NetTrends: Investors buy "free," but will it pay?
By Dick Satran
SAN FRANCISCO, Dec 22 (Reuters) - Everything wants to be free over the Internet -- but who will pay for it?
In the early days of the Web, the saying was that ``information wants to be free,' a slogan which captured the mood of a freewheeling, non-commercial Internet community before it morphed into the biggest business story of the century.
It's turned out to be true, too. Libraries of information are dumped on the Web each day at no cost to readers, comprising much of the ``content' on the Internet, and only a handful of sites have been successful at charging subscription fees.
The e-commerce boom, for a time, diverted attention from the free content side of the business. But it never quite went away, against all efforts to tame it and turn it around. And now, once again, it's growing, Frankenstein-style. Now, though, it's not just ``information' that likes to price itself down to nothing. Virtually everything digital wants to be free.
Here's a short list of what else can now be gotten at no cost over the Internet: Fax services, voice mail, e-mail, Internet access, word processing, spreadsheets, stock quotes, classified advertising space, long-distance telephone service, recordings, Encyclopedia Britannica, anti-virus software, The New York Times, storage space for personal data.
And the list goes on.
The driving force behind it all is the falling cost of computing power and communications costs. The relentless downward pressure is making it cheaper and easier for startups to enter any business that's going digital, in everything from telephone service to groceries.
The remarkable part about it, though, is that this flood of ``absolutely free' offers hasn't dimmed Internet investors' enthusiasm but has instead made them all the more eager for the stocks. A string of companies whose product lines are based on the free operating system software, Linux, have led the charge.
Red Hat Inc.(NasdaqNM:RHAT - news), the best known of the group, has jumped twenty-fold from its August initial public offer level to a market value of $20 billion. It charges for services but gives away its operating system -- a ``free software' business model that produced $3.4 million in revenues and losses of $4.9 million in quarterly results released this week. A number of other billion-dollar Linux companies have launched in recent months.
In the latest ``freeware' example, Juno Online Services Inc.'s(NasdaqNM:JWEB - news) stock, an also-ran in e-mail services, announced it would give away Internet access free this week -- and its stock leaped 300 percent in value. It also plans to charge for specialized services.
Giveaways are nothing new in the software business, of course, as a way of expanding market share. For Microsoft Corp. (NasdaqNM:MSFT - news) , it's worked well. It virtually invented the magical art of bundling software into suites and making the costs disappear to fight off competitors. Its Office software has added spreadsheets, Internet publishing software, graphics systems and other features. Those ``features' sometimes were entire companies before they were subsumed into Office.
The Microsoft strategy has been successful because it has still managed to sell over 100 million versions of its Office software, at $200 to $400, and 300 million or so more Windows operating systems.
What's new is that we're entering a new era when those applications are being given away free, not just bundled into money-making services like the free cocktails given to free-spending Las Vegas gamblers. It pits a wave of startups that give away software and charge for optional services against traditional players who invest heavily and charge for their goods up front.
The stock market seems to believe both versions of the future right now. The Linux and free Internet startups' stocks are surging and, still, Microsoft's $600 billion market value is holding up. America Online Inc.(NYSE:AOL - news), too, is facing free competitors in its basic Internet service, but it's managing to maintain its $190 billion market capitalization.
But can both visions of the future coexist?
``I meet with people in the technology business all the time and they are all asking -- what is going to happen with all of this free stuff on the market?' said analyst Rob Shavell of New York-based research firm Datamonitor.
The answer, he argues, is that value will win out. Microsoft spent $1 billion to add features and update its new Windows system and it looks like it's good enough to beat back the upstarts. But he forecasts that all Internet service will be free a year from now -- spelling trouble for AOL.
``The open systems of the Internet are creating unprecedented pressure on prices of things that used to be really expensive,' Shavell said. Everyone affected has to push harder to securetheir place in the food chain.
Internet pioneer Stewart Brand, who coined the phrase that ``information wants to be free' more than a decade ago, long before the Web took off, was also ahead of the curve in suggesting who might survive the coming digital downspiral of prices.
``Information wants to be free, because it has become so cheap to distribute, copy and recombine' he wrote in a 1987 book. But he added, in a much-less-quoted corollary: ``It wants to be expensive because it can be immeasurably valuable to the recipient.' |
