broadstuff

There is an interesting report out today on the game theory of the music industry (See here on El Reg - though I saw it first on TechDirt). This led me to thinking about how this music game theory may be applied to online video. Consider their economic analysis for music:



What the model shows is that the current situation is non optimal. The distributor, by underpricing the broadband assets, is incurring extra traffic (X axis) without being able to attract the revenue for it that exists in the market (Y axis). While this effect is "interesting" for Audio, it gets into the "Catastrophic" mode for Video, as the bandwidth impact for underpricing video is far, far worse.

Sadly, the game theory the report outlines for the players (aggregators, rights collectors, distributors) is non optimal today, as there is very little chance that they will collaborate to increase the market value - the inclination to defect is more likely. This leads to a broken supply chain with value (and new content creation) leaking away.

Now again, this is "interesting" for music - but as an industry its a fraction of the size of video - so if the same were to occur there it would be....well, you got the picture.

The (half a) trillion dollar question of course is how one can incentivise them to "play nice" together - clearly some form of extracting that revenue and allowing (i) The Distributors invest in capacity and (ii) some revenues to move back into content creation would help. As the authors note:

"Fixing the broken supply chain between content and connectivity provides more reasons to invest... Not only does the market become more buoyant, due to less leakage and more reward, but it also becomes more diverse - as those songwriters, publishers, artists, and record labels currently contemplating leaving the industry choose to stay, whilst more parties - be they rights holders or rights users - outside of the industry they choose to enter."

El Reg notes that there are 4 possible scenarios to fix the market:

The first option, "do nothing", means the negative externalities simply pile up. The second is to step up litigation and prohibition. However,the paper notes, "there is little evidence suggesting the costly process of pushing down on the black market will indeed raise up the demand for the licensed market."

The other two options involve licensing file sharing networks: pulling services like the old Napster or Oink into the legitimate market. There's a flat tax or levy approach to charging for this - sticking (for example) £2 on everybody's monthly broadband bill. However, this may cause more problems than it cures, the authors caution - since nobody has an incentive to invest in creating or promoting new music services.

But there's also a voluntary subscription method of offering these. More work is needed on this too, the authors recommend, such as calculating the effect on today's players such as iTunes and the displacement costs. But the inference we are invited to make is that this is the most attractive of the four, provided the incentives can be lined up.

Techdirt has a point I think when they note that a bit more thinking may be needed, as the authors:

....don't seem to take into account the idea that (a) there are other players in the market that should be considered in the ecosystem and (b) one of the three legs of the stool set forth in the premise (the collections societies) may not be needed. If you take them out of the equation, but plug in other components of the market (say, the musicians themselves) you can quite easily see the model working quite differently than what's described in the report.

Interestingly, I see that today a UK company is offering a deal with as much music as you can eat for £100 per annum. Now if that were to happen for Video, and a proportion of that surplus were returned to the pipe providers and new content creators in both cases, it could have the makings of a market structure.

Disclosure - This is funny - after writing this post I read that one of the report's authors is Telebusillis / STL Partners' Keith McMahon, who I'm working with on the Future of Online Video Distribution (I'll be presenting some of the findings as part of the Telco 2.0 Initiative next week next week) - I didn't know he was doing the music report - and he doesn't know I've written this - yet

From ZDNet comes news of Forrester's thoughts on why a company should use the Cloud rather than its own servers (I was going to comment on ZDNet, but their 2 page commenting signup process made me decide to blog it instead). Anyway, below is the economic argument:



Although this is all very true, unfortunately this is not the full picture of the real economics of Cloud computing. Here's why:

The sums you spend on The Cloud bit of the product or service are usually quite a small % of total value, unless the service is very processor / bandwidth intensive for its price (think YouTube). This means that the savings here are trivial compared to the risks you face if the Cloud:

1. Falls over and cannot serve your customers - in which case you stop paying the Cloud its pennies (hopefully you even have a few penalty clauses) but you lose Pounds.

