The Wealth of Networks: How Social Production Transforms Markets and Freedom.  Yochai Benkler.  Yale University Press, 2006.

In “The Wealth of Networks”, Yochai Benkler examines how the Internet and digital technology is changing society.  Benkler describes new types of collaboration as “social production”. In his view, non-market innovation is reshaping markets, while at the same time offering new opportunities to enhance individual freedom, cultural diversity, political discourse, and justice. Benkler also highlights the role for law and politics, calling for “an embrace of the networked information economy by anyone who values human welfare, development, and freedom”.

Benkler is a Yale law professor. Prior, He was a professor at New York University School of Law and Harvard Law School. He was a faculty co-director of Harvard’s Berkman Center for Internet & Society.

Benkler uses the first part of the book to describe “networked information economy”, a term he uses to describe the production, distribution, and consumption of information as enabled by digital technology and the Internet. Benkler’s focus is on commons-based approaches to creating information in networked environments.  

Benkler then went on to examine the impact of the shift from industrial to a networked information economy, specifically liberating individuals to better able to do things “for and by themselves”. Benkler further points out its culture implication, and predicts the decline of mass-media as a result of the newly-gained freedom. Individuals are better informed, empowered to act, thus becoming more “active participants in producing their own cultural environment”.

Finally, Benkler offers his perspective on the necessary social practice and political actions, to protect the emerging “networked information economy”. Benkler believe the incumbents, such as Hollywood and recording industry, will attempt to influence policy and laws to resist change. He calls for law and regulations to embrace the rise of commons based information production.

In analyzing the book’s arguments, Benkler makes a strong case for the phenomenon he calls “networked information economy”. Throughout the book, Benkler provides concrete evidence, with sufficient in-depth technology descriptions, and solid data, to back up his claims. Benkler is particularly strong in capturing the essence of complex technology, in the context of digital economy.

Benkler’s thesis of “social production” is built around how network information economy has empowered individuals, and consequently, encouraging collaboration among peers to produce information of significant social value.  Again, Benkler deployed his legal expertise, backed up by an amazing array of intriguing stories, like the one about rice genome (337).

However, Benkler’s presentation of “peer production” tends to underestimate the role of leadership and management, which leaves a critical gap. Benkler sometimes mixes mass production with collaboration. Benkler’s take on the NASA Clickworkers experiment (69) is such an example. In this case, success has everything to do with the cleverness of the designers. Dividing up a large task into discreet ones to be performed by the mass is quite different from active participation through collaboration. The role of leadership is as significant in social production as in a corporate environment.

Also absent from Benkler’s analysis are those less successful social productions. The absence from Benkler’s analysis leaves a significant gap.

Benkler seems to view participants as equals, and provides little insight into the organization of a social production system. Clearly, the role of leadership is uniquely different in a social production system. Many believe that large scale efforts such as Wikipedia is successful not because it lacks a management structure but because it has a very good one. Therefore, examining the structure, the communication, and the minds behind them will provide more insight into how networked information economy functions, and its long term impact.

In analyzing the economics of social production, Benkler’s take on motivation is rather scholarly, complex and inconclusive. As an academic, Benkler does not often see the pragmatic side of motivation. Consider these from a (professional or amateur) individual’s perspective:

• Learning new skills
• Enjoyment of solving problems
• Showcasing one’s talent
• Pride and Recognition
• Opportunity to contribute

All of the above have positive career and economical benefits. And the Internet provides the perfect platform. For those in the IT profession, playing a recognized role in a social production project carries great prestige and benefits. Given the low cost of entry, it is well worth the time and effort. This is not to negate Benkler’s search for noble causes, which absolutely do exist everywhere. It is just as important to acknowledge that the rise of the network digital economy does not fundamentally changes human motivations. Rather, it simply provides the better platform to act on them.

In conclusion, Benker’s work in “The Wealth of Networks” is a profound. He pulls together perspectives from technology, law and politics, referencing an impressive array of evidence both in breadth and depth.

