Competing with open – and free

I’m writing a chunk of my book now about one of my favorite topics: how much I despise real-estate agents and how eagerly I await the doom of their business model. And it so happens that Saul Hansell just wrote a blog post about Zillow and its effort to open up the mortgage market by providing information while protecting customers from spam. There’s this nice quote at the end from founder Rich Barton:

The Internet is a great big race to free. Anyone who has built a business model with a price above free for something that can be free is in a tough strategic position.

Add that to the line from Umair Haque via Fred Wilson that I quoted just below and will repeat now:

Competitive advantage is fundamentally about making markets work less efficiently. One catastrophically effective way to do that is to hide and obscure information – to gain bargaining power relative to the guy on the other side of the table.

And add that to Chris Anderson’s Wired cover story on free as a business model.

Once a marketing gimmick, free has emerged as a full-fledged economy. Offering free music proved successful for Radiohead, Trent Reznor of Nine Inch Nails, and a swarm of other bands on MySpace that grasped the audience-building merits of zero. The fastest-growing parts of the gaming industry are ad-supported casual games online and free-to-try massively multiplayer online games. Virtually everything Google does is free to consumers, from Gmail to Picasa to GOOG-411.

The rise of “freeconomics” is being driven by the underlying technologies that power the Web. Just as Moore’s law dictates that a unit of processing power halves in price every 18 months, the price of bandwidth and storage is dropping even faster. Which is to say, the trend lines that determine the cost of doing business online all point the same way: to zero.

  • How many chickens will you take for an ad on your Web site? Sooner or later, somebody has to buy something …

    Maybe online ads will be the new currency in the post-money society.

  • Sure, Internet infrastructure is getting cheaper, but you still have to create something for people to visit on your site. That means content creators or programmers. And they aren’t getting any cheaper — at least for high-quality work.

    I’m not arguing that some of the existing models are not dead or dying, but you also can’t just eliminate existing businesses without figuring out the replacement. For instance, for all the complaints about real estate agents, they do play an important role in the process. Perhaps their compensation scheme needs adjustment, but self-serve is not likely an appealing way for most consumers to buy/sell homes.

  • Dozens of companies have tried to break into the real estate sales or rental market over the years. With a few exceptions all have failed for the same reason: The network of “old style” agents controls access to the data.

    In the real estate sales market, unless you are willing to go the “for sale by owner” route, you’ll find that signing a contract with an agent provides exclusive listing rights to that agent and for that agent to gain access to the local multiple listing service, they must forgo alternative listing services. Also, most buyer’s agents won’t follow up on any listings not in the local monopoly listing service since they know that anything that encourages a more open market is a threat to their own revenues.

    In many rental markets, building managers regularly generate extra income by “selling” exclusive listings (above or below the table) to rental agencies. In a market with demand (like New York), the building owner feels no pain as a result of this limited marketing of rental units since agents are able to fill the units.

    The situation is so clearly wrong that many people have predicted, repeatedly, that this is a system that must soon fall to the power of the Internet. They’ve always been wrong in the past… At this point, my guess is that only law or court rulings, breaking the existing monopoly and requiring that licensed agents utilize all listing sources equally, would be able to break the system. Until that happens, consumers will be less well served.

    bob wyman

  • Marco

    Brian and Chip –

    I don’t see how Jeff’s comments in any way indicate that we are on our way towards a barter system or that we are moving towards a world where no one (companies included) will ever have to pay for anything.

    It is a misnomer to say that Google provides free services. They may not charge actual dollars for the use of their products but what they do charge as payment is information on its users. Google is the powerhouse that it is (at least currently) because they have a product (its search engine) that for one reason or another consumers deem superior enough to trade information about themselves to use.

    In standard economic modeling the supply and demand curves seek to illustrate the balancing point between the competing interests of companies to earn as much profit as possible and consumers to pay as little as possible for something they want or need. Price higher than a consumer is willing to pay and you have wasted inventory, price lower and you waste profit.

    The new dynamic emerging on the internet is the balancing point between the level of information companies want to be able to effectively target consumers with products that will be of the highest interest to them and just how much of that information a consumer is willing to provide.

    Offer a product that consumers aren’t crazy about and the adoption rate of your product does not rise, you get a small quantity of information and no one is willing to pay you to advertise. Demanding too much from your customers drives their assessment of your products cost up as well.

  • tim

    FYI Jarvis: Zillow is a real estate broker.

    Ya know, not all of us Realtor’s are bad. Some of us even read your blog in order to become better at servicing the needs of wired citizens. It’s unfortunate to hear such generalized comments coming from you Mr. Jarvis. The same could be said for many journalists, too….

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  • The Internet waits on the tips of the tongues of all idealists (I included). Thanks to the realists above we have actual progress.

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