Friday, October 31. 2008
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:
Media Pricing Model
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."
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:
Reasons to buy Cloud from Forrester
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.
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.
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.
Thursday, October 30. 2008
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:
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:
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.
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.
Transaction Cost Trap
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.
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:
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.
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:
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.’
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.
Wednesday, October 29. 2008
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:
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:
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.
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:
Nice to know Larry agrees with us
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