broadstuff

From the "Now who would have expected that" dept:

News that many of Bebo's senior managers are departing, following AOL handing over $850m in Cash.. And AOL's management conceded that they may even have overpaid.

All the old deal hands down at the Shark and Ferret were shaking their heads at their Babycham's at the time of the transaction, in fact. Not just that AOL had overpaid, but to give the target management cash up front, is asking for a rapid exodus. (It was called the Miami Factor in dotcom days - a dotcom Exec with a payout was instantly in need of a large yacht and pad in Miami )

It seems that its a given in this space that the acquirer will overpay*, but that shouldn't preclude doing other things such as:

- Paying in part in stock, ie linking part of the value paid to the value it brings to the acquirer
- Ensuring that part of the money is earned as an earn-out. A large amount of these valuations are justified on future growth, so nailing the acquired management's benefits to the growth targets they promised at acquisition (i) motivates them to stay, (ii) motivates them to stay working and (iii) ensures that if you have been sold porky pies, some of it lands up back in their faces

Once upon a time this was called diligent, good M&A practice. Even eBay did this with Skype, which ensured that even though they overpaid, they didn't overpay the whole kit and caboodle. In Bubbles, it is seen as Old Fart Rools.

* Why do they always seem to overpay, I hear you ask. It seems to be endemic when Old Co's buy into New New things, but I'd say it is usually due to a perfect storm of:

- Old Company desperation to Do Something to stave off some other looming problem sees this as an alternative that looks easy (the promise of "shape changing" easy money from rapid growth is always seductive to utility growth businesses)
- Old Company not knowing the space into which they charge - aka desperate dumb money
- Senior Acquirer management buy advice from top strategic consultancies and merchant banks, who are also not that familiar with the space
- Retained merchant banks are incented on transaction fees, not impartial advice, so are inclined to paint the rosiest case to get the deal fees
- (Typically) the BigCo deal team are incented on deal doing, not on having to manage the acquisition afterwards - so the business cases are usually way too overoptimistic. (Smaller companies where management have to buy and then manage are usually far more circumspect)
- If the acquirees are even half sharp, they create a hypefest and a bidding war. If its all over the popular press. you know they've succeeded. Timing here is critical, Bebo did a superb job on and got it right.

And this is the main reason that most M&A deals are value destructive and not value accretive. If you pay too much, and pay up front, it is extremely difficult to make a pig of a deal fly. But as long as the incentives for deal doing are not directly linked to the benefits, it will continue.

Anyway, we wrote a tongue in cheek post about it at the time, which - of course - has turned out to be true.

Umair Haque blogs about how one can re-hack Detroit, riffing off a New York Times article that notes that (surprise surprise) in these straightened times gas guzzling (and profitable) SUVs are losing ground:

Here's perhaps the ultimate industrial era business: Detroit - who seems to be trapped in terminal strategy decay.

Let me cede the floor to you.

How would you rethink Detroit for the 21st century - not just in terms of technology, but, in terms of management, strategy, and advantage?

You can use the principles we've been discussing, bring something new to the table - or perhaps you think the chances of renewal are slim to none

Here's some thoughts then, as requested - its not as if Detroit hasn't been shown how to strategically re-hack itself - Toyota etc have been in the game with Just in Time manufacturing and all those techniques for 40 years, now build cars in the US, and Detroit has crawled all over them. Ditto European car makers, and Ricardo Semmler had some innovative success in Brazil.

So the issue to me is more, given that they already know the answers, why are they unable to execute?

This is not a re-hacking issue, its a "how can we make them drink the water" issue.

Rigid labour conditions are often held as an example, as is the "DNA" - but if you go back to GM's Alfred Sloan, the original DNA was pretty flexible and pragmatic in many ways, and the Japanese companies have dealt with labour successfully all over the world. If I recall, the Japanese were handed a GM factory and turned it round

So is it just a basket case that should be left to wither away?

I suspect the answer - in my experience anyway - is that none of these companies have really had their backs to the wall for a long time, and organisations in that situation accumulate a lot of unnecessary crap in their workflow, like cholesterol in a blood system. This only goes away when they have to jettison bad habits or die. If you've ever done any change management, you'll know that apart from rare examples of forward thinking companies, in mos cases change is minimal without massive, compelling pressure - and that only happens when they face major crises that can actually kill the company in short order (ie the current management could lose their jobs in droves - focusses the mind).

I also wonder if the Detroit mob can't use the US's Chapter 11 laws to help restructure themselves, it may be the only way to exit some of the legacy issues they have built up while still viably trading.

