Antitrust Chronicle^® – Free Isn’t Free?

Dear Readers,

What is a “free” service? Intuitively, and historically, a “free” service would be defined, simply, as one that merely does not require payment at the point of sale.

Yet, new business models, facilitated by the Internet, have upended the notion of “free.” In particular, with regard to user-facing services such as online search, social networking, image and video hosting (along with countless others), users are not obliged to pay for the service in monetary terms.

In today’s economy, companies extract value (sometimes graphically described as the users’ “eyeballs”) by displaying advertising alongside the core service. In addition, they gain access to data on users’ preferences and habits, allowing them to display ever more targeted advertising and content.

Other services are also ostensibly “free,” yet also produce value for the provider company. An “open source” operating system may come at no monetary cost to hardware producers who seek to use it. But it may generate ecosystem and lock-in effects that represent genuine economic value for the software provider (and as a result produce market power).

On the other hand, such free business models can produce genuine innovation and provide valuable services to consumers (who might not otherwise be willing or able to pay for them).

The challenge for antitrust enforcers is to grapple with such novel and innovative market dynamics, while preserving innovation incentives,