Tuesday, December 06, 2005

Content: Can it continue to be free?

An interesting question was raised today by the European Publishers Council (see "Group: Online Content Cannot Remain Free"). Well, actually, you're correct, they didn't raise the question, they made a statement. But for the thoughtful among us, perhaps it is a question better asked than answered out of hand.

Let's take a look at what Francisco Pinto Balsemao, head of the council had to say:

"It is fascinating to see how these companies 'help themselves' to copyright-protected material, build up their own business models around what they have collected, and parasitically, earn advertising revenue off the back of other people's content"

To provide you some context, "these companies" means specifically Google. And the content under discussion is news.

More Content, Anyone?

Where to start? Let's start with getting a proper perspective on the value of content in the context of the internet. When was the last time you were yearning for more content? When was the last time you were wishing search technology was just a tad better.

Right. I can't remember the last time I thought there wasn't enough stuff to wade through on the Internet. But quite regularly wish I could be more effective at searching. That's really just another way to say I wish search technology was smarter - so I don't have to be.

Am I suggesting that content has no value? Certainly not. But the internet has made available to me vastly more content than I can productively deal with. Content can't have value to me, if I can't find it. Of course, search has no value to me either if I can't find anything of value. Which value reigns supreme? While both content and search have some intrinsic value, it is clear that the value of both is heightened when they exist together.

From a big picture perspective, the value to the content provider is the potential subscription fees and advertising revenue. For the content consumer the value is generally in being informed. The value of search is determined by how much time I save over alternative means to find needed content.

With that brief understanding of value, let's ask a micro-question. What value does an individual news story have? Clearly it depends. I don't follow cricket. A cricket story has no value to me. In fact, it may have negative value to me, since any time spent on it detracts from time available for the rest of my life. But a technology review of an html editor has potential value to me as it directly relates to how I make my living. Why only potential value? If the story contains nothing new TO ME, then it has no value. Only if it contains information I did not already know does it have value.

How about the value of a single search? It is really unclear. I know it has value, because I will find what I am after faster than without search. In fact it is hard to imagine how I would go about finding content without search. Browse, I guess.

A Bit of a Catch

So then, at what point do I know if a story has value to me? Unfortunately, only after I have read it. To be sure, some stories can be eliminated from the headline. If I can tell from the headline that the story is about cricket, then I know to pass it by. But that means I have to read all available headlines to get a first pass at the stories that may be of interest to me. Then I need to read them to see if they contain new information. Or perhaps I can narrow the field by using news categories or specialty providers to do an initial filtering of available news. But still I am left with an unwieldy amount of headlines to read (unless of course I am interested in almost nothing). Not to mention all the article that I then need to read.

If you believe in value-based pricing, then the reasonable thing to do is charge a fee based on the value of content. But I have to read it before I know the content is worth it. Would I pay in advance? Maybe for a study from a reputable research firm where I have had the opportunity to read an abstract and read others thoughts on the value of the study. For an html editor review? Not likely. The only way to charge me for that is to ask me when I'm done reading if the story had value to me and oh, by the way, would I mind paying for it? Not a great business model - asking people for money after they have gotten the value from your product.

Search has a similar, but even more difficult problem. At what point do I know how much a search was worth to me? I have a partial answer when I have found the content. I know how long that took. I'd have to compare it to how it would have taken me to find it without search. A difficult question to answer without actually going to find it without search. So how are you going to charge me to search?

For both content and search, you could try a flat fee or transaction based approach. I'll charge you for being able to search, knowing that it will save you time and therefore has some value to you. Or, I'll charge you for access to a repository of content, guessing that there must be something in there you will find useful. And you could do either or both of these, but with the large number of search engines and content providers, I think you'd have a hard time making a sale.

How Does Anyone Make Money?

Well, of all the search engines out there, I tend to use certain ones because the combination of their indexing and my thought processes tend to get me to results the fastest. For content, I only tend to read content that has first passed a search engine filter (or my manual headline filter if I'm 'browsing' for news). What is the common denominator here? To use a search engine I have to physically view the search engines results. To read content I have to physically visit the content providers site. So for both the search engine and the content provider, they have an opportunity to earn advertising revenue. The more I use a certain search engine, the more advertising revenue they make. The more content I read from a certain provider, the more advertising revenue they make.

