When Will People Stop Exploiting Google?

from the time-to-pay-up dept

I assume you’ve been hearing all about how sites like the Huffington Post are exploiting workers like a slave master by having them work for free. It’s all, as Nick Carr has noted, digital sharecropping, as “free” is really all about exploiting others. And, of course, what it comes down to — as Billy Bragg pointed out a few years ago — is about who profits from all of that “free” stuff. According to Jonathan Tasini, that’s “unjust enrichment.”

Since we’ve established all of that, I have to ask the big question that really represents the elephant in the internet room:

When will people stop exploiting Google?
You see, I recently read on Kevin Kelly’s site about how Google provides about $500 worth of value to the average searcher. And we got it all for free. But, but, but… you say: we’re paying for that in the advertising we see. Oh, how naive. Why, that’s just like saying that Tasini got paid in exposure (how do you measure that?!?) or that Bragg got paid in getting a free platform to promote his music. Others will point out that Google made the choice to offer its service for free — but, again, that applies to the people screaming about being “exploited” by Arianna Huffington as well. Then, of course, some will say that those situations are different because they involved companies cashing out. Yet, according to the Kevin Kelly piece, there’s approximately $65 billion in consumer surplus from Google that the company is not capturing. $65 Billion. How can the company possibly go on knowing that the public has made so much money off of its hard work?

So, all of you using Google without paying your $500 directly to Google, when will you stop exploiting that poor company?

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Okay, got that out of the system. A bit more seriously, you really should read the Kevin Kelly article which combines a few different studies to determine how much Google is worth to users. The really key point in all of this is the pure economic growth created by this. It’s not in Google’s bottom line (though, that’s part of it), but in the massive consumer surplus created by tools like Google that allow people to do things they simply couldn’t do before and do other things much more efficiently. If you understand how economic growth works, this is a perfect example. What are sometimes called “spillover effects” or “consumer surplus” is really economic growth in action. It’s when the sum is greater than the parts, and that value can be more widely distributed. This is a good thing, and it would be nice if people stopped getting confused by “free” and thinking that it means an economic disaster, rather than an economic multiplier, as it often is…

In terms of the specifics, this also really does a nice job of demonstrating the difference between price and value. The technical “price” of using Google is free, but we value it a lot more than that. Google offering up search for free doesn’t “devalue” search, as some suggest. It does the opposite. It creates more value. Kelly asks what would happen if Google decided to try to “capture” that excess value by charging. I’m sure a ton of people would pay. But, really, the question is would that be sustainable? The second Google did something like that, you could bet that Microsoft would suddenly jump to being the number one search engine, and it would open up all sorts of opportunities for new upstarts trying to enter the market. And, really, that’s the key point we keep making. Certain things can’t really succeed at a long-term price over zero, because the competition will just eat them alive. But, a la Google, it doesn’t mean there isn’t a ton of money to be made. You just have to figure out what to charge for. There’s no exploitation going on here. Just economics.

Filed Under: business models, economic growth, exploitation, free

Key Economics Lessons For The Digital Era

from the things-to-remember dept

Jeff Jarvis has a series of short notes that he’s put together on “hard economic lessons” for the news business, but many of them apply to pretty much any industry — and it seems worth pointing some of them out for discussion:

• Tradition is not a business model. The past is no longer a reliable guide to future success.
• “Should” is not a business model. You can say that people “should” pay for your product but they will only if they find value in it.
• Virtue is not a business model. Just because you do good does not mean you deserve to be paid for it.
• Business models are not made of entitlements and emotions. They are made of hard economics. Money has no heart.
• Begging is not a business model. It’s lazy to think that foundations and contributions can solve news’ problems. There isn’t enough money there.
• No one cares what you spent. Arguing that news costs a lot is irrelevant to the market.

There’s a lot more at the link, much of which I agree with (a few I think are slightly misleading or wrong, but those are outweighed by the ones I do think are dead on). However, these were the key points that resonated the most with me and which I think are good pointers that many in traditional businesses have trouble with. Many of the arguments we hear against the new business models we talk about (or the bad decisions by those legacy businesses) stem from not understanding the six points above.

