Generation has grown up expecting things to be free.   Young people think it's obvious that stuff is free online.

Older generation thinks it's wrong, economically illiterate.

Half says no way, half says duh.  Free is the most misunderstood word in english language.

Word has two meanings: 1) freedom, free speech; 2) no price

Free as in liberty is good.  Free as in price might be a trick, possibly good.  By combining the two meanings, there is ambiguity.

There is semantic confusion, and historic confusion.

Jell-O gave away Jell-O recipe books door to door.  Would then stock local merchants.

Give away something cool, but that has no value without buying something else.  Gillette is another example. 

Free is not a new economical model - in all these cases, you still have to pay at some point.

What's happened is that we've switched from an economy of atoms, to an economy of bits.

Bits have near 0 costs of production and distribution.

The other thing is that's changed is that it's an deflationary system.  Cost declines are huge.  Bandwidth and storage coming down, as is processing.  Whatever you are doing now, will cost you half as much a year ago.  We've never seen deflation hit as fast and as long as this.  Muscle power to steam power brought things down fast, but then started going back up.  Assembly line, same thing.  These are step changes.

Digital Goods are the first good that are able to keep this deflation up.  These seem like decade long trends. 

Razors to digital swords.

Virtual goods want to be free. Like water wants to flow down hill.  Closer to a force of physics, than a hippie mantra.  It's not philosophy, not moral - it just is.  An effect of processing, storage, distribution going down.

The kids are not wrong, are not spoiled.  They have just internalized digital economics.

Default marginal cost is zero.  But there must be an economic model to explain this right?  No, we don't.  This is new.

In the 1800s some new concepts were discussed and defined.  Competition.  It's obvious now, but then, every product was different (without mass production).  With the rise of the industrial age, you started to see the same stuff being built, and hence competing.

Two economists had different takes.  First economist believed that producers would conspire to limit capacity to preserve price.  Bertrand said no, manufacturers will compete on price, until they got to the marginal cost of production.  Competition will drive prices down.  This was the end of the discussion.

The Internet has brought all this back - it's the most competitive marketplace the world has ever seen.  It's easy to compete.   Near zero cost of production is the norm.

The Internet is largely driven by the underlying cost of production.  If you don't make your stuff free, someone will do it for you.  Music.  We didn't make it free because we are bad, but because we could.  Free tends to win.

Transistors.  RCA sold ahead of the price.  Lost money at first, made gobs at end.  Lose money from everyone, but make it up on volume.

YouTube is not making money today, but it will make money tomorrow.  Odds are it will become profitable.  So will Twitter and Facebook.  You can lose money today, and make it tomorrow because the costs are coming down.

Argument: you can't compete with Free.  This is wrong.  Microsoft competes brilliantly with free.  In the 1970s Bill Gates convinced people to pay for software, not just hardware.  He created a market.  He wrote an open letter to hobbyists.

In the 1980s, MS' competitors started bundling software with computers, with an upgrade plan.  MS releated Microsoft Works.

In the 1990s, MS had to compete with piracy,  Pirates are the animal forces of economics.  MS is against piracy.... but, they didn't crush them.  Bill Gates: China is a developing economy.  We want them to pirate our stuff.  When they are ready to pay,perhaps they'll buy ours.  Lose money now, make it later.

Netscape released a free browser, which MS crushed by bundling IE with operating system.

2000s - MS competed with OpenSource.  You are not selling software - you are selling risk reduction.  You would get an SLA, a phone number.  A promise that somebody would make sure the software worked.  In open source, the RedHat's were doing the same thing.  Selling service and security, contractual support.

Now, they are giving their enterprise software for free to startups.  BizSpark.  It's the chinese pirates all over again.  Lose money now, make it later when the startups start making money.  Free as a form of marketing.

The bane of the Free discussion is the newspaper industry.  It's not free vs. paid, but ad driven versus freeemium.

