Can Silicon Valley Repeal The Laws Of Economics?

from the not-paying-attention dept

The changes we've been seeing in the content industries is driven by some very basic economic forces: competition pushes the price of goods and services toward their marginal cost. There's now lots of competition in markets for information goods, and the marginal cost of producing those items (i.e. distributing a copy of an already-produced song or article) is very close to zero. Therefore, we should expect that over time, the prices of those products would also fall, to the point where the price becomes zero and producers use those information goods as a way to sell other goods. And that's exactly what we've been seeing over the last few years. Newspapers are dropping their paywalls and selling ads. Bloggers are giving away news and commentary as a way of building up their reputations. And we're starting to see musicians give away more of their music as a way to build up a fan base for their concerts. These trends are driven by some pretty fundamental economic forces, and there's not much any one person or industry can do to change them.

But some people are very confused about this. For example, writing in the New York Times, Jaron Lanier tries to blame Silicon Valley for setting the Internet up wrong. He claims that "we" could "design information systems so that people can pay for content." Apparently, Lanier hasn't been paying attention over the last decade. What Lanier is alluding to is micropayments, and micropayments have been tried over and over again. Silicon Valley was only too happy to offer consumers opportunities to pay small amounts of money for content. But it turns out that customers hate micropayments. They're a headache to deal with and they produce very little revenue for content creators. After years of trying to get customers to sign up for micropayments, websites finally discovered that it just works a lot better to give the content away and sell ads.

The other thing Lanier apparently hasn't noticed is that there's already a massive industry devoted to producing content and giving it away in order to sell ads. Last time I checked, a ton of people make a living in the television industry, despite the fact that virtually all the content they produce is given away free of charge. Yet inexplicably, Lanier seems to believe that giving away content and selling ads won't be a viable business model in the Internet age. The problem isn't that ad-supported content isn't viable. The problem is that a lot of incumbent media companies have executed their Internet strategies so ineptly that hardly anyone is visiting their sites. You can't sell very many ads if you've got a tiny audience. The solution is for them to come up with more appealing products (hint: dropping DRM is a good first step), not to once again bang their heads against the brick wall of micropayments.

Reader Comments (rss)

(Flattened / Threaded)

  1. identicon
    Joe Smith, Nov 21st, 2007 @ 7:01pm

    Give the customer what he wants

    The problem is that a lot of incumbent media companies have executed their Internet strategies so ineptly that hardly anyone is visiting their sites

    Most TV shows have a web site but if you go to those sites they are almost uniformly: in bad color choices; too much clutter and not enough information; impossible to navigate; too dark - when are they going to realize that only teenage webmasters like black backgrounds?

    reply to this | link to this | view in thread ]

  2. identicon
    Matthew Miller, Nov 21st, 2007 @ 8:14pm

    Yes But

    I understand your opinion about everything except the color part. I am an "expert" IMHO webmaster, and I like black backgrounds, but even I can't master (and as you have pointed out the "big guys" cant either) that particular design choice. I don't know, maybe theres something about black backgrounds you dont like, or everyone, majority of people dont like at this particular "generation" of people?

    reply to this | link to this | view in thread ]

  3. icon
    boomhauer (profile), Nov 21st, 2007 @ 8:40pm

    are you a


    reply to this | link to this | view in thread ]

  4. identicon
    Benefacio, Nov 21st, 2007 @ 9:07pm

    DRM is a non-issue

    I keep hearing pundits and experts decrying DRM. Who cares about DRM? It isn't what customers are concerned with. DRM only gets in the way for those of us who are looking for free collections.

    A good first step is to remove the need to download in the first place. Make episodes available to watch anytime, including the same time as over the air, as well as on any system (PC, HT or other) that can access the site. Why waste my time on an ever increasing demand for storage when I can go to someone else's storage for what I want.

    The next step is to remember that excessive greed will kill a business faster than ineptitude. Just because web pages offer more potential ad space doesn't mean it all needs to be used. It has taken 50 years to get the best spread of show versus ad on broadcast; hopefully it will not take that long for the web.

    reply to this | link to this | view in thread ]

  5. identicon
    Anonymous Coward, Nov 22nd, 2007 @ 1:29am

    "Bloggers are giving away news and commentary as a way of building up their reputations."

