Free

Why does the word “free” still make us stop, smile, and act before we even think? In Free: The Future of a Radical Price, Chris Anderson argues that the shift from atoms to bits—from physical goods to digital ones—has turned “free” from a marketing gimmick into an economic force. He contends that an age of near-zero costs is creating not just new industries but new ways of thinking. Understanding “free” isn’t about what you pay; it’s about how the world creates, measures, and trades value when money often no longer changes hands.

From Gimmick to Economic Principle

For most of human history, “free” was viewed with suspicion. There’s no such thing as a free lunch, right? Up through the twentieth century, free was a tactic—the free gift inside cereal boxes, free samples at grocery stores, or razors given away to sell blades. These were ways of nudging demand. Anderson begins with stories like Jell-O’s ingenious free cookbook campaign and King Gillette’s razor model to show that giving something away could build entire markets. But now, technology has changed the equation. Once the cost of distribution and reproduction fell toward zero—thanks to digital platforms, the internet, and Moore’s Law’s relentless march—free became not just feasible but inevitable.

Anderson calls this the rise of the bits economy, contrasted with the “atoms economy” of physical goods. In the atoms world, scarcity rules: every item costs something to reproduce. In the bits economy, abundance rules: once created, a digital copy costs almost nothing. The result? Free is no longer deceptive—it’s a natural consequence of cost curves collapsing. Moore’s Law doesn’t just double processing power; it halves the cost of storage, bandwidth, and computation every year. In digital spaces, zero becomes both a technical and economic reality.

The Examples that Changed Everything

Anderson’s prologue drives the point home through vivid real-world examples. When Monty Python found their comedy sketches pirated across YouTube, they tried an experiment: uploading high-quality versions themselves and giving them away for free, while inviting viewers to “click and buy” the official DVDs. Within three months, sales rose 23,000%. Free didn’t destroy value—it created it. Similarly, Google offers Gmail, Docs, and Maps gratis, yet earns billions because users’ attention fuels advertising. Linux powers much of the world’s tech infrastructure while remaining open source. The catch: free doesn’t mean profitless—it simply redefines how profit is made.

These examples illustrate Anderson’s paradox of free: “People are making lots of money by charging nothing.” As he puts it, you don’t make money from everything, but from enough of what surrounds the free. The web has created an economy as large as a small country built around $0.00 pricing. Anderson’s thesis follows his earlier book, The Long Tail, which explored how unlimited shelf space made niche products viable online. Free investigates another dimension—what happens when the cost of that infinite shelf space itself disappears.

The Psychology and Economics of Zero

Humans respond irrationally to zero. Anderson builds on behavioral economist Dan Ariely’s experiments: when chocolates dropped from one cent to free, people flipped their preferences instantly. “Zero is an emotional hot button,” Ariely said—it removes risk and triggers excitement. The author extends this to markets: between something and nothing, the difference isn’t one cent—it’s a chasm. This “penny gap” explains why Google thrives while micropayments fail. The mental transaction cost of deciding if something is “worth it” disappears when the price is zero, multiplying participation exponentially.

Free as a Catalyst of Creativity and Culture

But “free” isn’t merely economic—it’s cultural. With abundance comes democratization. Wikipedia, open source software, blogs, and the social web show that altruism, reputation, and community can drive production as powerfully as money. Anderson connects these trends to Adam Smith’s “enlightened self-interest”: people contribute freely because it benefits their identity or community. Free encourages experimentation, sharing, and innovation. In a deflationary digital world, the most successful companies learn to monetize around free: selling scarcity (status, premium versions, time saved, or customization) rather than fighting abundance.

Why Understanding “Free” Matters

The core argument of Free is that businesses must stop resisting zero and start managing abundance. Companies that cling to twentieth-century definitions of cost and competition will be left behind, while those that embrace “freemium” models, indirect monetization, and cross-subsidies will thrive. As Anderson concludes, free isn’t new—but digital technology has transformed it from marketing trick to operating principle. Understanding how to profit when prices collapse may be the essential skill for survival in the twenty-first century economy. The question isn’t whether free works; it’s whether you know how to use it.

Anderson calls the digital revolution the “first deflationary economy.” As computing, bandwidth, and storage costs plunge—halving each year—digital abundance transforms markets based on scarcity into ones governed by sharing and scale. He compares this to Lewis Strauss’s unrealized prediction of electricity “too cheap to meter.” Where nuclear power failed, the Internet delivered. Everything touched by information—from communication to commerce—has followed this path toward near-zero cost.