1. The best model is a mix of paid and free
2. YOu can't charge for exclusives that will just show up later
3. Don't charge for the most popular content
4. Content behind a pay wall should appeal to niches
5. The narrower the niche, the better

(alan murray, WSJ)

Freemium is the inversion of the free muffin.  Give away the majority, and charge the niches.

Churn rates are much lower for freemium models than those that charge up front.

Give away the head, sell the tail.

Two most interesting markets to look at Freemium: Video Games and iPhone Apps

Games are going from silver discs to online.  Games - free to play, but you better if you pay:

1. People will pay to save time. (buy teleportation tool!  save time!)
2. People will pay to lower risk
3. People will pay for things they love
4. People will pay for status (club pengin pets)
5. People will pay if you make them (and they are hooked) (times up!  time to pay)

Microsoft tells you that Open Source is "free like a puppy."

Q: where do you stand on micropyaments?
A: it's failed and failed and failed for two reasons.  One reason is going away (transaction costs).  Second reason is psychological barrier, penny gap.  Harder to make these go away.  I doubt we will see microcents like was originally prophesied, where everything will cost tiny amounts.

Q: What about quality?
A: Quality is funky word.  THe old way is that quality meant production quality. Quality is now about relevance, it's in the eye of the beholder. 

Q: Freemium works for EverNote.  We agree.  Optimistic about the future of the model.  (editor's note: this is not a question). 

A: This is not a question, but here's an observation.  First wave of Internet: big build audiences and slap the old model (ads) on top.  Second stage, be smarter with ads: adsense.  WIth Freemium, you need to build two products: 1) free, and 2) ideally, many paid.

Q: Where's the lockin for expert content?
A: Now it's DRM, but that will die.  With movies, we don't know the answer yet.  Going to near zero cost of production, to near zero cost of consumption.  Netflix you can watch as many as you want for $14.95.  Has to be a volume business.

Q: how will Newspapers use micropayments?
A: I don't think they will.  We know subscriptions well. 

Q: Price falls to marginal cost of production.  Health insurance pricing is more competitive now, because of abundance of information.  How do you last through the free zone to get to the profits?

A: great question.  You need to find the gaps.  Don't tackle Gmail and Yahoo Mail head on.  MS literally tried paying people to search.  Less than free. Startups can't do that.

Q: in a content model, you said 30 day free is not ideal.  WHat's the suggestion?
A: problem is you are giving people a real easy reason to get out.  You give enough free so that they get utility, and then upsell them.  ONce they are engaged it's not spam.

Q: With Wired, you can get stuff for free or pay for it.  Why pay for it?
A: Everything is free, but you get a superior format if you pay.  Print.   The packaging is important.  Online is not as good.  Pictures are thumbnails.  Our model is we convert some fraction of the online to print, because offline is superior.  Problem is not enough know that the print experience is so superior.  How do hint how superior the print side.

Q. Perception of free.  Webkinz - the subscription is bundled into the animal.
A. Also neopets, toy companies.  Game is free to pay, but characters are unlocked by buying code.  Marketing to children is fascinating.

Q.  With tiered service, what are your thoughts on number of tiers?  Before it gets confusing?
A. The upside of 30 day free trial is you can sample and try it.  The bad news is the level of commitment is minimal.   Every product is different - I think two paid tiers is a good level, and one free.

Here are my initial observations:

• Facebook chose to expose a JavaScript, not Flash, widget.  This means it will work fine on places like Blogger and TypePad, but won't work on places like MySpace, Wordpress, and uh, Facebook.
• Facebook becomes the second widget publisher to use Facebook Connect in a widget.  The first was RateItAll.
• It's interesting to me that Facebook chose not to use any easy add buttons from companies like Clearspring or Gigya.  They just expose the embed code and leave it up to the user to muddle through.
• The activity piece of the widget reminds me of the Plaxo Pulse widget.  Will we see a Facebook User activity widget follow?
• Minimum width for the widget is 200px - this rules out narrow sidebar placement.
• Who says Facebook doesn't care about SEO?  Check out this little, bare link beneath the bottom of the widget.  And they're optimizing for the company / band / public personality name!

