Over lunch the other day, Noah mentioned this really interesting product that was announced at CES. It’s called Airnergy and it somehow harvests the energy emitted by nearby WiFi signals and converts it into electricity that can be used to power and recharge various devices.
It reminded me of a concept I’ve been toying with for a while–free-rider businesses. Mancur Olson discussed the problem of free-riders and the incentives that produced them in his classic The Logic of Collective Action. Large groups have trouble creating public goods since each individual has an incentive to free ride on the efforts of others (since the good is non-excludable, meaning there isn’t a practical way to prevent specific individuals from benefiting from the public good once it’s produced). In many instances there will be individuals or small groups that have a large enough incentive to create a particular good, thereby creating the opportunity for their work to be exploited by free-riders. My thought was that there are some business that are free-riders, or at least benefit from this practice. Free-rider businesses are those that develop a product or service that relies in some significant way on the physical resources or creative content produced by others without providing compensation to those third parties or having helped create the resource or content themselves. In most cases, the third party resources serve as a critical input (sometimes even the main content) for a firm’s key product or service. The most obvious example of this type of firm is Google.
The core of Google’s business is to mine, analyze, and organize the massive amount of content produced by third parties on the web. In this way they are dependent on others to create a critical input, an input that they don’t pay for (Ed. although, the recent deal with Twitter is an exception to the rule). Media mogul Rupert Murdoch has publicly characterized the practice of news aggregators and, in particular, Google’s use of this content as “theft”. One can easily scan the Internet and stumble on other examples. Certainly the explosion of data and content that the Internet has facilitated creates an environment that is quite conducive for firms of this type.
The Airnergy product, on the other hand, would be an example of a free-riding device that relies on some kind of physical input or infrastructure. Airnergy is leveraging a preexisting infrastructure built and maintained by third parties who, to my knowledge, would not be compensated for the use of their WiFi networks. It’s as if the WiFi networks have become a massive public good that, after being established by a small group of actors that had a greater interest in their existence, can now be leveraged by all sorts of players free of charge. (I am still trying to figure out how this is not illegal.)
Noah and I tried to think if this was a trend unique to this time period or if there were historical analogs. We couldn’t come up with one at the time, but after some reflection I can think of a couple.
One would be the automobile industry. While manufacturers do not leverage some kind of input for their product they do rely on the physical infrastructure that makes car travel possible (i.e. roads, bridges, etc.). However, the difference here is that the physical infrastructure they rely on was established and is maintained by the government, who funds that work through taxation (which automakers must pay).
To be fair, the term has somewhat of a harsh connotation, and I certainly don’t mean it to. I’ve been struggling to come up with a term that more accurately reflects the relationship I’ve been thinking about. These businesses do provide something of value (to consumers, if not to the source of those inputs or the greater society at large). Additionally, these businesses are developing their own unique and innovative offerings that happen to leverage these inputs. For example, no one questions the innovative value of Google’s PageRank or the utility of LinkedIn or Facebook.
As I said, it was an idea I have been toying with and I am obviously still trying to work through the logic. Would be curious to hear others thoughts on this.
Filed under: Uncategorized | Tagged: Business, Economics, Innovation
Hey Bill. First off, Airnergy turned out to be a bit of a hoax, http://bit.ly/8vqfK3
Then, have you read “Tragedy of the Commons” article? It’s quite old, but explores beautifully the situation in which multiple individuals, acting independently, and solely and rationally consulting their own self-interest, will ultimately deplete a shared limited resource even when it is clear that it is not in anyone’s long-term interest for this to happen. You can read the full version here: http://www.garretthardinsociety.org/articles/art_tragedy_of_the_commons.html
I am not sure that what you describe is “free-riding”. I’d call it entrepreneurship: recognizing potential of combining 2 or more already existing products/services. (Classic examples are: faded blue jeans as recombination of workmen’s clothing and laundry technology borrowed from hospitals and hotels, cellphones as novel combination of the radio and the telephone, and medical devices are combination of both basic life sciences and clinical practice). After all, majority of innovation is based on seeing some novel and unexplored value in already existing resources. It is very rarely that any innovation starts from scratch.
Without Google, all the Internet’s data would not be very useful since we would not be able to mobilize it at will; and without news aggregators, we would miss a great deal of news that are potentially of our interest. It is these services that make already existing data more valuable. So it’s not free-riding, it’s value-adding.
(Thinks raw materials, sun or air – would you call solar panels or windmills free-riders?) Yeah, they might be, but without them, raw energy would be useless for us.
I am just making a blog related to this. If you allow, I would like to use some of your content. And with full refernce of course. Thanks in advance.