2. In any way causes your confidential data to be lost, stolen or otherwise mishandled

3. Believes you have in some way abrogated its T&C and suspends your service.

To mitigate these you will need to ensure the Cloud contract also provides you with:

- A Service Level Agreement (SLA) that guarantees a level of service (In the Old Networked Economy the Gold Standard was 99.999% uptime) plus a rate of response and penalty clauses that, if valid, motivate the provider to get you back up darn fast.

- An End User Licence Agreement (EULA) that makes it VERY clear that the data is yours, irrevocably, and cannot be used / sold / mishandled / stopped etc without VERY major damages to be paid. It is interesting to look at the EULA's of some current low end Cloud providers and seeing just who owns your data - a very recommended exercise for any would-be buyer.

- A Plan B, so if The Cloud in any way fails, you can switch over in a heartbeat to a working service. If this cannot be done, it requires you to pretty much run your own services, which means you may as well do some of it yourself - or back it off to a 2nd provider- in which case see if they can guarantee uptimes

These are the Real requirements for a Cloud service to be worth using for companies where the added value is high.

Now there are companies that can use it now, without these conditions being met - typically those with very high reliance on the infrastructure efficiency at this level, and where loss of service differences between value added and cloud costs are not too wide, and the added value of the content is not very high. Startups and processor hungry social media / user generated content plays fit this bill. For others, one really needs to get the sort of SLA and EULA that is common in traditional outsourcing to make it worthwhile.

I hate having to be the curmudgeon, but we are still firmly in the Hype stage of the Cloud (Gartner says so, so there!) and we probably need it to sink through its Slough of Despond before most commercial companies should look at it seriously - by then the cowboys will have gone out of business, the learning curve / Moore's Law effects will have made the services more reliable and economical, and there will be enough history with existing providers to know who is competent.

Until then, buy a spotty youth, a big server and a LAMP manual

Update - I see this this post has attracted the worst karma ratings since I had a go at Twitter in its geek first love phase - clearly Cloud is the new black (as broadstuff's writing and intellectual rigour is always of course above reproach, that cannot be the issue )

Friendfeed now offers an ability to post updates to Twitter, according to the Friendfeed blog. I saw this from Louis Gray's post, (via Twitter) which notes that:

The result essentially turns the lifestreaming functionality on its head. Rather than just have Twitter play a major role in inputting entries in user's feeds, FriendFeed now gives Twitter the chance to do more than operate as a microblogging tool, taking your personal FriendFeed, and mirroring it back Twitter's direction.

In other words please come and live your lifestream on Friendfeed, and we'll still tell all your Twitter friends what you are up to

For chatterboxes on Friendfeed this may seem like the opportunity of a lifetime to aggregate the rest of their lives and dump it on Twitter, but of course one of the strengths of Twitter is people can turn you off - and that has a strong moderation function. (In fact my main use of Friendfeed is to send all the noisy Twitter "power users" into it rather than following them, and get a once-a-day digest that I can scan in minutes - and to publish Broadstuff for people who would rather read it there.)

The question of course, if you are already on Twitter (which is the case for the far larger number of microblog users), is why add another intermediary to your personal workflow at all? To my mind Friendfeed - at the moment, anyway - is neither fish nor fowl. Its not closely linked enough to be a useful Twitter app, but it clearly doesn't really have a standalone role given that Twitter does most of what it can well enough, and has a far larger user base.

This is uncanny - no sooner do we see rational behaviour break out with respect to copyright, but now we see it in patents - the Court of Appeals for the Federal Circuit (CAFC) (aka the patent court) has changed a ruling it made in 1998 about business process patents. Says Reuters:

Business methods were widely considered unpatentable until a 1998 ruling by the same appeals court. The U.S. Patent and Trademark Office issued 1,330 such patents last year, up from 120 in 1997, according to figures on its website.

One of the best known examples of a business method patent is Amazon's (AMZN.O: Quote, Profile, Research, Stock Buzz) one-click process to buy goods on the Internet.