A group of law students went through the Facebook system and found that it broke the Canadian privacy code in many places, notes Ars Tech:

Facebook's policies and practices were analyzed by a "team of law students" over the winter, resulting in their discovery of what they believe to be numerous violations of the Canadian Personal Information Protection and Electronic Documents Act (PIPEDA). Some of the issues raised in the complaint are a little benign: for example, CIPPIC takes issue with the fact that all of a user's friends can see Wall posts (comments) left by other friends, and that it's not easy to simply delete all Wall posts with a single click. Other issues, however, are more serious, like a user's inability to easily delete his or her account and all the data associated with it.

We don't know of any study thats been done in the UK or EU but we suspect a similar situation would occur, from the working knowledge of UK data protection law we have. Any student legal teams fancy doing this as a project?

Maybe a Facebook group could be set up to co-ordinate it

There is an article on TechCrunch today asking if YouTube is building market dominance or building a business. The essential argument comes from 2 conflicting datasets:

(i) YouTube is apparently 37% of all video watched, says Comscore
(ii) Youtube, with c $200m revenues, is only 15% of e-Marketers estimated $1.35bn Web TV ad market

In other words they are apparently only getting 40% the revenue per TV unit output than their legion of tiny competitors. How can this be, TechCrunch asks.

This gap could mean one of two things. Either YouTube is unable to make money from a large portion of its user-generated video inventory (advertisers want to stick to the home page and the safety of their own channels). Or YouTube just hasn’t turned on the money-gushing hose yet.

Actually, they are doing both - by building market dominance they are building a business.

Leaving aside the dubiousness of any forecast in this market (I'd happily divide e-Marketers numbers by 25%, after all they will in 6 months or so anyway ), or any assertions that YouTube is less sharp at extracting Ad revenue than competitors, I can't see why this is so surprising. Any model ever built of network economics shows that (i) if you can first achieve market dominance, you rule and (ii) Free is a great business model to achieve dominance, especially if it can be subsidised by very deep pockets - and with the exception of Microsoft, there is no one on the planet in the space who Google cannot outspend to subsidise this. No one VC backed outfit can come close.

Thus YouTube is highly probably using good old Freeconomics, funded by Google (see our paper here for a detailed look at FreeConomics) to give away more than the rest of the competition and go for market dominance. Once they get to Google levels of dominance I'm sure they will find that monetisation follows, strangely enough.

Opponents may cry foul, after all this is not that different to how Microsoft beat Netscape (but they haven't cried foul yet), ie by cross subsidy, but its realbusiness so unless a regulatory hand enters its unlikely to stop.

Whether its a good investment of $1.65bn by Google - ie whether its profitable to dominate the sector - is another matter entirely, the jury is still out there (literally with the lawsuit games ), but at Google's size its not a very expensive option to play.

The BBC has set up a Trust, headed up by ex BBC'er Patricia Hodgson, to oversee the BBC's spend in the digital media arena and see if it is in the public interest. The Torygraph digital editor, proxying in the Grauniad, is very vexercised over this:

So the baseline budget for 2007/2008 of £74.2m is bumped up to £114.4m - a healthy 54% increase at a time when the BBC's private sector rivals are feeling the full whiplash of a global credit crunch.

A bit of perspective on £114.4m: that's more than the combined digital budgets of all of Britain's national newspaper websites. And it's only the tip of the iceberg: it does not include the costs of bbc.com, the BBC's commercial international website, nor does it include much of the website's journalism costs, and nor does it take account of the BBC's juicy £400m "future media'' budget. So, in reality, the BBC has well in excess of £500m to spend on digital media - a big enough war chest to crush its rivals, should the BBC get its act together.

But of course, should rivals feel "overwhelmed by the scale of the BBC'' they can always appeal to an "independent'' panel - overseen by the BBC Trust - in a process that typically takes 18 months to two years.

But why should the public care? After all, if it leads to an even better website, then that's surely in the public interest.

Not so - unless you take the view that weakening the private sector news industry is in Britain's best interest.

Quite a few separate strands here.

Firstly, the size of the budget - c £500m. That is huge, and can potentially put paid to any aspiring startup in any space the BBC decides to enter. For that reason, since it is "our" money after all, I think it is incumbent on the BBC to use UK startups as much as possible. The Backstage Labs and Innovation program are excellent, but I think more could be done to nurture UK digital talent - the BBC as a customer could feed a whole ecosystem of startups. The UK's big skill over the US and Europe is digital media (as opposed to infrastructure or mobile per se) and the BBC could drive the UK to bat seriously above its weight.

