The benefits of a "Freeconomics" model

Back in 2004, I remember reading that bittorrent accounted for 35% of all internet traffic and some recent statistics claim that it is actually 70%. My own observation would be that is probably around 50% on average, but I would not be surprised if it was higher when some popular new game, movie or music collection and hovered towards that 70%. Regardless, when you consider all the stuff that people do on the internet and all the business transactions that go on it as well, that's a freaking lot of bandwidth dedicated to pirating digital content!

Therefore, and not surprisingly, there has been a sentiment arguing not to fight it (much like the music industry tried to do in vain) since that is a losing battle, and instead to adopt a economic model based on free or "freeconomics". The open source software movement was an initiative started in the late 90s that attempted to capture this market, and aside from the dot com bubble of the late 90s and insane overvaluations given to some open soruce companies, phenomenons such as Linux, Mozilla, etc. have proven viable business model based on free. But what I'm particularly after, is first, a set of guidelines or framework for how to profit from this "free" distribution model and second, how to know if I'm on the right track.

A blog I just read seem to give a guideline to my first requirement. It is by Chris Anderson who popularized the notion of long tail economics, and he proposes using a time/money formula:

At some point in your life, you will wake up and discover that you have more money than time. And you will then realize that you should start doing things differently, which means not walking four blocks to find an ATM that doesn't charge a fee, driving for miles to find cheaper gas, or painting your own house.

This same calculus is the foundation of a big part of the "freemium" economy. We see it a lot in free-to-play online games, such as Maple Story, where you can buy things like "teleportation stones" to let you get from one place to another without a long slog or wait for a bus. Most of these paid digital assets don't make you a better player, but they do allow you to become a better player faster.

If you're a kid, you probably have more time than money. That's the force behind MP3 file trading, which is kind of a hassle and but is free (albeit illegal, of course!). As Steve Jobs famously pointed out, if you download music from peer-to-peer services, fixing the messy metadata as you go, the time it takes to avoid paying means you're working for less than minimum wage. Nevertheless, that works if you you're time-rich and money-poor. Free is the right price for you.

But as you get older, the equation reverses and $0.99 here and there no longer seems like a big deal. You migrate into a paying customer, the premium user in the freemium equation.

This makes logical sense to me, as when you get older and acquire more disposable income, paradoxically, the less time you have since in order to make that money you have to invest much of your time into your career or business (something I'm all too familiar with), so you will trade money for time.

Thus, what I take from this that you have to give something away free on your site to the point where eventually you gain enough of an audience in the proper demographics of "having more money than time" crowd of course, so that eventually they pay for a more premium version of what you have to offer and/or drive more traffic to you site and get ad revenue.

He summarizes his points and it seems to correspond to what I just outlined:

1. Build a community around free information and advice on a particular topic.
2. With that community's help, design some products that people want, and return the favor by making the products free in raw form.
3. Let those with more money than time/skill/risk-tolerance buy the more polished version of those products. (That may turn out to be almost everyone)
4. Do it again and again, building a 40% margin into the products to pay the bills.

The second of my requirements is outlined quite well in an article by the Economist:

For every song that is bought legally, in shops or online, around 20 songs are illegally downloaded, according to BigChampagne, a firm based in Beverly Hills, California, that compiles and sells statistics about file-sharing. Its customers can find out how many times, and where, a song has been illicitly downloaded, for example, what the figure was five weeks ago, what other music its fans like, and so on...

Many music executives were reluctant to take advantage of file-sharing statistics because of the trouble the technology has caused in the industry, says Eric Garland, BigChampagne’s boss. TV stations and film studios, by contrast, are “sprinting through the stages of grief”—and coming to terms with the reality that details of the illegal use of their material can, in fact, be very useful indeed.

Since you cannot stop piracy, you might as well gauge what files are being downloaded and in what quantities and use that information as marketing statistics to see where add on or peripheral items or services can be exploited for profit. What this means for someone attempting to model their online business on free, is to be vigilant and disciplined about monitoring what gets downloaded and/or generates the most popularity.