In classic Hub & Spoke fashion, Facebook offers a clear incentive to companies, bands, and public personalities to add the Fan Box to their site, blog.  Because Facebook Pages have the ability to publish to the newsfeeds of their fans, the more fans you get, the better your communication channel to your users.  This is the new email distribution list.

For more on the Facebook Fan Boxes, see TechCrunch, Inside Facebook, and the Facebook Blog.

The widget is available for the more than 2.2M items in our database, including everything from movies, to local businesses, to gadgets, to beverages, to politicians, and much more.  You can see it modeled in the sidebar of this blog - try posting a review.

We've gone to market with more than 100 launch partners.  Here are some of them:

Web Apps: 2Big2Send, Buxfer, Medgle, CitiAlly, CleanTechies, Tripsay, Cloud Disk, Commuto, Colnect, ExpertsColumn, Fan History, Fantazzle, FreeTideTables.com, Lefora, Mavrev, Morthix, MyGridironSpace, MyWikiBiz, OurConvo, PlayPing, Producteev, RaaajChat, Rainfall of Envelopes, RentersQ, Resnooze, Stuffpit, TasteKid, TechMunch, Tubefilter, TweekGeek.com, TweetTweetMe, Vigster, WaTunes

Agencies: Samasource, ElaborateSEM, Compu-Clean, Designious, Dreams Media, Vertical Measures, Goldstein Media, GSolutions Online, InterGraphicDESIGNS, JR Language Translation Agency, Webfeathers, Your Design Online

Software: Crossloop, Addaptron, Screencast Pro, TBG Security

Blogs: Sexy Widget (!), Stuntdubl, Sprol, eBykr, The Noe Farm Report, LenaCardell.com, The RateItAll Blog, Stickiwidgets, Easy Green Living, F***ART Blog, Mobile Buzz

eCommerce Sites: Asanea Gifts, Decorish.com, Giftah, Juvie, Kan Thai Decor, Active Health Supply

Online Comics: The System

Ad Networks: BlogUpp

Musicians: Giovanni String Quartet, Buddy Ivory

Local Businesses: Align Chiropractic, Miami Carpet Cleaning, The Finer Details, Back to the Past Comics, Fix'n'Tweak Computer Services, Hollywood Tans, Horizon Yacht Charters, Kokopelli Ski Holidays, Theresa Minnette Photography

To get your own widget for your site, blog, product, self, or anything else, click HERE.

I am moderating an all-star studded widget event at SF New Tech on Wednesday, June 17.

This won't be your typical panel of demos.  We will be comparing, side by side, head to head, several of the biggest and most innovative players in the widget space.

Clearspring vs. Gigya in widget infrastructure

Sellit vs. Adgregate Markets in widget commerce

Sprout vs. iWidgets in widget publishing

On hand will be Hooman Radfar, Carnet Williams, Peter Yared, Kurt Collins, Rooly Eliezerov, and Henry Wong representing their respective companies.  If you are interested in widgets and distributed web strategy, this is a can't miss event.

There may even be a surprise product announcement.

I described Splashcast as follows in my January, 2007 post:

It was write once, post anywhere.  It pulled in multiple media channels.  And it was nicely put together.

In discussing what went wrong, CEO Mike Berkley had some interesting quotes today on TechCrunch:

And from the Splashcast blog, from Tom Turnbull:

My own thoughts on Splashcast?  I would agree with much of what these guys said - to run a business off of ads showing up in widgets, you need tremendous scale.  Clearspring or Gigya kind of scale.

And precisely because Splashcast's tool was such a hit with the early adopter community, might have played a role in why it wasn't destined to reach that sort of scale.

This was no mass market product - this was a powerful, complex tool designed to appeal to creative, early adopters.  Which it did.

Musestorm has a robust widget publishing tool that they chose to license to agencies.  Sproutbuilder turned off the free version of their widget publishing tool in January, instead choosing to license it to big brands.

