Sunday, April 23, 2006

Free Lunch

Bob Wyman uses the Free Lunch principle (TANSTAAFL) to analyse the recent announcement by Google of a small charge for the AdSense API.

He makes two important points about service pricing.

Firstly, predictability. You should not assume that a free service is going to remain free. In fact, there is a significant possibility that it will disappear or degrade unless the service provider finds a reasonable way of funding the service.

While consumers might prefer services to be free, service providers might prefer services to be rare and expensive. But complacency here is an error as well. The more money you are making from your service, the more likely it is that someone is looking for a way to slice some of it away from you.

Secondly, incentive compatibility. Charging for a service helps to align the interests of the consumer and the provider, and discourages waste and abuse. In some cases, nanopayments may be set at a level that is trivial to normal users, but discourages grossly inappropriate use. Charging for a service also makes people appreciate it more.

From the service provider's perspective, charging for a service is therefore a way of influencing the experience and behaviour of consumers.

(Some people have argued for a nanopayment for sending email, in the hope of eliminating spam. If this had existed in the first place, spam might never have taken hold. But now that spammers are powerful, and the economic viability of spam is apparently established, there is a significant risk that spammers would find a way to cheat any nanopayment system.)

This means that the cost/benefit/quality/risk equation is likely to change over time. Players in the service economy may want some foreknowledge of these changes. And serious players will seek to influence the behaviour of other players in their favour.

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