New Economic Models

February 14

The rise of the networked economy is changing economic possibilities around the world. From the call centers in India to eBay and the new Internet entrepreneurs, there are many signs that suggest a flatter world fueled by innovative production and marketing strategies. In this session, we will explore the promise and reality of the changing economic tides associated with rising Internet use including those marketing to the long tail and the new oligopolists.

Download today's slides

Readings

• Wikipedia, Dot-com Bubble
• Chris Anderson, The Long Tail
• Kevin Kelly, Better than Free
• Eric von Hippel:
  • The Economics of Open Content Symposium: New Models of Creative Production in the Digital Age Collaboration and the Marketplace - Video stream of the 30-minute presentation: new improved link! (requires RealPlayer). See below for alternate links to the presentation in video and audio format.
  • Democratizing Innovation, Chapter 8: Adapting Policy to User Innovation

Additional Resources

• "Wikipedia Long Tail"
• Free by Chris Anderson[1]
• Larry Lessig's Code 2.0

Class Discussion

I really enjoyed the readings this week, particularly the "Long Tail" and "Better Than Free" articles. What was particularly interesting was the breakdown of potential profit for the music industry should they choose to release albums/songs digitally. I also enjoyed learning about Rhapsody's model: how & why it works. Also, I've definitely fallen victim to Amazon and even eBay's "collaborative filtering." I think it is an entirely new approach to marketing, one that works immensely better due to its broad reach. Consumers don't always know what they want and are generally open to sampling new material, whether it's print or media. This is where "collaborative filtering" or Rhapsody/Pandora's jukebox/radio station comes into play by allowing consumers to sample media they've yet to be introduced to. Thus, a new market emerges. Another interesting phenomenon are reviews. I tend to use reviews for everything, including books or products on Amazon, as well as restaurant recommendations. Reviews are a powerful tool that wasn't utilized in its full capacity until recently.

"Better than Free" brings up a good point: intangible services. I'd rather buy and download software or music from a trusted source (trust being an intangible service according to the article) rather than pirate bay, for instance, as it would guarantee virus, bug free software/music. Also, accessibility and convenience are equally if not more important intangible services. If the dying record label/music industry model doesn't catch onto this movement, it will take its last breath, so to speak, sooner rather than later. Aberg 02:29, 15 February 2012 (UTC)

What interested me more about the readings was the dot-com case and the high risk that these internet-based companies were taking. Even though they knew that there could only be one network-effects winner in each sector, they continued with their strategy of “get large or get lost.” Also, they were not investing a few thousand dollars, but millions of them in a battle to remain in the dot-com business. As a result, only some large dot-com businesses remained, such as Amazon and eBay.

Also I enjoyed The Long Tail article because it explains a number of phenomena I think all in this class have experienced but sometimes were unaware of the causes. First, we were living in a Hit-driven culture, talking about the same movies or TV series at high school, but we knew little about foreign TV shows and movies. Part of this issue is why the East criticizes the West, because probably we know who is Lady Gaga but we don’t who wrote Le Tartuffe.

Thus, what I like about The Long Tail, and also part of the author’s conclusion, is that we are entering in a more diversified time, where not everybody listens to the same songs, looks the same movies and reads the same books. The more we find, the more we like.Fabiancelisj 21:00, 14 February 2012 (UTC)

I have two thoughts relating this week's reading to the larger world. The first is a re-synthesis of other ideas, in that the internet has not really so much created new things as it has amplified already existing phenomena. Media sharing has been around nearly as long as the media itself. In the 80's, the band Metallica encouraged fans to make copies of their music (on cassette tapes) and hand them out to friends. I remember my own friends and relatives trading albums on cassettes and mix tapes. My grandmother had a set up to easily copy VHS tapes at home. She would rent movies, and copy them for later. Certain movies that were more popular were often purchased, since it made them easier to find (my grandmother had a cataloging system, where every tape was numbered, with the movies that were on each tape listed both on the tape, and recorded in a notebook - just looking for the right tape cover was much easier), and better quality. Sure, the movie companies didn't make as much money as if she had bought all of the movies, but then again, she bought much more than she would have otherwise. The only real difference now, is that it is easier, more widespread, more exhaustive, and easier to see.

