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-- AlexeySokolin - 14 Oct 2011 |
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< | My notes below, which will morph into a paper. FYI would be helpful to have a WYSIWYG plugin to build lists. |
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> | [Draft still] |
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< | Ethical Business Models / Or, What are the choices for business models under MC=0 |
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> | Introduction |
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< | What has been done: creating barriers to entry, limiting access to platforms, bidding |
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> | On the horizon is a world where cultural goods are distributed freely and quickly to the masses of the world without cost or hassle. But, even if society may be in transition to a system without private property in ideas, transitional stages are important. Stalinism, for example, was more than a step towards Marxist communism in that it became its own terrible creature. It matters how we choose to move from intellectual property regimes of today using today’s set of economy, politics and technology. What are the ethical ways to do business on the way to tomorrow? |
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< | Sources
- http://www.baekdal.com/insights/infinite-choices-and-a-world-abundance-vs-supply-and-demand
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> | Economic Axioms |
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< | Main point is that people have discretionary budget that they set. So say $10 for music per month. Then they choose to allocate that based on qualitative factors (e.g., emotional, design, marketing) rather than on the quantitative factors (how much does this cost, what did it cost to produce and how it is now priced). So someone may get $8 for a song and another $2 for another because of, what is essentially, love. Interesting idea but may be wrong in that this is a non-equilibrium position. This is for people with money to waste. Or for people who have been convinced/brainwasted/affected that they need to spend extra for something that has no cost. Echoes though the radiohead album sales.
Radiohead's free and nonfree album http://www.time.com/time/arts/article/0,8599,1666973,00.html ; http://techland.time.com/2011/02/14/radiohead-release-new-album-online-but-not-for-free/ ; http://www.breitbart.com/article.php?id=D8SOC7200 ; |
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> | Digital goods such as software, music, video and text have a marginal cost of zero. In economic parlance, this means that the cost of producing the next good is nothing. It costs nothing to duplicate and transfer an mp3, avi or ebook file. Digital goods do not have zero fixed cost. Furthermore, this non-zero fixed cost includes the normal cost of equity (or financing in general) which is a function of the risk of the venture. Higher-risk ventures involve a higher cost of equity. |
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< | RH released In Rainbows for free (auction style), next album was $9 in mp3 format. Band wants to make money, capitalizing on people's learned behavior of paying $1 per song on iTunes. 40% paid ($8 on average), 60% didn't.
Nine Inch Nails version of the same: http://news.cnet.com/8301-10784_3-9936210-7.html |
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> | Many such goods are cultural goods and enrich the lives of those consume them by anchoring them in the flow of human progress. Cultural goods exist in varying quality and significance (Bach vs. Limp Bizkit, Harry Potter vs. Picasso), which is independent from their popularity. Such goods also differ in their fixed cost and the time at which fixed costs are covered by revenue, which in turn depends on the number of consumers that pay and do not pay for the good. |
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< | Trent made good money (options: free for the first nine tracks, $5 for the whole digital album, $10-$300 for disc sets. Ghosts, according to Reznor, netted $1.6 million in just over a week.) The next one "Slip" was completely free. Also happened to be terrible [look at Metacritic data]. Also, what does it say that only successful artists make real money on this stuff? Did Bjork do it too?
Is there anything to say old mp3.com? Did people make money on it. http://en.wikipedia.org/wiki/MP3.com TBD |
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> | Capitalist economies efficiently produce innovation, technology and new companies. Venture Capital and other financial firms efficiently calculate cost of equity for new technology and aid the creation of new companies. |
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< | Interesting tidbit: At its peak, MP3.com delivered over 4 million MP3 formatted audio files per day to over 800,000 unique users on a customer base of 25 million registered users. This was about 4 terabytes of data delivery per month from three data centers. Engineers at MP3.com designed and built the Pressplay infrastructure, eventually purchased by Roxio and renamed Napster.
