Eric Briys Who’s Afraid of the Big Bad Wolf?: Internet and the Content Industry in the New(?) Economy IPADE International IPADE International Week Week October October 2005 2005
1. IPADE International Week October 2005 Whos Afraid of the Big
Bad Wolf?: Internet and the Content Industry in the New(?) Economy
Eric Briys
2. Not to be reproduced or quoted without the authors prior
consent Content Sharing Knowledge Flashback: The elusive quest for
prosperity: What history has in its bag for us n The New Economy:
From perspiration to inspiration: The economics of ideas n
Consequences: From the optimizing manager to the adaptative manager
n The content/media industry: Wrong or right? n Paving the way to
the future: Some guidelines n Cyberlibris, The First European
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3. Not to be reproduced or quoted without the authors prior
consent The quest for prosperity Sharing Knowledge Whatever the
perspective taken, the paramount question is that of wealth: n The
wealth of nations, shareholders wealth, managing for value etc This
is a challenging quest: Why is it that some are wealthy and
successful, n and some fail and stay poor? Yalis question and the
cargo cult: How is that you have so much cargo n Jared Diamond and
we so little? Cyberlibris, The First European Digital Library
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4. Not to be reproduced or quoted without the authors prior
consent The quest for prosperity Sharing Knowledge Yalis question
haunts also corporate boards. n Tons of acronyms and buzzwords were
crafted that define value metrics: n SVA, EVA, ROI, EBIT, CFROI,
balanced scorecards, value chain, corporate governance Joel Stern
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5. Not to be reproduced or quoted without the authors prior
consent Back to basics Sharing Knowledge Lets get back to basics: n
Put simply, prosperity is the consequence of one thing and one
only: Matching talent with capital, and holding both sides
accountable. Reuven Brenner In a nutshell: n K T Cyberlibris, The
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6. Not to be reproduced or quoted without the authors prior
consent Flashback: The history of prosperity Sharing Knowledge
Change is a new phenomenon indeed! Malthus was right for 55
centuries out of the last 57. Cyberlibris, The First European
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7. Not to be reproduced or quoted without the authors prior
consent Flashback: A parsimonious model Sharing Knowledge Robert
Solows model (1956, Nobel Prize 1987) n K = Capital n L = Labor n Y
= GDP = F(K, L) = Production Function Max Y - rK - wL with respect
to K et L . Robert Solow Outcome: Production grows with population
in the steady-state: Hence, no n wealth per capita growth. Does
yield cross-country differences n But this is more a model of
perspiration than inspiration . n Cyberlibris, The First European
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8. Not to be reproduced or quoted without the authors prior
consent Flashback: Perspiration economics Sharing Knowledge n
Industrial Revolution: Muscle Power: Why is that whenever I ask for
a pair of hands, a brain comes attached? Henry Ford n In Henry
Fords days, capital was the scarce resource that organisations were
designed to use efficiently, as his assembly lines did:
OPTIMIZATION n Alfred Marshall: Principles of Economics:
Optimization, Calculus, Marginalism Henry Ford Alfred Marshall n
Gilded Age/Robbing Barons: Yes, the Industrial Revolution was also
inspired . But, this inspiration, this knowledge was pegged to
capital. Lots of people had a thorough knowledge of chemistry, few
corporations were producing chemical products though. Hence
knowledge was not free !!! Cyberlibris, The First European Digital
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9. Not to be reproduced or quoted without the authors prior
consent Perspiration is not enough! Sharing Knowledge K T Hence: In
a perspiration world: n The only way to genuine prosperity is to
have technological improvements, n that is inspiration, namely
IDEAS. This leads us to the Economics of Ideas and the New Economy
n Cyberlibris, The First European Digital Library -9
10. Not to be reproduced or quoted without the authors prior
consent New economy: Inspiration leads! Sharing Knowledge How to
best define the new economy? n Ideas: Ideas improve the technology
of production. A new idea allows a given bundle of inputs to
produce more or better output Two Keys n Atypical cost structure:
The first unit is costly to produce (significant initial outlay),
the next units have a low or zero marginal cost Cyberlibris, The
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11. Not to be reproduced or quoted without the authors prior
consent New economy: Ideas Sharing Knowledge Are ideas a good just
like any other economic good? n Excludability-Rivalry scales n
Rivalrous/Divisible Non rivalrous/Non Shapiro / Varian divisible
Excludable CD PLAYER TV CABLE Mildly excludable SOFTWARE Non
excludable FISH IN THE SEA PYTHAGORE THEOREM Cyberlibris, The First
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12. Not to be reproduced or quoted without the authors prior
consent New Economy: Atypical cost structure Sharing Knowledge What
