Jason,

Buzz might be a better executed product in some ways (as you point out in your email), but there are two HUGE problems with Buzz as a Facebook/Twitter-killer:

1) Way more active Facebook accounts than Gmail

The ratio could be as high as 10:1 in favor of Facebook (see links below). In network effect terms, that order of magnitude difference would mean multiple orders of magnitude of advantage for Facebook. Also, even if you have a Gmail address, there’s no guarantee that you use it. Look at the domains on jasonslist. I’ll bet there are a fair number of yahoo, hotmail, etc. addresses… and that’s skewed way more heavily to gmail than for non-Internet people. On the other hand, you only have 1 Facebook account.

http://wiki.answers.com/Q/Exactly_how_many_people_have_a_facebook_account http://wiki.answers.com/Q/How%20many%20Gmail%20accounts%20in%20the%20world

2) Weak branding

People think of Gmail for mail and Google for search. They think of Facebook & Twitter for status/tweets. It’ll take a lot more than just launching Buzz to change the mindshare of users. Buzz is a pretty weak brand extension, and putting it in Gmail makes it even weaker. There may be ways to overcome these issues, and I think that Google will outlast Facebook and Twitter. But for now, like Wave, Buzz shows Google’s strength and weakness: cool product & tech, awful strategy & marketing. IMO, Google’s abundance of users severely handicaps their ability to gain traction for their consumer products. Those teams never have to figure out how to get users for themselves, and they never feel the do-or-die financial pressure of a real startup environment.

Thanks,

Anthony

The main thrust of Anderson’s latest book, from the (yes, free) preview article in Wired:

Practically everything Web technology touches starts down the path to gratis, at least as far as we consumers are concerned. Storage now joins bandwidth (YouTube: free) and processing power (Google: free) in the race to the bottom. … Every day the marginal cost of digital information comes closer to nothing.

Gladwell’s book review in The New Yorker critiqued Anderson’s assertion that most goods and services on the Internet will be offered for free, by turning one of Anderson’s key case studies against him:

Anderson is forced to admit that one of his main case studies, YouTube, “has so far failed to make any money for Google.”  … YouTube will lose close to half a billion dollars this year. If it were a bank, it would be eligible for TARP funds.

Cuban followed up with his thoughts as an entrepreneur and operator:

The problem with companies who have built their business around free is that it is far from free to remain successful. … When you succeed with Free, you are going to die by Free.

And then Wilson, a prominent New York VC, defended free/freemium as a strategy:

The Internet allows an entrrepreneur to enter a market with a free offering because the costs of doing so are not astronomical. And most entrpreneurs who take this approach will maintain an attractive free offering of their basic service forever.

A couple of observations:

1. YMMV: Anderson’s ideas don’t apply equally to all business models.

In general, both the long tail and freeconomics work better when applied to digital goods.  The more physical your inventory, the less you can use either idea.  It’s not that they don’t apply at all, it’s just that you won’t be able to use them as much due to costs and other constraints.  For example, in The Long Tail article, Anderson’s Rule #1 for Internet businesses is “Make Everything Available.”  This is a great idea if you’re selling digital goods, like e-books.  However, if you’re selling physical books, then the cost of storing and handling each book is much greater than a few bytes of disk space.  You have to deal with suppliers, distribution, and a warehouse — there are some economics of scale, but these costs can grow fast enough to make carrying “everything” very unprofitable.  Not even Amazon carries every book.  Why do you think they developed the Kindle?  To shift consumers and their business from to e-books, where the economics work even more in their favor — i.e., profit growth.

On top of that, there are lot of digital goods businesses where free doesn’t work so well (yet) — Facebook, Twitter, and Youtube are great examples.  Gladwell points out in his book review that YouTube is far from profitable, and Cuban thinks that it will never be.  Part of Cuban’s famed “only a moron would buy YouTube” argument is that the removal of copyrighted content from YouTube ruined their product, opening the door for Hulu.  The same product challenges await Facebook and Twitter, who don’t yet have answers for how to add revenue-generating features without screwing up the experience, a la MySpace.  More on this later.