The second is that my wife and I often observe to each other that while companies are often most concerned about owning the most market share, or getting the largest profit per unit, what really should matter is if any individual thing is profitable. It is ok to have a portion of the business that is less profitable, so long as it is still is profitable in the first place. It doesn't matter if an individual item is hugely profitable, so long as once all the costs have been payed, the item makes money. One example of this would be the breakdown of the starsplay/ netflix arangement. Stars Play wanted to deal with netflix like a cable company, making individuals who wanted the extra content pay separately for it. Netflix wanted to outright license the Stars Play content, rather than start a two tier pricing scheme. Because SP didn't want to compromise, there was no deal. I, for one, never intend on accessing SP content elsewhere (and certainly not paying for it), do not have a cable tv subscription that has access to it, and would not have paid extra for it if they had gotten netflix to budge. There are far too many interesting titles for me to watch that, while it might not be exactly what I wanted, costs me nothing additional. SP meanwhile, loses out on my little sliver of what netflix would have payed them. Sure, they wouldn't have made as much money per unit, but they would have made money they wouldn't have made otherwise. BlakeGeno 20:55, 14 February 2012 (UTC)

I really loved the Wired article and its point that this next era will be more about “misses” than “hits.” The internet and new technology remove almost all the related costs that created this all-or-nothing dichotomy; once I read it, it seems so obvious to realize that “misses” still can generate reasonable profits, just not ones that could overcome the expenses inherent in our older distribution systems (movie theater, an actual record store in a small town, etc.). The concept of the Long Tail and the 3 Major Business Rules he gives at the end are all great.

I’m a reasonably expense-conscious person in the just post-college age range with a low income, but I am also quite active in pursuing media I enjoy (movies, tv shows, music, books). With so much available free online (illegally) I tend to only pay (whether by actually paying or by getting it through a medium that provides ad revenue directly to the creator) for around 1/3 of all the media I enjoy. Those are the songs by artists I like best and truly want to support, or the movies that I am so impressed with that I want to contribute to their box office take and that simplemindedly measured “success.” Following the second Long Tail Rule, I would be very happy to pay SOMETHING for almost everything I enjoy. Lowering the prices dramatically or providing a “pay what you feel” option would actually increase what I’m happy to pay pretty significantly. And I know this is totally anecdotal, but I feel like most of my peers have the same sentiment.

Does that sound about right to everyone else in the class? Would you pay at least something for everything if that was an option?

Democratizing Innovation echoes a lot of discussions/other readings we have had about the importance of having both the manufacturers and users able and willing to innovate. The phrase “Policy makers should be aware of ‘collateral damage’ that may be inflicted on user innovation by legislation aimed at other targets“ really summed it up well for me. As cliché as it is now, “thinking outside the box” is sometimes only possible when people have the ability to ignore the boundaries that create that box. This is something very difficult for major organizations or corporations to do, but easy for individuals. Unfortunately, with acts like SOPA even being proposed, we seem to be moving in to opposite direction of the more user-innovation focused world the chapter argues for.

And just briefly on the dot com crash: I’ve studied the housing bubble/foreclosure crisis quite a bit in the past few years, but was too young to really grasp what was happening with these comparably massive dot com crashes at the time. This look back was pretty jarring. AlexLE 17:46, 11 February 2012 (UTC)

I personally had no knowledge al all of the dot-com bubble system. It seems to me that these bubbles were more of a financial scheme rather than a legally oriented invention. Creating something that people will invest in just because of the e- prefix or the .com at the end seems a bit naïve and risky but surprisingly enough many people fell for this and as a result some made money but the majority lost their funds and companies went bankrupt. I really enjoyed reading the Long Tail article. I never would have guessed that thanks to modern systems such as the internet and Amazon.com for example, old hits or even more surprisingly “misses” would turn out to be hits. I often noticed while buying merchandise on Amazon.com that at the bottom of the page it would show me related items and trends and I must admit that a few times while buying books or DVDs specifically, I have also bought related items suggested by Amazon. Another article that I enjoyed reading was the one Better than Free since I agree with the author and find myself in similar situations. I believe that most people emphasize one of the generatives rather than all eight of them. Personally I like having something immediately delivered to me rather than doing several searches for something that would take me time, and therefore I also agree with the Findability generative as well. I also enjoyed the last article and found it to be really accurate. Users looking for or in need of a certain device either continued with their lives without it or in the case of the article, built it or developed it themselves…the majority of inventions are user centered rather than discovered and developed by manufacturers . I personally think that some of the most important inventions took place because of the user’s need for a given device. Large corporations don’t usually see what people could use on an everyday basis but aim to invent spectacular devices in order to sell and make profits. Emanuele 16:50, 12 February 2012 (UTC)

@AlexLe I wanted to reply to your question about paying at least something for everything if it's presented as an option. My husband and I developed a catchphrase while traveling that went something like, "Why won't you let me pay you??!!" Sometimes this had to do with things like trying to find a place where we could do (or pay someone to do) laundry but oftentimes it had to do with companies not getting their act together online. One classic (hypothetical, of course) example was when my husband wanted to read a particular comic book while we were in Malaysia. So he went to the publisher's website and searched for it. They didn't have any digital copies and print copies weren't available either (not that they would have been much use to him in Asia). So he then went "elsewhere" and found exactly what he was looking for. He even contemplated sending money directly to the author because he really liked the guy's work and wanted him to get something for his efforts. Generally speaking, we try to go through proper channels first but if those don't work, we'll take our business elsewhere.