(Update - Ian Betteridge notes in the comments that the BBC is mandated to spend 25% of its budget on UK companies - I knew that and forgot it - in fact they can spend more, as there are other discretionary inside/outside budgets as well)

Secondly, the criticism that BBC spend is greater than the ToryGraph, Grauniad etc' spend on digital media put together and could crush them. To me, that's more a reflection on the fact that the private companies are underspending in the space. If the BBC action forces them to open up the purse strings a bit more, that's another win-win for UK.com

Thirdly, as to keeping a private media sector being in Britain's best interest - two thoughts here:

(i) In nearly every media sector the reason the UK has such high quality is because the BBC is producing at a reasonable quality level - ie it keeps the private sector from devolving to the lowest common demographic, as occurs in other countries.

(ii) The private sector is not an automatic "good thing", it needs to earn that right - and right now it isn't - from republishing PR and calling it journalism, to scamming phone call ins, private sector media needs to do a bit more "log out of own eye" work to be automatically considered a Good Thing.

Fourthly - is 18 months to 2 years acceptable - no, but then I have seen many a private sector company use the law to spin things out for this long - even getting bills paid can take ages. Its a karma thing

The big question is - does the BBC scale hamper innovation? The answer - not directly, but it does scare people off areas that the BBC can get into. Why this is any different to competing with say Microsoft or Google is unclear to me though, its just like.

But if - as I suggest above - the BBC works with / uses some of the UK companies, and even possibly open its archive / R&D side for use, it could actually foster a vibrant ecosystem, not stifle it.

The BBC has set up a Trust, headed up by ex BBC'er Patricia Hodgson, to oversee the BBC's spend in the digital media arena and see if it is in the public interest. The Torygraph digital editor, proxying in the Grauniad, is very vexercised over this:

So the baseline budget for 2007/2008 of £74.2m is bumped up to £114.4m - a healthy 54% increase at a time when the BBC's private sector rivals are feeling the full whiplash of a global credit crunch.

A bit of perspective on £114.4m: that's more than the combined digital budgets of all of Britain's national newspaper websites. And it's only the tip of the iceberg: it does not include the costs of bbc.com, the BBC's commercial international website, nor does it include much of the website's journalism costs, and nor does it take account of the BBC's juicy £400m "future media'' budget. So, in reality, the BBC has well in excess of £500m to spend on digital media - a big enough war chest to crush its rivals, should the BBC get its act together.

But of course, should rivals feel "overwhelmed by the scale of the BBC'' they can always appeal to an "independent'' panel - overseen by the BBC Trust - in a process that typically takes 18 months to two years.

But why should the public care? After all, if it leads to an even better website, then that's surely in the public interest.

Not so - unless you take the view that weakening the private sector news industry is in Britain's best interest.

Quite a few separate strands here.

Firstly, the size of the budget - c £500m. That is huge, and can potentially put paid to any aspiring startup in any space the BBC decides to enter. For that reason, since it is "our" money after all, I think it is incumbent on the BBC to use UK startups as much as possible. The Backstage Labs and Innovation program are excellent, but I think more could be done to nurture UK digital talent - the BBC as a customer could feed a whole ecosystem of startups. The UK's big skill over the US and Europe is digital media (as opposed to infrastructure or mobile per se) and the BBC could drive the UK to bat seriously above its weight.

(Update - Ian Betteridge notes in the comments that the BBC is mandated to spend 25% of its budget on UK companies - I knew that and forgot it - in fact they can spend more, as there are other discretionary inside/outside budgets as well)

Secondly, the criticism that BBC spend is greater than the ToryGraph, Grauniad etc' spend on digital media put together and could crush them. To me, that's more a reflection on the fact that the private companies are underspending in the space. If the BBC action forces them to open up the purse strings a bit more, that's another win-win for UK.com

Thirdly, as to keeping a private media sector being in Britain's best interest - two thoughts here:

(i) In nearly every media sector the reason the UK has such high quality is because the BBC is producing at a reasonable quality level - ie it keeps the private sector from devolving to the lowest common demographic, as occurs in other countries.

(ii) The private sector is not an automatic "good thing", it needs to earn that right - and right now it isn't - from republishing PR and calling it journalism, to scamming phone call ins, private sector media needs to do a bit more "log out of own eye" work to be automatically considered a Good Thing.

Fourthly - is 18 months to 2 years acceptable - no, but then I have seen many a private sector company use the law to spin things out for this long - even getting bills paid can take ages. Its a karma thing

The big question is - does the BBC scale hamper innovation? The answer - not directly, but it does scare people off areas that the BBC can get into. Why this is any different to competing with say Microsoft or Google is unclear to me though, its just like.

But if - as I suggest above - the BBC works with / uses some of the UK companies, and even possibly open its archive / R&D side for use, it could actually foster a vibrant ecosystem, not stifle it.

The discussion (sic) about who owns the comments on a blog, off a blog, whether a comment is creative content in its own right or not, who has the right to edit a comment, et etc, that has been rolling around for the last day or so has been truly.....well, its enough to make anyone want to give up blogging and run a mile from fair Geekland.

But its worth recording the story, simply because it is indicative of a mindset one can get into if you take all this stuff too seriously.

At its root is that various aggregation systems are essentially trying to create content (and thus some semblance of flippable value) for themselves by "capturing the conversation" - so instead of commenting on this post on this blog, you comment on it in say Friendfeed or whatever. All very well, but when a blogger cuts his blog's line into Friendfeed, various others who were commenting on that blog post, in Friendfeed, lost their comments.

Well.

This started a whole raft of Blogma discussions - is a comment creative, who owns it, does a blog have a right to delete comments on the blog, who is liable for libellous comments, should the Creative Commons policy be changed - and other angels on pinheads sorts of discussions. I like Steven Hodson's Grumpy Summary

Anyway, turns out that as bloggers we are definitely at fault because it is not clear to you, gentle reader, what the commenting policy is on Broadstuff.

So here it is:

1. You may comment anywhere you darn well like but commenting here strokes the ego far more
2. If you comment on this blog, play nice (please).
3. Thus, if we think the comment is spam or libellous or stupid, or I just think you are an *sshole, I reserve the right to delete the comment on this blog. The decision, however apparently irrational and capricious, is final. Unmarked £50 notes can influence decisions
4. If the comment is made on this blog, I will do my best to respond. This should take the form of rational argument but can equally be gibberish or....irony
5. But, I really cannot be *rsed to go chasing and responding to comments made elsewhere in any way. Life, as they say, is too short.

Seems like a plan.

Oh - and one more thing - we reserve the right to flatter and paste any comment in any blog post......

Update - Disqus, which is essentially a walled garden comments aggregator, has setu up a Commentors bill of rights over here: It Sez:

I’m going to make an initial attempt to materialize what some rights should be.

a) The ability to edit and remove their comments
b) Access to all of their comments, even if it has been deleted on a blog
c) The right to use their own comments as blog posts. After all, a commenter is just a publisher not writing on his own website.
d) A life for the comment beyond a single blog. I want to take my comments with me, even if the blog shuts down.

This may seem threatening to the publisher, but it really isn’t. A commenter should have rights to what they post, but bloggers should still have control over content that appear on their blogs. Bloggers should still control:

a) Whether or not someone is allowed to comment on his blog
b) The deletion of a comment
c) The modification of a comment, as long as the original copy is still accessible and the edit is transparent

My thoughts are, based purely on what Serendipity (our blog software) will do:

1a) No. My blogging software won't let that happen, and we ain't giving commentators full admin rights. Worst case, email us to change it.
1b) No. Ditto blogging software issues. Make your own copy, we're not going to put an admin load on ourselves to manage commentators.
1c) Absolutely
1d) You are welcome to take your comments if Broadstuff shuts down, but I ain't going manually through 2,000 odd comments to return 'em. Make a copy if its valuable to you.

2a) Agreed
2b) Agreed
2c) I'll only mod a comment if the author wants it.

Now, by my answers to 1 above, I have clearly played into the hands of the aggregator agenda, but it would be impossible not to without being economical with the truth, because most blogging software today doesn't do No's 1 a,b and d (hence the aggregator existing), and as this blog is an amateur endeavour I'm not taking on that admin load. As and when Serendipity's hive decides to implement something like this I'll add it, until then its on our roadmap

In fact, this is a "be careful what you wish for" thing, in that by increasing my cost of blogging, I may choose to manage that by (i) exiting the market (or exiting commenting more likely) because I can't afford the load, (ii) limiting commenting to a manageable level in some way or (iii) seeking to extract the extra cost from the commentator in some way

The secondary thought therefore is that those requirements are fine, but that is in our "platinum" Service Level Agreement....it costs £10 a month per commentator, and that will pay for the time to manage that. The "Gold" service is free and is stated as above.

So here's the counter-deal - we want commenting to be as open access as possible (no barriers my end) but the quid pro quo for a free service is we want as light a touch in comment management as possible. As technology comes along to help we'll take it, but the rules are these:

(i) The technology is open to all, no walled gardens
(ii) The technology is open source, no proprietary lock ins, and users can build on it.

Fairy nuff?

There have been a number of recent discussions – spanning free music, blog aggregation models, social media futures, open source strategies, various Citizen mediated activities etc - that have made it clear ( to me at any rate ) that when some people talk about “Free” services – i.e. free to user services – they tend to get caught up in a sleight-of-mind, conflating “Free” – i.e. costing nothing to use them – with “Free” as in costing nothing to produce, and/or “Free” as in not owned or controlled.