defines New Economy, according to Daniel Cohen, is its atypical
cost n structure, namely a significant (not to say massive) initial
outlay and a low marginal cost for the next units Consequence: The
pure and perfect competition model falls apart. Firms will n enter
only if they can charge a price higher than marginal cost, hence a
move away from perfect competitition. Daniel Cohen Why?: n With
increasing returns to scale average cost is always greater than
marginal cost Cyberlibris, The First European Digital Library -
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13. Not to be reproduced or quoted without the authors prior
consent New Economy: Wrap-up Sharing Knowledge Ideas ---> Non
Rivalry ---> Increasing returns ---> Imperfect competition
Brad DeLong: We now have an economy that is more specialized in the
n high-value added role of creating and commercializing ideas. In a
nutshell: n Bradford DeLong T K Cyberlibris, The First European
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14. Not to be reproduced or quoted without the authors prior
consent Managerial consequences Sharing Knowledge Consequences for
the manager: optimisation vs adaptation OPTIMISATION ADAPTATION
Alfred Marshall Brian Arthur Perspiration Inspiration Value Chain
Value constellation, networks Producers --> Consumers Producers
competing or co-opeting with consumers Decreasing returns
Increasing returns Victorian values of stability Non-linearity,
instability, winner take-all Cyberlibris, The First European
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consent Managerial consequences Sharing Knowledge To put it in John
Kay's words quot; goals are most likely to be achieved when n
pursued indirectly .quot; Obliquity is the name for this. What does
it tell us about businesses and the goals they shoud be pursuing?
The current fad is for businesses to concentrate on maximizing
shareholders n value. Metrics have been crafted that supposedly
measure the failure of success in achieving this target. John Kay
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16. Not to be reproduced or quoted without the authors prior
consent Managerial consequences Sharing Knowledge The
increasing-returns world is a world were things tend to wander off,
n where things that get ahead, get further ahead, where things that
get down, get further down. How do people, corporations behave in
such a world? Should they optimize n la Marshall, strive for the
maximization of some metrics such as EVA or rather shoot for more
holistic approaches la forest rangers? Well, it seems that the best
option you can go for in a complex world (which is n a mixture of
Marshall's and increasing returns') is to develop a strong sense of
adaptation. After all, when you look at earthquakes or floods,
rather complex phenomena n indeed, it is hard to predict them but
easy to avoid building your house in an earthquake or flood prone
area. Cyberlibris, The First European Digital Library - 16
17. Not to be reproduced or quoted without the authors prior
consent Examples Sharing Knowledge Dilbert: Scott Adams and his
e-mail n Intel: Andy Grove: Only paranods survive! n Cyberlibris,
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18. Not to be reproduced or quoted without the authors prior
consent In a nutshell Sharing Knowledge Anything can happen! n No
one knows anything! n A good metaphor is the Call Option metaphor:
Convexity effects n Cyberlibris, The First European Digital Library
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19. Not to be reproduced or quoted without the authors prior
consent Content industry in the new economy Sharing Knowledge Tech
Industry (Infrastructure We, the people Hardware Software) Content
Industry (Culture/Media) Cyberlibris, The First European Digital
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20. Not to be reproduced or quoted without the authors prior
consent Content industry Sharing Knowledge The moguls Vertical view
of the world From producer to consumer Copyright / Litigation We
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consent Tech industry Sharing Knowledge The techies This is a fast
growing industry including: -Infrastructure: Fiber optic, cable
networks, satellites etc -Hardware: Computers, mp3 players, DVD
players, CD burners, cellphones, digital cameras etc -Software:
Media and publishing softwares, XML, RSS, blogs, wikis, VoIP etc
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22. Not to be reproduced or quoted without the authors prior
consent Content industry vs. Tech Industry Sharing Knowledge
Content Sales 2003 industry ($Bn) Television 260 Newspaper 220
Sales 2003 Tech industry (Bn) Movie 90 (except TV) Telecom 1182
Radio 45 Software 1328 Music 38 Video games 32 Retail 280
electronic Content 2 websites Sources: Bureau of Census, Sreen
Digest Source: Idate World Bank, Idate Content Industry = less than
1/5 th of Tech industry Cyberlibris, The First European Digital
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23. Not to be reproduced or quoted without the authors prior
consent We the consumers Sharing Knowledge Technology has given us
tools that allow us to do things that the content n industry does
not like: Peer to peer networks: Napster, Kazaa Skype Blogs Wikis.
