Virtual Goods, Scams, Investigative Reporting And The Media

from the all-in-one-package dept

For many years, we've been quite skeptical of any business model in virtual worlds/social networks that rely on "buying virtual goods." That's because these are all based on artificial scarcities, and as we all know (hopefully, by now), relying on artificial scarcities for a business model is incredibly risky, especially once people realize the scarcities are artificial. And yet, over the past few years, a number of businesses have been built on this very premise. In fact, Silicon Valley is crawling these days with businesses built on selling virtual goods, and if you talk to many VCs about it, you'll quickly note that they're positively giddy over the fact that people are paying for this stuff. What they don't seem to realize is that it's unlikely to last.

In the last couple weeks, Mike Arrington, over at TechCrunch, did an amazing job calling attention to the widely known, but rarely discussed in polite company, dark underbelly to most of those business models: quite a large part of their revenue is based on scammy offers that effectively trick unsophisticated purchasers (often kids) into signing up for expensive subscriptions to things they don't want. I was at an investor "roundtable" a couple months ago, which was mostly bankers in suits, and they were laughing about just how gullible people are on these things, and it's great to see TechCrunch exposing them, and pushing the worst abusers to clean up their act. Of course, even when some, like Zynga, claim to be cleaning up their act, Arrington was able to dig up a video where Zynga's CEO proudly talked about the scammy tactics he used -- and then noted that these same scammy tactics showed right back up on Zynga, after the company promised they were gone. Those who use these kinds of tactics may find that while they "bring revenue now," it may be short-lived. Companies that focus on such abusive tactics live to regret it (just ask RealNetworks).

But, the really amazing thing, as pointed out by Dan Lyons/Fake Steve Jobs, in an amazingly un-Fake-Steve-Jobs-like rant, is to compare the series of writeups by Arrington with the love letter to Zynga and other "virtual goods" companies in the NY Times, which came out after most of Arrington's posts, and makes no mention of them at all. As Lyons/FSJ notes:

So: they walked into this shit-storm and somehow, by some miracle, managed not to notice the fecal matter flying all around them. It's like covering a football game that took place in the middle of the blizzard and neglecting to mention the weather.

Now, maybe they did all the reporting before Arrington's stuff broke. In which case they should have gone back and updated their info. Or maybe, just maybe, Zynga's PR people teed up a Times story as a kind of rebuttal to what Arrington was reporting. Either way, that's what ended up happening: Zynga used the Times to deflect the bad shit flying at them from Arrington. They need good press because they're hoping to cash out by going public next year. That story in the Times will be worth millions. Many millions.

Meanwhile, Arrington, still digging, blasted again on Saturday night, reporting that sleazy ads had popped up again on Zynga, despite promises that they would be taken down.

Um, New York Times? If you guys are still wondering why people are dropping their subscriptions and getting their news from blogs instead of you -- this is why.

After which, Lyons/FSJ notes:

And to all those people who go around wringing their hands and saying what are we going to do when the "real newspapers" all die and we have to get our news from Gawker and HuffPo and TechCrunch? Friends, I think we're going to be just fine.... What really cracks me up is how often I still hear people say that bloggers are mere "aggregators" and the "real journalism" gets done at places like the Times. Because time after time, blogs are simply beating the shit out of the newspapers. They're the ones who still dare to go for the throat, while their counterparts at big newspapers just keep reaching for the shrimp cocktail.

Of course, there's just a bit of irony in noting that Dan Lyons wrote one of the quintessential blog bashing articles four years ago, when he was writing for Forbes, at one point suggesting that blogger "journalists" were no different than notorious (NY Times) maker-up-of-stories, Jayson Blair. Nice to see he's coming around to recognizing things perhaps aren't so bad in the blog world.

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AP Quotes Blogger In Discussing Bloggers Quoting AP; Hilarity Ensues

from the i-want-my-$12.50 dept

The ongoing ridiculous situation brewing between bloggers and the Associated Press has now taken a turn towards the enjoyably hilarious. We had already mentioned the fact that, despite the AP's complaints that bloggers quoting less than 100 words were violating fair use, the AP had a long history of quoting more than 100 words from bloggers -- and not even linking back to the original blog. Now, in a bit of ultimate irony, the AP's own article about this brouhaha quoted (without linking) twenty-two words from TechCrunch. That's 18 words more than the supposed four word "limit" the AP has suggested. With an ironic chance that wide, TechCrunch's Michael Arrington couldn't resist, and asked his lawyer to send a DMCA takedown notice to the Associated Press, along with a bill for $12.50 (directly off the AP's own pricing schedule). He admits that it's ridiculous, but that's what his actions are designed to present. By law, the AP should be required to takedown the content before filing a response -- though, since it's filing the response to itself, then perhaps it won't need to takedown the content. Either way, this helps illustrate the insanity of the entire situation.