A meaningless article on branding as a way to pump up price. Hello AAPL. http://www.techdirt.com/articles/20070215/002923.shtml |
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< | http://roepermccullough.blogspot.com/2007/12/when-marginal-cost-equals-zero.html |
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> | The Ethics |
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< | If there was some way of figuring out exactly how much each person valued particular television content everyone would have access to it at a price that is worth it for them. But there isn't, so channels have to charge a uniform fee.
Chris Anderson on Free. http://www.wired.com/epicenter/2009/06/disruptive-by-design-wired-editor-in-chief-chris-anderson-discusses-the-future-of-free/ ; better discussed here http://www.david-campbell.org/2010/05/13/thinking-freely/ and here http://www.techdirt.com/articles/20091119/1634117011.shtml which provides a summary with stats |
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> | We pick two principles that define an “ethical” approach to business. The first is Rawlsian “veil of ignorance,” which implies a set of rules that would be preferred regardless of position in the genetic and geographic lotteries. We also rely on Kant’s second formulation of the categorical imperative, which holds that no person can be used as a means to an end. |
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< | Takeaway is ConnectwithFans? +Reasontobuy = win. Create artificial scarcity on goods that sit on top of free. Limited sets or prints. Basically a fremium model. Think kickstarter? What's the problem -- the problem is that everyone becomes a marketing/sales person. We all have to be marketing and sales gurus with a need to be heard. It is the attention economy so the person that is loudest will get the most attention--is this an optimal outcome? Thus we see all these companies popping up about connecting with fans and marketing to fans. Are these a potential replacement to old school labels. Yes they are.
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> | From behind the veil of ignorance it is clear that free goods should be free. We want access to music and the internet if born in New York or India. Less clear is how much access we want—perhaps there is a line to be drawn between necessity cultural goods (learning the classics) and luxury cultural goods (StarCraft? ). One empowers, lifts people from their station into the flow of human progress; the other entertains and distracts. The two are not synonymous in function and moral imperative. The problem encountered in this distinction is who decides, and how. |
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< | A musician changing his mind about free and regretting it http://www.chicagoreader.com/chicago/mp3-file-sharing-music-revenue-models-tiny-mix-tapes-freeloading/Content?oid=1361486
. Ruen proposes that independent record labels borrow some tactics from companies that sell fair-trade coffee—he's betting that many file sharers have ethical qualms and can be lured away from BitTorrent? by a guarantee that their money is going to a label that does its business in a transparent, artist-friendly fashion. |
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> | Kant’s categorical imperative has several restrictive implications. A business may not use the information and data of users without their express permission and approval. Advertising and data mining may not be used unless consented to, with full knowledge and understanding, a priori. We postulate that few people would opt-in to being sold as audience or data to other corporations, even if this funds the consumption of their favorite media junk food. Second, a business may not charge one set of users for one thing, and then arbitrarily give that thing away for free to everyone thereafter. Such a scheme (e.g., taxing American users to subsidize Indian users) would use one set of people as a means for others. |
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< | Conventional wisdom amongst my peers," Shadow writes, "has been remarkably short-sided [sic] over the last decade: 'Yeah, CD sales are down, but all the money is in licensing.' Not anymore. 'Yeah, licensing money is down, but the video game industry is killing it.' Less so these days, according to recent data. 'Well, the real money is in touring.' Really? When was the last time you saw a 'new,' post-record company artist headline a major music festival? At this rate, we'll be stuck with Coldplay for decades (no offense intended)."