A minute’s sober reflection makes you realize that this is impossible – if the service is free to user, but not free to produce, then it must be being paid for in some other way.

So why the belief that this can all be free, forever?

Part of the reason is that costs across the supply chain have gone down (see below), plus there is also always some cost absorption due to VC funding and, (if the business takes off) Advertising subsidized models.

But that is not the whole story, there is almost an attitude of entitlement in some quarters, that all things can and will be free, sustainably, into the far future – and anyone who dares suggest otherwise is a rogue, a heretic, and doesn’t “Grok” the New New Economy. As it was put on Slashdot recently:

“You must be new, welcome to the Internet. Here on the Internet you are required to view any publicly held company as evil and any effort on their part to charge for a service as pure, unadulterated greed preferably attributed to their CEO or other high-ranking executive. Corporations should provide as many possible services for free, regardless of the time, capital, and human resources required to develop and run those services or products. Any efforts of corporations to charge money in voluntary exchange for their services or products is to be likened to highway robbery, extortion, or in the case of particularly large corporations, rape. I hope these guidelines have helped.”

I have called the set of beliefs around this mythplex “FreeConomics”

But first it may be useful to look at the facts about where cost actually is created in the value chain.

The Facts of “FreeConomics”

There is no doubt that costs across the supply chain have been reduced, sometimes by orders of magnitude. Below is a simplified model of the digital supply chain, showing the major stages and cost reduction in it..



Content Creation - lower costs of content producing equipment has reduced costs of capture and creation (as has the ability to copy and evade rights charges), and the emergence of User Generated (aka free) Content has reduced content costs for professionals where differentiation is low (Photography comes to mind). In addition, enthusiasts are often tempted to offset their costs in creation of content (See our earlier post on this here), which is the underlying economic driver of initial Open Source economics

Aggregation – Moving from Push to Pull via Search has reduced costs, as has the automation / socialization of editing functions. Marketing costs are also reduced in a networked world, to the extent where the transaction costs of some items makes it cheaper to give them away rather than charge for them

Distribution – Moore’s Law, working open standards and a glut of bandwidth and kit from the dotcom failures has meant the cost per megabyte, teraflop and kilobaud has plummeted.

Customer Environment – Moore’s Law, Metcalfe’s Law and increasing adherence to open architectures, plus device interchangeability and application flexibility, has led to the total cost of ownership falling.

There is also no doubt that the dramatic fall in costs has totally changed the industry structure, by changing the transaction costs of doing business, and this is a true shift to lower costs. In addition, I contend there has been a temporary “Dotcom Bust benefit” – so much stuff was sold off at firesale prices in the dotcom crash, which has driven a “one off” cost crash - and these effects leads some people into mistaking a (temporary, one off) rapid decline in cost for a trend towards “always free”.

But, even if costs fall by 90% across teh board, it does not mean free, and certainly not indefinitely, especially as volumes rise. If you look along that supply chain, at each point there is still hardware to buy, software to write, wetware to feed etc.

FreeConomics is not pervasive, if you look at that supply chain, the services closest to the customer – Distribution and Customer Premise Environment (CPE) - are most definitely not free to use, and the customer already pays for them fairly happily. They will pay for connectivity (DSL, Mobile, Cable) and into this is typically bundled their “Free” hosting etc etc. Similarly, the customer is paying for their CPE, they are buying laptops, routers, iPhones etc, and in fact often paying premiums for the look, feel, brand etc rather than pure functionality.

No, what is more curious is that there is a pervasive view that even though we are happy (to varying degrees) to pay the downstream costs, the more upstream services – the content and aggregation services – should be Free Forever. Herein lies the heart of FreeConomic theory.

FreeConomics is based upon two key Myths, viz:

- All Free-to-Use services are Free to Produce
- All Free-to-Use services in their turn use data and information that is “Free”, as in open and portable etc etc

The Myths of FreeConomics – Part I

The “All Free to Use services are Free to Produce” belief drives these two main submyths:

A Free to User service costs nothing to build
A Free to User service costs nothing to deliver

Now another moment’s thought will tell you that I’m being dim – how could anyone think these absurd things? And yet, and yet – in post after post on the Blogosphere, often by Very Important (A-List) Persons, whether it’s the raptures that greet Google’s every new “Free” service, or every new paean to the copious bounties that will be provided by the “Free” Open Source model, or the wonders of Portable social network data , or Citizen Media’s latest shafting of the Olde Order, or “Net Neutral” services that can and must be “Free” – at every turn I see people proposing building great empires of commercial or citizen capitalism atop these sandy economic constructs.