Is it just me, or does that somehow sound reasonable?

  • Good search = high search traffic = high advertising revenue.
  • Good content = high reader traffic = high advertising revenue.

And who exactly is the parasite here? I just don't see one. In fact, let's quickly check ourselves with a different technology - newspapers.

  • Good content = high circulation = high subscription fees + high advertising revenue.

Subscription fees are much smaller than advertising revenue. Advertising rates are based on circulation (a proxy for the quality of the content). And advertising generates the lion's share of newspaper revenue. In the internet, costs of distribution are lower, offsetting (at least in part) the lost subscription fees. And so it seems that content providers are making money the same way they always have.

So Can Online Content Remain Free? Absolutely. Who are the losers? There are none. As always, good content draws readers and that generates advertising revenue. There is a new player that brings value to the new distribution medium of the internet - search. Good search draws users and that generates advertising revenue.

Few things in life seem as fair as that. So, my advice to the European Publishers Council? Stop whining and get focused on writing decent content.

Steven Beebe
6200 feet above sea level
steveATthebeebesDOTorg

Wednesday, November 30, 2005

Piracy & Economics 101

You may have noticed that the Recording Industry, Movie Industry and Software Industry, all have something in common. No, it's not that they all like to sue their customers. Well, okay, they do like to sue customers, but that is not the point of this entry.

The point is, they all seemed to have failed economics in school. Personally, I thought pretty much everyone had to take economics. You know, supply curves, demand curves, graphs that show price and quantity in a marketplace? Really, it's pretty basic stuff.

Well, in their self-righteous outrage over the 'theft' of their intellectual property (yes, I know, this is usually in close proximity to suing their customers), all three glibly cite the tremendous amounts of revenue being lost to their respective industries due to piracy. I'm not suggesting that all forms of piracy are okay. But I do think it is important not to exaggerate in these types of discussions. After all, I believe it is precisely this type of thinking about how much revenue is being lost that led Sony down the path of the 'rootkit debacle' (see Sony, Rootkits And Digital Rights Management Gone Too Far).

A Word on Piracy
Now, I'm not talking about businesses that copy and sell music, movies, or software for profit. That's a different issue. But I am talking about:

  • I purchased a CD that I usually listen to in the house, but when I'm in the car, I like to use a copied version (if you've ever had your car broken into and your CD's stolen, you'll understand why you might do this).

  • Or perhaps a move I purchase on DVD that my children regularly handle - I'd rather have them handle a copy.

  • Or that PC that I purchase that came with a monopoly operating system with an 'OEM' license - the hard drive died and I put in one of a different size. Now I can't restore the OS through the legal means of the restoration disks, so I use a different physical copy of the OS CD that I happen to have.


Let's call this consumer piracy and define it as behavior that a reasonable person would not find criminal, but is under the current laws and licenses.

Now, back to the claims of lost revenue. Here are some examples:

Movies: "The Motion Picture Association of America (MPAA) and its international counterpart, the Motion Picture Association (MPA), estimate that the U.S. motion picture industry loses in excess of $3 billion annually in potential worldwide revenue due to piracy." See the MPAA's write-up Anti-Piracy.

Music: "Each year, the industry loses about $4.2 billion to piracy worldwide -- 'we estimate we lose millions of dollars a day to all forms of piracy.'" See the RIAA's write-up Anti-Piracy.

Software: "BSA estimates that software publishers lose roughly $13 billion to software piracy every year." See the BSA's write-up Anti-Piracy Information - Product Activation.

OK, now let's talk economics. Let's start with my copied CD in the car. If I go to purchase a new CD, it will likely cost me $13.99, or perhaps $14.97 with a little sales tax. Now, the CD's I purchase, have enough value to me, that it is worth my nearly 15 bucks to buy it. That's one of the basic economic principles at work here. If it doesn't have $15 worth of value to me, I don't buy it. Now, I carry a copy in my car to protect against theft. You could think of it as insurance. How much is the insurance worth to me? Well, certainly not $14.97, because the chances of the CD being stolen are small. It might be worth $0.30 to me (that's about a 2% probabability that the CD will get stolen and a little more than the cost of the blank CD).