While the thesis is well argued and supported, Benkler’s academic approach has some limitations. Specifically, he significantly underestimates the role of leadership in networked digital economy. In doing so, he missed an opportunity to examine the emerging new and perhaps superior managerial structure that has potential implications on how work and individual careers are organized.

More than two years after its initial publication, “The Wealth of Networks” is still thought-provoking, a must read to understand and explore the social, cultural and political consequences of the digital age.

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.

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?

In “Free, The Future of a Radical Price” (Hyperion, 2009), Chris Anderson describes the new digital age as a world of “abundance”. He argues that businesses can profit more by giving things away than they can by charging for them – Free becomes a business strategy.

Anderson has had an accomplished career. With a degree in physics from George Washington University, he did research at Los Alamos National Laboratory. He launched coverage of the Internet at The Economist. He has also worked at the journals Nature and The Scientist, before becoming editor-in-chief of Wired Magazine. His previously authored “The Long Tail: Why the Future of Business is Selling Less of More”, which became a New York Times Best Seller.

Anderson’s thesis is based on the observation that technology has been driving cost down to a level that is “too cheap to matter”, bringing disruption to the traditional economic model based on scarcity. Anderson uses many examples to illustrate how Internet and digital age has brought abundance of information, and how companies react and compete in this new environment.

Anderson starts by examining the history and psychology of free. He explains that free is an age old tactic that has been used successfully as a business model. Free is a weapon to generate tremendous interest, according to Anderson, therefore “there is huge difference between cheap and free” when it comes to market penetration.

Anderson then proceeds to explore abundance in the digital age. He examines the effect of faster, better, cheaper technologies – processing, storage and bandwidth, coming together to constantly driving down the cost of all things digital, which built on these three technologies. Anderson concludes that there is only one end state, which is free.

Finally, Anderson explores free as an economic model. He provides numerous examples to show how savvy businesses are already succeeding with the model. Anderson uses cable companies to illustrate the cross-subsidies model (giving away a DVR to sell cable service). He uses Flicker to illustrate the freemium model (offering Flickr for free while selling the superior FlickrPro to serious users). In music industry, Anderson highlights Radiohead’s successful name-your-own-price experiment with its latest album. Anderson went further to also examine the use of free model in the international market, including China and Brazil. While piracy accounts for a large percentage of consumption, artists can still benefit from publicity generated by free, and profit from concerts and merchandising. Anderson brings collisions of thoughts to the readers vividly, by telling stories of email battle between Google and Yahoo, as well as Microsoft’s war with open source and Linux. The most effective price is no price at all, argues Anderson.

In analyzing the thesis and arguments, I agree with much of Anderson’s assessment of the technology revolution and its impact. Anderson brillantly pointed out that the key difference between “atom” econony and digital economy is the difference between scarcity and abundance. In the digital economy, marginal cost, or the cost to make a digital copy is practically zero. With examples such as Google and Craigslist, I think Anderson has convincingly presented the case that free can be a viable business model in some cases.

Anderson is less convincing with a radical “one price fits all” model. Will all things digital eventually be free? In arguing for the case of technology driving down cost, Anderson mainly focused on content distribution. There is little coverage about content creation which is a critical aspect . In the example of music and DVD piracy, Anderson discards DRM and copyright technology, which I agree. However, by ignoring copyright in favor of free, can we sustain a creative and artistic ecosystem? Prehaps the answer is yes, but more analysis and evidence remains to be seen.

Anderson’s over-simplification sometimes weaks the argument. In his detailed analysis of Microsoft’s battle with opensource (chap7, competing with free, 101-112), he presented the a case of the software giant going from denial, anger, bargaining, depression, to acceptance. Anderson told a great story but did not serve to support his arguments. The fact is, Opensoure has gained a relatively small portion of the server market, with no significant growth. Even its biggest fans are not predicting the demise of Windows Server. From a business point of view, Microsoft probably executed quite well over the years, protecting its revenue stream, and maintaining its leading position in coroprate America.  In fact, the example is a case of coexistence of free with paid software. 

