Chris Anderson is Editor-in-Chief of the US edition of Wired magazine, a post he has held since 2001, and is also author of 2006 best-seller The Long Tail: How Endless Choice Is Creating Unlimited Demand.

His latest foray into the lucrative non-fiction business book market relies on the same trusted formula as his first: entertain the reader with engaging, loosely-connected historical anecdotes wrapped in confident, well-turned prose to present a modish and more or less plausible concept sure to set the twittering classes a-chatter. Then cash in with a series of speaking gigs at upscale digerati gatherings to guarantee media mindshare for your new idea.

However, second time around the zeitgeist has been shaken by financial dissolution and reality has reasserted itself in place of neoliberal abundance economics. The claims The Long Tail made about distributed markets have been largely discredited and people are rightly remembering that there is no such thing as a free lunch after all.

Nevertheless, Anderson’s thesis is of interest, especially in the new media markets which are his native environment and are currently in a turmoil apparently caused by the collapse of business models based on charging for content.

He makes two main proposals, both of which have indisputable premises. The first is that inexorably falling digital processing, storage and bandwidth costs have steadily brought the production and distribution costs of digital goods and services closer to zero. No-one could deny that, nor the key point that the internet powerfully combines all three.

However, tending towards zero and reaching it are not the same thing. And someone still has to pay the remaining marginal costs, which can be considerable at scale. A recent report by Credit Suisse estimates that YouTube will cost Google half a billion dollars this year in bandwidth and content licensing fees.

The second is that there is a significant psychological difference between low price and no price: research shows that the “mental transaction costs” involved in thinking about a purchasing decision inhibit participation even in otherwise attractive propositions. Sweep away charges and the lure of free creates extraordinary demand, not to mention unprecedented competitive advantage.

However, as Anderson says, “advertisers will pay as much as five times more” for readers who are committed enough to subscribe “than they’ll pay for a free magazine that may be treated as junk mail”. So reducing mental transaction costs to zero by giving your product or service away will mean you are neither able to demonstrate commitment to advertisers nor bring in money by charging. Who would invest in a business like that?

In fact, Anderson is apparently quite happy to propose an idea only to refute it himself a few lines later. His introductory claim that we are looking at “an entirely new economic model” which is not just a variation on well-worn strategies is soon contradicted by his admission that “all forms of free boil down to variations of the same thing: shifting money around from product to product, person to person, between now and later, or into nonmonetary markets and back out again”. All of which he identifies as tried and tested marketing methods.

But there are the beginnings of an interesting discussion in this book, a more thorough exploration of which might have made a welcome contribution to the ongoing Great Paywall of News debate. The freemium (free plus premium) approach, giving away a basic version or limited sample of a product or service, offers to combine the benefits of lower barriers to participation without undermining the commitment of paying customers who are also attractive to advertisers.

There’s nothing new about this business model, but it is a key strategy for content producers challenged by the web. It certainly works for The Economist, three-quarters of whose 1.3 million readers are subscribers. And both The Wall Street Journal, with a million subscribers, and the Financial Times, which has been charging for access to its website since 2002, are succeeding behind the paywalls that many pundits said would signal their demise.

Some would protest that these publications are unrepresentative as they offer specialist information which conveys commercial advantage, are aimed at high earners and are often paid for on company accounts. But quality, scarcity and value remain relevant whatever the context and delivery platform. Although cost has become less connected to price on the web, businesses are still not so much built at a price point but according to the value they deliver and the cost of delivering it.

Developing this angle might have encouraged Anderson to admit that some income remains necessary to meet lower but still real production and distribution costs. He might also have attempted a more nuanced assessment of the perceived value involved in paying for a product whose quality, authority or reliability is implied and may even be guaranteed by the cover price.

However, none of this amounts to anything approaching the new market law that Anderson is aspiring to spell out. Many business and marketing models exist, some of which will fade and some grow, but free is not the single determining concept in any of them.

This is essential reading for anyone involved with the online world. It takes a refreshingly honest look at the first generation of web applications and the way the web has evolved. Check out the talk below then buy the book and delve deeper into his arguments.

Even if you disagree with his perspective, your understanding will be enhanced by having to work out why. And you get treated to a unique musical introduction, too.

Useful interview. Shame about the lousy video player interface design (it’s ten minutes long and no, you can’t control the playhead).

First of all, despite the way it was pitched on initial launch, Wave is not simply a replacement for instant messaging or email, although it does incorporate features that look very similar to those communication modes. Nor is it a new form of social media along the lines of Facebook or Twitter.