So what we have here is both demand and supply side frameworks for a freeconomics model: On the demand side, create demand ironically, by giving away content for free so as to build that customer base willing to pay. A kind of "carrot and stick" model. On the supply side, monitor and measure which items (or ideas if you're trying to sell something like articles or a book) get downloaded or the get the most "hits" and target those so you make sure you have enough supply people are willing to pay for.

In essense, give something away to use as adversting and marketing, then figure out at which point you can start charging people for a more premium version of what you were giving away free. When you think about it, it's pretty much basic markting 101. I guess the big difference these days is that the internet has made this easier and more possible for practically anyone willing to invest time, effort and a little bit of investment to start such a venture, and probably most for industries such as the music, movie and other media and content based ones, where previously high profitable items such as CDs and DVDs are now no longer profitable and adjusting their mindsets is quite difficult.

Socilialized Captitalism

Read this very interesting post by Robert Reich, one of the only few modern political figures I really admire, who defines the notion of "socialized capitalism" and proposes to end it as follows:

Socialized capitalism of the sort the Fed and the Treasury are now practicing, consisting of private gains and public losses, is untenable. On the other hand, it's also true that giant Wall Street investments banks as well as Fannie Mae and Freddie Mac are too big to fail. How to reconcile these conflicting principles?

Here's a modest proposal: When taxpayers insure a giant entity against loss -- as we now are with Freddie, Fannie, and Wall Street investment banks -- those entities must agree that:

(1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the President of the United States, and

(2) the government gets five percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance) -- so that if and when the entities become profitable again, taxpayers are compensated for the risk they've taken on.

Most striking to me is that while we like to think of ourselves as living under a free-market economy, when the government intervenes like it does above, we are in reality a quasi hybrid socialist-capitalist country. And history indicates that we gravitate towards the socialist when the economy is bad like it is now, and capitalist when times are good.

I guess on a positive note, it shows America's ability to be dynamic and elastic with its monetary and economic policies as the climate dictates, but as it stands now, I do like Mr. Reich's proposals, especially the second one!

30 Days of Outsourcing in India

Very interesting and compelling videos on the phenomenon of outsourcing from a FX series called "30 Days":

Part 1:



Part 2:



The site describes his situation pretty well:

Morgan Spurlock's volunteer, a successful computer programmer who lost his lucrative job to outsourcing, travels to India to try to get it back.

Will he discover the secret of India's success? Or that sending jobs overseas is an unstable gamble?

In the 1980s American corporations realised they could manufacture their goods cheaper in a foreign country and millions of American factory workers were left unemployed.

In the 1990s it was the turn of the white-collar worker, as the advent of the internet allowed companies to fire expensive American employees and hire foreign franchises to run key parts of their businesses. This is outsourcing.

With its well-educated, English-speaking workforce, India is fast becoming the destination of choice for outsourced jobs in technology and customer services.

Typically, one imagines sweatshop like environments and poor disheveled Indians toiling away in a third world country slaving away stealing jobs from America, but the video does a pretty good job of dispelling such a prejudicial notion, and giving a fair and compelling glimpse into the realities of the outsourcing of white collar jobs from the United States.

Blue Ocean Strategy

The whole field of strategy intrigues me, especially as it applies to business pursuits. My current profession of managing projects is typically concerned with more tactical pursuits such as completing my activities on time and within budget, but I often like to view projects that I am working on for their strategic impacts. This probably stems from my background in running my own business, as I was constantly looking for strategies to stay ahead of the competition.

It was with interest that I ran into this article explaining "Blue Ocean" strategy which is the title of a book Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant by W. Chan Kim and Renée Mauborgne, which was one of Harvard Business School Press' best selling books. In this primer published by Insead, it summarizes blue ocean:

The rule of strategy has been that to gain share in a given market place you must take something from the competitor. In other words, you win, they lose. This is known as zero-sum gain... In this traditional view of strategy, it is presumed that the structure is fixed – the environment and conditions are already determined and cannot be changed by the efforts of a company. In academic terms this is known as the structuralist view or environmental determinism. “Strategy thus becomes a question of outpacing rivals to gain a greater share from a limited economic pie,” Mauborgne says. “But when we look at industry who do we admire most? Those who outpace rivals? Yes, we admire winners. But more so, we admire people who create new paradigms, businesses and market spaces. These are what expand the pie of intellectual and creative wealth. In other words, creating a non-zero sum game.” This shift from win-lose to a win-win is the essence of Kim and Mauborgne’s Blue Ocean strategy.