Bernard Bilski and Rand Warsaw had challenged the U.S. Patent and Trademark Office's rejection of their request to patent their method for managing the risk of sudden movements in energy costs.

Bilski and Warsaw founded the company WeatherWise to sell services based on the method used by some utilities. The U.S. patent office rejected their patent application in 2000 and the patent board upheld the rejection in 2006.

Erika Arner, a patent attorney with law firm Finnegan LLP, said that many business method patents would now be vulnerable to attack as invalid.

As I noted in an earlier post, I disagree with the Techdirt team on "FreeConomics", but in this area I agree 100% when they comment:

This ruling will, however, send serious shockwaves through pretty much every industry -- because software and business method patents are found just about everywhere. Companies that rely on such patents (such as patent hoarding companies) may have just found out their current business model is about to go away. An awful lot of patents are now about to be invalidated, and a lot of patent lawsuits may get thrown out as the patents do not meet the criteria set forth in this decision.

You can bet, however, that the supporters of widespread software and business method patents will not go down without quite a fight. Beyond appealing the decision, it's likely there will be a push for a different type of patent reform in Congress that will expand the patent system to allow software and business method patents. There will be ridiculous announcements from companies that have chosen to litigate rather than innovate, claiming that they cannot innovate (even though they weren't) without much broader patents that they were actually using to hinder innovation.

Indeed - let the games begin - but the pendulum, methinks, is still swinging back to rationality, as we suggested a few months ago.

Silicon Alley Investor is the latest to report on the demise of the "Too cheap to charge for" way of thinking about online business models:

....startups are starting to return to a business concept many thought had faded into the past -- asking customers to pay for things. Namely: Pro accounts, plus accounts, premium features, enterprise editions, and white label versions.

This pleases us. Some of our favorite Web companies -- Flickr, TypePad, LinkedIn and Smugmug -- were born before Google launched AdSense -- and they turned to Pro accounts for revenues. They helped launch a wave of innovation on the Web that led some to -- at first cleverly, then obnoxiously -- say the Internet had iterated into version 2.0.

Indeed - I presented some of our thinking at the Web 2.0 Expo in Berlin, and I actually use Flickr as an example of a Freemium 2.0 model (you can see the Slideshare presentation and some commentary over here).

I'd like to just add a few thoughts which I've realised, from feedback at Berlin and after, is not clear to people about the economics of networked businesses.

1. Although the benefits follow Metcalfe' Law (ie value is added exponentially as links grow), so do the transaction costs - especially on social graph based services. And for most people, the Metcalfian value starts to come to an end at some number (the Dunbar limit of useful connections for them on that service). The transaction costs however, do not end - as the service grows, they grow with it and this is ultimately what kills "free". If the business is growing on an exponential S curve, and costs are rising exponentially to this exponential growth, and you cannot make money, then at some point the business is not sustainable from capital funding alone. And because costs, albeit small individually, are growing on an exponential of an exponential, that comes faster than you think..... I've graphed this effect above.

2. If you look at the game theory here, Free works well if you are the only player, or in early enough to get the positive return cycle going. If not, the game theory is merely a race to the bottom, typically with increases spending to try and bribe customers onto your service rather than the competitors'.

3. Its not the Crunch that is making these business unsustainable, they were always unsustainable - its just making them unsustainable earlier in their lifecycles. And that means they cannot be sold as easily (which is of course why people are less willing to fund the $0.00 revenue growth)

What is true is that $0.00 is a great way (probably the only way today) to start a business (a consumer facing one anyway), and that the burn rate of running it before it hits real traction is very low compared to the dotcom world. If you can get in early and / or be the only player who can afford to go free, (say going up against Old Industry players) then it can run for quite some time as t is clear that it will be bought or create sufficient value.

So for startups going forward, I'd argue that one needs to look for that sweet spot - in early, vs incumbents. In late, vs me-toos, is a death by a thousand razor & blade cuts.

