Last night I read Malcolm Gladwell’s review in the New Yorker of Chris Anderson’s new book “Free: The Future of a Radical Price” followed by Chris Andersons’s response on his blog. I have not yet read the book, so my initial reaction is based on and to Gladwell’s review: there seems to be profound and ongoing confusion about critical economic concepts including marginal and total cost, marginal and total benefit, and price. I tried to clarify these in my posts on the Economics of Abundance and on Name-Your-Price for Digital Goods.
Since Youtube is apparently one of the examples in the book and one that Gladwell tries to pick apart, let me give this another whirl:
The marginal cost of serving one additional stream for Youtube is (essentially) zero as at (almost) any time they have spare capacity. That does not in any way imply that the total cost of operating Youtube is zero. Having all that capacity in the first place (processing, storage, bandwidth) is very costly.
The marginal benefit of someone watching another video of funny cat clips is almost certainly zero – I only watched it because my daughter made me. But that doesn’t mean that many people (my daughter included) did not get genuine enjoyment out of watching this video, so that total benefit is positive.
The price of watching a stream on Youtube is zero. With marginal cost zero and marginal benefit zero, from a perspective of maximizing total social (net) benefit, free is the right price because it does not preclude any video that could possibly have benefit from being viewed. That does not mean that free is sustainable because it obviously doesn’t help cover the total cost.
It seems to me impossible to have a constructive discussion around the social challenges of “free” without getting these basics right. The participants’ energy will be dissipated with such unproductive distrations as questioning each others’ motives, when we should be innovating on ways to capture some of the benefit and transferring it to cover the cost.
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