The diagram below highlights the main points and differences:




Though the argument is interesting, I can't help but feel that this is hardly an original thesis. There have been numerous books which have positioned the same assertion such as The Innovator's Dilemma: The Revolutionary Book that Will Change the Way You Do Business (Collins Business Essentials) by Clayton M. Christensen back in the 90s.

Nevertheless, I may read the book as the primer indicates it has case studies and practical examples such as how "Cirque du Soleil eliminated animals and star performers from the show, which dropped its cost structure and created an all new element of artistic dance and music to achieve differentiation." I have been impressed with how this franchise has been able to constantly re-invent themselves and sustain their niche market share given that the circus has all but disappeared as an entertainment venue.

Given the projects I'm currently working on, the major focus of all of them is based on this reconstructionist notion of needing to simultaneously differentiate yourself from the competition while keeping costs down, and is probably why I have not had any free time. As everyone attempts to differentiate, the irony is that the process of differentiating is such a widespread practice, that it no longer differentiates you to differentiate! Maybe the new strategy is not to differentiate but to aggregate and synthesize. Maybe I'll write the next big strategy book...

The IT department is dead?

In an article just published on Network World, it claims that business writer Nicholas Carr boldly states that "the IT department is dead, and it is a shift to utility computing that will kill this corporate career path". Such is the thesis of his newly published book The Big Switch: Rewiring the World, from Edison to Google.

This is not a surprise since in 2003, he published a similar sentiment in a HBS article titled "Does IT Matter" which got published in a book of the same title. The article asserted that IT investments didn't provide companies with strategic advantages because when one company adopted a new technology, its competitors did the same, thus eliminating any competitive advantage originally claimed. This in turn is what leads to the commoditization of IT software and hardware. In addition, the skill sets which were originally highly sought after to set up an IT infrastructure become commodities in turn, since the skill's value diminish in parallel with growing ubiquity and ease with which such high tech products are purchased and implemented.

Seems Carr still holds the above view and further predicts that such services will be transferred over to a IT "utility" type company, much like electric utility companies replaced company-run power plants in the early 1900s. As Carr explains:

Factory owners originally operated their own power plants. But as electric utilities became more reliable and offered better economies of scale, companies stopped running their own electric generators and instead outsourced that critical function to electric utilities.

Carr predicts that the same shift will happen with utility computing. He admits that utility computing companies need to make improvements in security, reliability and efficiency. But he argues that the Internet, combined with computer hardware and software that has become commoditized, will enable the utility computing model to replace today’s client/server model...

Carr embraces Google as the leader in utility computing. He says Google runs the largest and most sophisticated data centers on the planet, and is using them to provide services such as Google Apps that compete directly with traditional client/server software from vendors such as Microsoft.

"If companies can rely on central stations like Google's to fulfill all or most of their computing requirements, they'll be able to slash the money they spend on their own hardware and software — and all the dollars saved are ones that would have gone into the coffers of Microsoft and the other tech giants," Carr says.

While I do agree that IT is becoming more of a commodity, I think it is a bit of a jump to assume that this will render all IT type jobs obsolete. I definitely think jobs tied to a specific technology will become obsolete, but anyone working in IT knows that or should know it. I think the real trend, and one which I'm noticing in my day to day work as well as what I observe going on in the industry, is that IT will be though of a just another necessary operational function and be more aligned with business functions and needs, and less as a separate division in which you need highly paid and skilled technicians to run it.

Obviously Carr is resorting to hyperbole to sell his book, but I read his first book and found it thought provoking and I expect the same from this more recently published work, and if it gets me to think more critically and strategically at my job function as an IT project manager, then I think it will be well worth the effort.