The Economic Gravity of Zero

A guiding principle emerges: “In a competitive market, price falls to marginal cost.” For digital goods, that marginal cost is zero. Once a file exists, replication costs nothing. This simple fact overturns centuries of economic thinking based on scarcity. Online, Cournot’s production-based model gives way to the Bertrand Competition model—businesses undercut each other until price sinks to the cost of producing one more copy. Unlike the world of atoms, where fixed costs remain high, bits want to be free. You can’t stop free—it’s economic gravity.

The implications ripple outward. As Anderson explains, this doesn’t mean profit dies; it relocates. Using examples like the semiconductor industry, he shows how Moore’s Law shapes everything digital. Each doubling of processing power doesn’t just make technology cheaper—it expands the possibilities. Google’s servers embody this compound learning curve: every eighteen months, the cost per user halves even as efficiency doubles. Companies built on scale—Google, YouTube, Facebook—turn waste into wealth. They embrace abundance instead of conserving resources, flipping the old industrial mindset.

From Conservation to Waste

Following Carver Mead’s insight, Anderson urges us to “waste transistors.” When resources grow plentiful, trying to conserve them limits progress. Alan Kay’s graphical user interface did this brilliantly—using extra computing power for visual ease, wasting resources to make computers human-friendly. The same mindset powers YouTube’s avalanche of videos: abundance enables experimentation. As Anderson writes, “The best way to exploit abundance is to relinquish control.” Wasting storage or bandwidth is not a mistake—it’s the method by which innovation scales.

The broader lesson: technology makes abundance normal. Managing abundance requires new habits—round down your costs, expand your reach, and let users explore possibilities without barriers. Like steam power before it, information’s abundance redefines what industries can do, turning what was once “too expensive to care about” into “too cheap to matter.”

To show how free works in practice, Anderson identifies four main models. Each represents a different kind of cross-subsidy or value exchange, explaining why sometimes zero really does make economic sense.

1. Direct Cross-Subsidies

This is the most familiar kind—give away one thing to sell something else. When Wal-Mart offers “buy one, get one free” or airlines issue free tickets to generate paid upgrades, they’re using direct cross-subsidies. Classic examples include King Gillette’s razors and Jell-O’s free recipe books. Modern versions? Free phones sold with paid contracts and free coffee machines given to offices that pay for coffee refills. The key is defining your market broadly enough that free becomes the gateway drug to revenue.

2. Three-Party Markets (Two-Sided Systems)

Here, someone else pays so you don’t have to. Advertisers subsidize free content, just as radio and television have done for a century. The digital version is Google and Facebook: users pay nothing, but advertisers fund everything. Economists call this a “two-sided market.” It includes credit cards (users pay no fees but merchants do) and open source ecosystems where developers receive free tools tied to paid enterprise support. It’s the backbone of the web’s media model.

3. Freemium

Coined by investor Fred Wilson, freemium describes products with free basic access and paid premium upgrades. Flickr’s free photo sharing and $25/year “Pro” accounts follow this approach, as do online games like Club Penguin or RuneScape, where a few paying users sustain millions of players. Anderson calls this the “5 Percent Rule”: a tiny paying minority supports a free majority because digital costs are near zero. This model works best when free versions are genuinely useful while pro versions add clear, aspirational benefits.

4. Nonmonetary Economies

Here, free isn’t about money at all—it’s about motivation. Communities like Wikipedia, open source projects, and Freecycle thrive because people trade reputation, attention, and altruism rather than cash. Anderson highlights these nonmonetary exchanges as the truest form of “gratis.” People create value because recognition and purpose are rewards in themselves. Attention and reputation become currencies that can sometimes convert to real-world income—consulting gigs, book deals, or leadership roles.

Together, these four models explain almost every instance of free—from Google’s ad empire to open access universities. The art lies in knowing which form of free you’re offering and how to monetize around it.

Free doesn’t just change markets—it rewires minds. Anderson devotes a section to what behavioral economists call the “psychology of zero”. He shows how consumers’ emotional reactions undermine rational economics, turning zero into a magnet for attention and action.

The Penny Gap and Mental Transaction Costs

A penny may seem trivial, but psychologically it’s a wall. Anderson borrows Nick Szabo’s concept of “mental transaction costs”: the cognitive effort involved in deciding if something is worth the price. Even a one-cent charge triggers deliberation that slows or stops purchasing. Free erases that cost entirely. With zero, there’s no hesitation—participation skyrockets. When Amazon replaced $0.20 shipping with free shipping, sales spiked across every country except France (which mistakenly charged one franc). Once corrected, French sales soared too.

Why Free Feels So Good

Dan Ariely’s chocolate experiment is iconic: when Lindt truffles were 15¢ and Hershey’s Kisses 1¢, most chose the truffle. When prices dropped by one cent—making the Kisses free—preference flipped instantly. People responded not to relative value but to emotional reward. “Zero risk, zero loss,” explains Ariely, triggers a pleasure response stronger than a modest discount. Anderson likens free’s allure to a “cognitive hot button”: it activates desire divorced from rational cost-benefit analysis.

Waste, Guilt, and the Cost of Zero Cost

But free has downsides. When things cost nothing, people often consume carelessly. Anderson notes the overflowing snack tables at Google and the charity bus tickets that stopped getting lost only after they charged $1. Free loosens discipline—people take more than they need. Businesses must balance generosity with structure, using small costs to raise perceived value. As shown in Zappos’ free return shipping offer, zero can reduce risk and fuel sales, but it also risks waste. The smartest use of free, Anderson argues, is risk reduction, not endless indulgence.

Ultimately, free works because it lowers barriers to entry. When no payment is required, experimentation flourishes. Whether launching a new product or building a community, eliminating mental transaction costs ignites engagement—and that engagement can later be converted into value.

One of Anderson’s central lessons is that most businesses still manage for scarcity even when surrounded by abundance. In the digital world, scarcity thinking—focused on control, cost, and efficiency—drains opportunity. Abundance thinking—focused on experimentation, sharing, and scale—creates growth.

When Everything Gets Cheaper

Throughout the twentieth century, industries thrived by controlling scarce resources: oil, steel, manufacturing capacity. But in the twenty-first, the scarcest assets aren’t physical—they’re time, attention, and trust. Abundance drives costs to the floor but also births new scarcities. As Anderson writes, “Every abundance creates a new scarcity.” When information becomes infinite, attention becomes the new currency. Managing abundance means shifting focus from cost reduction to the creation of adjacent forms of value.

Examples of Abundance Thinking

Google wastes bandwidth to build better products. YouTube lets anyone upload videos, embracing “waste” in pursuit of discovery. By contrast, companies that cling to scarcity lose relevance—like phone providers limiting voicemail storage in a world of terabyte drives. Anderson’s credo: “Embrace waste.” When resources fall below the threshold of measurable cost, stop metering them. Free storage, free distribution, and free experimentation turn individual creativity into collective innovation.

Inside organizations, abundance changes management culture. In print media, editors must ration pages—a classic scarcity model. Online, space is infinite; anyone can publish. Managers who switch from controlling content (“don’t screw up”) to enabling discovery (“fail fast”) adapt better. Free economies reward iteration over perfection.

Scarcity teaches caution. Abundance invites risk. To thrive in the world of free, Anderson says, companies must stop guarding limited resources and start cultivating unlimited imagination.

What happens when money isn’t the main motivator? Anderson reminds you that attention and reputation now function as currencies. In digital ecosystems, these nonmonetary economies explain why millions contribute to Wikipedia, open source projects, or social networks without direct payment.

Reputation as Currency

Tim Berners-Lee’s invention of the hyperlink created a measurable way to trade reputation online. A link is a vote—it transfers trust and directs attention. Google’s PageRank converts this into an algorithmic form of value: reputation quantified. “Incoming links are like votes,” Anderson writes. Sites that attract more links rise in visibility, gaining a convertible currency. From blogs to social media, participation now earns status and influence. Reputational exchange is the backbone of the gift economy.

The Attention Marketplace

Economist Herbert Simon predicted this shift in 1971: “A wealth of information creates a poverty of attention.” As content multiplies, attention becomes scarce. Companies pay for it; creators compete for it. This is why YouTube views, tweets, and followers translate to sponsorships or career opportunities. Attention converts into reputation, which can then convert into money. Larry Page, Google’s co-founder, thus acts as “central banker of the reputation economy.”

The Gift Economy of Participation

Anderson traces gift exchange from indigenous cultures—where generosity built social capital—to the peer-production economy. On Freecycle, millions give away furniture or bikes to strangers. On open source platforms, programmers share code out of pride or community spirit. These acts operate on Maslow’s higher needs: creativity, esteem, and belonging. The gift economy doesn’t replace money but overlays it, expanding the total value produced in society.

For you, this means recognizing that motivation beyond money drives digital work. Whether you’re building a business or a brand, reputation and attention may be your most potent assets in the new free economy.

Can you make money when your competitors give your product away? Anderson explores how companies from Microsoft to Radiohead answered this challenge—and what entrepreneurs can learn from their freemium experiments.

