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Wednesday, June 08, 2005

Media 2.0 - Why And How Much Should You Open Up Your Goods?

"...Seriously though. It's all a great idea, but his case study was "House Music 1980-2005"?? How are producers of underground house music today any better off today than, for example, a local bar band was in the 70s? Did I miss the point here?

I was hoping for some actual models as to WHY a content producer should do all the opening up. His "Three sources of Media 2.0 Value" slide seemed to omit any value for the content to the original producer. Hmm...."

Says Mick at Ian's blog. I think these are great questions, so let me spend what little blogging time I have today discussing them.

First, why should content producers open up? Well, the reason in my model is straightforward: when you open up, complementarity happens. That is, other people can add cool stuff (like complements; mods, playlists, tags, etc) which increases the value of your good.

Now, obviously, in a perfect imitation world - one where everything you make can be costlessly, instantaneously ripped - opening up is a dominated strategy always and everywhere for everyone.

But most content producers don't (and will never) live in such a world. This is what the Snowball Effect is really about, and it's a point I should have made more explicit. By the time others get around to ripping your good and eroding your margins, you've already shifted the game: you've not only created more, but you've also made it more difficult to imitate.

For example, mods which are specific to your game, tags which refer specifically to you, playlists which cite your track, not theirs, etc, etc. These complements act as imitation/entry barriers, because of increasing returns, which make switching away from your good, and to the imitators', much more costly.

Now, that's economics. Here's the strategic bit, which I'm a bit hesitant to discuss, because content providers wanna feed me to sharks every time I do. The point is that if you don't open up your goods, someone else likely will. It's a pre-emption game.

Like it or not, we now live in a world where plasticity drives value. Grey markets arbitrage digital media property rights away with ease. I split my time between three continents; on all three, I can get my PS2 chipped for a few bucks, and defeat the region encoding on my DVD player as long as I have a Net connection.

To use a relevant example, think about how much value Nullsoft/Napster/etc captured from the music industry because they refused to open up even partially, with simple digital distribution and ideas like playlists. The more you focus on locking things up, the worse off you are in the long-run, because you build exactly the wrong competences - you build competences that result in rigid, not plastic, goods.

Now, this points to another dimension, which is in some upcoming work. In the short-run, how much should you open up in order to maximize profitability? This is a function of how far along the spectrum of goods and services you are (or your value chain is). The more to the services side, the more complements you can help prosumers produce cheaply, so the better off you are opening up more.

On the other hand, if you can only produce goods, and can't provide the services which let prosumers produce cheap complements, then you're better off closing your goods, since it will difficult to generate snowball dynamics (or even if they do get generated, those players providing services will capture the rent).

For example, let's say you can only produce tracks and albums, but not playlists, GarageBand, iTunes, or BitTorrent. Then you're only providing goods, not services - and you can't capture the rents that flow from complementarity. So you're better off closing off your goods in the short-run, but this builds exactly the wrong competences for long-run success. This is exactly the problem the music industry's created for itself - a competence trap.

As to how house producers are better off than bar bands...I think this a is a great question. Here's my answer: on average, house producers make more money per output, gain more utility from what they do, and crucially, are more productive. This makes everyone along the value chain better off - consumers, suppliers, distributors.

Or, you could think about the counterfactual and just look at clubs: there wouldn't be so many house clubs in most cities if house producers weren't better off than bar bands - house producers would choose to be bar bands.

I think the forces I outlined - openness, decentralization, etc - have hugely increased the gains to everyone involved in the house music value chain - that's why I chose it as an example.

Now, all this ultrageekery points to kind of a rich irony with Yahoo 360. I think it's cool, but I couldn't leave this as a comment; I'd like to chat with Ian, but I can't contact him - because Yahoo 360 is a closed beta. Ha ha.

-- umair // 9:36 PM //


Thanks for spelling it out :-).
// Blogger Mahashunyam // 12:46 AM
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