Being different, is really being the same

I found this interesting observation from marketing guru Seth Godin, about an experience he had when he visited a Starbucks and noticed that all 5 people with notebook computers were using Mac notebooks.



As he states, "when your entire culture is organized about being the other, the outsider, the insurgent, the one that's better than the masses... (like Starbucks, btw), what do you do when you are the masses?".



But the point brought up by Seth Godin from a business marketing point of view is a good one, for if like the Mac you market yourself as being the brand for people who "Think Different", what happens when you are adopted by the majority and become the product of those who "Think Similar"?

An interesting dilemma for those involved with marketing a brand and the strategic implications inherent with it.

On a similar note, I can recall a conversation I had with a long time friend of mine from high school where we reminisced about how we thought we were being so cool and rebellious listing to heavy metal, punk, whatever and having long hair or spiked hair and adopting all attitudes required to comply with the image doing this entailed, but in reality we were really conforming to a teenage prescribed notion of "cool", which was anything but rebellious.

In addition, I have no doubt that at that time this image was researched and carefully thought out and nurtured by music and other entertainment executives, which was picked up on by clothing companies, to get those very parents we were rebelling against to buy the albums, CDs, clothing, hairstyles, etc. into a very profitable venture.

You gotta love the irony!

Everybody wants a cut...

Ran into this article reading my weekly subscription to The Economist about the rise of the secondary ticket market. It was especially interesting to me, because I lead the development efforts for a seat charting application prototype for Ticketmaster when I worked for an IT consulting firm, which was one of the more interesting projects I worked on.

At the time, StubHub was the major competitor and leader both in having the most robust internet seat charting application and market share for ticket exchanges. Things really heated up when eBay bought the company for $310M, which gave the company financial and infrastructure backing, equaling Ticketmaster, forcing them to change their business model and adapt to the new demand. As the article states:

This year ticket resales in America are expected to top $3 billion. Fans like online exchanges because many of them hold money in escrow, giving it to sellers only after the event to ensure that tickets are legitimate...

Even a company that once legally challenged the online-resale market is now on board. Ticketmaster, the ticketing agency in Los Angeles which sells roughly half of all tickets to big events in America, developed a creative legal argument in a bid to shut down resellers it felt were earning unfair profits on tickets Ticketmaster had originally sold. Buyers, the company argued, should not be able to resell tickets because they don't actually own the tickets in the first place: tickets are merely licences to enter a venue, and licences are not freely transferable. That argument did not prevail, and Ticketmaster now has its own resale subsidiary, TicketExchange. More than 50 professional sports teams have now negotiated a cut of TicketExchange's resale revenue.

And its on TicketExhange where I found an actual implementation of the seat charting prototype I helped build reside. Though the technology helped spur the growth of this new market demand, its really not as important as being able to understand and foresee how the technology can disrupt and change a market.

And it is this disruption that caused the music industry to hemorrhage so badly, and is now effecting the movie industry which culminated in the recent writers strike covered in the same magazine. With so much video content being siphoned off through non traditional media channels via the internet, the writers realized that they were not going to be adequately compensated for this loss, and the executives do not want to give concessions. The reality is that neither of them are going to win. As Patrick Goldstein, and LA Times writer states:

The WGA is fighting the good fight. But the glory days of "Norma Rae" are gone. Real change in today's world comes from the energy and ideas of entrepreneurs, not from labor negotiations. To take control of their work, writers have to cut out the middleman. Marshall Herskovitz and Ed Zwick, who just struck a deal with NBC to air their "Quarterlife" Web-only dramatic series, will reap most of the rewards, since they own the show. Not every writer has the clout of that duo to attract outside investors. But as the Internet has proved time and again, game-changing ideas are more likely to come from an unknown 26-year-old newcomer than a fiftysomething veteran.

THE models are everywhere today, especially in the music business, where economic upheaval has given birth to a new array of artist-entrepreneurs. Radiohead and Prince have both bypassed the soul-killing tangle of retailers and promotion people by releasing their latest records themselves (with Radiohead using the Internet as its distributor, even letting its fans set the price of the record themselves).