To get a little Cluetrain Manifesto, companies are shooting themselves in the foot if they think they can sit back and dictate the terms of their relationships with consumers. Yes, the profit margins may be smaller to offer products online in easily reproducible formats, but companies are effectively putting themselves out of business by not acting as useful intermediaries. Kevin Kelly does a great job of highlighting the potential value-adds of intermediaries in "Better than Free", while Chris Anderson explores the significant profit opportunities available to companies that exploit the long tail. If companies invested as much time and energy in getting ahead of the on-demand media delivery curve as they did fighting for control of an antiquated relationship between producers and consumers that consumers are opting out of anyway, then those companies might actually have a shot of staying in business for the next five years. /rant Aditkowsky 04:26, 13 February 2012 (UTC)

"Power of the Preview"

During high school, the internet was in its infancy. Therefore the accessibility of lesser-known artists to sell their songs/albums in the open market was limited. I have been involved in music throughout my life and a band’s path to creating a commercial album has been a challenging and structured process starting with signing up with a label, providing upfront costs for production, pressing CD's and so on. In this digital age where physical CD's are no longer required and home studio technology has advanced, the costs to produce an album are certainly less. While I am not familiar with popular music sites such as Rhapsody, I know that iTunes is quite accessible in allowing independent musicians sell their songs on their platform.

In addition to the algorithmic recommendations that have created the Long Tail, I also believe that the “preview” function is also vitally important. To hear a segment of a song is particularly powerful for the Long Tail effect (i.e. iTunes). Prior to the music digital media age, the only way that a listener could preview a more obscure band was by listening to the album through others or seeing live shows. Therefore consumers were less likely to pay full price for an entire album from a band that they were wholly unfamiliar with. However the ability for consumers to hear parts of songs has undoubtedly contributed to the Long Tail affect.--Jimmyh 17:38, 13 February 2012 (UTC)

I find that the generative qualities immediacy, personalization, accessibility, and findability allow Youtube, online radio, and Netflix to become my main source for entertainment in the free copies world. I no longer depend on my TV, which had limited shows and a fixed schedule. On the contrary, I can basically find any video on Youtube and watch them for free. With a Youtube account, I can create a play list and watch my favorite videos at my convenience. I had also watched many seasons of America’s Next Top Model on Youtube for free. I remember the days when I had to call into a local radio station to request them to play my favorite song. Now, I can just go on Youtube and watch/listen to my favorite songs. I also no longer feel the need to run to a store to buy a favorite CD or the need to purchase my favorite songs. I also appreciate the fact that I can stream my favorite local radio station online, even when I am out of the local range. Netflix is another example of a convenience source to access shows and movies instantly. Qdang 04:38, 14 February 2012 (UTC)

I enjoyed the Technium article that mentioned the generative qualities that favor the consumer. Companies like Amazon and Wikipedia embody these qualities the most, with Amazon give us a great example of the Long Tail. As a superstore, Amazon has an incredible amount of adaptability and ability to connect buyers and sellers. Lots of items bought off Amazon are from other sellers they do business with so they are just connecting you to them. I do wish Kevin Kelly touched on advertising which he admittedly omitted. Perhaps he wanted to avoid the discussion of consumer versus producer driven demand and who shaped or steered these generative forces more. Brendanlong 06:21, 14 February 2012 (UTC)