The risk of course is that people are going to be very disappointed, because the hidden but iron hand of Real World economics sits behind all these dreams, and its not the smell of coffee that dreamers will wake up to, but something far nastier .

Another reason I want to make the myths of FreeConomics clear to all is that, in my view, some of the promoters of the FreeConomic ideas are well aware this is all snake-oil, but so long as they can entice “digital sharecropping” (as Nick Carr puts it) they can make out like bandits on the Information Superhighway. If reading this makes the average geek more aware of this – even if initially they are apoplectic with rage at my heresy in questioning FreeConomics – then I will have done my job here.

So, examining the Sub-Myths in turn:


All Free to Use services are Free to Produce

The first Submyth states that all Free to Use services are free to make – this divides into “stuff already built” – ie sunk costs – and “stuff to be built” – ie creation costs

i) Sunk Costs

This FreeConomic sub-principle states that stuff that has already been paid for (i.e. where costs have been sunk) should now be Free regardless of who still owns it (Otherwise known as the Great Music Brouhaha). Yes, you can get nearly any existing recorded music, book, or video for free if you know where to go. But is this (a) ethically right, and (b) economically, is it sustainable?

Ignoring Ethics for now (after all, everyone else will) you hit 2 simple problems with existing material:
- Someone else owns it and wants to keep it
- It is Free to Use, so Google wants to own it

At any rate, it starts to fall into the realm of the “All Free to Use Content must be Free from ownership” myth which I will deal with in Part II in more detail.

(ii) New Content/Service Creation Costs

The FreeConomic sub-principle here is that new creative content should be Free to use, copy and most certainly should not be not paid for. Unfortunately, if no-one is paying the creator, the creators will do one (or more) of three things (driven mainly by the need to eat) viz (a) stop creating and get another job, (b) create crap on limited budgets or (c) move into the main option for Free Creation, the Offset Model (see below).

A small number of Creatives will no doubt opt for Parisian garrets, absinthe and starvation, but that, as we know from history, is not sustainable – they tend to die young.

If the New Media industry’s travails so far is any indication, option (b) – creating crap – is the initial default option. As Nick Davies notes in Flat Earth News, the newspaper industry has significantly moved from an investigative reporting model to a PR release broadcasting model, and from paid-for content to Ad funded content.

The other option for "Free" creation, and the only sustainable one, is the frequently misunderstood (wilfully in some cases) approach called Offset Economics.


Offset Economics 101

A non-free service can be offered free to the user for a number of reasons, from wanting to contribute for recognition reasons (e.g. Open Source developers as noted above) to wanting to grow market share (name your Web 2.0 startup here) through to more subtle requirements (build a database to better target customer adverts or sell it on to others).

This is the world of Offset economics.

In this model, peoples’ or organisations’ time and effort are given away for free because they are earning income elsewhere, from someone else (for example their daytime employer). What they are doing is giving up their “Free” time to produce these wonderful things you then get for free.

That worker’s time is not “Free” of course – it is an opportunity cost of say coding Open Source software vs some other use of the time, and so for the game theory to work here, the non financial paybacks (eg peer recognition, a better job later) have to exceed the benefits of the alternative options for it to be sustainable.

Thus, where this model breaks down is when it becomes clear that the time input is not creating the desired non financial return, or worse is being usurped by others for their own financial gain – ie Digital ShareCropping.

Common examples of Offset Economics are:

(i) Cost Offset via 3rd party benefit

- Cross-subsidy - Service provider gives away free service X because it makes money elsewhere, often the free service actually drives a benefit elsewhere
- Commercial funding - funded by advertising (or more insidiously, by selling customer databases)
- Non Economic Offset – aka “Dumping” - the service is given away for free because the benefits sought are non-economic, eg to prevent competitor entry (or deliberately non sustainable – such as trying to break a competitor, eg Microsoft vs Netscape)

(ii) Time Offset - Giving Away services for returns later

In this case the services are given away for free in the explicit hope of a future benefit – usually market share. Common examples are:

- Self Funded – Service is given away free but is funding itself e.g. via Friends, Family & Fools
- Other People’s Money (e.g. VC) funded - companies give away service for free funded by capital in the enterprise

(iii) Arbitrage

One could argue that Dumping is a form of arbitrage, but by this I mean taking advantage of short term discontinuities created by the arrival of new technologies. Examples are:

- Free copying – the ability to copy and distribute digital media at near zero cost, usually because the rightsholders have no similarly low cost way to force payment (aka Piracy today)
- A market pricing mechanism that creates a surplus that can suddenly be exploited by new technologies (this is how FreeServe started in the UK) creating an illusion of Free. The service is rapidly built and flipped, typically to dumb money or a large player who can actually drive the arbitrage synergies (or even better, both), eg FreeServe sold to a NewTelco

All Free to Use services are Free to Deliver

When you use Twitter, or Skype, or Google, or Facebook, or Friendfeed, or whatever Freebie 2.0 you are into, there is a temptation to think of it as “Free” to deliver because it is free to consume. This just isn’t true, especially Video services with big user bases and big bandwidth transport bills.

