1. IPADE International Week
October 2005
Who’s 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 author’s prior consent
Content
Sharing Knowledge
Flashback: The elusive quest for prosperity: What history has in its bag for us
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The New Economy: From perspiration to inspiration: The economics of ideas
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Consequences: From the optimizing manager to the adaptative manager
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The content/media industry: Wrong or right?
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Paving the way to the future: Some guidelines
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The quest for prosperity
Sharing Knowledge
Whatever the perspective taken, the paramount question is that of wealth:
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The wealth of nations, shareholders’ wealth, managing for value etc…
This is a challenging quest: Why is it that some are wealthy and successful,
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and some fail and stay poor?
Yali’s question and the cargo cult: « How is that you have so much cargo
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Jared Diamond and we so little? »
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The quest for prosperity
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Yali’s question haunts also corporate boards.
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Tons of acronyms and buzzwords were crafted that define value metrics:
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SVA, EVA, ROI, EBIT, CFROI, balanced scorecards, value chain, corporate
governance…
Joel Stern
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Back to basics
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Let’s get back to basics:
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« 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:
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K T
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Flashback: The history of prosperity
Sharing Knowledge
Change is a new
phenomenon indeed!
Malthus was right for
55 centuries out of
the last 57.
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Flashback: A parsimonious model
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Robert Solow’s model (1956, Nobel Prize 1987)
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K = Capital
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L = Labor
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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
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wealth per capita growth.
Does yield cross-country differences
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But this is more a model of « perspiration » than « inspiration ».
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Flashback: « Perspiration economics »
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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 Ford’s 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 »!!!
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Perspiration is not enough!
Sharing Knowledge
K T
Hence: In a perspiration world:
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The only way to genuine prosperity is to have technological improvements,
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that is inspiration, namely IDEAS.
This leads us to the Economics of Ideas and the New Economy
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New economy: Inspiration leads!
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How to best define the new economy?
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Ideas: Ideas improve the technology of production. A new
idea allows a given bundle of inputs to produce more or
better output
Two Keys
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Atypical cost structure: The first unit is costly to
produce (significant initial outlay), the next units have
a low or zero marginal cost
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New economy: Ideas
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Are ideas a good just like any other economic good?
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Excludability-Rivalry scales
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Rivalrous/Divisible Non rivalrous/Non
Shapiro / Varian divisible
Excludable CD PLAYER TV CABLE
Mildly excludable SOFTWARE
Non excludable FISH IN THE SEA PYTHAGORE THEOREM
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New Economy: Atypical cost structure
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What defines New Economy, according to Daniel Cohen, is its atypical cost
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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
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enter only if they can charge a price higher than marginal cost, hence a move
away from perfect competitition.
Daniel Cohen
Why?:
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– With increasing returns to scale average cost is always greater than
marginal cost
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New Economy: Wrap-up
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Ideas ---> Non Rivalry ---> Increasing returns ---> Imperfect competition
Brad DeLong: « We now have an economy that is more specialized in the
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high-value added role of creating and commercializing ideas. »
In a nutshell:
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Bradford DeLong
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K
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Managerial consequences
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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
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Managerial consequences
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To put it in John Kay's words quot; goals are most likely to be achieved when
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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
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value. Metrics have been crafted that supposedly measure the failure of
success in achieving this target.
John Kay
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Managerial consequences
Sharing Knowledge
The increasing-returns world is a world were things tend to wander off,
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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 à
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la Marshall, strive for the maximization of some metrics such as EVA or rather
shoot for more holistic approaches à la forest rangers?
Well, it seems that the best option you can go for in a complex world (which is
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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
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indeed, it is hard to predict them but easy to avoid building your house in an
earthquake or flood prone area.
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Examples
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Dilbert: Scott Adams and his e-mail
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Intel: Andy Grove: Only paranoïds survive!
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In a nutshell
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« Anything can happen! »
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« No one knows anything! »
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A good metaphor is the Call Option metaphor: Convexity effects
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Content industry in the new economy
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Tech Industry
(Infrastructure We, the people
Hardware
Software)
Content Industry
(Culture/Media)
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Content industry
Sharing Knowledge
The moguls
• Vertical view of the world
• From producer to consumer
• Copyright / Litigation
We
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Tech industry
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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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Content industry vs. Tech Industry
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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
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We the consumers
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Technology has given us tools that allow us to do things that the content
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industry does not like:
– Peer to peer networks: Napster, Kazaa
– Skype
– Blogs
– Wikis….
As a matter of fact, boundaries are blurring: consumers become producers,
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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
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We The Media
Sharing Knowledge
At the end of his life, famous movie actor Jean Gabin sang a song where he
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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
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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.
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The squeeze of the content industry
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The content industry is squeezed between a fast evolving tech industry that
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empowers consumers and consumers that compete with it.
All this is very reminiscent of the gradual erosion of the market power of the
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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
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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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The squeeze of the content industry
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How has the industry tackled the challenges it is facing? As usual, in the
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wrong (vertical) way!
– First, litigate, litigate, litigate: Sue your customer! Don’t 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,
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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.
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They did not adapt, they just tried to optimize under constraints.
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The squeeze of the market industry
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To put it in Andy Grove’s words:
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« How many years of sequential 5 percent revenue declines will the music
industry take before they’re 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. »
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Paving the way to a new future: Some guidelines
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Pricing: How and how much?
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Content versioning: What?
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Copyright management: Where?
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Loyalty / Lock-in: Be adaptative
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Network effects: Critical mass
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More on this in Hal R. Varian, Joseph Farrell and Carl Shapiro
« The Economics of Information Technology », Raffaele Mattioli Lectures,
Cambridge University Press 2004
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29. Not to be reproduced or quoted without the author’s prior consent
Pricing content
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Understand cost structure
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Be aggressive not greedy
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(Share of the pie vs. Growing the pie)
Differentiate product and price
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Understand consumer and personnalize
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Yahoo Unlimited
Sell to groups
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Versioning content
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The automobile industry vs. the digital content industry
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Versioning north vs versioning south
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– 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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Rights management
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Reproduction/Distribution costs: use cheapness to your
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advantage
Be open and flexible: Maximize the value of your
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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 author’s prior consent
Lock-in
Sharing Knowledge
Value constellation approach
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Get your customer to invest in you (remember he/she knows things too!):
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Books and blogs, movie reviews etc…
Sell complementary products
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Networks and positive feedbacks
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Positive feedbacks: get bigger, get stronger
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Conclusion 1 : Adapt !
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Conclusion 2 : Stay tune!
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