THE COST OF FREE

But what if it's not quite as equal as that? What if the wealth is not neatly transferred from the few to the many, allowing a thousand flowers to bloom? What if it really just disappears or, even worse, leads to even fewer winners than before?

This is what Google's Schmidt worries about. The Internet is a prime example of a market dominated by what economists call "network effects." In such markets, where it's easy for participants to communicate with one another, we tend to follow the lead of others, resulting in herd behavior. Since small differences in market share can get amplified into big ones, the gap

between the number one company in any sector and the number two and beyond tends to be great.

In traditional markets, if there are three competitors, the number one company will get 60 percent share, number two will get 30 percent, and number three will get 5 percent. But in markets dominated by network effects, it can be closer to 95 percent, 5 percent, and percent. Network effects tend to concentrate power — the "rich get richer" effect.

Although this was the argument used to justify the antitrust prosecution of Microsoft in the 1990s, in this case Schmidt's concern is not about lasting monopolies. In today's Web market, where the barriers to entry are low, it's easy for new competitors to arise. (That, of course, is the argument Google uses to defend itself against charges of being a monopolist.) Nor is it about limited choice: Those same low barriers to entry ensure that there are many competitors, and all the smaller companies and other inhabitants of the Long Tail can collectively share a big market, too. Instead, this is simply a concern about making money: Everyone can use a free business model, but all too typically only the number one company can get really rich with it.

Why should Google care about whether other companies can use free to economic advantage? Because it needs those other companies to create information that it can then index, organize, and otherwise package to create its own business. If digital free de -monetizes industries before new business models can re -monetize them, then everyone loses.

Just consider the plight of the newspapers. The success of the free Craigslist has caused the big city dailies to shrink, taking many professional journalists out of circulation. But low cost and user- generated "hyperlocal" alternatives have not risen equally to fill the gap. Maybe someday they will, but they haven't yet. That means that there is less local news for Google to index. There may be more local information, but it can no loclo±€y tnger use the fact that it came from a professional news organization as an indicator of quality. Instead, it has to figure out what's reliable and what's not itself, which is a harder problem.

So Google would very much like the newspapers to stay in business, even as the success of its own advertising model in taking market share away from them is making that more difficult. This is the paradox that worries Schmidt. We could be at a moment where the short-term negative consequences of de-monetization are felt before the long-term positive effects. Could free, rather than making us all richer, instead make just a few of us superrich?

From the billionaire boss at the Citadel of free, this may seem like an ironic observation, but it's important to Google that there are lots of winners, because those other winners will pay for the creation of the next wave of information that Google will organize.

"Traditionally, markets are segmented by price, making room for the high-end, the middle, and the low-end producers," Schmidt explains. "The problem with free is that it eliminates all the price discrimination texture in the marketplace. Rather than a range of products at different prices, it tends to be winner-take-all." His worry, in short, is that free works all too well for him, and not well enough for everyone else.

Of the richest four hundred Americans, a list that Forbes creates each year, I count just eleven whose fortunes were based on free business models. Four of those, including Schmidt, came from Google. Two came from Yahoo! Two more came from Broadcast.com, an early Web video company that sold to Yahoo! at the peak of the dot-com bubble and whose founders, Mark Cuban and Todd Wagner, subsequently invested well. Then there is Mark Zuckerberg of Facebook and, if you will, Oprah Winfrey, whose $2.7 billion was built on free-to-air TV.

I didn't include all the media tycoons, from Rupert Murdoch to Barry Diller, because they run diversified conglomerates that are a mix of free and Paid. And the Forbes list stops before including a lot of people who have become rich, but not megarich, from the free model, such as the MySpace founders and a few open source software heroes such as the founders of MySQL (sold to Sun in 2008 for $1 billion). But Schmidt's point holds: If we measure success in terms of the creation of vast sums of wealth spread among more than a few people, free can't yet compare to Paid.

But there are signs that this is changing. To see how, you have to look at the evolving nature of the original free business: media.