It is true that many of these services today are offsetting in the hope of a Greater Gain tomorrow, using VC money and a dream of Ad revenue. But it’s worth keeping in mind how else they may choose to make money in future.

The issue with many Social Network based services is that they lend themselves very well to the less benign areas of Offset Economics, owing to the level of data about yourself you expose, and the content value you are adding to (other people’s) properties.

It’s worth looking now in a bit of detail at these less benign forms, as these are the fundamental rationales behind the value add of social media systems:

(i) Data Mining

Facebook’s Beacon is the most public example of this play to date, but anyone who is collecting user data is up to this to some extent. A company attempts to extract large amounts of data about its users and their interactions, and then sell it on to people who wish to influence them – usually for advertising, but be aware there is a darker side to Social Media, the amount that can be deduced about you from data mining is truly staggering.

(ii) Digital Sharecropping

This is the “User Generated Content” social network play. The value is added by the users, the money is made by the platform owners when they sell – from Flickr to YouTube to Bebo there is a litany of services where the owners have cashed out handsomely on the back of free user effort and input. Nick Carr put it well:

To put it a different way, the sharecroppers operate happily in an attention economy while their overseers operate happily in a cash economy. In this view, the attention economy does not operate separately from the cash economy; it's simply a means of creating cheap inputs for the cash economy.

Now, a cynic may argue that this is just the California Cult model writ into software, where a band of dedicated cultists drink the kool-aid, tithe over their money, their daughters and their free time to the cause, and continue to look on in admiration and love as the New Media Maharishis drive off into the sunset in the new Rolls Royces

Fortunately that’s not strictly accurate either, as the user is typically gaining a host of free benefits they otherwise wouldn’t have had. And there is even hope (of a kind). Because of the Pareto nature of these things, about 20% of the people (at most) are doing 80% of the (free) work, so its only the true faithful that are getting ripped off in any major way, the majority are in fact “below average” contributors and thus benefit more than they lose. (And the faithful may well be getting their jollies in non financial ways, though it would seem that even these worms may be turning now judging by increasing moves to pay contributors)

In summary then, any and every Free to User Service is not Free, and those costs are being recouped in one or more of the Offset Economic models. Some are more benign to the user (choosing to do something with spare time, giving away free services to gain market share) and some are far less so (Data Mining, Digital Sharecropping).

Anyway, next time you sign away your data in the T&C, just make sure you f(au)st understand which bargain you are striking.

We'll go into this area - how free is that walled garden - in more detail in Part II

(PS you can thank (blame ?) Stephen Waddington for persuading me to post this by the egregious tactic of telling me it made some sense )

Fred Wilson uses his brother's post on Mott the Hoople to drive a lesson home about the dis-economics of blogging caused by Aggregators like Friendfeed etc. (if ya don't know Mott, ya don't know squit about music, so go Google 'em before continuing).

Sez Fred:

My brother, known as Jackson to the blog world, wrote a wonderful post on the rock band Mott The Hoople last week. I saw it today and posted it to delicious. Which resulted in it showing up in my FriendFeed.

And the good news is that a bunch of people saw that post that would have never seen it otherwise. A few went to Blogger and left a comment for Jackson. And a bunch left comments on FriendFeed that Jackson will never see and never reply to. And he also won't see Robert's compliment which I know he'd appreciate.

So here's the deal. Jackson instigated the conversation with that post. His reward is the comments it generates. That's how bloggers get paid. And he's not getting his due on this one.

It's sort of my fault because I posted it to delicious and got the conversation going elsewhere. It's also sort of the fault of the people who left comments on FriendFeed and not Jackson's blog.

Fred then calls for something we have argued for since aggregation became fashionable, ie reverse aggregation:

So it's time for aggregation to work two-way. You can suck it out. But you have to pump it back too.

Indeed - a parasite ecosystem is supposed to keep its host alive, not kill the thing it loves most. Just putting wires into blogs to suck stuff out of them reduces the incentives of bloggers to bother. And here's the thing - the aggregation phase comes AFTER the content creation phase in the supply chain.

