Why Charging Just a Little Can Be Smarter Than Charging Nothing at All

The strategy of giving everything away often creates as many hassles as it solves. Why charging just a little can be smarter than charging nothing at all.

Google's much-anticipated desktop operating system, Chrome OS (debuting in late 2010), has one main selling point: It's free. The search company plans to give the software to computer makers in an attempt to amplify its rivalry against Microsoft. That's Google's way — nearly everything it makes is free to users.

In an earlier generation, we might have scoffed at this marketing strategy. What business gives away its products? But not anymore. Free is the new normal. Today, every business that deals in intellectual property — from software to journalism to music — feels the no-cost push. If you're not giving it away, the thinking goes, you must be doing something wrong.

Though digital prophets champion our pay-nothing future, it's instructive to consider why free sometimes fails. To return to Google's Chrome OS, sure, Google will persuade some computer makers to install the OS. But when you consider what free really buys, the answer is not much. The computers are likely to sell at $20 or so less than the price of comparable Windows machines (Microsoft sells Windows XP to netbook makers for just $15 a copy). In exchange for that slightly lower price, customers will get computers that do much less — they'll run fewer programs and connect to a smaller range of peripheral devices. And good luck finding tech support.

Most consumers get it. There's already a free operating system for computers: Linux. Yet netbooks running Windows outsell their Linux counterparts by a margin of nine to one. In other words, free is getting trounced.

Why? Because free costs too much, weighed down with hassles that you'll happily pay a little to do without. That's why people buy bottled water and cable TV. That's also the model that The Wall Street Journal uses to goad people into paying for news online. Anyone can read its stories for free through Google or a news-aggregation site like Digg, but people who want the full newspaper experience pay $103 a year for the privilege. More than a million subscribers consider that a good deal. This isn't an anomaly, either. According to a recent study by the private-equity firm Veronis Suhler Stevenson, consumers now spend more time reading or watching media they've paid for than free media.

There are also natural advantages to charging a price — for starters, revenue, which can fund such extravagances as marketing and support. Google's free cell-phone operating system, Android, has had a tough time competing with Apple's iPhone in part because Apple has the funds to spend big sums on advertising and to staff its Genius Bars. Apple makes an enormous profit on each iPhone; Google, meanwhile, will make money only incidentally — through advertising revenue from people who use Google products on their phones.

Some companies have been at the vanguard of making a paying business out of "free." IBM, HP, and other tech giants generate significant revenue selling consulting services and support for Linux and other free software to businesses. These customers are willing to pay for nominally free products, because they understand that only when money changes hands does the seller become reliably responsive to the buyer.

Even Google is starting to learn this lesson. You can run Gmail and its office suite for free, but if you'd like tech help, better reliability, and someone to blame when everything goes wrong, you have to pay. Perhaps Google should take this strategy more to heart. If rock-bottom prices don't work out for Chrome OS or Android, there's only one way to go: up.

Farhad Manjoo covers technology for Slate and is the author of True Enough: Learning to Live in a Post-Fact Society.

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