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.

Institutions – Save it or leave it?

When I first graduated from engineering, I was fortunate to work for a telecom giant. It was the number 4 equipment manufacturer in the world, and the president told us the goal was to be number 3 next year (which we did). As new hires, we had training, great opportunities, and a lot of fun. The facilities were amazing. It was built like a university campus, with glass towers, complete with cafeteria, gym, skating rink and baseball diamonds, even our own ATM machines.

I will never forget those words from the head of the research, he said our research team was so strong with so many patents, that even if we stopped doing anything, we would still have enough to last us another 25 years. It was truly an awesome institution.

In 2009 that company declared bankruptcy.

In technology domain maybe more so than others, failure of institutions has been the norm. Although the human impact behind those failures are always painful to bear, technology advancement has only accelerated. In fact, failure of old institutions is almost always accompanied by the birth of new institutions, thus starting a new lifecycle.

History is filled with colossal failure of once mighty institutions, their significance often fading into distant memories. Dynasties fall, replaced by another. In nature, whole species sometimes disappear. New species emerge. Charles Darwin called it the “natural evolution”.

The Internet and associated technology advancement, whether it is processing power, bandwidth or storage, is constantly changing the cost equation. Sometimes those cost equations are the foundation of institutions. When those equations are no longer balanced, and if institutions are not able to adapt and re-balance, failures will occur.

The more meaningful question is, are new institutions replacing the old, to fill the gap socially and economically? History has shown that has always been the case, as the failure is often the direct result of the new. Wouldn’t we be better served by embracing the new, than trying to save the old?

Embracing Free

We all agree that change is taking place in digital media. What surprised me the most is how our fear for loss sometimes overshadows joy for new opportunities.

Looking at the model again: Facilitation Cost / Aggregate Value

Facilitation method is being revolutionized, facilitation cost is going down, way down. So any business and career built around that value proposition will be difficult.

Aggregate value represents the value created by aggregated participation (facilitated by digital media). Facebook uses software and web technology for facilitation. The aggregate value include the enjoyment and opportunity for communication among members, as well as commercial value enjoyed by owners of Facebook.

Aggregation value is the real upside, that’s where we want to be. Writing a reivew or contribute a piece for Wikipedia provides a certain amount of satisfaction. Starting a popular blog and drawing a large crowd may lead to a modest financial gain. Yet it takes special skills and creativity to develop a social media platform, reaping even more rewards.

Why would Yahoo hesitate to match the “free” offer? In the email market, wasn’t it already in the enviable position Google wanted to be in? There is prehaps the factor of margin erosion, and different financial and competitive positions. The real difference is the mindset, one says “free is going to cost us”, and anther says “free is going to help us”.

I believe “topple rate” applies only to companies and individual who fall behind in mindset. Yahoo is focused on keeping facilitation cost down, but lost sight of creating exponential aggregation value. Microsoft never lacked the cash, and still doesn’t today. “Free” is a mindset to embrace a new world, but it takes courage and vision.

Loss of an “institution” may not be so comforting, but it is not nearly as horifying as some would want us to believe . Change is inevitable. “Free” is a a world of opportunities to embrace.

The Changing Supply Side of Media

Economic theory is based on supply and demand. A change in supply, which could be a change in the value of any key determinants such as the price of inputs, the state of technology, and the number of suppliers, causes the equilibrium price to change (Media Economics, 48-50). In the case if digital media, those elements are very much related; technology clearly changed the number of suppliers as well as the price of inputs.

What surprised me the most is the relatively little attention to consumer’s direct participation in the supply side, which appears to be among the most disruptive forces. Wikipedia is such an example. In the old days, dictionaries were the work of a group of respected scholars, who often work for years behind closed doors. Wikipedia is so successful because in many cases, the speed and wisdom of the crowd is far more dynamic and superior to limited scope offered by a few professionals. And it is hard to distinguish supply from demand – consumers are acting as suppliers at the same time.

That is not to say, consumer participation will necessarily fully replace all forms of supply in media. As the saying goes, content is king. Technology typically does not replace content; it threatens distribution. Consumer generated content can be more disruptive to the supply side.

So what makes “new media” successful? Facebook is a prime example here; it combines a technology platform with user generated content. Technology wise, it is very easy to create a similar distribution platform. But it is really the combination of supply and demand that makes its first mover advantage so powerful. Twitter is much the same way. The changing supply side of media also has a non-economical dimension which is a game changer. I hope to explore that with the learning ahead.

Reflections

If there is one word to capture the state of economics in digital communication, a lot of people would probably think of “free”. For me, the word is “change”.

There are a lot of different opinions about what is going on, and what is about to happen. Surely, a lot has already happened. Many years from now, I think we will look back at the digital revolution, and realize that its impact is no less than the introduction of printed press. The ability by human race to disseminate information is increasing by orders of magnitude, in terms of speed, volume, and reach.

I don’t take for granted that technology achievements are always positive for human advancements. But changes tend to be disruptive, and sometimes painful. If we look at job losses with a historic perspective…our ancestors had only two jobs: hunters and gatherers. Gradually we could meet the basic needs with less resources, other “professions” emerged, and the excess in human capital allowed us to expand our horizons. In this framework, I see the disruptive forces in digital communication as enablers for exploring new frontiers.

A lot of people, like me, probably wonder if the combined forces of free market, technology and globalization could be as damaging as they are powerful. As the lessons are still being learned from the recent financial crisis, we are probably at a point to reflect on what has taken place in the digital communication space, and perhaps even shape its future.

These are just some of the topics I hope to learn and engage in our discussions:

• The fundamental economic impact of the economic model from scarcity to abundance
• The changing media industries, particularly entertainment, TV and interactive media
• Does economics necessarily drive everything, particularly digital communication?

As we send astronauts to explore planets, we have come a long way from hunter and gatherer days. To me, expanding human horizon is good economics, more so than preserving the same jobs for 100 years. I hope my optimism will be validated by the learning ahead.