Chris Anderson + Wired explain the business of free.

In the last few years, Wired Magazine has transformed itself from the best magazine about obscure geeky technological shit that might one day make people rich into the best magazine about obscure business concepts that are already making people rich (but that most people don't know about). Wired is the magazine that lets the wider world in on the secrets of these forward-thinking capitalists. For example, editor-in-chief Chris Anderson's celebrated article about The Long Tail made everyone understand the secret of's success (i.e. that it has a bigger selection than any single record or book store on earth). It was also a notion I have toyed with in print.

And that notion is? That in our increasingly wired world, small is the new big; that the future is not about the mass market, but the niche which you control; that blockbusters are a thing of the past; and finally, that benefiting from many small transactions is the wave of the future.

Now, Anderson has done it again, with Why $0.00 is the Future of Business in Wired's March issue. (You can click here to download a free PDF of the article or here to read it on the web. Yes, here's a case where a publisher is putting their money where their mouth is.)

Anderson will publish a book-length explanation of this phenomenon in 2009 and as befits a longer work, his new article hints at a detailed taxonomy of how free functions in our day-to-day economic life -- as advertising, as "freemiums," as cross-subsidies, et. al. My favorite passage in his piece, however, is BIG IDEA graph wherein he provides a clear explanation of the major difference between the winner-take-all markets of the 20th century, and the "free" markets of the future:

To follow the money, you have to shift from a basic view of a market as a matching of two parties -- buyers and sellers -- to a broader sense of an ecosystem with many parties, only some of which exchange cash.

The most common of the economies built around free is the three-party system. Here a third party pays to participate in a market created by a free exchange between the first two parties. Sound complicated? You're probably experiencing it right now. It's the basis of virtually all media.

In the traditional media model, a publisher provides a product free (or nearly free) to consumers, and advertisers pay to ride along. Radio is "free to air," and so is much of television. Likewise, newspaper and magazine publishers don't charge readers anything close to the actual cost of creating, printing, and distributing their products. They're not selling papers and magazines to readers, they're selling readers to advertisers. It's a three-way market.

After the jump, I start making weird allusions to communism and explain why Anderson unfairly disses the music industry.

Add Anderson's "three-party system" concept to the long list of warm and fuzzy business notions that have been popping up since the turn of the millennium. (Think of terms like "green capitalism" or "social entrepreneurship.") The 21st century business world is shaping up to be very community-oriented place -- some might even call it communistic. Economic transactions are no longer thought of in the adversarial way they've been thought of in the past. No more "tit for tat" or "quid pro quo" or "us vs. them." Suddenly the world that's emerging is about "all boats rising together."

Unfortunately there's one boat that neither Anderson nor any of his forward-thinking peers dare to ride -- that being record labels. Everyone seems to agree these ventures are sinking ships. As a record label proprietor myself, however, I have to take issue with this.

I'd point to Anderson's three-party system to explain why record labels will survive (albeit not in the bloated form major record labels took in the '80s). When Anderson talks about the world of music the three parties he focuses on are (1) the artist, (2) the non-traditional music vendors who are selling CDs at unprecedented discounts, and (3) concert venues -- the idea being that live music is the future; that CDs are a natural loss leader; and that this will cause all record companies to fail. He communicates this by using anecdotes about the Brazilian band, Banda Calypso (who allow street vendors to burn and sell their CDs without passing on any of their profits to the group), and Prince (who gave away two million copies of his newest release in London's Daily Mail to promote a 20+ date string of concerts in the city).

This notion of "free" recordings is a trendy one. It grabbed hold of the public's imagination when Napster kicked off the peer-to-peer phenomenon and it's been kept alive all the way through Radiohead's pay what you want experiment with In Rainbows). Record labels have emerged as the consistent bad guy in the new world of "freemiums"; artists are consistently congratulated for the future that awaits them as self-sufficient business entities.

The problem is there's a certain bit of self-servicing hypocrisy when writers at major media outlets present this kind of model. They ignore how record labels are an essential third party in the musical market and, instead, romanticize the unrepeatable, one-off efforts of street vendors and wildly famous rock stars.

To understand why I call this hypocrisy, look at who Anderson talks about when he is discussing the three parties in the world of print media: (1) publishers, (2) audiences, and (3) advertisers. These parties, he says, have perfected a business model that will soon revolutionize the rest of the business world. Why is it that he avoids talking about how writers (the publishing equivalent of musicians) might benefit without going through magazines and other traditional publishers (who are basically the "record label" in the publishing equation).

I'd gather that Anderson has this blind spot for the same reason journalists and writers get such lengthy obituaries in newspapers -- he has a vested interest in making publishers look good. Anderson is simply unable to see how his employer Conde Nast resembles in many ways the major labels in music.

My larger point is this: Journalists benefit from appearing in major magazines both in direct ways (pay for articles) and in indirect ways (increased credibility to win book deals, to go on speaking engagements, to win consulting projects). Similarly, musicians benefit from being on large, established record labels in both direct ways (advances, tour support), and in indirect ways (increased draw on the road, marketing budgets which make them famous and provide opportunities to appear in films, to promote Vitamin Water, to start their own clothing lines, et. al).

The rise of "free" may have highlight those indirect opportunities, and their importance in the career of all creative people, but they are hardly new. And the record label's role in creating those opportunities is not going to go away overnight.

One popular way to dismiss the power of record companies these days is to say they're merely investment bankers for musicians or -- a more barbed comparison -- advertising agencies for musicians. Thing is, entrepreneurs don't turn up their noses at major lending institutions just because their is a credit crunch. Packaged goods companies have not turned away from Madison Avenue just because audiences for traditional media advertising have fragmented. Similarly, musicians can't ignore record labels and their large agglomerations of capital and specific skill in popularizing music. The skills which are most called for may have changed a bit in the last few years, but record labels are the only ones who are going to have a strong desire to learn them.

You should read Anderson's article right now because he elucidates the mechanics of the modern world we're living in. But, much like record label executive and US Presidents, he sometimes resorts to flawed reasoning when it suits his own interests.

(image via New World Notes)