Can Freeconomics be made profitable on-line?

In his recent book, appropriately titled, “Free,” author Chris Anderson advocates using digital economics to create an economy of free internet access.  He firmly believes that free on-line access to sites and services for which we would otherwise pay can be profitable.  But how?

Anderson cites early examples of economic “loss leaders” used to generate consumer demand for later cash purchases:  from free recipe books for colored gelatin to drum up interest in Jell-O; to free Gillette razors creating the need to buy newfangled thin, cheap and disposable blades; to cheap cell phones sold with expensive monthly plans, etc.  These, however, are examples of what he refers to as a 20th Century “bait-and-switch” model based on an “atoms economy,” where economies of scale can reduce but not eliminate the cost of good and services that still need to be purchased.

Anderson contrasts the “atoms economy” with a new 21st Century “bits economy,” meaning the “online world [where] things get cheaper.”  He cites Moore’s Law, which dictates that a unit of computer processing power halves in price every two years, and extrapolates an annual rate of deflation in the online world of nearly 50 percent.  The upshot of this deflation in the virtual world is that “free in the bits economy can be really free, with money often taken out of the equation altogether.”

If the free bits are not loss-leaders for a bait-and-switch – or indirect payment of money – then on-line merchants have to make money in some other fashion.  We know of monetizing page views through advertisement and click-throughs with affiliate programs.   If these virtual indirect payments are not sufficient, what about direct pay walls?  Anderson says that “free has become the default, and pay walls the route to obscurity.”

In on-line journalism, however, the New York Times is the biggest of the old-line media to go back to such a pay wall in March of 2011.  The verdict?  It seems to be working.  According to “Mashable Business,” over one-half million people now subscribe, up 13% from the pay wall’s one year anniversary in March of 2012.  And the Times attributes the recent increase in subscriptions to reducing the number of free articles per month to 10, down from 20 in the first year.

I think the issue is value.  I currently pay $33.93 just for weekend home delivery of the Times.  Digital subscriptions cost between $15 and $35 per month.  Not such a bad deal.  All things being equal, I’d prefer not to pay anything for access, but as Milton Friedman schooled us, there’s no such thing as a free lunch.  And Anderson never answers the question in his free download of the first chapter of his book as to how free can really mean free in the bits economy.  You have to pay to download the rest of his book to find out how Freeconomics works.  Sounds like a 20th Century loss-leader model to me.