Internet Economics
ALL THE WORLD’S A CROSS-SUBSIDY
Cross-subsidies are the essence of the phrase “there’s no such thing as a free lunch.” That means that one way or another the food must be paid for, if not by you directly then by someone else in whose interest it is to give you free food. Sometimes people are paying indirectly for products. That free newspaper you’re reading is supported by advertising, which is part of a retailer’s marketing budget, which is built into its profit margin, which you (or someone around you) will ultimately pay for in the form of more expensive goods. You’re also paying with a bit of your time and, by being seen reading that newspaper, your reputation. The free parking in the supermarket is paid for by the markup on the produce, and the free samples are subsidized by those who shell out for the paid versions.
HOW CAN A DVR BE FREE?
Phone companies sell calls; electronics companies sell gadgets. But cable giant Comcast is in both those businesses and a lot more besides. This gives it flexibility to cross-subsidize products, making one thing free in order to sell another. To that end, Comcast has given about 9 million subscribers free set-top digital video recorders. How can it make that money back?
Comcast earns back the cost of its DVR in 18 months. ● Add hidden fees. Comcast charges a $20 installation fee to every new DVR customer. ● Charge a monthly subscription. Comcast customers pay $14 a month to use the DVR box. Even if Comcast paid $250 for its DVRs—a very high estimate—the boxes would pay for themselves within 18 months. ● Upsell other services. Comcast hopes to win over customers with free DVRs, then interest them in services like high-speed Internet ($43 a month for 8 MBps) and digital telephony ($40 a month). That doesn’t count pay-per-view movies, which can cost $5 each.
In the gift economy, the cross-subsidies are more subtle. Blogs are free and usually don’t have ads, but that doesn’t mean
Cross-subsidies are the essence of the phrase “there’s no such thing as a free lunch.” That means that one way or another the food must be paid for, if not by you directly then by someone else in whose interest it is to give you free food. Sometimes people are paying indirectly for products. That free newspaper you’re reading is supported by advertising, which is part of a retailer’s marketing budget, which is built into its profit margin, which you (or someone around you) will ultimately pay for in the form of more expensive goods. You’re also paying with a bit of your time and, by being seen reading that newspaper, your reputation. The free parking in the supermarket is paid for by the markup on the produce, and the free samples are subsidized by those who shell out for the paid versions.
HOW CAN A DVR BE FREE?
Phone companies sell calls; electronics companies sell gadgets. But cable giant Comcast is in both those businesses and a lot more besides. This gives it flexibility to cross-subsidize products, making one thing free in order to sell another. To that end, Comcast has given about 9 million subscribers free set-top digital video recorders. How can it make that money back?
Comcast earns back the cost of its DVR in 18 months. ● Add hidden fees. Comcast charges a $20 installation fee to every new DVR customer. ● Charge a monthly subscription. Comcast customers pay $14 a month to use the DVR box. Even if Comcast paid $250 for its DVRs—a very high estimate—the boxes would pay for themselves within 18 months. ● Upsell other services. Comcast hopes to win over customers with free DVRs, then interest them in services like high-speed Internet ($43 a month for 8 MBps) and digital telephony ($40 a month). That doesn’t count pay-per-view movies, which can cost $5 each.
In the gift economy, the cross-subsidies are more subtle. Blogs are free and usually don’t have ads, but that doesn’t mean