5 ms·

This guy keeps getting stuff wrong. Instead of fearing free, take some time to understand it.

by konsl 19y ago

dkokelley 19y ago
I don't know. He has a point about the monopolistic policies of taking a loss on something to kill the competition, but that doesn't exactly work the same way with information products. If you can make money from free, then by all means it's not monopolistic. If you use free to clear the market so that you can charge later, then it is monopolistic.
- caudicus 19y ago
  Agreed - there's nothing really to "understand" here, as the grandparent called for. Businesses like Google are just doing what will maximize their profits. They aren't trying to be free or partaking in some "free!" revolution - they're just saying "Oh, ok, that will make us the most money, let's do it." It's a side effect rather than a goal.
  - konsl 19y ago
    Well, not really - free is maximizing value creation, not value capture. Chris Anderson explained all this: "the world of free exists mostly to acquire these valuable assets [attention, reputation, etc] for the sake of a business model to be identified later" It just so happens they already have a great business model, but they didn't when they released their search engine. They didn't make their search engine free to "maximize their profits"
    - caudicus 19y ago
      I shouldn't have used "profits"... I guess I'm thinking of what is called "Net Present Value"...which basically factors in short term losses for long term gains. Which kind of is what you're saying with "value creation" I guess. In which case, yes, they decided to give away Google Search for free (as well as GMail) because they saw future revenue streams in another area. My point is calling it "free" is BS in terms of NPV - which business decisions are all about, which valuation is all about, etc.
- te_platt 19y ago
  Do you have an example of a company undercutting prices to kill competition and then later raising prices? Gmail is still free. I'd worry about a company establishing a monopoly by using government coercion. It seems to me a company that figures out how to improve my standard of living by offering services free is a good thing.
  - newt0311 19y ago
    Using very low prices to undercut competition and then later raising prices only works where there is some way to lock customers in. Japanese companies do it all the time (they have exclusive contracts to provide lock-in). This is extremely common in game consoles because the dominant console will have the most games which will tend to make it stay as the dominant console. In general, anything with high switching costs can make use of this. (Phone and cable companies also used to do this). I would argue that these kind of monopolistic practices are bad for the economy but should only be dealt with after it can be proven that a monopoly exists. Thats because government stifling of beneficial businesses is a far bigger danger than monopolies.
    - dkokelley 19y ago
      Using very low prices to undercut competition and then later raising prices only works where there is some way to lock customers in. Exactly. That's why many utilities (water, gas, electricity) are granted government-sanctioned monopolies on their products or services. The infrastructures required to provide these utilities are so great that competition is near impossible.
  - cstejerean 19y ago
    IIRC GMail isn't exactly making money for Google. I never thought about it before reading this, but I can see GMail being offered for free to drive people away from Yahoo and Hotmail. Chances are once you're on Google services you're more likely to use Google Search (which is where the money lies). For example look at the nicely placed Search the Web box at the top of GMail.
- Prrometheus 19y ago
  >He has a point about making a loss on something to kill the competition, but that doesn't exactly work the same way with information products. Actually, I have never seen a good example of this phenomena in the real world. People say it is true about Wal-Mart, but they don't raise their prices after they kill the competition, which defeats the thesis.
  - dkokelley 19y ago
    They may not raise their prices right after major competition leaves, but by removing the competition, they do increase traffic. So, even though they may not raise prices, they make it up on volume.
  - brand 19y ago
    Taking a loss to kill competition was standard operating procedure for Standard Oil at the turn of the 20th century.
- Xichekolas 19y ago
  Who said Google was taking a loss on Gmail? All they did was shift the source of revenue. Gmail displays a LOT of ads on any given day. I know I spend more time in my gmail account than on any other website (including YC News), so the exposure is huge. Since ads are the primary revenue source for Google, this looked like a brilliant move to support its ad product, not an attempt to muscle into the email biz for its own sake. (I don't know if Gmail is actually profitable, because I doubt even Google breaks it down like that officially, but I suspect they aren't just pitching money down a black hole in order to gain marketshare in the email business.)

