Chris Anderson has an excerpt of his next book, titled "Free! Why $0.00 Is the Future of Business" over at Wired. He begins by recounting the two great inventions of disposable razor magnate King Gillette: the disposable razor and a new business model, where you give the durable product away for cheap or free and make your profit from the disposable or serial product. Cellular phones and their calling plans, video games and their consoles, cable boxes and cable all partake of this now-ubiquitous model.
It's a great analogy. But Anderson stumbles in his transition.
Over the past decade, however, a different sort of free has emerged. The new model is based not on cross-subsidies — the shifting of costs from one product to another — but on the fact that the cost of products themselves is falling fast. It's as if the price of steel had dropped so close to zero that King Gillette could give away both razor and blade, and make his money on something else entirely. (Shaving cream?)
No! For one thing, Gilette does sell shaving cream. They also sell deodorant and nose-hair trimmers and all manner of other grooming accoutrements. But more to the point, making money from shaving cream is a cross-subsidy. It's not a fundamentally different model from the razor and blades, just a weaker one, since presumably different lathers can be used with different blades.
No. The answer is that under the new model, and presumably at some point in my lifetime, when every durable surface is an information-aware screen, Gilette will give the razor and the blades and the shaving cream and deodorant all away for free. Instead, they will make their profit from the time you spend looking in the mirror. That is how the web works.