Now, the music industry would say they are out $13.99. But would I EVER pay $13.99 to carry a second copy in my car? No. It's only worth $0.30 to me. Is the music industry out $0.30? No. They won't sell me a backup copy of the CD. They will only sell me another copy for $13.99. So how much money has been lost here? $0.00. If you could prevent me from making a backup copy of the CD, I would never pay for another CD to carry in my car - it's not worth to me. The music industry has lost nothing. Make sense?

Now let's get into something a little more grey - mostly because our definition was concerning behavior a reasonable person would not find criminal. But let's go a little farther. Let's say a friend of mine found a new band that he just loves and wants to share that with me. So he burns me a CD to try out (he doesn't want to lend me his, because he wants to keep listening to it). I'm sure you've had this happen. How many times do you share your friends enthusiasm for a new band?

Yeah, me too. Sometimes yes, but a lot of times, no. Now, being a good friend, I'm going to listen to this CD a few times so I can share the experience with my buddy. I'm not going to lie and say it's my favorite, but I'm going to find a track or two to that I like that I can talk about with him. Would I ever buy this CD? No. Maybe at $4.99, but not at $13.99 - it just doesn't grab me. Has the music industry lost anything? No.

Let's say they could prevent my friend from copying the CD. What would happen then? I'd either hear the CD in his car while driving somewhere, or we would listen to parts of it at his house or mine. Would I like the CD enough to go buy it? No. It's the same music that doesn't grab me. What has the music industry lost? Nothing.

Of course there is the case where I do like the band (maybe 40% of the time). And I like it enough to want to continue to listen to it. Here's where a little personal integrity comes in. Am I going to drive to Best Buy and buy it? Or maybe fire up iTunes and download it (geez, I only have to like it $9.99 worth to buy it from iTunes)? Me personally, I'm going to buy it. But let's say that only 40% of the people would do that. Now we have about 40% of the CD's that 'should' get bought, that don't get bought by 60% of the people. That works out to about 24% of the CD's that get copied. This is a much smaller number than number of copies x retail price. And remember, there would never have been the sales to the people who did buy, if they didn't get a trial CD to listen to. That's about 16% sold that wouldn't have otherwise. Now the true impact is the 24% - 16%, or only about 8% of the copied CD's in this scenario that represent lost revenue.

So there is lost revenue. But it is a much smaller number than number of copies x retail price. Why is that? If you get something for free, it says nothing about your willingness to buy it. My consumption preferences are very different at a price of $0.00 and $14.97. As are everyones. The question for the Recording, Movie and Software industries, is how much do you want to spend to recover what is likely to be a fairly small revenue number? You also have to remember that attempts to limit 'piracy' are mostly effective against the average consumer and piracy like I've described here. It is generally not effective against business piracy. It also tends to alienate customers and is likely to have an overall negative effect on sales. That would make that 8% an even smaller number.

I'm not advocating piracy for profit. I am advocating common sense and Fair Use. I think with a little basic economic perspective on what is going on here, will get the battle focused where it belongs. Delivering content and software in the way customer's want. That is what will cause revenues to grow in all these industries. Trying to criminalize consumers for doing what seems very natural to them is a dead end street.

For a more thorough analysis of the economics concerning the business of piracy, see On Software "Piracy", Lies, BSA, Microsoft, Rocks, and Hard Penguins.

Steven Beebe
6200 feet above sea level
email: steveATthebeebesDOTorg

Wednesday, April 28, 2004

There's Nothing Wrong with MicroSoft - it's Monopolies that Are Bad

Unfortunately, a lot of people think that Linux is all about being anti-Microsoft. And that Microsoft is the evil empire that must be subverted at all costs. These perceptions are true both inside and outside of the Linux camp. But there is nothing inherently evil about Microsoft. Most large companies today are formidable competitors and should be looked upon warily by competitors. You don't get big without having done something right. AND once you are big, you have the resources to do things that smaller companies can't. Fortunately, smaller companies have the advantage of having less invested in the status quo and are therefore more likely to break paradigms and truly innovate.

All in all, it works out to a pretty fair fight. The big and rich against the hungry and nimble. Consumers win as producers vie for market share by delivering ever better feature / price combinations. We call it Free Enterprise, and at least for the last few hundred years, it has proven itself to be the producer of a pretty darn good standard of living. Generally only out performed by economies based on possession of large supplies of scarce natural resources.