As a comprehensive study of the free economic model, Anderson paid surprisingly little attention to consumer’s role in the free economy. Low cost technology does not produce content, consumer participation does. It is an equally powerful force that works in parallel with technology, to bring abundance of content. Finally, Anderson largely ignored non-economic and social motivations behind the free movement.

in conclusion, Anderson brilliantly captured a trend and phenomenom, and brought it to world’s attention. It is well argued and supported by intriguing obeservations and real-world stories. However, there are many other factors at play in business and the world in general. Anderson’s “Free” is definitely an interesting and rewarding read, but businesses and inviduals are advised to conduct analysis and exercise judgement before applying in their specific scenarios.

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.

I listened to Chris Anderson’s “Free” podcast on EconTalk, which is very insightful, much like his excellent book. Both mentioned the interesting story of Google’s entry into the email market. I don’t agree that the reason Google is able to offer near “unlimited” storage for free is because it has a small user base. Google wants to have as many email users (if not more) than Yahoo, and as fast as it can. It has to fundamentally believe that the net benefit will increase with the number of users.

So why is “Free” a more feasible economic model for some than others? Free is the catalyst to reach mass market. So the real incentives are the consumers, or, the “demand” side in the traditional model. If a consumer creates value simply by participating, then the cost of participating will actually decrease as the number of consumer increases.

Rather than simply acting as a purchaser of goods (atoms), the concept of consumer value by participation is not new. Lottery is such an example: everybody contributes a small sum for an even smaller opportunity to win a large sum. Insurance is another example. The product does not exist without participants.

Neither lottery nor insurance is free, because there is a payout and facility cost. They happen to be very stable business models too, because facilitators are almost guaranteed a profit, as long as there are enough participants. So what has that to do with digital media?

Consider this model: Per Consumer Cost = Facilitation Cost / Aggregate Value

The abundance model as enabled by Internet and digital media continues to lower facilitation cost. Consequently, the lower per consumer cost leads to a larger user base, thus creating more aggregate value. The end result is per consumer cost approaching zero, hence, free.

A business that relies on charging for facilitation cost high will be under pressure. Examples include Yahoo email, long distance carriers, cable…

 A business that can harness the aggregate value will do well in the digital economy. Goog411 becomes more valuable with more user voice prints. Facebook enjoys a snowball effect. Hulu grows as larger audiences bring more advertising dollars and better programming. Finally, the success of a business in the digital age is not only defined by the success of stock holders, but the collective interests of stake holders, as in the case of Craigslist.

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.

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.

The Great Wall of China is one of the marvels of human history. Astronauts claim that the Great Wall is the only man-made object that can be seen from space.

The original construction of the Great Wall started 6th century BC, and continued through various dynasties into the 16th century. It is the longest and largest construction ever completed in human history, and easily the most expensive ever. Despite of its grandeur, it was never truly successful in achieving its original objective as a defensive fortification. Yet the obsession to build walls around valued assets continued through dynasties, and to this modern day.

Just like the Great Wall, defensive Digital Rights Management DRM has a number of inherent weaknesses:

The presence of “Wall” is an open invitation for attack

The wall is an advertisement for something valuable, a challenge for the brave, a magnet for the greedy, and a prize for the brightest hackers in cyberspace. Any human-constructed form is destructible.

The wall is comprised of almost infinite number of single points of failure

The wall is a linear structure. Compromising any point will lead to the failure of the entire defensive system. A highly restrictive DRM system is a fragile line of defense. It may have the most advanced technology, but it will never overcome the fact that digital media must eventually be presented in its original open and free form, for human consumption.

The wall is static

The wall, once built, can not be moved to accommodate changing needs. DRM based on restriction locks down content, prevents creation and interaction. This severely limits the value of the content it is trying to protect.

Opponents of DRM calls it “Digital Restriction Management”, probably for good reason, because traditionally DRM attempts to control the use of digital media by preventing access, copying or conversion to unrestricted formats. This is essentially about the control of content, a perfect legit cause, but when pushed hard onto the users often creating resentment and severely impacting the flow of information. Whether to protect value by prevention, or to create value by open interaction, is a delicate balancing act.

As long as there are those who build artificial walls, there are those who break them. To avoid becoming ancient relics, DRM needs to change from its foundation, starting from the mind set.