    I don't know any blogging site that give away news. The only news content in blogs are references to other stories already published the net, sometimes blogs add pertinent commetary but mostly they are confused.

    Some bloggers assume that in the future all content will be free on the Internet and paid for by adverts. This is an example of the standard bloggers assumption that "everything I don't understand is easy".

    In fact no one like adverts in their internet experience and would like to avoid them (and most browsers cater to that to some extent). Also advertisers need to have a business case and be cost effective - essentially they need to make more money that they spend on the adverts which includes the costs of the "free" content.

    In addition the assumption that content paid for by advertising is identical to content not paid for by advertising is clealry erroneuos since content is tuned tothe purposes of the adverts - e.g as applied to music advertising tends to push music towards jingles and ring tones since that's the mostcost effective way to manufacture music; putting multiple ideas into complex music of longer diration requires much more time, effort and risk from the advertisers point of view.

    reply to this | link to this | view in thread ]

  6. identicon
    Max Powers, Nov 22nd, 2007 @ 2:10am

    Blogging News

    I agree that bloggers just check the news-wires and give away others news. I do it myself. Would I pay for news? Of course not, it's free everywhere, but these news outlets do offer premium services for those websites that need it.

    Even though the "free content" is on the rise, I already see some sites that you are unable to tell if the content is "real news" or "advertisements."

    reply to this | link to this | view in thread ]

  7. identicon
    Donald Jessop, Nov 22nd, 2007 @ 7:37am

    Ad supported?

    But it turns out that customers hate micropayments.

    The problem isn't that ad-supported content isn't viable.

    I may be in the minority here, but aren't advertisements really micropayments for the content? I mean, it isn't the content consumer that is paying for the content, but, in the long run, doessn't each little advertisement count as a micropayment? The more popular the content, the more micropayments a site makes. Sounds a lot like a television network that charges potential clients more money for a popular show because more people (more micropayments?) watch it. I'd say the model we have right now is TV 2.0.

    reply to this | link to this | view in thread ]

  8. identicon
    Bigpicture, Nov 22nd, 2007 @ 8:28am

    Re: Yes But

    If you don't understand the emotional impacts of color then maybe you should visit some professional interior decorating sites. The overwhelming recommendation is only use black as trim. But the informed use of colors and saturations and tones have a huge effect on mood. Then of course there is the overall look and feel, and the intuitive navigation issues.

    reply to this | link to this | view in thread ]

  9. identicon
    Max Swanson, Nov 22nd, 2007 @ 9:09am

    Tim Lee makes some very good points. The Net may be the new, if not still hot, medium; yet purveyors of content can still draw lessons from their own past. Newspapers perfectedthe art of the insert, but they make the least effort to separate ad content from their own product when on the Web. For my money, the prime example of a company that got it wrong again and again, and yet again, is Real Networks. They have a reasonably good audio an video format, and decent software for the end user; but as Lew Reid might put it, "Everybody had to pay and pay." Winamp taught that lesson to AOL some time back, but I rarely visit AOL for fear of the sticky software they offered in the past.

    reply to this | link to this | view in thread ]

  10. identicon
    Tim Lee, Nov 22nd, 2007 @ 9:41am

    Re: Ad supported?

    That's not how the term "micropayment" is usually used, and more to the point, that's not the way Lanier is using it, since he's specifically criticizing the idea of giving content away and selling ads. But you're right that ads are a very efficient way of generating "micro-revenue" from each visitor, without incurring the overhead of a formal payment system.

    reply to this | link to this | view in thread ]

  11. identicon
    Jon, Nov 22nd, 2007 @ 2:12pm

    Re: Ad supported?

    What really killed the idea of micropayments is simple: Who wants to go through the hassle of repeatedly inputting all the needed information to make an online payment for a relatively trivial amount of money on every paid site?