But it's not beyond the wit of man to build reverse aggregation either - all it requires is for aggregators to keep the source metadata, pump comments into a common format that blogs can then suck back in, and open sesame. (OK, its non trivial to code, but its not that hard).

Another thought I had was a change to my CC conditions to a more GNU like approach - you are welcome to comment on my stuff, but a comment is like a code change, so you have to return a copy of the comment to me.

Problem is that doing this destroys the value proposition of the aggregators short term - long term they die of course, but no doubt they are hoping some dumb mone...some strategic investor will buy the service complete with the extracted intrinsic social media content within.

But kill the will to produce content, and why would anyone play the game anymore - which leaves nothing to aggregate and comment on, right?

Or, as Mott the Hoople may have put it:

They gambled, with my life
and now I've lost my will to fight
Oh God these wires are so tight....
I'm just a marionette.

So who shall dis-aggregate the aggregators?

(PS blogs are also well mannered enough to link to source content)

Update - as expected, a number of people take issue with Fred, the two main counters seem to be that (i) the off-blog conversation drives extra traffic and (ii) this is inevitable, live with it. Stowe Boyd leads this view with:

Fred and others in the comment discussion touch on many perspectives, but I think they share a naivete about the difference between the concept of a flat and unitary web and the realities of a discontinuous and partially closed web. The small worlds is like human scale, while the flat and unitary model is the sort of web that traditional media people would want.

Well yes, but the point I was making (in my naivete ), is that any system that relies on its existence on another, but does not help it, is creating lousy game theory for any form of co-operation. Hence I don't think the Aggregators are sustainable, whereas Blogs are

I don't usually read Joi Ito, but a friend of mine pointed me to his post on whether or not the Mobile Internet has a future. He notes that:

I don't think there is anything wrong with mobile or with some of the great new mobile applications and devices, but we have to be careful to remember that most mobile networks that actually work are built on infrastructure that is operated by a small number of mobile operators who use a lot of regulated and closed technology.

The reason that we have vibrant startup driven innovation is because the Internet is open by nature. Anyone can participate without asking permission and anyone can compete with anyone else at every layer of the stack. This DNA of open and free competition (except for the occasional semi-monopoly) is what allows startups like Google to come in and displace incumbents. If it weren't for the Internet, I'm positive that the telcos would have determined that it was the most efficient that THEY design and operate the "online directories".

Apart from calling Google a startup (would a new Google be able to start so well now the old one rules the Web?) I think this is a pretty sound analysis, and one we've made before in our Planet Mobile posts (see here and here for instance).

Joi's post is interesting in that he is critiquing the Japanese market, which is usually held up as the shining beacon of the Future of Mobile. He notes that:

In 2006 in Japan, mobile advertising was only $330M vs Content (Ringtones, Song-tones, Games) at $2.2B and Commerce at $4.7B. (http://www.johotsusintokei.soumu.go.jp/whitepaper/eng/WP2007/2007-index.html) Although all of us are experimenting with advertising and advertising is increasing on mobile, the overwhelming percentage of money spent on mobile devices goes to paying for and the collection of payments for a small number of not so innovative products from a small number of providers.

So - same old same old as we have in Europe then. As Joi notes, in many ways the mobile Telcos are captive to both regulation and the prices they paid in mobile auctions, which drives their strategy and thus their "DNA".

However, what really caught my eye on this post was this paragraph:

In Japan, services like Mixi have announced that their web usage is decreasing, their mobile usage is increasing and that more of their users are using their services from mobile and than the web. I don't think mobile monetizes as well (for the company) as the web. I think that if we move over to mobile too quickly we're risking moving our game to a platform where the DNA is not what we're used to on the Internet and most importantly, putting money in the pockets of people who do not redistribute it to startups, but instead feed giant vendor ecologies instead.

So - there is apparently a shift to Mobile Internet by some companies, but less surplus goes into their pockets - clearly teh classic new entrant approach, ie enter a market by being prepared to take a lower margin. Joi's solution?

Maybe those smart companies in the mobile space like Vodaphone and Nokia who see the future should create a fund to invest in open innovation on mobile.

Vodafone is experimenting with the BetaVine ecosystem though its still small scale, and hopefully Nokia has had a significant kick up the *rse from the Apple/iPhone business model and will start to truly innovate again.

However, given the DNA in the US/EU industry I'm familiar with, and that the above article implies Japan is not too different big picture, its not clear why they would do this investment unless pushed.

More effective I suspect is to create real competitive alternatives

Update - in a counterpoint, it would seem that Google's Eric Schmidt thinks the Mobile Internet is the new new thing - for advertising anyway. Well, we hear that annually, who knows, 2009 may actually be the Year of the Mobile Internet!