What makes it different to these is that instead of propagating or exchanging discrete chunks of content across the web, it supports the collaborative creation of self-contained documents in a specific, single location.

What is so revolutionary about that? In a way, making a self-contained document the canonical content source, without copies elsewhere, is a return to the early days of the web, when individual pages authored in HTML were served as read-only content in response to individual requests, and only further networked via hyperlinks.

A Wave differs from a page of HTML in a very important way, however. As its name suggests, it contains fluid, rather than static, content. Not (necessarily) animated CGI graphics of waterfalls but a collaboratively created and edited real-time stream of text, audio and video coalescing into a single constantly updated content element.

Imagine the future of news, as Jeff Jarvis does: three journalists, four witnesses and two editors together create a story using text, audio and video using laptops and mobile phones which they format at the scene of an event and then publish everywhere, to all kinds of devices, instantly. Think then of others responding to this news story by contributing their own perspectives and unique content, not just in the form of comments and feedback, but by directly inserting new material into the document. That would be a Wave, changing form as it rolled out in all directions at once.

So is a Wave like a wiki? Wikis and Waves are certainly both collaborative creation and editing tools, but as those who have edited a Wikipedia article know, there are two faces to every page on the site. Each article not only has a public-facing content page, it also incorporates revisions and discussion pages which are only visible to its editors.

Waves, by contrast, are about simultaneously editing a document and having those edits fuse into a single piece of content, with discussion and edited summary both visible. And when I say simultaneous, I mean exactly that: the operational transform protocol that powers a Wave is very nearly synchronous, even across federated servers, meaning that as you add new text on your screen I see your keystrokes included in the Wave on mine.

So will Google Wave roll out and absorb everything in its path? It certainly represents a completely new kind of web platform, and promises to become at least as ubiquitous as RSS, even if also mostly invisible to the end consumer. But is most of the noise around it because, as Gina Trapani remarked, ‘Wave is to developer’s egos as complex jazz is to musicians’? It is true that one of its strengths is that developing gadgets and bots to extend its core functionality resembles the familiar web development process that has allowed so many coders to profit from the enormous success of Facebook, Twitter et al.

On the other hand, there are a couple of as yet unresolved technical issues which prompt criticism, despite the project’s alpha development stage. One problem is that there is currently no whitelisting or permissions system to control the accessibility of identifying contact information which not only makes privacy an issue but also makes spam control impossible. This must be a priority for the beta release.

The other, perhaps more intractable, issue is that the Wave operational transform protocol does not output simple HTML, which would facilitate universal one-step publishing, instead preferring a custom Wave document format written in XML which has made developers’ eyes roll. Whether the Wave team choose to move on from this position remains to be seen.

And there are some questions about the ways we might use Wave in the real world. At the moment, Wave’s federal core means that while all participants in a particular Wave remain on a single server, others cannot see what they are up to: it is only when others are invited to join in that the wave federates across servers, propagating changes as they are made. While this looks ideal for private document management inside organisations, it doesn’t support the new media publishing vision outlined above.

Another issue is the missing consensus process that makes Wikipedia function so well. Waves, like wikis, need shared goals (in the case of Wikipedia, a neutral point of view) to guide their creation. Without such consensus, the deletion that content editing requires could be perceived as a hostile, or at least censorious, act. The social psychology that accounts for the way many are motivated to contribute to some of the web’s greatest successes may need careful consideration before the Wave user experience design team settles on such unmediated interaction modes.

For now, in the absence of public Waves (you still need an invite to see what’s going on first hand), here’s an entertaining glimpse into the flavour of the platform, courtesy of Whirled Interactive:

If you want to know more about what you currently can and cannot do with Wave and its gadgets and bots, you would do well to check out Gina Trapani’s Complete Guide to Google Wave.

Via This Week in Google Episode 10.

And who could belong to one set without also belonging to the other?

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Together they form an excellent example of network effects in action, along with commentary on those effects by the author.

You might also like to check his new publishing venture Fray, a ‘quarterly of true stories and original art’.

Synopsis: they need to be targeted at precisely-defined and highly-engaged niche audiences rather than large, loosely-determined, often indifferent mass markets. Why? Because that’s where the advertising money is going.

But don’t let the brevity of that summary (or Leo’s weird pronunciation of French vocabulary) stop you enjoying his delivery, full of anecdotes packed with valuable insights and opinions informed by real-world experience. This is a man who succeeds in a space that many others merely speculate about.

The Q&A session in the second half is worth watching too: the audience of professional journalists know exactly which questions to ask to prompt perceptive answers from the recently inaugurated President of the Internets.

Via New Business Models for News, The City University of New York Graduate School of Journalism.