"You Can Compete with Free-and Win" - Something Worth Reading

... if for no other reason than to analyze the errors in its conclusion. These errors are critical enough to warrant commentary. Those who study economics would be wise to read.

The article basically argues that when you have a business and you run into a competitor who offers the same product or service for free, that it's not the end of your world. You can still innovate and convince customers to purchase your product. Basically it's called adding value to your product.

Real world examples abound, and I mean legitimate ones. Take blogging services, for instance. For-pay blogging services compete against for-free blogs like Google Blogger, for instance, by offering free blogs while offering a wide variety of paid upgrades. (Google does this, too.)

However, ultimately, free can and often does win. First, let's visit Frank Addante's blog. Read it in its entirety and then come back here:

http://www.founderblog.com/2012/05/23/you-can-compete-with-free-and-win/You Can Compete with Free-and WinMay 23rd, 2012 by Frank Addante

Now let's get to one of his examples.

Having built multiple businesses that compete with “free,” I was absolutely fascinated by the conversation with the boy. I asked the young entrepreneur how he’s managing to compete with this free alternative. Andrew was quick to say that his competitor is “only offering this service to become popular” and that his competitor’s sales pitch is that “his parents are rich so he could afford to do it for free.”

So, to combat that position, Andrew said he and his partner were highlighting that they offer higher-quality work and, aside from doing strong work for customers, don’t have any ulterior, hidden motivations. Andrew also told me that his competitor bought a $95 yo-yo and therefore, doesn’t understand the needs of an average customer who buys a lower-priced yo-yo. While Andrew had had to modify his offering and pitch, it seemed that business was doing just fine.

First of all, this is a 10 year old kid he's talking about, who is selling improved yo-yo toys. Smart kid, hat's off to you. The problem is that he's up against a competitor who is selling free yo-yo's. The lesson being imparted here is that he can compete against this other kid by careful marketing strategies. In his case, it seems to be working.

The problem is that the adult world applies a variety of ugly reality checks which throw cold water on this story. Let's take a look at a real world example of price competition that closely mirrors this situation: China versus the United States and Germany in the solar industry.

While China's solar panels aren't free, there are some startling parallels. In Andrew's case, his competition is a boy whose parents are subsidizing his free yo-yo's. America and Germany have been making high quality solar panels for years. Then came China's solar industries - analogous to Andrew's competitor. Remember the father in that blog entry who is subsidizing the competitor's yo-yo's? The Chinese government is that father in this situation: it is directly subsidizing the Chinese solar industry. As a direct result not only has China outpriced American solar companies, but also German companies. Moreover, China is driving many of these foreign companies out of business.

Another parallel to consider: America and Germany have used roughly the same arguments that Andrew used to defend his market position, but the reality check is that it didn't work. The solar panel industries in America and Germany are both being severely undermined by Chinese subsidies. China does this for many of its industries to give them a global price advantage.

China does this because they're taking the long bet on one basic rule: in the long term, you cannot always compete with free. Unless, of course, you lie and cheat and distort reality.

Now let's go back to what Addante listed as examples to support his point. Almost all of these examples represent corporate activity which borders on downright nefarious.

The biggest lesson I learned here was about competing with “free.” Many markets have free alternatives. If companies were not able to compete with free, Microsoft would have been crushed by Linux, Oracle by MySQL, and the dot-com boom would have wiped out half of the world’s brick and mortar economy. Cable TV or satellite radio wouldn’t exist. And, yes, while services like Napster offered consumers the ability to download free music, Apple came along years later with iTunes and charged a fee per download. Today, Apple is the most valuable technology company in the world.

1) Microsoft has survived by the excessive use of Fear, Uncertainty and Doubt. Making up lies about Linux, such as accusing Open Source software of patent infringement lawsuits, outright collusion with computer systems suppliers, are part of how Microsoft has avoided being destroyed by Linux. It has also been convicted of, and punished for, monopolistic activity in both the United States and the European Union. In the EU Microsoft was forced to pay the largest fine in the EU's history at the time for its monopolistic behavior - $794 million in 2004. The fine eventually skyrocketed to nearly $2 billion, all for anti-competitive behavior. Microsoft has beaten free and open source Linux by deceptive marketing and monopolistic activity which persists to this day.

Oh, and let us not forget that Free and Open Source has devastated Microsoft outside the PC/laptop environment: see Android in the mobile market. Microsoft Office is losing ground to Open Office, and Internet Explorer? Hello, open source Google Chrome and Firefox. Their combined usage dwarfs Internet Explorer and Google Chrome is far more popular than Internet Explorer. Certain governments are forbidding the use of Microsoft in government operations.

In short: Worst. Example. Ever. Or was it? Read on.

2) Yes, Oracle has held off MySQL, handily no less. They apparently have done so by maintaining a big quality advantage over MySQL - precisely the kind of tactic that beats a free competitor, fair and square, in the marketplace. I for one would have ditched all these other examples and upheld this one by itself.

3) The Dotcom boom didn't wipe out half the brick and mortar business, but it is getting there. Look what Amazon did to Borders Books and what it is doing to Best Buy now. Amazon is building fulfillment centers with the intent of achieving same-day delivery in major population centers within the country. You know what that means to brick and mortar businesses. In short: the Dotcom boom is slowly eating brick and mortar's lunch; it is advancing, not retreating.

4) Cable TV and satellite radio wouldn't exist? What, they still do? Okay, well Cable TV isn't extinct-in-the-wild yet, but they're seriously, seriously losing ground to online solutions. Furthermore, Cable TV providers who have internet services are also trying to kill these alternative markets by establishing low bandwidth caps and metering. They can do this because they've established natural regional monopolies. (Oh dear, did I just say 'natural monopoly'? Why, yes I did. Because two separate companies cannot feasibly run cable to the same house, Cable TV abides by the "there can be only one" rule.)

Cable TV is on borrowed time - there are a rising number of digital receivers/media player boxes out there that will deliver the same content, plus more, to the television. The Roku is one prominent example, and Western Digital's TV Live is another. In the future it will be possible to catch all the minor and major networks, not just the ones that your Cable provider picks, and the independent shows (think: webisodes) to boot.

Addante's argument implies, like the other examples, that Cable TV has something that free services don't. Over the long term, this is going to prove untrue.

5) And now... Apple's iTunes outdid NAPSTER. Really, now? Napster was wiped out by the RIAA. Filesharing of copyrighted content has been under relentless assault by the RIAA and MPAA, and the Government: the DMCA and its many offspring. Had it not been for all of this Government interference, the only thing that would have stopped Napster was a new type of Napster. Apple's iTunes survives because their customer base consists of people who fear the Government and are aware of the fact that you can get as much time in prison for stealing a movie or an MP3 as you can get for grand theft auto or forcible RAPE.

So no, Apple iTunes didn't outdo Napster. Heavy-handed Government involvement outdid Napster.


In conclusion: I'm not saying that there's no way to beat a product or service being offered for free. What I am saying is that sometimes doing so is simply not possible without Government intervention, persistently deceptive marketing, monopolistic tactics, or other undeniably anti-capitalistic distortions of the marketplace.

And in the era of 3D printers which are about to give birth to ultra cheap manufacturing, I've got some advice: