Freemium, a better world?

On his extensive blog, Peter Froberg, posts a draft for an ebook. In it, he argues that the freemium business model could create a better world. In short, consumers as a whole gain from the free part while the company gains from the premium part.

Although Peter lists numerous examples of the freemium concept being applied to positive results, a real argumentation for 'a better world' is not (yet) worked out. So, while the examples seem instinctively to answer the title of this post positively, is there also a real logic to it?

First, let's look at the comparison. To determing better, there needs to be a reference point. Either we have to compare the freemium offering to a situation in which the service wouldn't be available at all or it should be compared to an equal service offering in which there is no free or no premium part.

Secondly, we need to define 'better'. Being an economist and liberalist to the core, I opt here for an economic definition of 'better', in my own phrasing, based on the Pareto principle: "a non-negative combined value for all stakeholders in which none of them experiences a negative value". This implies that no single stakeholder can be worse off while fulfilling this criterium. In addition, I assign some value to a zero-value option, as it increases choice.

Is it now possible to conclude that Freemium creates a better world when combining the above? Let's look at the situation of a few stakeholders.

• The provider: Given that this party acts rationally, only offerings that bring him or her positive value will remain in existance. If the freemium model increases revenue as argued in the book, it also compares well to the case in which only a paid offering is made.
  
  Comparing to giving away freely is more difficult, because a lot of charitable work is done (consider Wikipedia as an online example) for free. Given that offerings with negative value should disappear, charitable work brings a positive value to the offerer. However, given that freemium also contains a free part, it is reasonable to suppose the value of freemium would in this case at least equal the value of free. The criteria for 'better' are thus met.



• The user: If an offering does not bring positive value for the user, he would not use it. Therefore, by definition, the value for the user cannot be negative. Both the comparison with the situation in which there is no offering and the free situation thus meet the criterium. Is this also true for a non-free offering?
  
  If a user opts to use a paid offering, it must bring him a value greater than it's cost. Therefore, at least the premium offering should bring him the same value as the paid offering. In some cases, users might prefer a paid service with a higher service level than a premium offer that has lower quality standards (consider the call quality of skypeOut for example). Still, freemium maintains at least a status quo here, as long as the paid offering remains available.

If desired, the above analysis can be repeated for the community, environment, ... . One constant that emerges however is that any new offering is most likely positive, although it might become tricky in case of environment.

We might thus conclude that, from an economic perspective too, freemium adds to a better world.