The properties of generative innovation that von Hipple spoke of is quite eye opening, albeit not unexpected. The shift from manufacturing standards to user generative improvements reflects the long tail effect spoke of in the other articles. Unfortunately it seems as though most companies and manufacturers adhere to the antiquated principles of limitation. Von Hipple is quite clear when he states that many of the users and innovators seek a shift of the current legal precedents set through patent law and copyrights. As he noted, the physical world costs time, money, actual physical stuff to be modified. But in the virtual world, anything can be copied and modified without the need for physical items, or even R&D, since that can come through democratization of innovation. Because the virtual world inside computers allows for instant copying and modification, and since the internet allows for the instant communication and copying between systems, the long tail is not only enabled, but it allows for instant results at virtually no cost. But it is precisely because it is virtual and it avoids cost (or profit for that matter) that the application of laws and practices that rule a world of normal distribution don’t apply. Those laws apply to systems of manufacture in which it is difficult or costly to enable that manufacture. One in which all users can be grouped into large groups, instead of millions of small ones. As the world moves closer and closer to the singularity, the laws and rules of the physical world need to be modified in order to account for the virtual world, or new laws and regulations need to be made, ones which address the difficulties of controlling the long tail. And I don’t really see that happening because of the rights that would be infringed upon (freedom of speech, press, expression, et al.).Nthib 20:32, 14 February 2012 (UTC)

By the way here is a link to "Free" by Chris Anderson: http://books.google.com/books?id=lLZbXN2odVYC&printsec=frontcover&source=gbs_navlinks_s#v=onepage&q&f=false Brendanlong 20:34, 14 February 2012 (UTC)

Kevin Kelly's article, Better than Free, touched on something we discussed in our first few classes - a human element of trust when communicating on the Internet. A lot of the reading selections for class keep coming back to a common theme for me: "Golden Rule" or Trust. Kelly places a monetary value on "trust" but more importantly recognizes that this notion of being able to trust products, people, etc. on the internet will always remain a key player. Eric von Hippel also spoke about an element of trust - between the user and manufacturer regarding innovations. There is a fine line between intellectual property rights and access for users to change and improve products. User:Hds5 16:29, 14 February 2012 (UTC)

Though the traditional mode of financial transaction appears threatened by digital reproducibility, Kevin Kelly suggests that being "free" is only part of the equation. We can explain why iTunes, Netflix, Steam, and Amazon have been so successful despite piracy efforts: what they are monetizing isn't just the product, but also the services around the product that enhance and secure the consumer experience (this is also, I think, the juncture at which law feels most relevant to the consumer: it promises reliability and safety that the pirate cannot). Unfortunately, not only does much of the entertainment industry remain stubbornly tethered to protecting the copyable product, but it even fails to outperform pirates in the eight generative areas. For instance, consider the recent incident where Japanese comics publisher VIZ Media ordered Manga Stream, an online group which scans and translates comic series as they are published weekly, to stop releasing some of its most popular titles. Yet Manga Stream had exceeded VIZ in every respect when it came to providing quality comics: MS did not censor the original content, as VIZ had in its English-language versions; MS's translations were far more consistent and accurate; and most perhaps importantly, MS's releases were almost immediate, whereas VIZ released their own English scanslations weeks after the Japanese originals. Instead of proposing a superior alternative, VIZ was focused on preventing what is inevitably—thanks to the affordances of technology—unpreventable. This, to me, seems to be a lose-lose situation for all parties involved. We receive inferior products and services, and the publishers receive unenthusiastic business. Looking forward to hearing what others think can be done. Michaels 21:54, 14 February 2012 (UTC)

I really enjoy getting my eyes opened to how things really work in the world, and sometimes it is things behind the scenes. The dot com article was one of these "eye-openers" for me. It seems so easy for people to be manipulated into doing things that are obviously dumb, but the (we) keep falling for it again and again historically, and there are always a group of those who know how to leverage human nature for their own gain. I suppose that's what marketing is all about. I'm very intrigued by this new opening on the horizon for each individual to market their intellectual goods, a freedom of ideas available on the internet, but of course, there will be those who want to stop it. It is not to their advantage, for whatever reason, monetary, or because it represents an opposition to their power and influence. This was also high-lighted in the Long Tail article, which really got me to thinking how to take advantage of this "breach in the wall" to share ideas in the world. It really opens up a whole new world of opportunities for those who want to bring innovation onto the scene of world influence.Mike 22:02, 14 February 2012 (UTC)

I really enjoyed reading the article on The Long Tail and found it quite impressive that with the introduction of new technologies and platforms such as iTunes, Rhapsody, Pandora, etc., they have opened the doors for consumers to focus on the artists or songs that might not be mainstream or "megahits." Turning that "megahit" concept on its head and essentially disrupting or dismantling the music industry especially with iTunes, is what was needed to revolutionize the aging concept of purchasing an album, making it more personalized and cost effective for consumers. Also with the mention of documentaries and how that is now flourishing online and creating new markets in places that had not previously existed or providing new channels for filmmakers to get their content out in the world. I am now going to look for Chris' book!JennLopez 22:24, 14 February 2012 (UTC)