This guy keeps getting stuff wrong. Instead of fearing free, take some time to understand it.

by konsl 19y ago

This guy keeps getting stuff wrong. Instead of fearing free, take some time to understand it.

I don't know. He has a point about the monopolistic policies of taking a loss on something to kill the competition, but that doesn't exactly work the same way with information products. If you can make money from free, then by all means it's not monopolistic. If you use free to clear the market so that you can charge later, then it is monopolistic.

caudicus 19y ago
Agreed - there's nothing really to "understand" here, as the grandparent called for. Businesses like Google are just doing what will maximize their profits. They aren't trying to be free or partaking in some "free!" revolution - they're just saying "Oh, ok, that will make us the most money, let's do it." It's a side effect rather than a goal.
- konsl 19y ago
  Well, not really - free is maximizing value creation, not value capture. Chris Anderson explained all this: "the world of free exists mostly to acquire these valuable assets [attention, reputation, etc] for the sake of a business model to be identified later" It just so happens they already have a great business model, but they didn't when they released their search engine. They didn't make their search engine free to "maximize their profits"
  - caudicus 19y ago
    I shouldn't have used "profits"... I guess I'm thinking of what is called "Net Present Value"...which basically factors in short term losses for long term gains. Which kind of is what you're saying with "value creation" I guess. In which case, yes, they decided to give away Google Search for free (as well as GMail) because they saw future revenue streams in another area. My point is calling it "free" is BS in terms of NPV - which business decisions are all about, which valuation is all about, etc.
te_platt 19y ago
Do you have an example of a company undercutting prices to kill competition and then later raising prices? Gmail is still free. I'd worry about a company establishing a monopoly by using government coercion. It seems to me a company that figures out how to improve my standard of living by offering services free is a good thing.
- newt0311 19y ago
  Using very low prices to undercut competition and then later raising prices only works where there is some way to lock customers in. Japanese companies do it all the time (they have exclusive contracts to provide lock-in). This is extremely common in game consoles because the dominant console will have the most games which will tend to make it stay as the dominant console. In general, anything with high switching costs can make use of this. (Phone and cable companies also used to do this). I would argue that these kind of monopolistic practices are bad for the economy but should only be dealt with after it can be proven that a monopoly exists. Thats because government stifling of beneficial businesses is a far bigger danger than monopolies.
  - dkokelley 19y ago
    Using very low prices to undercut competition and then later raising prices only works where there is some way to lock customers in. Exactly. That's why many utilities (water, gas, electricity) are granted government-sanctioned monopolies on their products or services. The infrastructures required to provide these utilities are so great that competition is near impossible.
- cstejerean 19y ago
  IIRC GMail isn't exactly making money for Google. I never thought about it before reading this, but I can see GMail being offered for free to drive people away from Yahoo and Hotmail. Chances are once you're on Google services you're more likely to use Google Search (which is where the money lies). For example look at the nicely placed Search the Web box at the top of GMail.
Prrometheus 19y ago
>He has a point about making a loss on something to kill the competition, but that doesn't exactly work the same way with information products. Actually, I have never seen a good example of this phenomena in the real world. People say it is true about Wal-Mart, but they don't raise their prices after they kill the competition, which defeats the thesis.
- dkokelley 19y ago
  They may not raise their prices right after major competition leaves, but by removing the competition, they do increase traffic. So, even though they may not raise prices, they make it up on volume.
- brand 19y ago
  Taking a loss to kill competition was standard operating procedure for Standard Oil at the turn of the 20th century.
Xichekolas 19y ago
Who said Google was taking a loss on Gmail? All they did was shift the source of revenue. Gmail displays a LOT of ads on any given day. I know I spend more time in my gmail account than on any other website (including YC News), so the exposure is huge. Since ads are the primary revenue source for Google, this looked like a brilliant move to support its ad product, not an attempt to muscle into the email biz for its own sake. (I don't know if Gmail is actually profitable, because I doubt even Google breaks it down like that officially, but I suspect they aren't just pitching money down a black hole in order to gain marketshare in the email business.)