Ad supported businesses need scale to have a chance.  Ad supported widget businesses need massive scale, because of the small footprint, and lack of placement control associated with widgets.  And the more complicated your product is, perhaps the less likely you are to reach that scale.

Of course, I noted none of these points in my early review of Splashcast.  It sounds like they have a promising plan b in their "Social TV" product, and I wish them the best of luck in their transition.

The common denominator needed to build these sorts of applications is access to up to date and accurate local business information - business name, street address, phone number, city and state, zip code.

As of today, there are two ways to get this sort of data in large quantities; 1) scrape it from other services; 2) license it from companies like Acxiom and InfoUSA.

Local business data is notoriously difficult to keep up to date.  I've heard estimates that up to 40% of all local business data goes stale per quarter.  With a centralized approach, such as the call centers operated by Acxiom and InfoUSA, it is a costly (and lucrative) proposition to keep this data fresh.

To me, the sale of local business data seems like an industry in grave danger of getting wiped out.

Yesterday, Google announced a new local business dashboard, designed to incentivize local businesses to claim their listing on Google.  Claiming a business means being responsible for keeping its data updated, thus eliminating the need for centralized data providers.

Would it shock anyone if Google were to expose this local business information in exchange for attribution, much like they did with the Google Maps API?  Not only would a local business data API represent another snippet of code to suck analytics data back from countless websites, but Google's mobile platform, Android, would stand to benefit from increased numbers of location based applications.

This wouldn't be the first time that Google wiped out an industry overnight - just ask those that competed with Urchin, now Google Analytics.

And there are LOTS of folks working on this.  In just the past few weeks, Socializr, Digg, Lunch.com, and my employer RateItAll, to name a few, have announced tighter Facebook and Twitter integration.  Spymaster is an even more pronounced example of a service that is uber-optimized for Twitter distribution.

The idea here is pretty simple - find ways to push, or help your users push, your site's activity out into the larger social media rivers, with the hopes of driving clicks back to home base.

Let's call this the Inside Out strategy.

But what would happen if we we flipped this strategy on its head?  What if in addition to optimizing your site's activity for distribution on Facebook and Twitter, you tweaked your service to accept content from activity within those services? 

Here are some examples of what I'm talking about:

- a blog comments service in which you could post your comment on Twitter or your Facebook status
- a polling app where you could create your poll via a tweet
- a social game where points are earned via activity on Facebook and Twitter (Spymaster incorporates a bit of this)
- a rating app where ratings could be published via a tweet or status update

Outside In is not a new strategy.  There are plenty of examples out there - Posterous posts are created via another app (email) and aggregated on Posterous.com.  The vast majority of content on FriendFeed originates on other networks.  The appropriately named Outside.in pulls in blog posts from around the web that have a hyperlocal slant.  Mahalo's QA site has a scraper that pulls in questions (any question) from Twitter (sometimes against the will of the originating site), and the defunct Edgeio was an early pioneer in aggregating classified ad listings.  All of these services refused to restrict the content publishing piece of their service to their own domain.

Other than Friendfeed, which doesn't really count as it's story agnostic, I haven't seen any services gain traction by coming up with a standard to accept content via Twitter or Facebook statuses:

e.g. #poll What's the best blog? #1 Sexy Widget #2 Widgify #3 Sprol

The main hurdles to overcome would seem to be A) The simplicity of the posting format; and B) the character limit.

I expect to see some folks try though.

A look at this same graph will tell you that interest in widgets has been in gradual decline since then - in fact, we would appear to be at similar levels of interest as we were in late 2005, before the first YouTube widget hit MySpace. 

But just when you thought that those lovable chunks of embeddable code had run their course, widgets now seem to be roaring back.

Data Point #1

At this week's Google I/O conference, widgets played a significant role in each of the morning's keynotes.  On Day 1, Google VP of Engineering Vic Gundotra spoke extensively of "cut and paste programming," and announced the exposing of a whole new suite of widgets, cleverly called Google Web Elements.  Several of Google's most successful properties including search, maps, and calendar, are now available in embeddable, widget form.