Filed Under: digital, economics, journalism, tradition

'Economics In One Lesson' Apparently Doesn't Include Pricing; Kindle Version Most Expensive

from the let's-try-that-again dept

Copycense, who has done a really bangup job in pointing out some ironic ebook pricing decisions, has another one. The book “Economics in One Lesson,” by Henry Hazilitt is available new from Amazon in paperback for $7.95… or at $9.99 for the Kindle. Apparently, “Economics In One Lesson” either doesn’t include a section on pricing… or whoever did the pricing on the book didn’t read that section…

Filed Under: books, ebooks, economics, pricing

More Video Game Makers Fear The Free Market And Don't Know How To Compete

from the welcome-to-market-changes dept

Here we go again. Remember a few months ago when Nintendo’s President Reggie Fils-Aime was bitching about the fact that people were buying video games on mobile phones for a buck or two, rather than spending many, many multiples that for his games? Apparently, he’s got friends. Epic Games president Mike Capps is playing the role of Nintendo parrot by saying the same thing:

“If there’s anything that’s killing us [in the traditional games business] it’s dollar apps,” he continued. “How do you sell someone a $60 game that’s really worth it? They’re used to 99 cents. As I said, it’s an uncertain time in the industry.”

To be fair, he admits that it’s also “an exciting time for whoever picks the right path.” But if he’s worrying about selling $60 games, perhaps he’s made it clear that he’s not picking the right path. After all, time and time again we’ve seen that video game makers have found it to be significantly more profitable to drastically lower the prices of their games and rake in significantly higher sales.

And, of course, the same time he’s complaining about pricing, we’re seeing the third Humble Indie Bundle selling quite well yet again (just like the first two) using a pay what you want model, that is quite flexible, DRM free and also has a charitable component. If you want to look at who’s on the right path, perhaps you should be looking at those “cheap” game makers who are so profitable and the success of things like the Humble Indie Bundles. Perhaps the problem isn’t convincing anyone to buy a $60 game, but convincing yourself that $60 isn’t the right price.

Then again, this is Epic Games we’re talking about — which, you may recall, was the same company who’s VP scoffed at some indie gamers for talking about the importance of really connecting with their fans. So, basically, this is a company that doesn’t want to connect and wants to charge super high prices. Good luck…

Filed Under: competition, disruption, economics, innovation, markets, video games
Companies: epic games

Can Bitcoin Really Succeed Long Term?

from the questions-to-ponder dept

For quite some time, I’ve been interested in the general concept of currencies and how money works in general. I remember an early episode of NPR’s Planet Money podcast, in which they tried to answer the simple question: what is money? They quickly discovered it’s not an easy question to answer (and, in fact, those working on the podcast have revisited the question many times in many interesting ways — including a fascinating episode a few months back looking at the Island of Stone Money. That episode discussed the island of Yap in the South Pacific, that for many years used massive limestone discs as money. And, by massive, I mean sometimes weighing upwards of a ton. In other words, it didn’t have one of the key features that many normally associate with “money,” which is that it’s a “currency of exchange.” In theory, you can’t easily “exchange” a giant rock.

But the clever islanders on Yap came up with a solution. It was made clear who actually owned which stones, and then you could effectively transfer “title” to the stones, even if you didn’t move the stones themselves. There was even the story of boat that was bringing in a new giant limestone disc (the limestone all came from another island), and due to a storm, the boat capsized and the stone sunk to the bottom of the ocean. However, it still counted as money, just so long as everyone knew whose it was. Now, when you hear that at first, it sounds ridiculous, but as the Planet Money folks pointed out, is it really all that different than your bank account? The only reason you have “money” in your bank account is because the bank marks it in its database. The bank isn’t literally holding a stack of cash for you. In fact, as soon as you give it your money, it’s probably handing it out to someone else.