But what is wrong in the world of computing today, is the presence of an organization that is anti-thetical to the idea of free enterprise. An organization that threatens economic freedom, not because of the management style or an 'ends-justifies-the-means' competitive spirit. But because by its very existence, it displaces free enterprise. This organization is not Microsoft; it is a monopoly.

If you've had MacroEconomics 101, then you understand the issues. A monopoly is not BAD because it is run by malicious or vicious people. A monopoly is bad because it destroys competitive balance in the market place. It undermines the forces that allow a free market to produce high customer value, high economic returns to shareholds and deliver an economy-wide high standard of living. A monopoly is to be feared, again not because of the specific people that run it or are employed by it, but because a monopoly wields power in the market place destroys free enterprise. It is most likely that any company in a monopoly position would behave in an anti-competitive fashion. Not because they are anti-capitalistic, but because they CAN. It is the out of balance market power that comes from being a monopoly that allows them to do things that a non-monopoly can't do.

A good example is the change in Microsoft's enterprise licensing. What do you think would have happened to Norton AntiVirus if they decided to require users to pay for upgrading thier product every, whether they actually installed the upgrade or not? The net result being about a 2x increase in what they have been paying for virus protection. I suspect a very large portion of their customers would have opted for MacAffee. Now, personally, I prefer Norton. But not at 2x the price. I'd make the switch in a minute. That's the power of competitive balance in the market place. It's a restraining influence on products that forces them to keep the customer's best interest in mind.

A good historical example is from the early 80's when PC's were still young. Processor speeds were starting to climb, and IBM began to be concerned about approaching the performance of there low end mini computers with these new desktop contraptions. Their solution? To limit the processor speed they offered on the pc line. Had then been a monopoly, this strategy would have worked just fine. But, the presence of competitors in the market place made this a short lived strategy. You could turn around and buy a faster pc for about the same price from a number of other suppliers. So here we see competitive balance correcting a market policy that was clearly against the customers' best interest.

Do you see the distinction? There is nothing wrong with Microsoft. It is not the company, but it's position in the market place that is the problem. Monopolies on the other hand, are generally intolerable. I say generally, because in some domains, a monopoly has been determined to make sense. In these cases, the monopoly is regulated to insure that they don't abuse their dominant position in the market place. What does this abuse look like? It takes many forms, but the outcome is always the monopoly gains at the expense of its customers. This is contrary to the general outcome in a free market place where consumers benefit and innovative, efficient companies prosper.

Linux is not about being anti-Microsoft. Linux is about restoring choice, freedom and competitive balance. It is about trying to restrain the harmful activities of an unregulated monopoly.


Steven Beebe
Colorado Springs, CO
email: steveATxapwareDOTcom

Friday, December 12, 2003

Well, it has been a while. I'm really about done for the day, but thought before I call it a night, I'd jot a few things down.

How to restore competition in the world of software. Today there are a couple of impediments to competition. The first is the Microsoft monopoly. It's really not the fact that windows runs on 90+% of the pc's that's the problem, the problem is with 1) compatibility concerns, and 2) excessive monopoloy profits.

Let's take these one at a time.

With an established monopoly, people get used to the idea that you can send a document to anyone and they can open it. They don't think twice about "Can Mable open a word document". They just fire it off. They also don't think about the fact that there's only one company in the world that can create a document in that format. This is true in both the business and consumer realm. People are reluctant to change because they would have to battle incompatible file formats. Now, if you take a look at Microsoft's financials, you would see an incredible profit level (as a percent of revenue). See anyone else around with that kind of performance? About 50% of that profit comes from the MS Office suite. Ahhhh. No one wants to risk compatibility issues, so they consistently fork over $400 bucks to upgrade the office products (can't stay with old versions because then you would be incompatible).

But let me ask you a question. What feature or group of features have been added to any of the office products since Office 97 that could even possible come close to justifying $250 (let alone $250 for office 2000, $250 for office xp and soon $250 for office 2003)? Let alone $400 to purchase it new. But the question remains, what features could possibly be worth that kind of money? People are paying out of fear of being incompatible, not because they are becoming so much more productive. So MS has this incredible cash generator that is a result of their monopoly on the office suite - not really for any value being delivered to the market place. Or said differently, they aren't really earning it.