Update - article today on TechCrunch saying that Facebook may need to make cash calls sooner than expected - I suspect its this very effect that is causing it:

The company is likely spending well over a $1 million per month on electricity alone, say experts we’ve spoken with. Bandwidth is likely another $500,000 or more per month on top of that. The company has earmarked $100 million to buy 50,000 servers this year and next. And sources say they’ve been buying one NetApp 3070 storage system per week just to keep up with all this user generated content. At up to $2 million each, that adds up quickly - we’ve heard estimates that they may have spent as much as $30 million this year alone with the company. And the icing on the cake - earmark another $15 million per year in office and datacenter rent payments.

And don’t forget those human assets. With 750 employees and growing, Facebook is spending at least another $10 million per month on payroll.

It costs a couple of hundred million dollars a year just to keep the lights on at Facebook. But the real problem is keeping up with growth, particularly storage needs.

Every new user makes many connections, the costs go up per connection, not per new user.......

Tom Lehrer was a mathematics lecturer at Harvard, UC Santa Cruz and at MIT, where he taught game theory and related mathematical modelling in the Political Science department. He is also a writer of satirical songs, and here is his ouvre that applies to some of the fluffier stuff going on in Social Media today today:

First, on Social Media:



And then, on Viral media.



One wonders what he would do with todays' Social Media scene....

Think Tank* Demos reckons bosses should embrace Facebook, as reported by the BBC:

Attempts to control employees' use of such software could damage firms in the long run by limiting the way staff communicate, the think tank said. Social networking can encourage employees to build relationships with colleagues across a firm, it added. However, businesses are warned to be strict with those who abuse access. Firms are increasingly using networking software to share documents and collaborate in ideas, the research found.

And while more work-specific systems, such as LinkedIn or bespoke in-house software tended to be used for work matters, the likes of Facebook, Bebo and MySpace still had a place, said Peter Bradwell, a Demos researcher and the report's author.

"They are part of the way in which people communicate which they find intuitive," he said. "Banning Facebook and the like goes against the grain of how people want to interact. Often people are friends with colleagues through these networks and it is how some develop their relationships."

Now there's a use for Beacon - as an Enterprise 2.0 tool! Why bother with all those intrusive email-spy systems when you can just stick all the drones on Facebook and scrape their data to kingdom come. I see a new revenue stream for Facebook in these straightened times

More seriously though, the issue with consumer social network designs is that they are not really "fit for purpose" yet for enterprise use outside a number of (fairly low risk) applications. Core issues are security, privacy and the different social structure (heirarchical) within organisations.

(Update - to be specific - will employees use Facebook - of course, its an email alternative. What I mean is that its not the sort of structure an organisation - in my view - should use for its own internal systems)

I have also become a bit fascinated with "Think Tanks" and their future in an online world, in that they are often (usually?) merely opaque lobbying organisations with agendas posing behind impressive semi academic sounding names - which of course the emerging open web is a direct counterpoint to. They are nearly always Charities or Not for Profit organisations (which is an area ripe for scams in itself) and thus not held to the same accountability as companies, or even government agencies - they are sort of intellectual hedge hunds. My hypothesis is that, used correctly, the emerging New Media - blogosphere et al - is actually a better approach than the Think Tank as it is currently structured.

Anyway, whenever one sees Think Tank research, the interesting question is always "why is the funder behind this lot punting this line", and "why did they use a Think Tank, not another approach" (Orange funded this by the way). Demos is - and I quote:

Once the theoretical journal of the Communist Party of Great Britain, seen as close to Tony Blair before 1997 general election. Works with number of government departments, public sector agencies and charities.

And is a:

Multi-purpose think tank aimed at increasing effectiveness of all policy making.

However, a recent Open Democracy article lambasted the modern British Think Tank as an obstacle for open democracy, given its opaque funding and accountability, and that they are increasingly putting sizzle over substance:

....a world where right and left have been transcended and where thinking has become traduced to a narrow bandwidth about micro-delivery, policy-lite ideas and buzz words and concepts such as ‘Nudge’, while the big issues of the age about pensions, the credit crunch or how we regulate modern capitalism go unanswered. Where have been the think tank thoughts about the nature of the recent global downturn, or what Britain’s contribution to it should be?

