In 1988, “Saturday Night Live” aired a parody commercial deriding clumsy business models. “At First CityWide Change Bank, our business is making change,” said actor Jim Downey, portraying a naive “service representative.” After listing various ways in which his company could break a five, he explained how money is made. “The answer is simple: volume.”

More than 20 years later, I wonder if some digital entrepreneurs think the same. “Simple: we’ll make money on volume of traffic, at some future date,” they promise, even if the math doesn’t add up right now. Despite a knee-deep recession, the idea of giving away something for free and charging for something else later is bigger than ever. But is “free” selling?

Free
Although not the inventor, the chief evangelist of the “free” world is author and Wired editor Chris Anderson. Last year, before the recession hit, Anderson outlined his upcoming book in a cover story titled “Free! Why $0.00 Is the Future of Business.” A year and a half later, the final subtitle was changed to a less pretentious “The Future of a Radical Price,” “mostly because ‘why X is the future of business’ is now a cliche,” Anderson tells me.

The gist of his book: “People are making lots of money and charging nothing,” he writes (via the LA Times). In fairness, though, the idea of “Free” is a little misleading, since someone has to part with money so someone else can profit. “For most customers in the marketplace, the product is really free,” Anderson clarifies in an email. “The difference is who the paying customers are: advertisers or ‘premium’ users,” which effectively summarizes Anderson’s thesis.

The only problem? It’s difficult to cite thriving examples of either ad-sponsored or paid upgrades taking place online, at least when compared with the disproportionate amounts of money still being exchanged for offline goods and services. Google is the glaring exception, a web darling Anderson is quick to reference in his book. But even the search giant isn’t perfect — YouTube is a money pit, as part-time critic and full-time intellectual Malcom Gladwell notes in his dissenting review of “Free” for the New Yorker. Read more…

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