Unlike the music and movie industry, the ticketing companies seem to be aware that it was not in their best interest to try and fight against this force, but rather to find a way to profit from it.

What this indicates to me, is that industry executives are finally starting to realize this and reacting in a more appropriate manner, instead of ridiculously trying to sue some John or Jane Doe who simply wants to purchase and exchange goods and services, through a highly efficient distribution channel cheaply and quickly and on their own terms and conditions.

It has truly become a more user generated and customer focused marketplace, and its sometimes interesting to sit back and see how you contributed to it, no matter how small it was.

The Long Tail and Personal Branding

In a previous post, I had written about the importance and paradox of personal branding. I was just now thinking about and reading some literature on the topic of "The Long Tail", which as a Wikipedia defines, "is the colloquial name for a long-known feature of some statistical distributions... In these distributions a high-frequency or high-amplitude population is followed by a low-frequency or low-amplitude population which gradually 'tails off'".

The graph below is a nice illustration of this phenomenon:



As the graphic illustrates, in these types of curves its about 20% of the whole area being measured that dominate about 80% of the phenomenon. Indeed, it is Pareto's 80/20 principle that is being displayed and the long tail is in a sense a Pareto tail. This is important to keep in mind, because later I will show how Pareto's principles come back to us.

This notion was popularized by the Wired article written by Chris Anderson which is probably the most commented and written about article in Wired history. Here's how he describes the Long Tail:

You can find everything out there on the Long Tail. There's the back catalog, older albums still fondly remembered by longtime fans or rediscovered by new ones. There are live tracks, B-sides, remixes, even (gasp) covers. There are niches by the thousands, genre within genre within genre: Imagine an entire Tower Records devoted to '80s hair bands or ambient dub. There are foreign bands, once priced out of reach in the Import aisle, and obscure bands on even more obscure labels, many of which don't have the distribution clout to get into Tower at all...

When you think about it, most successful businesses on the Internet are about aggregating the Long Tail in one way or another. Google, for instance, makes most of its money off small advertisers (the long tail of advertising), and eBay is mostly tail as well - niche and one-off products. By overcoming the limitations of geography and scale, just as Rhapsody and Amazon have, Google and eBay have discovered new markets and expanded existing ones.

This is the power of the Long Tail. The companies at the vanguard of it are showing the way with three big lessons. Call them the new rules for the new entertainment economy.

The music industry is where the effect of this has been the most pronounced, as the industry has lost significant market share to downloaded music both legal and illegal. The reference to Tower records is most telling of all, as that franchise recently declared bankruptcy and has closed all its stores down.

So what does this entail for someone (like myself), trying to pursue establishing a personal brand? Quite a bit.

My feeling is that the whole idea of trying to brand yourself is predicated on there being enough market share in the long tail for your to monopolize. Because lets face it, you are trying to be a "minor" celebrity within your chosen profession, industry, service, etc. niche. In other words, you don't want to be just another Joe/Jane competing with a bazillion other Joes and Janes for a job, business opportunity or gig. You want your brand, namely you, to be recognizable enough in your chosen niche such that opportunities come to you, instead of like the rest of the herd, fighting for the scraps.

Let us now look at the main tenets of the Long Tail and how they will influence your pursuit of your personal brand dominating a niche (I got this summary from an Amazon book review of "The Long Tail" by Chris Anderson):

1. In virtually all markets, there are far more niche goods than hits, as a result of the improvements in the basic tools of production (i.e. Internet).

In the regard, it would be the ability for you to distribute your brand and ideas about you very efficiently, effectively and cheaply through the internet. Just like I'm blogging here and all the other forums I participate in related to my specialty.

2. The costs of reaching these niches is now falling dramatically thanks to digital distribution, search and a critical mass of broadband technology.

The key here, is having your self-brand to be easily searched and identified. As I posted in my previous blog, while it is very easy to get your brand out there, paradoxically, so it is the same for everyone else, so you have to work harder to distinguish yourself.

3. There are a range of tools - from recommendations to rankings (think search) that help to shift demand down the long tail, and help people find useful/relevant niches.