And further noted that:

What is revealing is how lacking in self-criticism and renewal are many of the people involved in the think tank industry. Richard Reeves, newly appointed director of Demos, has recently argued that think tanks ‘win their influence through intimacy with their principal political ‘clients’ or through independent technical expertise.’ This leads, Reeves believes, to the political class listening to them the way ‘you might listen to your spouse or your GP.’

Reeves did not address why think tanks are the best arbiters and providers of this ‘expertise’, or consider Jim Knight, Labour MP’s point that they are ‘ultimately very elitist, top-down institutions’.

There is now discernable doubt around Westminster about the quality of much of think tank work, the influence of corporate funding, and how success is judged by insider access to politicians and media coverage generated.

In other words, for a Think Tank to be talking about open-ness is something of a paradox. But for a New Labour Think Tank to be fishing in new waters unsullied by unpleasant remembrances of its time past - details like old fashioned economic crashes and retirement ruination - is very unsurprising, and what better than Social Media, a sexy area that is fast becoming the repository of Old and New Utopian dreams of all stripes.

As you race towards the trains at London's stations, with 10 minutes or so to spare, you can usually count on grabbing something to eat from one of the fast food stalls near the platform (thats Track to my US readers). The St Pancras station seems to offer that fast food heaven, the "healthy" option - Benugos - where you can choose fresh meats, salads etc on panini bread rather than a "burger wif' coke". Its in pole position, being closest to the ticket barriers. A licence to print money, you may think...

Hah! Let me describe the order-fulfilment process.

First, you stand in a queue to order your delightful concoction. Only problem is, there are people in it in front of you umming and ahing about what they want. For my New York readers, you need to understand that in London the servers do not move on to the next person on the second Ummm....and in fact the server side is usually undermanned. Anyway, once you have decide what order you want to sign up to, you are asked to walk to another counter, about 10m away, and.....

....join another queue to pay. Same issues with undermanning. Once you have paid, you go back to the first counter, where (hopefully) your order has been prepared (by the overloaded server system) and thus queue a third time to get it.

Now, this is probably barely acceptable except for ladies and gentlemen of leisure in normal situations, but at a railway station where people have got but a few minutes, it has two effects:

- Firstly, the slow process time reduces the rate of revenue input - a McBurgerChicken would have done 4 or 5 people in that time. So its low productivity for its high rental

- Secondly, it limits the total revenue - I, and many others in the queue/s said "sod that for a game of soldiers" and ran for the trains or other further away food options

This is, as they say, no way to run a railway cafe.

But, whats this got to do with Open ID, I hear you ask? Well, just that the method of signon is like Benugo - and in my view that is its biggest drawback for adoption. Never mind the quality (security etc) issues, just get a one-stop-shop workflow going. We are as impatient and hurried on the Inter networks as the Inter rails.

Open ID must be like Burger King, not Benugo !

This is my contribution to the discussions about User Research coming out from various worthy organisations today, and that they are looking at ways of doing single sign-on.

(I saw this great comment on WebMonkey by the way: "Why not make a firefox plugin that you can use to login to every stupid site that asks for you to register. I even have a good name for it, you could call it bugmenot. Pretty clever right?")

Luke Razzell has written a very good short paper on the Twitter experience. You can download it over here. This is no fanboi pap, Luke is a User Experience consultant and also co-invented BlogFriends, a social blog filtering service way in advance of its time.