2. It’s interesting to see the VC’s (Wilson) point of view vs. the entrepreneur’s (Cuban) point of view on this.

Everyone knows that offering your product for free is a great way to enter a market and acquire users/customers.  However, there are questions as to how defensible and sustainable this strategy is.  It’s tough to have a defensible position when you’re on a free model, since someone can always come along with a better product that’s also free, and steal your user base.  Cuban puts it well:

Lets look at the rule that eventually KILLS all freemium based content plays: There will always be a company that replaces you. At some point your BlackSwan competitor will appear and they will kick  your ass. Their product will be better or more interesting or just better marketed than yours, and it also will be free.  They will be Facebook to your Myspace, or Myspace to your Friendster or Google to your Yahoo.

It’s also tough to build a sustainable business model on free or freemium, especially with recent declines in online advertising revenues.  And, as mentioned above, you can easily alienate your users by adding revenue-generating features.  The Facebook group, We Will Not Pay To Use Facebook. We Are Gone If This Happens, has almost 5 million members.

On the other hand, Wilson the investor seems to have little doubt that these are challenges that can be overcome:

We have seen it again and again. I’m not going to even give examples. … Once you have built that audience, you can deliver upsells via freemium models, you can monetize it via advertising and you can branch out into other services which are easier to monetize.

Who’s right?  Well, they’re both right… only the investor has the luxury of making the assumption, while the entrepreneur has to figure out how to make it happen.  As John Gapper of the Financial Times puts it:

For a venture capitalist investing in internet businesses that are trying to grow as rapidly as possible, free is also a good bet. If nine out of 10 of those businesses fail because they burn through their capital but one grows enough to make money from advertising or freemium services, that is a good result.

On the other hand, the entrepreneur is often 100% invested in that single business, in terms of money, time, and emotion.  Failure to make the switch from free to non-free can be crushing.  That difference in perspective explains a lot about why Cuban and Wilson see different sides of the same coin.  Cuban is much more worried about how to build a defensible, sustainable business from the beginning, while Wilson feels like this transition is less of an issue, because he expects to fail 90% of the time.

In this context, it seems that the current poster children for free — YouTube, Facebook, and Twitter — must answer these two questions:

1. Is it even possible to make the switch from free to freemium/paid?
2. When do you do it?

YouTube has failed so far, Facebook seems to have some early answers, and Twitter is just getting started.  Reply with your thoughts on these companies, or the free debate in general, in the comments.

You can see why Google wants this so badly: get all digital communication hosted on your system, and you can trump Facebook, Twitter, the blogosphere, and anything else that comes along.  Google won’t need to buy Twitter — it’ll have all the tweets on Wave, plus responses in other formats, like email and Facebook comments, that Twitter won’t have.  And, you can search it all!  The downside: if people are concerned about Google having too much of their data now, imagine what it’ll be like if they get widespread adoption on Wave…

Which brings us to the other, and more immediate, hurdle: user adoption is a HUGE “if.”  A unified product, platform and protocol (Google’s description) for all online messages might be an seductive concept, but it smells like the whole Esperanto experiment to me.  Or the metric system in America, for that matter.  Sounds great, but no one wants to make the change.

People don’t adopt things because they work better on a grand scale (remember the Nash equilibrium from A Beautiful Mind?), they adopt them because they make their life better.  And for something like email, which is ingrained into people’s lives, the cost of switching is very high (especially for those who are not tech-savvy or even anti-tech).  So, in order for the ROI to be reasonable, the return has to be very, very high.  From what I saw in the video, I’m not sure it’s enough.

I think Google might be better off positioning this as an Outlook replacement and forgoing all the Grand Unified Theory hoopla.  Take one step at a time: get some users for the email & productivity client — that’s 80% of the battle right there.  Then, you can integrate with more content streams, starting with the big blog platforms, Facebook and Twitter.  Then, you can worry about opening things up to the developer community.  Not that they can’t do these things concurrently (and maybe they are), but I just get the feeling that this is just another Google product with the engineers driving the boat.  Great features, cool technology, no users.

Anyway, I can see why the Internet product geeks are getting all drooly, but I have a feeling the general public will stick to their Hotmail accounts.  Hate to be a downer, but that’s how I see it — hope they prove me wrong.  I welcome your disagreement (or agreement, even!) in the comments.