This leads directly into the second issue. Excessive profits leads to distorted investments and unfair competition. So, Microsoft is now sitting on all this cash and they have to do something with it (this year, investors finally insisted that they start returning some of that in the form of dividends - why do companies pay dividents, well generally speaking it is because they don't have any investment options for the money that are better than what the shareholders can do with it by investing in some other company).

With the cash they keep, MS invests in things like MSN to take on AOL. Nevermind that MSN can't seem to make money, but they are putting a squeeze on AOL. But wait Isn't that good? Isn't that competition? Nope. It sure isn't. One company (AOL) has to make money to stay in the game, the other company doesn't. MS can keep at it until they force AOL out. Then what happens? MS moves on to something else they can tackle and MSN becomes a very poor service (like IE is a very poor browser) and we all lose. And it's not just MSN. It's Windows Media Player, taking on Real Networks. It's MS developing a competing file format to mp3.... WMA. What in the world do we need with another compressed music file format for? Well, if MS owns that format then they have a greater ability to lock you into their applications and platform, thus perpetuating the monopoly.

So, how do we get out of this mess. The answer as I said last time is more straightforward than you might think. It could easily start with the US Government. Now before you get too excited, let me say that I'm a bit of a libertarian when it comes to politics, but this is a place where Government intervention could be extremely useful. If the US Government required that all electronic documents exchanged with them were in a publicly documented or open format (with some control on the rate of change) this would start off a powerful series of events. Either MS would have to open it's format - allowing other vendors to produce products that could faithfully read / write to the same format - giving you and me a wonderful range of choice for features, usability and price combinations; or MS would have to adopt a public standard, meaning their products would need to read / write to this open format, with the same results. With a little competition, I think you would see the price of MS Office fall to well below $100. And it would get better, just as new competing products being introduced to the market would be better. Do I mean they would have more features? Certainly not. What percent of the features do you really think you use in Word? Or Excel? But you might find a very nice product with a feature set closer to what you use, that is more productive, simply because it's less complex. Oh, and it probably costs less than $50.

With this chink in the armor of the monopoly, and a choking off of excessive monopoly profits, MS would have to compete more evenly on other fronts. They wouldn't have the same resources to go after things like MSN, WMA, or even trying to attack the server market like they are. And with an appetite whetted for choice, people may very well branch out and try different operating systems. Because, afterall, those operating systems would be able to produce documents (and by documents, I mean, word processor, spreadsheet, presentation formats primarily) in the same open formats that can be done on a windows computer. And you know what, with a broader variety of Operating Systems in the world, things like viruses become much less interesting (or problematic). Let's say there are 3 dominant OS's, each with roughly 1/3 of the market. In that situation, a virus can't bring the world to it's knees. Only a third of it. And don't forget, OS's like linux are not susceptible in the same way as Windows is. I think we'd see a lot less of that type of activity. It just wouldn't have the same thrill any more.

Well, I think that's enough for tonight. If you are wondering what Christmas is all about, let me suggest you watch A Charlie Brown Christmas. It will do your heart some good. And that Linus kid is pretty sharp. Pay attention to him.

God bless,

Steve

Friday, October 24, 2003

So, why is Linux better than Windows? I think that was the topic for today. Well, actually, it isn't. I'm not saying it's worse, but I'm not going to say it is better. I like it better. Some people prefer Maxwell House to Folgers and some prefer the Chiefs to the Broncos. Does that make one really "better" than the other? No, it doesn't.

But I have a lot more fun using a computer running Linux that Windows. As I said in a previous post, the excitement that was there back in the early days of the PC is here today on Linux. There isn't just one application that everybody uses (like MS Word, Excel, PowerPoint, Outlook, Outlook Express, etc) there are a bunch of good applications for pretty much every need. And each one of them brings something to the table. It's alot of fun to try different applications to see which one suits my style of working.

Need a spreadsheet? Well, there's gnumeric, kspread, and OpenOffice Calc (if you're curious, here's a list of some others... linux spreadsheets. And there all bring some neat features. And none of them has to be the "best" - whatever that means, anyway. I use the one I like. You use the one you like. Well, you say, what if we have to share a spreadsheet? You know, what if we both have to work on it?