As a matter of fact, boundaries are blurring: consumers become
producers, n worse they compete with them. The traditional notion
of value chain becomes obsolete. Dan Gillmor goes as far as to
title his latest book: We The Media n Cyberlibris, The First
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consent We The Media Sharing Knowledge At the end of his life,
famous movie actor Jean Gabin sang a song where he n said that at
last he knew that he knew nothing but this he knew!. As a matter of
fact, what he should have said is that we all know something n but
more often than not we do not realize it or more precisely that
what we know has value to some people. This is for instance what
blogs are about among other things. n Cyberlibris, The First
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25. Not to be reproduced or quoted without the authors prior
consent The squeeze of the content industry Sharing Knowledge The
content industry is squeezed between a fast evolving tech industry
that n empowers consumers and consumers that compete with it. All
this is very reminiscent of the gradual erosion of the market power
of the n Robbing Barons. When financial markets and funding became
easily available, talent could go his own way and start its own
ventures. The financial revolution made it possible (see Luigi
Zingales, U of Chicago) Other things being equal, consumers have
been empowered by the tech n revolution ( + the massive wealth
surplus transfer from shareholders to consumers during the Internet
bubble). This has helped them challenge the Media Robbing Barons.
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26. Not to be reproduced or quoted without the authors prior
consent The squeeze of the content industry Sharing Knowledge How
has the industry tackled the challenges it is facing? As usual, in
the n wrong (vertical) way! First, litigate, litigate, litigate:
Sue your customer! Dont listen to him or her. Next, merge!:
AOL/Time Warner, Vivendi/Universal: Namely vertical integration:
Content + Pipes But, this is exactly what should not have been
done: Content wants to be seen, n listened to by as many people as
possible and pipes need content as varied as possible. In a
nutshell: They played vertical when they should have played
horizontal. n They did not adapt, they just tried to optimize under
constraints. n Cyberlibris, The First European Digital Library -
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27. Not to be reproduced or quoted without the authors prior
consent The squeeze of the market industry Sharing Knowledge To put
it in Andy Groves words: n How many years of sequential 5 percent
revenue declines will the music industry take before theyre going
to scratch their heads and say: You know, maybe we ought to get
serious about digital distribution of music ? And, they will
discover what is obvious to the ponytail folks. Cyberlibris, The
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28. Not to be reproduced or quoted without the authors prior
consent Paving the way to a new future: Some guidelines Sharing
Knowledge Pricing: How and how much? n Content versioning: What? n
Copyright management: Where? n Loyalty / Lock-in: Be adaptative n
Network effects: Critical mass n More on this in Hal R. Varian,
Joseph Farrell and Carl Shapiro The Economics of Information
Technology , Raffaele Mattioli Lectures, Cambridge University Press
2004 Cyberlibris, The First European Digital Library - 28
29. Not to be reproduced or quoted without the authors prior
consent Pricing content Sharing Knowledge Understand cost structure
n Be aggressive not greedy n (Share of the pie vs. Growing the pie)
Differentiate product and price n Understand consumer and
personnalize n Yahoo Unlimited Sell to groups n Cyberlibris, The
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30. Not to be reproduced or quoted without the authors prior
consent Versioning content Sharing Knowledge The automobile
industry vs. the digital content industry n Versioning north vs
versioning south n Adjust characteristics of content products to
extract clients surplus Strengthen editorial skills Version along
multiple dimensions (delay, interface, speed, support etc) Add
value to bits Explore the Long Tail: Aggregate thin demands
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31. Not to be reproduced or quoted without the authors prior
consent Rights management Sharing Knowledge
Reproduction/Distribution costs: use cheapness to your n advantage
Be open and flexible: Maximize the value of your n intellectual
property, do not maximize protection Lawrence Lessig Creative
Commons: From All Rights Reserved to Some Rights Reserved)
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32. Not to be reproduced or quoted without the authors prior
consent Lock-in Sharing Knowledge Value constellation approach n
Get your customer to invest in you (remember he/she knows things
too!): n Books and blogs, movie reviews etc Sell complementary
products n Cyberlibris, The First European Digital Library -
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33. Not to be reproduced or quoted without the authors prior
consent Networks and positive feedbacks Sharing Knowledge Positive
feedbacks: get bigger, get stronger n Cyberlibris, The First
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34. Not to be reproduced or quoted without the authors prior
consent Conclusion 1 : Adapt ! Sharing Knowledge Cyberlibris, The
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35. Not to be reproduced or quoted without the authors prior
consent Conclusion 2 : Stay tune! Sharing Knowledge Cyberlibris,
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