When tech geeks like me look at Twitter we see it in terms of UC distribution, asynch comms and non aligned link following rules etc - ie we see it in in gobbledygook terms to most people. Luke puts it much better:

Physical-world social networks are naturally “fuzzy” in two key ways:

1. Fuzzy relationship definitions: we tend to have a unique set of associations and feelings about each person we know, rather than simply categorising them in our brain as “friend”, “colleague”, “partner”;

2. Fuzzy social network boundaries: although we may participate in specific and notionally-separate social networks in the physical world, the boundaries of those networks are often highly porous. Someone who is a member of your running club might become one of your group of drinking buddies in the course of a Saturday afternoon.

The vast majority of social web services - including giants like Facebook - construe social networks primarily in terms of a binary division between “contacts” and “not contacts”; in general, one must request that a person becomes a “contact” before engaging them in conversation on the network. Just imagine if you had to do the same thing in the face-to-face world!

Twitter, conversely, by allowing even non-contacts to impinge on the periphery of one another’s attention with “@” messages (provided that the recipient of the message opts in to such a possibility - see “Talk to her”, above), emulates much more closely the way that we naturally socialise with one another, very often dipping our toes into relationship through half-gestures and casual observations on the weather etc in order to test the relationship’s potential before taking such a high-risk step as asking the person in question to be our “friend”. In fact, just how often, since primary school, have you asked someone to “be my friend”? Perhaps never?

Its a good read, and good thinking to boot.

I'm a great fan of Mike Masnick's Techdirt, except I do think they have an Achilles heel in their oft voiced views that all content can be free forever sustainably - this post on the recent Google Books Copyright settlement being typical. However, a more sanguine analysis (in my view) was posted by one of the commentators there (Techdirt is one of those great sites where the commentators are often as good as the writers) - its by a commentator called Lost Sailor, here it is in full:

For all the wailing and gnashing of teeth, and even though it's contrary to Mike's ardent desire that such content be "freed," this is not a bad agreement at all. Quite the opposite.

Now, I've only scanned through the actual text of the agreement, but it actually provides for far greater use of scanned books than Google might have been able to do if it just asserted its right of fair use.

First, it pretty much clears up any possible lawsuit by a publisher or author (assuming it's accepted by the court) and also shields the libraries that were participating in the project from any liability. It also provides Google with a competitive advantage now that publishers and authors will be even more encouraged to participate in the project since they know their rights are protected...and they'll get paid something.

Second, it allows for much wider use of digital copies of the books and provides Google with safe harbor. Google is allowed to fully display out-of-print or otherwise commercially available books that are still in copyright and will set up an automated process for making that determination. They can still provide limited display of "snippets" of the content for in-print and commercially available books.

Educational institutions and public libraries will get the rights to display all the books in-branch.

Participating libraries (i.e., those that make their collections available for scanning) have even greater latitude than they would have for using the digital copies they received back from Google.

All in all, while you may not have gotten the knock-down, drag-out fight you wanted to see, Mike, this agreement will get more books on to Google with much greater options for users to read and use the content much sooner. Cooperation between the publishers/authors, libraries, and Google will mean more books will be available for the service (and I'd anticipate a scenario where all newly published books are digitally sent to Google for the project automatically upon publication).

All because Google had the foresight to realize that publishers and authors have rights too, and that if reasonably addressed (and this is really quite a reasonable agreement), new cooperative models can actually be put into practice.

The way out of the current no win, free for all scenario is to hammer out workable copyright rules going forward. I couldn't have put it better, so I didn't - Lost Sailor, whoever you are, consider this a sincere form of flattery

Update - Larry Lessig reckons its a good deal as well:

IMHO, this is a good deal that could be the basis for something really fantastic. The Authors Guild and the American Association of Publishers have settled for terms that will assure greater access to these materials than would have been the case had Google prevailed. Under the agreement, 20% of any work not opting out will be available freely; full access can be purchased for a fee. That secures more access for this class of out-of-print but presumptively-under-copyright works than Google was initially proposing. And as this constitutes up to 75% of the books in the libraries to be scanned, that is hugely important and good. That's good news for Google, and the AAP/Authors Guild, and the public. (My favorable views about the AAP at least are not, of course, reciprocated.)

Nice to know Larry agrees with us