On The House

Sometimes, the best way to make millions is to provide something free of charge.

Justin Kitch has raised millions of dollars by giving things away. Homestead.com Inc., the 120-person Menlo Park, California, business he co-founded in 1997, provides free Web sites for the asking. Anyone who wishes can get 16MB of free disk space on the company's Web servers, along with the use of free site design tools that rival costly commercial versions.

Huge numbers of people have signed up to create their own "homesteads" on the Web for free. "Last year, we started with 100,000 homesteads and ended up with four million," says Kitch, 27. "And we're currently growing at more than 15,000 new sites per day." Granted, it's not too surprising that customers like Homestead's offer. But how do you explain the more than $50 million Homestead has raised from investors over the past two years?

The fact is, Kitch has figured out how to generate revenues by giving things away. It works like this: Homestead collects fees from more than 75 online brokerages, electronic publishers, search engines and others for distributing their services to customers who are building free Web sites. "I don't believe in charging upfront for it," Kitch says of his company's site-building service. "And you can actually make a lot more money off the enormous volume of visitors you generate."

Kitch isn't the only one attempting to give his way to the top. Many well-known companies hand out products and services without charging anything for them. Adobe Systems has distributed millions of free copies of Acrobat Reader software for displaying electronic documents. Id Software has given away fully functional versions of the popular computer games Doom and Quake. And Microsoft claimed ownership of Web browsing software by doling out its Internet Explorer for free--after Netscape Communications, since acquired by AOL for more than $4 billion, created the browser market by gratuitously dispensing the Mosaic browser in the early 90s.

As Homestead does, other businesses can generate revenues from giveaways by selling others the opportunity to present their messages. TV broadcasters and free community newspapers do this, too. Businesses can also generate revenues by selling additional products and services, such as add-ons, upgrades, manuals, consulting and training, to people who are using the freebie. Adobe, for instance, charges $250 for the Acrobat software used to create the documents its free reader can display.

The power behind giving away products and services for free is in the way doing so can quickly create dominant market share, says Philip Evans, a senior vice president at Boston Consulting Group in Boston and co-author of Blown to Bits: How the New Economics of Information Transforms Strategy (Harvard Business School Press). "The strategy works," he says, "because once you have dominance, you can extract enormous value from it."

Mark Henricks is an Austin, Texas, writer who specializes in business topics and has written for Entrepreneur for 10 years.

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This article was originally published in the June 2000 print edition of Entrepreneur with the headline: On The House.

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