Microsoft’s Lesson: Adapt or Die

Microsoft spent decades battling “free”—from pirated software in China to open source Linux. At first, it resisted, calling free users thieves. Later, it adapted: selling cheap licenses to partners that distributed free or discounted products and bundling Internet Explorer with Windows. Eventually, under leaders like Bill Hilf, Microsoft learned to coexist with open source. It introduced limited free products (Works, browsers, developer tools) to preserve market share, realizing that “you can’t beat free, you join it.” The takeaway: embrace interoperability, add value, and monetize expertise and service rather than software alone.

Google’s Playbook: Max Strategy

Google represents the opposite mindset: free as foundation. By giving away dozens of products—Maps, Docs, Gmail—it maximizes reach. Eric Schmidt calls this the “max strategy”: deploy products wherever attention can expand, because “the marginal cost of distribution is free.” The company then monetizes complements—advertising attached to information. A free tool isn’t a gift; it’s a doorway to data, insight, and engagement. Businesses succeed when they redefine what they sell: Google isn’t selling software, it’s selling intent.

The Freemium Toolkit

Anderson outlines tactics for managing freemium: time-limited trials (Salesforce-style), feature-limited tiers (WordPress, Dropbox), or customer-type segmentation (Microsoft BizSpark). Success depends on choosing the right conversion rate. Most digital businesses break even if 5–10% of users pay—a crucial ratio observed across Club Penguin, Flickr, RuneScape, and TurboTax Online. Free attracts a wide base; paid refines the value. Anderson advises entrepreneurs: design free for reach, paid for retention.

Competing with free requires shifting from defending price to amplifying value. As Yahoo discovered when Google launched Gmail, sometimes the only way to respond is to become even freer—then monetize the audience you gain. Free isn’t your enemy; misunderstanding it is.

In its final chapters, Free ventures outside Silicon Valley to show how free shapes global industries—even in places where piracy and informal economies dominate. China and Brazil, Anderson argues, are the laboratories of the future economy.

China: Piracy as Marketing

In China, 95% of music consumption is pirated. Record labels have learned to adapt: promoting singles and using concerts, sponsorships, and endorsements to earn revenue. Pop stars like Xiang Xiang see piracy as publicity—4 million fans means full arenas and advertising deals. Labels act as talent agencies and event promoters, monetizing celebrity rather than recordings. Similarly, fashion knockoffs work as free marketing for luxury brands, creating desire even among buyers of fakes. Anderson calls this the “piracy paradox”: imitation fuels aspiration, expanding the future market for real goods.

Brazil: The Party Economy

Brazilian musicians like Banda Calypso thrive by letting local DJs and street vendors sell ultra-cheap CDs ahead of concerts. They don’t make money on the recordings but on performances sponsored by brands and ticket sales. “Letting others get your music for free creates a bigger industry,” says Anderson. Economically, it’s a feedback loop: free distribution drives awareness, awareness drives demand, and demand drives paid experiences. Brazilian tech policy mirrors this ethos—open-source software powers government systems, proving that free infrastructure can support national productivity.

The lesson from emerging markets: free isn’t chaos—it’s adaptation. In contexts where enforcement is weak or consumers can’t pay, zero becomes the only viable platform for growth. Free creates ecosystems—from concerts to code—that monetize the human factors surrounding it: fame, participation, and trust.

Anderson concludes by examining what happens when the economy itself contracts. Surprisingly, he argues that downturns accelerate free. When consumers and companies want to cut costs, free becomes more appealing—and more necessary.

Survival Through Free

After the 2008 crash, businesses turned to open source software, netbooks with free operating systems, and web-based tools like Google Docs. Consumers streamed free video on Hulu, listened to music on Pandora, and replaced long-distance calls with Skype. In recessions, $0.00 becomes the winning price point. Anderson calls this “a consumer’s paradise—everything is 100 percent off.” Free helps maintain engagement even when spending shrinks.

From Attention to Sustainability

However, free alone doesn’t pay bills. Entrepreneurs must pair free with paid—a return to freemium discipline. The key shift after crises is from speculation (“build to sell”) to steady revenue (“build to sustain”). Apps like Tap Tap Revenge used free play to attract millions, then introduced paid music packs. Microsoft’s BizSpark gave startups free software until they matured into paying clients. These hybrid strategies turn survival tactics into scalable businesses.

In short, economic downturns don’t kill free—they refine it. The challenge becomes balancing reach with revenue. As Anderson closes, “Free may be the best price, but it can’t be the only one.” Understanding that balance—between generosity and discipline—is the art of thriving in the free world.