On Day 2, it was announced that Google's most ambitious product announcement in some time, Google Wave, will be supported by an embed API.  The key premise here is that the Google Wave format, which is part email, part bulletin board, part IM, and part document, will proliferate via embed to social networks and blogs.

Data Point #2

Widget infrastructure company Clearspring, after several months of quiet execution, has announced that their widgets are now reaching more than 500M users a month, more than half of the Internet's population.  As founder Hooman Radfar says in a blog post:

"...if we were a publisher, only Google, Yahoo, and Microsoft have larger reach."

Data Point #3

Union Square Ventures just announced an investment in HeyZap, a distributed social gaming company that, if you believe their site's navigation, is emphasizing proliferation via widgets and APIs over all else.  This is interesting as Union Square Ventures' Fred Wilson, once once of the biggest advocates of widgets, had more recently cooled to them, paring back widgets on his own blog and suggesting that widget makers needed to figure out how to get out of the sidebar and into the river.

To me, HeyZap looks like a good, old fashioned widget play from 2006 - in fact, just like one I covered on this blog.  And I'm not disparaging that - I thought that a YouTube for games was a good idea then, and I think it's a good idea now.

Summary

While one week does not a resurgence make, when thought leaders like Google and Union Square Ventures throw their weight behind widgets (again), and a leading widget company announces the kind of reach that Clearspring did, you have to stop and take notice.

And I have to say, the timing couldn't be better.

As luck would have it, I am moderating what we are calling a Widget Smackdown event in San Francisco on June 17.  Participating companies are: Clearspring and Gigya, iWidgets and Sproutbuilder, and AdGregate Markets and Sellit.  Details will be posted on SFNewTech.

Eric Schmidt kicked things off with the message of "The Time is Now" (to finally realize the dream of the Web as the ultimate programming platform).  Schmidt was followed by a number of senior Google engineering lieutenants as well as a few token engineering executives from companies like Mozilla and Palm.

There was a lot of attention paid to how far the browser has come in terms of speed, as well as the promise that HTML 5 holds for both users and developers.

The portion of the keynote most relevant to readers of this blog was the launch of "Google Web Elements" - an attempt to bring the same embed / cut and paste programming that is available for YouTube to other Google products.  Yes, this is what the rest of the world calls a "widget." 

And no, I am not changing this blog's name to "Sexy Web Element."

Specifically, Google is now exposing embeddable JavaScript snippets for the following Google Products:

- Calendar
- Conversation / Commenting (watch out Disqus, JS-Kit?)
- Custom Search (neat because it isolates the host domain and other domains that you choose, watch out Lijit?)
- Maps
- News
- Presentations (watch out Slideshare?)
- Spreadsheets
- YouTube

Here's an example of the commenting widget:

And here's an example of the custom search widget:

For more on Google Web Elements, see Technologizer.

I will likely share more of the specifics of what we did in regards to sharing in a future post, as I think we're doing some neat things.

As part of our Twitter project, we decided to build our own URL shortener as opposed to using an existing service like Bit.ly or TinyURL.

Here are the reasons we did this:

1. It preserves our brand in tweets.  Our brand happens to say exactly what we do.  It's a description of the service, and hopefully, a means to attract new users.  We felt it was important that our brand be preserved as our service gets tweeted and retweeted.
2. It was easy.  Setting this up for four different types of links took us a few hours.
3. We have a fairly short domain name.  By using our own URL as opposed to Bit.ly's, we don't lose all that much in terms of saving space against a 140 character limit.
4. It protects us against third party services deciding to change the rules.  To its credit, Bit.ly is currently a search engine friendly redirect, meaning that link juice appropriately gets transferred to the destination domain.  There's no guarantee that Bit.ly will stay that way.

You can see our sharing tools and url shortener in action on this page about Star Trek characters.

For more technical posts on URL shorteners, see Joshua Schachter and Danny Sullivan.