In the last century, "Free" was a powerful marketing method (used successfully by companies such as Gillette, which created a captive market for razor blades by giving away razors), writes Chris Anderson. The 21st century's form of Free is an entirely new economic model.

It is not a gimmick, a trick to shift money from one pocket to another. Instead, it is driven by an extraordinary new ability to lower the costs of goods and services close to zero.

This new form of Free is based on the economics of bits, not atoms. It is a unique quality of the digital age that once something becomes software, it inevitably becomes free - in cost, certainly, and often in price. And it's creating a multibillion-dollar economy - the first in history - where the primary price is zero.

In the atoms economy, which is to say most of the stuff around us, things tend to get more expensive over time. But in the bits economy, which is the online world, things get cheaper. The atoms economy is inflationary, while the bits economy is deflationary.

The 20th century was primarily an atoms economy. The 21st century will be a bits economy. Anything free in the atoms economy must be paid for by something else, which is why so much traditional Free feels like bait and switch - it's you paying, one way or another.

But Free in the bits economy can be really free, with money often taken out of the equation altogether. People are rightly suspicious of Free in the atoms economy, and rightly trusting of Free in the bits economy. Intuitively, they understand the difference between the two economies, and why Free works so well online.

Reaching more people

A decade and a half into the great online experiment, Free has become the default. In 2007, the New York Times went free online, as did much of the Wall Street Journal, using a clever hybrid model that made stories free to those who wanted to share them online.

Musicians from Radiohead to Nine Inch Nails now routinely give away their music online, realising that Free lets them reach more people and create more fans, some of whom attend their concerts and even - gasp - pay for premium versions of the music.

The rise of "freeconomics" is being driven by the underlying technologies of the digital age. Just as Moore's Law dictates that a unit of computer processing power halves in price every two years, the price of bandwidth and storage is dropping even faster.

What the internet does is combine all three, compounding the price declines with a triple play of technology: processors, bandwidth and storage.

As a result, the net annual deflation rate of the online world is nearly 50%, which is to say that whatever it costs YouTube to stream a video today will cost half as much in a year. The trend lines that determine the cost of doing business online all point the same way: to zero.

Extracted from FREE: The Future of a Radical Price by Chris Anderson (Random House Books, 18.99). Copyright Chris Anderson 2009.

Chris Anderson is the editor-in-chief of Wired magazine and the author of the acclaimed bestseller The Long Tail. He blogs at thelongtail.com.