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On Content, Promotions, Basic Economics... And Loutish Statements

from the content-and-advertising dept

Last week, I wrote a post that kicked off an interesting discussion on the fact that all advertising is content... and that all content is advertising. The discussion only convinced me I hadn't clearly explained myself on the subject. I'm thinking of maybe doing another short series of posts to discuss this concept further. And, what better way to kick it off than to point out more faulty logic from Nick Carr. Just yesterday we had discussed how incorrect Carr was in his assessment of Billy Bragg's equally incorrect op-ed piece in the NY Times. Mike Arrington over at TechCrunch chimed in as well, making many of the same points that we make around here, and have made for years. Oddly, Nick Carr then responded to one particular sentence from Arrington, calling it: "the saddest, stupidest sentence I've ever read." Carr also called Arrington's explanation "loutish." What deserved such a claim?

"Recorded music is nothing but marketing material to drive awareness of an artist."

Now, I'm not going to speak for Arrington, but I will speak for myself, and note that I've been saying similar things for nearly a decade. So I'll defend my own statements and explain exactly how it fits into the point last week about all content being advertising -- and all advertising being content. First off, I don't think that recorded music only drives awareness of the artist. I think it helps drive awareness of a whole host of other scarce goods related to the artist. But awareness is the biggest and most important in implementing a useful business model. So I find it hard to see how it's either sad or stupid, considering that it's actually quite accurate and a fundamental understanding of economics would show how it's true. Besides, if that's really the saddest or stupidest (or both!) sentence Carr has ever read, he doesn't read much.

So why is Arrington right and Carr incorrect? Because Carr still doesn't seem to understand the difference between scarce and abundant (or infinite goods). He doesn't seem to understand externalities. And he doesn't seem to recognize basic econ 101 points, such as price being set at the intersection of supply and demand, or price being equal to marginal cost (two ways of saying the same thing). Finally, he doesn't understand that non-monetary value is equally as important as monetary exchange (and that non-monetary value can be turned into money). For someone who is apparently (is he really?) a well respected economic commentator, these are odd omissions to his education. With an infinite good, the price gets pushed to zero over time. Map out the supply and demand curves and you see that, and you can confirm it when you see that the marginal cost is zero. But this doesn't mean that all is lost. In fact, it's a benefit, because that infinite good now becomes a resource that makes any scarce good it touches much more valuable. In other words, it acts as "promotion" or "marketing material" or "advertising" for those scarce goods. But, you've heard this before.

This is also why all content is advertising. Content is an infinite good. All content advertises something and makes something scarce more valuable. Nick Carr's blog, for example, helps advertise him and convinces people to buy his book (a scarce good) or hire him for consulting (which is buying his time -- another scarce good). Billy Bragg's music acts as advertising for Billy Bragg. It helps him sell more concert tickets at a higher price, or better yet, embrace newer more interesting business models like Trent Reznor, Jill Sobule or Maria Schneider. All of whom are examples of using their content to sell something scarce. It's that content that makes the scarce item valuable, but the content itself, once it exists, is an infinite resource. Once you think of it that way, it's a promotional good that can be given to everyone for free, making every other scarce good you possess more valuable. It's hard to think of why you wouldn't want to promote that way.

And that leads us to Carr's mocking of Arrington with the following paragraph, showing how little he understands the difference between scarce and infinite goods:

"As a printed poem, one assumes, is nothing but marketing material to drive awareness of a poet. As a sculpture is nothing but marketing material to drive awareness of a sculptor. As a film is nothing but marketing material to drive awareness of a director."

As for the first example, yes, a poem is marketing material to drive awareness of a poet. And that allows the poet to sell many scarce goods, including books of poems, the ability to write a new poem, the ability to perform the poetry or even to get a job (say, as a poet laureate or a poetry teacher). None of those things are possible if the poems are not known. A sculpture is not an infinite good, so the statement doesn't quite fit. But an image of a past sculpture absolutely does help promote the sculptor and get them additional work in creating new sculptures (scarce goods!). As for the film, we've discussed this in great detail in the past. It is marketing material to drive people to buy scarce goods: seats in a theater. Even the great theater owner Marcus Loew recognized that: "We sell tickets to theaters, not movies." The movie is the content. It "advertises" the seats. It makes those scarce seats valuable. The content, you see, is advertising. That's not loutish, sad or stupid. It's just a basic economic truth.

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Other posts in this series:

• Advertising Is Content; Content Is Advertising
• On Content, Promotions, Basic Economics... And Loutish Statements
• Content Is Advertising... In The Newspaper Industry
• Content Is Advertising... On TV
• Newspaper Content Is Advertising For More News Content

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