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< | Hey there actual academic research http://www.mendeley.com/research/business-models-for-internetbased-ecommerce-an-anatomy/ |
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< | So are all digital goods then public goods? http://en.wikipedia.org/wiki/Public_good Solutions OTHER than club goods (you can't have it) include (1) serious subsidy and (2) pooling of resources by users to generate funds for the FC + some profit, (3) some fancy taxation scheme. People would pay if they are coerced or out of the goodness of their hearts. What's the % conversion on both of these (can look up charitable giving statistics). |
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> | Onto Business |
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< | Yes. In economics, a public good is a good that is nonrival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good.[1] In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful. |
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> | Goods with marginal costs of zero can be defined as pubic goods. They are nonrival and non-excludable, and can be subject to free ridership and such that they are not optimally produced. While some cultural public goods may indeed be emergent (perhaps music and literature), others require significant capital investment and equity returns in order to be produced. Examples of such goods are blockbuster Hollywood movies (Harry Potter), high-end video games (Blizzard), and professional software (Adobe Photoshop). These goods cost nothing to distribute, but each require a large sum of money to build initially, requiring employees, office buildings and financing. |
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< | These problems with the club-good mechanism arise because the underlying marginal cost of giving the good to more people is low or zero, but, because of the limits of price discrimination those who are unwilling or unable to pay a profit-maximizing price do not gain access to the good.
good stuff a couple of pages in http://www.docstoc.com/docs/81250205/new-Internet-Business-Models |
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> | One approach to making money from public goods is turning them into “club goods,” meaning layering on top of them a power to exclude others from consumption. Venture Capital firms look to invest in such endeavors, focusing on building barriers to entry, platforms to keep value, monopolistic potential and long-term profitability above normal returns. This is needed as insurance against the chance of failure of a company or project, which in a software context can be quite high. On average, the evidence shows that VCs achieve normal or below normal returns, which may justify the types of businesses they invest in. The economic rents a winner like Facebook may extract is a subsidy for all the Facebooks that failed. Without such cases, financing costs would be much higher and would be added to the initial fixed cost of production. |
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> | Still, this breaches our ethical compass, at least for cultural necessities. It may not breach our ethics in the case of superfluous goods—it is one thing to provide Chinese students with textbooks, and quite another to give them movies that costs millions of dollars to produce.
But, we cannot coerce businesses to generate cultural goods and then distribute them for free without covering fixed costs and financing costs. Arbitrarily charging those first in line and distributing for free to the rest of the world is unethical. If advertising and data-mining are unethical as well, we must fund the product by user contributions and bifurcate paying users from non-paying users. There must be enough paying users to get the product to the point where MC=0. Two acceptable models have emerged: (1) auction, and (2) freemium (up-sell, cross-sell or marketing).
In the auction set-up, people bid up to their willingness to pay for the free good. For some this is zero, for others it is a positive value. There are no ethical problems if people self discriminate, and there is evidence that established musicians are able to net significant returns in online auctions. Examples of this are Radiohead’s “In Rainbows” (1.2 million downloads), Nine Inch Nails ($1.6 million in one week), and Kickstarter ($75 million raised). Inherent in the auction model is a utility from the cultural good so positive that people pay a creator to express gratitude. The creator should be particularly good at signaling the quality and differentiation of the good from a commodity such that price does not equal marginal cost.
The second approach builds on the idea of differentiation, marketing and tiering value. Technology commentators advocate connecting with fans and generating a reason to buy. Again, the creator must prove that their good holds value separate from that of the free digital file or service. That value is either a truly superior experience that deserves compensation by choice, or comes bundled with a physical items whose marginal cost is not equal to zero (e.g., limited edition collectible sets /prints, t-shirts or signed items). Similarly, many technology start-ups use a freemium model to charge for superior service (which often is nearly identical to the free service) and provide the core service for free, which allows users to self-discriminate. We will thus continue to see core free offerings, bundled with highly targeted value propositions to fans and power-users.
Still, these models do not guarantee that fixed and financing costs are covered, especially for capital intensive and highly experimental projects that can have extremely positive payoffs but are not easily marketable and come with significant chances of failures. In that case, we need public subsidy to offset the innovator’s temptation to convert the public good into a club good. The categorical imperative does not allow us to use movie studios as a means to enrich others. A hybrid solution could involve some indication of private interest (via Kickstarter), a significant public subsidy once a goal is reached (how many people must want an Avengers movie?), and a Creative Commons license on the final good produced. |
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