    Remember how long it can take setting things up to make an online payment in Amazon? Well try multiplying that by every site that would like to have you make "micropayments". Not to mention the security risks involved when you're putting in a credit card number in dozens of sites. At least one is bound to have easily exploitable security flaws.

    While the infrastructure for micropayments could be easily implemented, it's really something that would end up detouring more views than the revenue it would generate could justify.

    One thing really should be brought to attention:
    With the proliferation of ad-blocking extensions for most browsers and their effectiveness increasing just as fast as adds try to get around them, How much longer will it be before the ad-supported model ceases to be a viable option?

    reply to this | link to this | view in thread ]

  12. identicon
    Anonymous Coward, Nov 22nd, 2007 @ 4:00pm

    "Apparently, Lanier hasn't been paying attention over the last decade. What Lanier is alluding to is micropayments, and micropayments..."

    Just read the linked article and actually Lanier is the one who was paying attention : "A decade is a long enough time that idealism and hope are no longer enough. If there’s one practice technologists ought to embrace, it is the evaluation of empirical results." you must have missed that part.

    Nor does he doesn't allude to micropayments; the example he references are iTunes and Second Life.

    Perhaps the kind of news bloggers are giving away is the kind you make up !.

    reply to this | link to this | view in thread ]

  13. identicon
    Matthew, Nov 23rd, 2007 @ 8:39am

    Merely the conversion

    from democrat to republican has occurred:

    Affordable turns out to be much harder than free when it comes to information technology, but we are smart enough to figure it out. We owe it to ourselves and to our creative friends to acknowledge the negative results of our old idealism. We need to grow up.

    The ideology of youth has been worn away by the sands of time and crushed by the dropping of NY Times' paywall and his article not being paid for per view any longer.

    reply to this | link to this | view in thread ]

  14. identicon
    BeyondABuGroN, Nov 23rd, 2007 @ 10:17am

    Re: DRM is a non-issue

    "It has taken 50 years to get the best spread of show versus ad on broadcast"

    You're kidding, right? You must be de-sensitized to ad, cause last I checked the DVR has been widely accepted as *the* must have television experience enhancement. (for the obvious, marketed reasons). Big broadcast sold themselves out to AOL a long time ago already, we've had permission to bypass their commercials for quite some time.

    "pundits and experts decrying DRM"
    "excessive greed..." "faster than ineptitude"

    Where did you get these words that you use so freely? Do we use the same internet, or are you *the one*?

    reply to this | link to this | view in thread ]

  15. identicon
    Anonymous Coward, Nov 23rd, 2007 @ 12:59pm

    Micro payments won't work because even the smallest hinderence to access puts many if not most, viewers off. Heck, I usually click right on past when a site I would otherwise be interested in simply asked me to register, for free.
    I know for me it's that you just get to the point where having to enter all that info [i]one more time[/i] just becomes so tedious I just won't for most sites anymore.
    Not to mention a few bad experiences like when I registered for access to a major newspapers site, for free, and immediately and for weeks after my inbox was flooded with dozens of "alerts" everyday until I figured out how to undo the "alert me for everything" defaults they had.

    reply to this | link to this | view in thread ]

  16. identicon
    Anonymous Coward, Nov 23rd, 2007 @ 3:01pm

    There is actually a technology that is intended to work as a universal ID on the 'net, if enough sites accept it. You could essentially register on one site, go to another and quickly setup an account on a separate one (providing it supports the feature).
    I forgot the name of it (I know that Microsoft is trying to implement its own version), but perhaps a similar setup could be used for online payments (with a lot more security, of course).

    I'm not sure but I think I may have strayed from the topic (free ad-supported content on the Internet).

    reply to this | link to this | view in thread ]

  17. identicon
    Kosta, Nov 23rd, 2007 @ 7:42pm


    it is openID

    reply to this | link to this | view in thread ]

  18. identicon
    Perros, Nov 24th, 2007 @ 12:30am


    Micropayments worked successfully on (before it was shut down).

