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Why the Era of Free Stuff Is Ending

Rick Newman

Just a couple of years ago, writer Chris Anderson asserted that free was the new price of everything . But now, it's looking like time to say farewell to free.Anderson, editor-in-chief of Wired magazine, argued that plunging production costs--combined with the transformative power of digital technology and the Internet--made many things so cheap that companies could afford to give them away. Some examples: Unlimited data storage offered as part of Yahoo's email service. Music given away by Radiohead and Trent Reznor. The New York Times online. Almost everything Google offers to consumers.[See how to escape the middle-class squeeze.]Then the recession hit, the financial system quaked, the economy stagnated and corporate America came under intense pressure to maintain profits without the revenue increases companies were used to. For many businesses,, free started to seem too cheap. As a result, in recent months, we've begun to see signs of a countertrend, with companies now trying to charge for things that their customers have grown accustomed to getting for nothing.It's been ugly. Bank of America, for instance, sparked an uproar with its recent plan to start charging debit-card holders a $5 monthly fee to use their cards for purchases. Other banks are testing similar fees and taking away perks like free checking for many of their customers. Some banks even charge to visit a teller or call customer service.Movie-rental company Netflix enraged many of its customers with its recent plan to split its mail-delivery and video-streaming services into two separate plans, with higher overall charges for those who want both. Netflix, of course, got its start sending DVDs through the mail, adding streaming video years later as the technology matured--at no additional cost to its subscribers. So when Netflix separated the two services--and started charging for both--it basically forced its customers to start paying for something they had been getting gratis.[See 5 ways to beat bank fees.] Airlines used to charge one ticket price that included everything along the way. Now they charge extra for checked bags, a few additional inches of legroom and even pillows and blankets. Travelers gripe, but the a la carte fees have stuck.News organizations such as the New York Times, Wall Street Journal and many others have stopped giving away all of their digital content for free. There are different pricing schemes, but in general they allow users to see some material at no charge, with payment required beyond a certain threshold.Even on Amazon, one of the clear winners of the digital era, "free shipping" has a price: $79 per year. That's the cost of becoming a "Prime" customer and getting the best perks.Consumers might feel gypped by mounting fees, but charging for formerly free stuff reflects the narrower margins of a stagnant economy, as companies compete for customers with less cash to spend and more financial worries. The end of free, and the rise of the fee, might even end up being good for consumers, as prices more accurately reflect the actual cost of goods and services. Basing purchase decisions on the real cost of merchandise enforces spending discipline, and reduces the urge to chase enticing offers meant to lure you into spending down the road. And in some cases, the unbundling of services and a la carte pricing lets consumers pay for only the features they want, instead of paying a higher one-size-fits-all price.[See why Netflix is smarter than its customers.] Many formerly free offerings, of course, weren't free to the companies that offered them. But companies were able to cover the cost of freebies through other revenue streams or higher prices on somebody else. A few firms, such as Google and Facebook, can still afford to offer free services to consumers because they make so much money off of corporate customers. But for many other firms that's become an unaffordable luxury. Media companies, for example, can no longer subsidize the cost of jazzy Web sites with profits from their print or broadcast operations, which in most cases are declining. Airlines exist in an intensely competitive industry where the ability to charge ancillary fees has meant the difference between modest profits and a rash of bankruptcies.In the banking industry, new rules have reduced risky investing practices that once pumped up profits, but also caused cataclysmic losses. So banks are trying to impose new fees on retail customers to replace revenue they're no longer able to rake in elsewhere. It might seem like banks are now asking the little guy to subsidize other parts of their business, but for awhile, profits from other activities allowed banks to be fairly generous toward Mom and Pop customers who generated a small portion of overall profits.Those years of free checking and other small perks trained many consumers to think of basic banking services as a birthright--which they're not. No matter how unpopular they may be, banks offer services with genuine value, such as convenience and security. Yes, it's your money they're holding, but there's still a cost to the services they provide. Banks transfer money when you write a check or buy something with a debit or credit card, and they do so with a lot more security than if you delivered cash to everybody you paid. They also allow you to access just the amount of money you need--practically anywhere--while the rest remains secure. It's not unreasonable to pay a monthly fee for those types of services, and if they hadn't become free at some point, hardly anybody would be complaining about fees now.[See who would win under Obama's jobs plan.] Banks are more likely to continue offering "free" checking and other perks to customers who keep higher balances, consolidate their accounts at one institution, and generate the most business--a once and future retail strategy. Merchants have long offered bulk discounts and frequent-customer rewards, and sought to establish a vertically integrated structure that keeps customers in the corporate portfolio as they branch out or move up the value chain. This was General Motors' famous multi-brand marketing strategy all the way back in the 1920s, under Alfred P. Sloan.Those time-tested retail strategies are now taking a decidedly digital turn, with big retailers like Amazon vying for as much control as they can get over each individual consumer. Amazon's new Kindle Fire tablet device, for example, isn't just a gizmo; it's a portal into everything Amazon sells, which is why the online giant seems willing to take a loss on each of the $199 devices that consumers snap up. While the Kindle Fire isn't free, Amazon is willing to tolerate it as a loss-leader because it thinks it will earn back the difference, and then some, by selling more stuff to people who shop via the tablet.One company that has always resisted free giveaways or cross-subsidized products is Apple, which has an enviable ability to charge premium prices for its merchandise. Apple hasn't needed to give anything away, because its customers feel they're getting a good deal even when they pay top dollar. Yet Apple, like Amazon, wants captive customers who do as much of their shopping as possible in the Apple universe. So while "free" isn't part of Apple's lexicon, new competition from Amazon and others may force it to consider discounting its iPad, iPhone or other products. Cheaper may not be as satisfying as free, but it's probably more sustainable.Twitter: @rickjnewman--Check out editorial cartoons about the economy.--See how to escape the middle class squeeze.--Check out the month's best political cartoons.