In this lecture we draw on material from Chris Anderson's book "Free" to explore how free products have changed over the last 20 years. The exponentially falling costs of CPU, storage and bandwidth mean that the low marginal costs of serving today's customers will continue to halve every year allowing smart companies to round down into the future.

1. (Stanford BUS-21)
Martin Westhead
Mastering Marketing
Free is changing
How to make money
by giving things away

2. Overview
 Cost reduction in CPU, Storage and Bandwidth
 Why Moore’s Law works
 Atoms vs. Bits
 Inflection point in exponential growth
 Impact of Cloud computing

3. Triple play of
technologies
 Transistors (CPU)
- Part of the computer that does the calculations
 Storage
- Computers memory
 Bandwidth
- Network that allows computers to exchange
information
 All three are falling in price exponentially

4. Transistors
 In 1961 a single transistor cost
$10
- 2 years later it was $5
- By 1965 it was $2.50
- 1968 $1
- 1975 $0.10
- 1982 $0.01
 Today
- Intel 62-Core Xeon Phi: 5B
transistors
- $2500 -> 0.00005 cents
- 16Gb flash drive 64B
- $10 -> 0.00000002 cents
http://en.wikipedia.org/wiki/Transistor_count
Gordon Moore

5. Rounding down
 Early 60’s Fairchild Semiconductor 1211: $100
 Competing with vacuum tubes: $1.05
 Robert Noyce, Jerry Sanders rounded down
- Knew that volume production would lower price
- Offered transistors for $1.05 from the start
“We were going to make chips in a factory we hadn’t built, using a
process we hadn’t developed but the bottom line was that we
were out there next week quoting $1.05. We were selling into the
future.”

6. Hard drives
 Flips magnetic alignment on a
spiral of spinning disk
 Head floats 10s of nm over
the platter
 Platter spins at 4,000-
15,000rpm
 Performance improvements
from:
- Faster speeds
- Higher power magnetic heads
- Closer to the disk
- Higher quality magnetic
surface
 Spinning disks replaced with
Solid State Disks
- No moving parts
 Kryder's Law – price
performance of storage
doubles every 18 months

7. Bandwidth
 Speed of optical switching
 Ultimate speed limited
- Speed of light
 Can squeeze more colors down
a single fiber
 Building fast switches that work
purely with light
 Doubling in price performance
every 9 months – 1 year

8. Why Moore’s Law Works
 Learning curve
- One person gets better with practice
- 10-15% for each doubling in production quantity
 Experience curve
- Many people get better together
- 25% for each doubling in production quantity
 Technology innovation
- 1970’s saw 12 doublings in transistor production
- Experience curve predicts 1/13
- Actually observed: 1/1000 (!)
- Ideas based businesses
- Sustained improvement through continuous innovation

9. Atom vs. Bit Economy
 Rules are different for atoms
 New Free is about bits not atoms
- Falling cost of storing, processing and delivering bits
- Bits can be copied perfectly almost for free
- Near zero marginal cost
 Price of digital goods is will fall towards to zero

10. 2nd Half of the Chessboard
 Grains of wheat on a chessboard
 Double the grains for each square
- (1 + 263)grains
 Lesson in the unexpected nature of exponential growth
 First half of the chessboard numbers are small
 Second half (inflection point) numbers go crazy
 CPU, Storage and Bandwidth are entering the 2nd half of the
chessboard
 No indication that they are slowing down

11. Reach for the clouds
 Scale important to reduce fixed costs
 8 years ago had to buy servers
 The Cloud changed the equation
- Start-ups can take advantage of
economies of incremental server
costs
- Web start-up needs only a credit card
- Costs scale with service
- Not as cheap as google but
- when users numbers are small costs
remain manageable
- New entrants to free have an
advantage

12. Summary
 Cost reduction in CPU, Storage and Bandwidth
 Why Moore’s Law works
 Atoms vs. Bits
 Inflection point in exponential growth
 Impact of Cloud computing