    If the content is good enough (and has enough perceived value) i.e. Music/Films, then people may be willing to pay small amounts for DRM free, high quality copies.


    reply to this | link to this | view in thread ]

  19. identicon
    DeveloperZero, Nov 25th, 2007 @ 2:17am

    A Couple of Things

    A couple of things:
    1)On the color subject, I had a friends who explained it to me once. People who use computers a lot have realized (and it is pretty logical, thouch I'm too lazy to implement it) that by using a black background, you can create a lower contrast display that is better on your eyes for extended use (i.e. browsing the web or programming for hours).

    2)Most of you misunderstand the micropayment system. The basic theory of how it would work is: you PRELOAD an account with money, then spend a few cents at a time on content you felt was worth the money. PayPal had been working on a system for something like that at one point in time, but it fell through.

    3)Premium content is still viable (as a moneymaking method), and is seen from time to time, in the form of ad-less content. I can't give any example off-hand, but I have seen it from time to time (especially on those sites that have 50 banners all around the page). Another example of premium "content" would be Microsoft's Visual Studio products; they just started offering a free version of their professional-quality software last year, but still offer (and make a profit from) their full, professional version because it offers more features (such as having one program for every language, and extensibility).

    4)Microsoft did (and still does) have an ID system. It used to be called Passport, and is now called Live ID (I believe). The only reason you didn't see Passport very often was because Microsoft charged companies to use it (they basically charged for access to the Passport server), and no one wanted to pay for it. (Well, that and because 90% of the internet has a stick up their ass about not wanting Microsft to make ANY money on their products). I honestly don't know if they offer Live as a service to other companies or not.

    Side note, did anyone else notice comment number 4 on the first "over" link: "packets could actually be artificially delayed". Sound familiar to anyone?

    reply to this | link to this | view in thread ]

  20. identicon
    Allison, Nov 25th, 2007 @ 2:41pm

    Interesting. Blame silicon valley? What happened to the idea of a free market? Hasn't the past ten years given the market a chance to decide and to make it very clear: keep it free and open, and upsell premium content?

    At some point the bulk of content producers are going to have to see that the winning model is Google, which uses fairly understated ads to produce revenue, and is experimenting with a similar type approach on YouTube. The other winning model is iTunes, which is a paid model, but is a central portal/distributor for premium content, and has a large amount of free content in the form of podcasts. Facebook and others are variations on the theme.

    As for micro payments, Second Life is a prime example of it in action. Good content providers do make money in there, but, it's also showing signs of content theft, so even a successful micro payment platform has it's problems of people not wanting to pay for content.

    It seems to me that when trying to answer the question of how much are people willing to spend on a given virtual item, the answer is heading closer to zero, and artificial constraints are unlikely to change it.

    reply to this | link to this | view in thread ]

  21. identicon
    Nismoto, Nov 26th, 2007 @ 9:54am

    Re: DRM is a non-issue

    Who cares about DRM? It isn't what customers are concerned with. DRM only gets in the way for those of us who are looking for free collections.

    Customers DO CARE. I purchase music regularly. I have had music cds install hidden software when inserted into my cd drive. I've been forced to use the "artists" branded flash media player to listen to the cd instead of MY media player. I've purchased music online and then went to hell and back trying to get it to play on my (and my kids') mp3 players, not to mention trying stream the DRM'd files throughout my house. And let's not even talk about i-f#cking-Tunes. My collection is not free and I HATE DRM.

    A good first step is to remove the need to download in the first place.

    What are you talking about and where have you been? How would I listen to music on my portable, hand-held media player? I don't think a single one is made that can connect to the internet for your "streaming" solution anytime/anywhere. Most streaming internet radio stations don't allow you to listen to what you want: they broadcast THEIR playlist.

    It has taken 50 years to get the best spread of show versus ad on broadcast;

    WTF??? The last time I checked, i get nailed every 6.5 minutes with about 2 minutes worth or crap-vertising. It has gotten so incredibly ridiculous that I won't even watch Heroes anymore on TV. I can download the commercial-free episode and, with timezone differences, watch it at almost the same time as it airs (no, I don't have Tivo).

    reply to this | link to this | view in thread ]

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