Yes, and given that you are targeting a niche in the Long Tail, there is a more highly focused audience and potential market demand. The key as I mentioned, is to be easily identifiable and recognizable.

4. The effect of all of this is that the demand curve will eventually flatten, with the hits becoming relatively less popular and the niches growing in popularity.

Yes, but as I will mention in a moment, your niche will eventually grow into its own meaty curve with sub long tails within it.

5. All of the niches add up to comprise a market that rivals the hits.

We are already witnessing this phenomenon with the advent of user directed content on YouTube, blogs and social networking sites that is now rivaling traditional mainstream media, and in some respects have exceeded it.

6. The internet can reveal a natural shape of demand, undistorted by distribution bottlenecks, scarcity of information and limited choice of shelf space.

While this is true, there is a concern where the Long Tail gets too flat and the demand distribution gets too diluted. When this occurs, the curve can shift back.

History seems to indicate that no matter how much a certain technology, and the internet was a pretty huge one, disrupts economic patterns, there is still only a finite amount of people, time and attention you can expect to obtain, thus the fundamental laws of economics will still hold. When the Long Tail becomes to flat for your particular focus, the Law of Diminishing Return will kick in and effect you.

Thus, here's what I'd recommend in your strategy to expand your personal brand:

• Pay careful attention to the niche you are targeting. Will you have enough time to occupy the upper quadrant of the Pareto curve within the niche you are focused on? Is it large enough to be worth your effort?
• If so, then Pareto's law kicks in, because in every economic phenomenon, about 20% of the entities control 80% or more of the resources. You cannot escape this, so make sure you obtain and sustain the monopoly or oligopoly to which your brand identifies with.
• Then when you are a well established personal brand, be careful of overexposure and complacency. The very same disruptive forces that allowed you to dominate a niche, can displace you as well. Clayton Christensen documented this well in his book, "The Innovator's Dilemma".
• One way of preventing the above, is to parlay your brand to capture another niche. A great example of this is Arnold Schwarzenegger, a person who found a way to become a dominant brand within the niche of bodybuilding, then parlayed that skill to gain great prominence in business, acting, and politics.
• Finally, you are the CEO of the company called "You", thus you must work hard much like a company does to market and acquire mind share as opposed to market share, and do all the very same practices the big companies do to maintain it. Fortunately, you are a one person show, thus you are more nimble and can adapt quickly to changing circumstances.

Interesting what I'm describing above is much like the phenomenon of Fractals in Chaos or Complexity Theory. Each time you zoom into the Long Tail, you see other Long Tails, each with their own Pareto curves. Likewise, your brand niche could be as software programming expert, and within that field, there would be sub-niches such as Java expert or web scripting expert, and so on and so forth.

Lots of work and things to think about, but what could be more important than being mindful of that identity called "You"?

Robert Reich's Confirmation of the "Inverted Bell Cuve"

I just came across this interesting blog entry from Robert Reich, who was always my most favorite cabinet member of former president Bill Clinton. In the post, he seems to confirm what I had posted about a while ago about the declining middle class causing an Inverted Bell Curve, for he writes:

According to new polls, the economy is the number 1 issue for American voters. But that's not just because the economy is slowing and mortgages are harder to come by. The real reason is middle-class families have exhausted the coping mechanisms they've used for over three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation. Male wages today are actually lower than they were then; the income of a young man in his 30s is now 12 percent below that of a man his age three decades ago...

The fact is, most Americans are still not prospering in the high-tech, global economy that emerged three decades ago. Almost all the benefits of economic growth since then have gone to a relatively small number of people at the very top.

Funny how we kept talking about how the information super highway and blossoming high-tech industries were going to increase worker productivity, which increased productivity so much in fact, that it seems to have put them right out of work!

It has been quite some time since America has undergone a major revolution, and by that I mean such events such as gaining independence from England during the 18th century, the emancipation of African-American slaves, or the expansive social reforms instituted by FDR during the Great Depression, but as more and more of the middle class gets squeezed out and the curve keeps dipping downward, it will sling back up very hard before breaking and that's when a revolution can occur. It always seems to work that way.