Are free Internet services sustainable?

Free e-mail, free games and free access to many online services, when describing the Internet age it is hard to ignore its "for free" aspect.

This strategy is being applied in the ongoing wave of smart cities in the country as well. Since the Ministry of Housing and Urban-Rural Development published lists of 193 sample smart cities in 2013, one city after another has published its plans for being smart. For example, guided by its plan to propel the construction of a smart city, Shanghai is currently making more efforts to combine information technology with industrialization and apply big data to promote greater convenience for residents. And other cities are trying to accelerate the smart process by offering online services for free. As one of the groundlaying infrastructures of a smart city, Wi-Fi coverage is often on the "for free" list.

But an analysis of the origins of "for free" is needed to decide whether it is proper to build smart cities providing free online services. Digital products have a special cost structure: most of the resources are invested in producing the first copy and hardly any more are incurred in reproducing them; further, the Internet makes it easy to distribute them. For example, it might take a long time and considerable labor to compose a new song, but little time and energy to copy it and offer online download sources.

That makes it possible for many corporations to attract customers by offering free digital products, which are often heavily subsidized. Then having won the competition for customers they make their profits through advertisements or other channels. Typical examples of this are video websites, where audiences can watch movies for free but have to watch advertisements too, or online games where people play for free but have to buy equipment to gain an advantage.

Thus it is clear that products are not truly free in such a "for free" business mode. As early as 2004, Chris Anderson, editor-in-chief of US-based Wired magazine, had a long tail theory according to which the future of business lies not in popular products at the start of the demand curve, but in the long tail which can be almost indefinite. The strategy of attracting customers through subsidized free products is adopted by increasingly more corporations to derive more profits in the Internet age.

Therefore it is not unconditionally proper to offer services and products like Wi-Fi for free in building smart cities, which will make no profit and lead to heavy subsidies using public funds.

There are examples of cities in the United States that tried to offer free Wi-Fi. In Philadelphia, EarthLink reached an agreement with the municipal government in 2006, according to which they would make the largest Wi-Fi net at that time and provide Wi-Fi services to locals. However, the users never reached the expected number and in 2008 EarthLink had to withdraw from the program, as well as similar programs with Corpus Christi of Texas and Milpitas of California. Its failure sent a warning that there are many prerequisites when the "for free" mode is being employed in building smart cities.

In Hong Kong, the government offers free Wi-Fi in 390 public spaces, including government buildings and parks and leaves other areas to commercial service providers; a Fair Usage Policy has been introduced to make sure that users get convenient access to Wi-Fi without disturbing others. Currently it has a ripe market with abundant supply of low cost Wi-Fi services, which lay a solid foundation for a smart city. In the mainland an "upstream charging" mode has been adopted in Jiading, Shanghai municipality, where commercial advertisers pay for the cost in return for users automatically seeing their advertisements when accessing the Wi-Fi; free users are ensured basic access, while paid users enjoy broader bandwidth. These show how Wi-Fi should be introduced in a smart city. Wi-Fi, of course, is only part of the overall plan of a smart city, which will accumulate population, resources, intelligence and consumption and will be a worthy test to local governments. In the process, local governments need to first realize the need to build more platforms to connect different groups and do well its job of connecting them; it is also necessary to analyze the interests of residents, service providers and competitors so as to attain the maximum benefit for all.

Of course, the job won't be finished in a day. Therefore the government should concentrate on building long-term effective mechanisms for them to interact in a win-win way. In details, its responsibilities include coding policies on matters such as taxes or subsidies, overall designations such as dividing cities into zones and granting them different features, and supervision to make sure the rules are obeyed by all. That will not only be helpful in building smart cities, but in the process it will also deepen the reform transforming the role of government.

The author, Zhou Xianghong, is a professor at School of Economics and Management, Tongji University. This piece first appeared on Dongfang Daily.