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Friday, October 20, 2006

Research Note: The Peer Value of Money

The other night, at my NMK talk, Sam asked one of the classic power-to-the-people questions: when are we going to start really paying peers, and isn't this really not a revolution until we do - just a big house of cards to which connected consumers will stop contributing?

I get this question a lot (a lot) lately, usually with a burning revolutionary fervor ("money to the people, man!!$#$!").

Unfortunately, it's (totally) the wrong question.

Here's an existence proof for you: Revver vs YouTube. Revver's big differentiator from YouTube, as hyped when funded, was it's p-model: it shares (50% I believe) of ad revenues with video contributors.

But here's the interesting bit.

Who scaled? Who realized an exit? YouTube - not Revver. Why? Presumably, Revver's model - revenue shares to peers - created little value; and the market (tippy as it is) must reflect that to some degree.

If Revver's value proposition was so much more attractive to consumers, they would have defected en masse, rendering tippiness irrelevant. Of course, the opposite was true: the value of money, at least to connected consumers sharing videos, was much (much) smaller than Revver thought.

Now, note: I'm distinctly *not* arguing that peers don't "deserve" revenue sharing, or that financial incentives don't count.

Rather, I'm trying to clarify the strategic question - the value of revenue sharing.

The strategic question is: how much will offering financial incentives improve the quality of xyz?

In other words, what is the marginal benefit (marginal product, if you like) of offering peers a revenue share?

Put another way: in basic econ, we assume that workers are paid wages, which roughly equal the value of their marginal product. The reasoning is simple: we will always profit by hiring people until the value of their marginal product equals the level of wages we're willing to pay.

Alternatively, think about it this way - it's a less accurate way to think about the question we are asking, but may shed some light on it nonetheless: what is the labour elasticity of peers like? Just like demand for goods is elastic, so demand for wages is elastic - it responds differently to wage increases under different conditions. How does this simple relationship change in the peer production world?

The answer to this question - the marginal benefit of paying peers - isn't straightforward, but let me try and shed some light on it.

For example, take the recent Myspace + Snocap deal. Unless revenue is shared there, value creation will be deeply minimized.

But that wasn't true in YouTube vs Revver's case. There, a lack of financial incentives doesn't impact value creation a great deal. As it doesn't at Wikipedia, Blogger, etc.

Of course, you're asking: why? What are the factors that make these situations different?

I can't get into it very deeply (sorry). But I will say this: peers play vastly different roles in all these value chains. Understanding the new value chain, how value is created - and who requires the ability to capture a share of that value - that's where this question is answered.

-- umair // 7:47 PM //


I was there too, I wrote about this in detail in my post on the Disaggregation of Aggregation here but in a nutshell my view is that aggregators return value in a number of ways, by:

(i) reducing my search costs
(ii) some form of quality control
(iii) allowing subsidy of the service to me (ads, sponsors etc)
(iv) and lastly, returning cash to me

Clearly if a service does some combo of (i), (ii) and (iii) well then (iv) is unnecessary.
// Anonymous alanp // 12:37 AM

I think the biggest problem here is equating value with money. Each person in a p2p system gains value in a different manner.

What YouTube et al need to ensure is that they meet the value requirements of as many people as possible. This will include revenue sharing but this won't be all.

If revenue sharing was a requirement for these types of business interaction then Linux would have never been built or the Linux based companies would be continually forking over sums of money to the kernal builders. They don't because the developers involved gain value (or receive compensation) by other means.

Lets take the analogy of open source a little further (remembering as with all analogies it just that). YouTube et al are the open source versions of their closed source counterparts i.e. broadcasters. As long as people whom contribute gain value (monetary or not) everything is good. At this stage revenue sharing is not a big issue and while it will over time it is more likely to be along the lines of Google's AdWords program.

A good time to remind people of Coases Penguin.
// Blogger Simon Cast // 1:57 PM

revver has the right model, but compare the UI of revver and youTube and which is easier to get started with? Who started later in the game? Revver...so i think we have two extra points to differentiate why users moved to YouTube...they knew about it longer and it has an easier and more fun branding then revver...
// Anonymous Anonymous // 4:04 PM

Hi Alan,

Thanks for the points.

Hi Simon,

That's exactly right - but unfortunately this is the question that's being asked across boardrooms at the mo (despite huge evidence to the contrary).

Hi Anon,

YouTube started a matter of weeks before Revver iirc.

I'm not sure if Revver's harder to use, but that's a good point.

Thx for the comments guys.
// Blogger umair // 4:32 PM
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