Chris Anderson’s recent book, Free (referenced on his blog), paints a vivid picture of a world where information wants to be free. Anderson’s thesis — that the underlying architecture making it possible to produce digital content is getting cheaper all of the time, making the cost of individual content “too cheap to meter” — means that many things we previously thought “should” cost money are now low-cost or free. Whether this used for a marketing campaign (the “Freemium” model coined by VC Fred Wilson), or as a way of life (Google and many of its free services subsidized by highly targeted advertising), Free as a model is here to stay. So in a world ruled by Free, what sells and why would customers buy those things? Products and/or services that target identity, security, and utility provide sustained value and competitive advantage over free (and Free will eventually adopt these characteristics if it has not already).

Identity is the first building block for maintaining competitive advantage over Free. By Identity, I mean both the ability to authenticate that you are who you say you are (popularized by services such as OpenID) and the ability to authorize certain actions, products or services based on that identity. So far, various services have done a good job establishing online identity on a single site, but they’ve had challenges extending that influence beyond that site. Twitter’s oAuth and Facebook’s Connect APIs are an interesting step toward this goal, but a service that combined these “public keys” with a few “private keys” would undoubtedly be more effective in aggregating the identity model in one place and securing it.

Security is another concept that provides clear value over Free. Although Free models can offer individual privacy and security, they often feature aggregate data mining, which can allow a savvy investigator to link the digital “fingerprints” of that user across multiple sites. Adding an anonymized model to securely access public sites such as Twitter, Facebook, and other social media will allow users to establish a federated individual identity. Today, if you want to enable purchasing through Twitter, SMS, Facebook, or many other mediums you need to either have that purchasing conversation outside of those services or use a web site as a proxy. Having an “agent” or personalized API for your secure information would allow the user to purchase goods, share information, and to have an audit trail that would allow you to track the secure use of your identity information across the Internet (and offline as well).

Utility is the third idea that can provide value over a Free product. I don’t mean to argue here that Free products do not find utility, but that paid products are a signal that certain users find greater economic utility in a paid product over a free product because it saves them time and money that they otherwise would have spent elsewhere. Free products do have this effect, but I think that targeted products have a stronger effect because they are focused on the 20% of users who really find great utility rather than the 80% of users who like the product but don’t see great economic benefit from that effort. Do You Matter, by Robert Brunner and Stewart Emery, posits that great design can uncover this economic utility that fuels Super Users.

What beats Free as a model? Your product certainly doesn’t beat Free unless it offers clear economic utility to a small group of users who will subsidize the rest of the system, or provide enough revenue to run it on its own. Products that can do this offer Identity (the ability to validate that you are who you say you are), Security (the ability to protect and audit your transactions and actions), and Utility (a clear benefit from using your product that no one else offers in quite the same way to those customers. Products that succeed at this don’t necessarily avoid Free — they just also create an alternate model that gives the most passionate users a way to pay some and to get back more than they paid in terms of time, productivity, and success. iPhone/iPod touch is a great example of this model, but now the application providers building applications for that platform are able to make the same divisions in their customer base to market to the masses and to convert the true users to paying customers. And if those customers want something different, try it. As Chris Anderson notes, Free creates a model where “…company culture can shift from ‘Don’t screw up’ to ‘Fail fast.”