All that brings me around to the question of Bitcoin. In various techie circles, there’s been a fair amount of buzz about Bitcoin lately. Especially following efforts by other payment companies like Paypal and Mastercard to cut off contributions to Wikileaks, there’s been a lot more interest in figuring out what infrastructure pieces in today’s world should be more decentralized, and an obvious target is “money.”

And that’s where many point to Bitcoin. Jerry Brito has a nice writeup on Bitcoin about how it’s a decentralized digital currency that is growing in popularity, and, in theory can resist attacks and problems of previous attempts at various digital currencies, while providing significant anonymity. Tim Lee quickly responded with skepticism about whether or not Bitcoin can really work, looking both at the demand side of the question and the supply side. I’m not sure Lee’s specific arguments are entirely accurate, but I think his general arguments may be.

This doesn’t mean Bitcoin (or something like it) can’t be successful. It’s just that it has an uphill battle. I think it’s already useful in certain areas, but that’s a big step away from getting to where it really needs to be to succeed in the long run — and those steps can be much bigger than most people imagine. However, I could certainly envision scenarios that lead to rapid Bitcoin (or similar offering) adoption. I just wonder how sustainable it would really be vs. how much would just be a fad. In the end, I have to admit that I’m torn on this one. While I appreciate the concept of Bitcoin, and think that it might be nice if something like it was really popular, I do wonder if it really has the legs to reach such a level of success. One thing I do know for sure, however: I’d certainly like to hear the folks at Planet Money examine Bitcoin and how it plays into their sporadic explorations of money itself.

Filed Under: bitcoin, currency, economics, money

Economist Explains Why Paying Certain Bribes Should Be Legal

from the taking-them?-not-so-much... dept

With a big bribery scandal continuing to unfold in India, it’s a bit interesting to see Kaushik Basu, the chief economic advisor to India’s Ministry of Finance, make the argument that paying bribes should be perfectly legal. Before you jump to conclusions, you have to realize he’s just saying that paying bribes should be legal. Accepting them should remain against the law. As it stands now, both the bribee and the briber are guilty of a crime, and he thinks that’s a mistake.

Under current Indian law, Basu writes,

once a bribe is given, the bribe giver and the bribe taker become partners in crime. It is in their joint interest to keep this fact hidden from the authorities and to be fugitives from the law, because, if caught, both expect to be punished.

But if the law were changed as Basu suggests,

once a bribe is given and the bribe giver collects whatever she is trying to acquire by giving the money, the interests of the bribe taker and bribe giver become completely orthogonal to each other.

… In other words, the interests of the bribe taker and the bribe giver are no longer aligned.

The argument is that this way, there’s less incentive to actually have bribery, because if someone demands a bribe, you can pay it, but then you can report it and get the person in trouble:

In Basu’s world, you pay the bribe and get your refund. Then you go to the authorities and report the clerk who collected the bribe. If the clerk is convicted of taking the bribe, he has to pay you back, and faces additional penalties. You get your money back, and you face no charges.

Of course, the clerk knows that you have this incentive to report him. So, Basu argues, he’ll be less likely to demand the bribe in the first place. These kinds of bribes, which Basu says are currently “rampant” in India, will become much less common.

Of course, the link above, to the Planet Money discussion about this, notes that there would be some unintended consequences. Certainly, it wouldn’t remove all bribery, as many people willingly pay bribes to try to get favors, and in such cases, this would make the power of those bribes even stronger, since they’d have something to hold over the bribe-taker. To deal with this Basu is suggesting that this idea of making it “legal” should only apply to bribes people are pressured to pay to get something they’re legally entitled to receive — and not for things like a company paying off the government to get a contract. Still, another unintended consequence is that it could increase false accusations of bribery. So it’s not a perfect solution by any means, but it is interesting to think about.

Filed Under: bribes, economics, kaushik basu

Discussions About Scarcity vs. Abundance In Copyright From A Century Ago Sound Just Like Those Today

from the history-repeats-itself dept

A reader by the name of Shadow-Slider points us to a fascinating report from a 1897 Copyright Commission in Great Britain in which the report points out how content is different than real property because of the difference between scarcity and abundance. It sounds very much like what we discuss here — just well over a century ago.