I have a couple of thoughts on that one. When was the last time you truly shared a spreadsheet with someone? Come on. Most of the time you just want them to see the results, not actually get in there and start mucking around with your formulas. So, you just "print" or save as a pdf file - something that can be done from any of these spreadsheets, and send that off in an email.

But, ok, some times you do need to work on the same spreadsheet with someone else. The 3 mentioned above interoperate pretty nicely. Why? Because their file formats are publically available - there's no voodoo going on behind the curtain to try to prevent people from reading or writing to their format. Since all of these can be had for free, if you send me a gnumeric spreadsheet and I prefer KSpread, well, I just fire up my copy of gnumeric and use it.

But wait! If I use kspread all the time won't I get confused trying to use gnumeric? Oh, got me on that one, didn't you?

Give me a break. What has really changed in spreadsheets since VisiCalc? I have never run across a spreadsheet program that I couldn't solve moderatel compex problems on with minimal effort.

Ok, that's it for tonight. Next time, I'll pick up with what is needed to restore competition to the world of software, bringing back innovation, and the just plain ol' fun of using a computer. It's really easier than you think.

God wants you to know who is He is, and He's giving you a tool. Grab a bible and read Acts 3:11-26.

God bless,

steve

Wednesday, October 22, 2003

OK, so we have a market that has been conquered by MS (the browswer market), then they lose interest in it, but not after introducing a bunch of windows and IE only extensions. This starts me thinking... Maybe integration and a single source supplier isn't such a great thing. I had had a linux box for a while but it was mostly just a curiousity. So then I decide to migrate all of my non-development activities over to linux to give it a shot.

Don't get me wrong, there are plenty of open sources products available on windows (in fact I'm using the best browser available as I write this - Mozilla Firebird, tonight running on windows), but I decided to give linux a real try. So, if you remember the excitement of personal computers in the mid-80's, that's kind of what using linux is like today. The rate of change is incredible. REAL innovation is going on (not just stuff like Office 2003 where the biggest new feature is being able to control who accesses what document and in what mode, but only if you drop a ton of money for a microsoft only server infrastructure). Linux occassionaly gets knocked for just imitating what already exists on windows - and there is some of that, but mostly, it's just good developers writing original software.

Then you start to get used to things like, no viruses. Oh, sure, it is possible to write a virus for linux but in general, because of the user and permissions model of linux, they could never be as damaging as what you get on windows. Some people claim that you don't see viruses on linux because there just aren't that many machines running linux and virus authors want to do maximum damage. But are arguing emotionaly, not based on reality. These people don't understand that about 60% of the web servers in the world are running apache - an open source web server and the majority of these are running on linux. That's a lot of machines. No real virsuses to speak of. It's funny, you start to get used to not seeing the "requesting virus scan" at the bottom of your app's when you open a file, then when you run windows you kind of feel cheated that you have to sit and wait for that.

So next time I'll start on why linux is better. Talk about what I use and why. What I like and don't like.

Jesus came that we might have life and have it abundantly.

steve

Friday, October 17, 2003

Whew. This is turning out to be a bit of a long way around things, but back to the browser issue. To summarize: MicroSoft dominates the browser "market" by giving away an inferior product and attempts to take control of the internet with value added extensions that only work with their platform and browser (ideas completely contrary to the interet). But, enough of us (this includes me) think it's ok. After all, IE really does everything I need.

THEN... Enter things like pop-up adds. And all of a sudden, browsing the internet is painful. In researching what to do about it, I stumble across the fact that there still are other browsers out there. And, hey, they have some neat features: pop-up blocking (selective by site), in-line add blocking, tabbed browsing, AND they are fast. Hmmm. This sounds to good to pass up, so I start using some of these. Then I run into the issues from MS's polution of the internet.

I come across a number of poorly developed sites, that require either IE or Windows to function properly. Now, what iritates me about this, is I have found some good software products (i.e. browsers better than Internet Explorer), but I can't use them because of what MS did to the internet. Then I start looking around at other product areas. Like email programs (Outlook / Outlook Express) or word processors (Word). And you know what. People have very little choice these days about what products to use. AND, if you do go digging for some of these products, you will find that they have some desirable features. In fact, some of these products have done a better job of innovating (in ways that really help me out) with very little (or in some cases 0) funding.

What is this all leading to... I think I'll pick it up tomorrow.

Take care. There is a God and He loves you.

steve