"Imagine a free phone with no guaranteed contract on the back end. That is all in front of us."

"Imagine a free phone with no guaranteed contract on the back end. That is all in front of us." This was said by Jonathan Schwartz, the CEO of Sun Microsystems, seemingly to ignite some interest in a vision of the future. It sounds attractive, doesn't it? A cell phone with zero cost to the user, with no contracts and enforced terms, etc... Sounds like nirvana, no cell phone bills.

Jonathan Schwartz has been telling a similar vision for quite awhile. An earlier story he told was of a customer visit with a car company, they're discussing business, and he asks the business guy "How many services would you have to sell bundled with the car so that the consumer would pay zero dollars for the car"? You can just see the consumers with gleaming visions in their eyes, A FREE CAR!!! Anyway the finance guy said, oh, $200 per month in services or some such figure. In other words the vision is that a gizmo can be given away for zero price if a business can earn enough revenue from that gizmo being in the customers hands.

It's up to the business to figure out how to get an income stream from a free product. It rather turns business on its head to give away products. Especially ones that cost a lot of money to build, like a car.

Suppose you had a combination of technologies where the car is covered in graphics display panels, and a computer in the car received instructions about which graphics to display. Each car would become a moving billboard displaying advertising controlled by some centralized advertising system. The advertising could be made relevant to the area the car is driving through and perhaps could be chosen to be relevant to the drivers surrounding that car. An income stream could be earned through displaying advertising on these cars...

If you think it's bonkers that someone would turn their cars into moving billboards... a few years ago some businesses sprung up to wrap vehicles in plastic carrying advertising, and the car owner would earn money. I haven't heard of this service being sold to individuals but I notice lots of city busses and trains carrying similar advertising wrapped around the whole vehicle. If you're in a car showroom negotiating a deal to buy a car, and the sales guy says "Hey, you want to save 50% of the purchase price? Just agree to let us mount this panel on your car for 2 years." What would you do?

Giving away a free gizmo would have to be tied to enforced use or consumption of a service which earns revenue for the giver of the gizmo. How else would the giver of the gizmo pay for the gizmo? A key metric in judging business success is the Return On Investment (ROI), the cost to build a gizmo is the 'I' (Investment), and the revenue is the 'R' (Revenue).

The simplest model for earning revenue is advertising.

For example why do Windows PC's often include a bunch of bundled extra stuff? PC's riddled with adware force the user to be shown advertising while using the computer. The advertising pays for part of the cost of the PC. And I recently read an article claiming how one vendor offered two kinds of PC's, one riddled with adware and special deals, the other with just Windows (and no adware), the second PC cost more than the first one. Meaning the PC maker set the price of the PC based on earning some revenue from the adware, and that without the adware the real price is higher.

When a gizmo costs $0 what's the real price of the gizmo?

And would you enjoy living a life buried in advertising?

Suppose the bundled advertising deal for a car GPS system (that has zero price) is that the GPS system shows a continual stream of advertising. Say you're driving around and the GPS system is reading off to you directions, and it says "Oh, by the way, that McDonalds over there has a special on McGreasyBurgers". It's been an advertisers wet dream for years to be able to interrupt our lives with this sort of location based advertising. It would be more intrusive than roadside advertising. From the advertiser point of view that might be more effective, but from a humans point of view ... it just makes me think of that 60's protest song: "Signs, signs, everywhere signs, filling up the landscape, filling up my mind" (er.. that's not the actual lyrics but it's something like that)

There's other ways besides advertising. Tying service revenue to a gizmo could pay for the gizmo.

For example Apple's iTunes software is given away for free. This free software has a lot of valuable features, it can rip CD's, it manages a library of music and other multimedia, it can snarf podcasts from the internet, etc. But it includes paid for services through the iTunes Music Store. The user can 'buy' audio books, movies, music, and TV shows through iTMS. Apple obviously pays for developing iTunes through the revenue earned by iTMS.

A current example is the new iPhone 3G, just announced. Apple is loudly proclaiming "twice as fast, half the cost" which is a head turner of a proposition. Morefasterbettercheaper...

But, wait.

The original iPhone carried required payments from AT&T to Apple: Piper Jaffray: AT&T paying Apple $18 per iPhone, per month "Apple is receiving $18 per month for each iPhone subscriber, under the revenue-sharing agreement between (Apple and AT&T)"

The iPhone 3G may be cheaper at the consumer cost, but what of the long term cost: iPhone 3G's True Price Compared The service plan includes a higher cost per month for data. This makes it so the carrier (AT&T) is earning more per-month revenue some of which is probably paid to Apple to subsidize Apple's lower up-front cost.

However that difference isn't very much. In the last year Apple has come up with other ways to earn revenue on the iPhone. The iTunes
Wi-Fi Music Store
means the user can buy iTunes content via their iPhone (and iPod Touch). And the 'App Store' is a coming feature which will allow the user to buy applications that can only run on an iPhone (or iPod Touch). Apple is maintaining tight control such that the only channel to distribute applications into this platform is iTunes and of course Apple will earn a fee for every app sold into the iPhone/iPodTouch platform.

And, uh, oh, by the way,

Apple iTunes