Reflections: Where is the wealth in networks?

In the past few weeks, we have learned a lot about dramatic changes that have been taking place in the age of digital media. From the free model to peer production, we seen wealth of information created, as a result of the liberating power of the Internet. But often we question whether the expansion of economic wealth exists in parallel. Many times, we witness the opposite, the ugly side of technology advancement, loss of traditions and jobs, and declining institutions seemingly threatening the health of our social fabric.

So if the content is free, and much of it comes from the commons model, where is the economics and wealth in the future of digital media? Are we ultimately paying an economic price for the social freedom and advancement that technology provides us? Or, will the free and peer production model be unsustainable in the long term?

While I don’t have all the answers, I think it is necessary to step back from the changes that are happening everyday, to put it in a more historic perspective. If we ask ourselves, how many well-paid, desirable jobs in the 19^th century, that still exist today? How much the society has evolved in a mere one hundred years? And for the average person, how far have we gone from barely surviving to have the kind of tools and voice, to do what we want to do, to have the kind of impact as individuals, and to be able to interact and collaborate with each other.  As in every industrial revolution in the past, the more dramatic the change, the more painful the transition can be.

I also think of the example of Intel, which seemed to have weathered every economic storm in its history. Few realize, the original Intel was built on the memory business alone. In 1984, then-CEO Gordon Moore and President Andy Grove proposed to exit the core memory business, and reinvest in microprocessors. It was a disruptive decision as it threatens almost everything the company and its employees value. As Grove remembers, “Intel equaled memories in all our minds. How could we give up our identity?” They resolved to eliminate the division.

It is often more comforting to hold on to the past, but it takes courage and leadership to be the first to adventure into the unknown. History has shown that the odds often favor the brave.

Reflections: Think Microsoft and Hollywood

Our small group (Vera, Pei-Chieh, Michelle) had an interesting discussion last night. We started by asking, if “free” is the better model, then how is it economically sustainable in the long run? In other words, if the Microsoft’s of the world will ultimately lose to free peer production, where would all the paying jobs go? If everybody is happily engaged in social production, what do they do as their day jobs?

We have heard that careers are shifting from corporations to individuals. But even if we work as independents, somebody has to pay. Or we do more bartering? That doesn’t sound very efficient.

So we tried to look for some answers. And we thought Asia is a little bit ahead in certain stages of “free”, largely thanks to looser IP protection. Take the DVD market as an example:  there are thousands of new TV shows produced in Asia. Almost none is sold as “legal” copies. In fact, there are less pirated copies sold now due to online viewing (which is another form of piracy). But all of that seem to be (however unwillingly) accepted by the industry. In the mean time, the media industry didn’t collapse there. There are actually more shows produced every year, many of them very popular. Actors and actresses can usually turn popularity into profits, with concerts, shows, and as spokespersons.

One key difference that makes it more sustainable, is the income level of “stars” in Asia, which is far lower than their Hollywood counterparts. They still do very well, making maybe ten thousand instead of a million per episode. So to Benkler’s point, Hollywood and the media establishment will fight hard to protect the “status quo”. But is it really a sacred “right”, for somebody to make in one day, what an average consumer makes in a life time?

King of Profits

Do you know Gillette’s razor heads are the most shoplifted product in the UK? It was so bad, not only the package is protected by electronic tag, some stores also installs monitoring system that automatically activates when the product is removed from the shelf.

A pack of eight razors costs £18.53, that’s almost $30! A small fortune just to get a clean shave. The Office of Fair Trading, a UK Government watchdog is involved in a long-running inquiry into alleged collusion between manufacturers and retailers.

Apparently, it only costs about 50 cents to manufacture and package the goods. A profit margin that is hard to beat.

So what makes Gillette so successful? There are competitive products, selling for less, and does the same job more or less.

It’s the brand. Gillette knows it.  Just look at who is on its payroll: Tiger Woods, Roger Federer, David Beckham, Derek Jeter, the list goes on.

For the digital media industry, Gillette is more than a pioneer that invented the “free” model. From its humble beginning, it has come a long way building the tremendous brand recognition, and a loyal customer base, generation after generation.  In other words, “free” itself is not a guarantee for success, rather it’s a bridge to “be known”. And if the product or solution is attractive enough, it will grow the market by itself.

In the digital world, free is the most effective way to gain visibility and mass adoption. Given the speed of how new products are emerging, it is probably the only way to take the enviable number one position. Google already got to first place, and became very profitable. Yet it continues to pour out new features, services, for free…much like Gillette has continued to strengthen its brand. Think Linked-in, Facebook…none making money, but few doubt their command of the market. The overwhelming priority is to get an absolute lock in the market, leaving no competitions in sight, becoming totally indispensable to consumers.

Just remember, 100 years later, we are still paying for very expensive razors.