an area where your users have low switching costs and don’t pay you anything, then you are definitely in a position where someone new can come along and cause you trouble.  The key is switching costs – an active social network that is exercised daily (or many times a day) is a powerful barrier to switching. 

  • Richard Forster

    Brad – I like the simplicity of your point of view as an investor, I'm sure that helps to quickly crystallise whether or not you invest.

    From a customers perspective I'd say maybe they don't know whether they want it or not unless its free (at a basic level at least).

  • Just to complete the chorus (and I'm sure the debate is just starting), Seth Godin weighed in as well, with "Malcolm is wrong", http://bit.ly/1MWeb.
    Nonetheless, I'm glad to see where the VC's are siding on this issue. For me, the only Free that makes sense is one that leads to a Paid of some sorts- whether subsidized by someone else or subsequently paid.

  • I find myself faced with the same question especially in investments involving an exit by the founding team. We recently said no to one opportunity, which was essentially a free chunk of equity for the burden of running the co.

    I tend to think that free is rarely free. There's the cost of attention and effort. It's free on the price side of the equation and not free on the cost side.

    Albert Wenger also had a good post on the topic: http://continuations.com/post/132871055/the-conti

    • nice one Cem – "free is never really free"

      i'm going to use that

      • I'd like to hear how you, Brad, and you, Fred, answer the main question above in this post: (Certainly lots of people “would try it if it were free”, but do they actually want it?)

        If a business has not "launched" or reached "the market" yet, is there any more to answering this question, as professional investors, than a simple quick gut check? Is your gut instinct even sufficient to warrant investing in any company (in today's investment economy)?

        If there are so many customers willing to try the "new thing" for free or at some cost, how do you assess whether a company's initial success will last? Are there really that many cases you know of where a company failed after a short-lived initial success, because nobody really wanted what they decided to try?

        The viability of "freemium" biz models has been debated to death, although I have always sided with "free is never really free". http://www.wired.com/techbiz/it/magazine/16-03/ff

        • There are lots of cases where I’d want it if it was free.  In fact, we’ve done four investments so far this year so the answer to each of them was yes.  In addition, three companies I’m on the board of have done a total of five acquisitions so there are a few more affirmatives.  I’ve also said no to this a number of times where a company I was involved in could have done an acquisition for virtually nothing and we chose not to.

          Regarding your “simple gut check” question – that’s not what I’m referring to at all.  Rather, I’m suggesting this question be asked in the middle of a reasoned analysis as a way of taking the emotion out of the activity.

          • Your answers give rise to 10x more q's from me, but they are too specific and could be answered on a 1-on-1 email basis if the answers were more crucial to me.

            Thank you for responding. Always impressed with your blog dedication, and equal treatment that you give to comments.

          • Thanks Aziz.  Feel free to send email anytime.

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  • Frank Greces

    Interesting thread….that's why as part of our m&a strategy back in my day's working as a Director for a (very) large software company in Seattle, we used to have a separation of powers if you will between the m&a team who often got so focused on making the kill (ie closing the deal) that they often lost their objectiveness when it came down to the ROI factor of the acquisition, investment, etc….there was always an internal third-party that would ask "would we want this if it were free" before either red lining or green lighting the deal…..

    Lots of great lessons learned from guys the guys sporting pony tails in Redmond;)


  • I like that question because it forces you to really consider the burden of ownership that comes with something free. It makes me instantly recall the lessons imparted by Daniel Ariely in the chapter on "free" in his book Predictably Irrational. In short, "free" is a price which consumers gravitate towards, even if doing so means foregoing a more valuable economic incentive. SO, if owning a company for free doesn't even tempt that irrational side of your brain, then it must be not worth pursuing.

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  • The book is available now "Free" on Scribd http://bit.ly/umbVL. Also, I configured this comprehensive aggregator on Free, Freemium & Freeconomics using the Eqentia platform http://beta.eqentia.com/free

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  • Interesting angle that are are involved in the game more than we are involved in winning of that game.

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  • Sure, we'll give you a review. We'll even make it free. And add chocolate, whoop cream, and some ice cream. Some sweet review, huh?

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