Some of the witnesses whose evidence has been received by Your Majesty’s Commission have urged the claim of authors to perpetual copyright, on the ground that the right of an author to property in his published works is as complete and extends as far as the right of any person to any property whatever.

If this analogy were admitted, it appears to me that it would be difficult to dispute the claim of an author to perpetual copyright; but I venture to submit that the claim of an author to a right of property in his published works rests upon a radical economic fallacy, viz., a misconception of the nature of the law of value.

The necessity which is recognize in all civilised societies of conferring rights of private or personal property arises from the limited supply of that for which there is an unlimited demand. It is only from a limitation of supply that there can be any value in exchange.

But supply may be limited either by natural or artificial causes.

Wherever supply is limited by natural causes it is necessary in the public interest to limit the demand, by investing the possessor of the subject of it with proprietary rights, for without them the progressive increase of an unlimited demand operation on a limited supply would lead to the dissolution of society. To whatever extent these rights partake, as they often must, of the character of a monopoly, they do so in virtue of attributes derived from the nature of things, which may be regretted, but must be accepted as inevitable, and which the law is therefore compelled to recognise.

There is no such necessity in the case of those objects which are useful or necessary for mankind of which supply is unlimited. In that which is absolutely unlimited, in the air, in sunlight, in the forces of nature, such as heat, electricity, magnetism, &c., there is no natural exchangeable value, and therefore no property; that which, although absolutely unlimited in itself, nevertheless exceeds all probable or possible demands in exchange, there can be little or no value, and little or no property, e.g., in the sea, in the water of large or unfrequented streams, in the game of a wild country, or in the fish of the sea. It is in fact scarcity which creates value, and renders property necessary. Property exists in order to provide against the evils of natural scarcity. A limitation of supply by artificial causes, creates scarcity in order to create property. To limit that which is in its nature unlimited, and thereby to confer an exchangeable value on that which, without such interference, would be the gratuitous possession of mankind, is to create an artificial monopoly which has no warrant in the nature of things, which serves to produce scarcity where there ought to be abundance, and to confine to the few gifts which were intended for all.

Apparently my own thoughts on this stuff is accidentally derivative of what came way before…

Filed Under: 1897, abundance, copyright, economics, history, scarcity

According To Microsoft's Own Numbers, Microsoft Costs The World Economy $500 Billion

from the money-could-go-elsewhere dept

It’s always amusing when you see studies done by companies about how much money is “gained” or “lost” from certain activities — as if the actual money wouldn’t or doesn’t go to other sources if diverted. So, when Microsoft hired IDC to write a report hyping up how Microsoft and its various partners “generated revenue of $580 billion in 2010,” the idea was clearly to suggest that Microsoft was very good for the economy. Yet, that’s only one way to view it. Glyn Moody, quite reasonably, points out the other side of the story, which is that if that money weren’t spent on Microsoft products, it could have gone to much more productive uses. By his (somewhat tongue-in-cheek) back-of-the-envelope calculation, this study really seems to suggest that Microsoft cost the world economy somewhere in the range of $500 billion:

Red Hat’s CEO Jim Whitehurst makes an interesting point about the cost of software:

He said that he did think that Red Hat could get to $5 billion in due course, but that this entailed “replacing $50 billion of revenue” currently enjoyed by other computer companies. What he meant was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion.

That is, open source software typically costs only 10% of the equivalent proprietary products. This isn’t about “destroying” wealth, though: customers are left with the other 90% to spend on other things. It is still in the economy, but spent elsewhere.

Applied to IDC’s figures for Microsoft, this would imply that the $580 billion revenue might well be replaceable by a tenth of that – let’s say $80 billion, to be on the safe side. Which means, of course, that the effective cost of the Microsoft ecosystem to the world in terms of money spent needlessly is around half a trillion dollars.

Seems only fair. If Microsoft and others are going to claim “ripple effects” for unauthorized copies, it seems reasonable to point out that there are ripple effects to people paying for Microsoft software, rather than spending it on other, potentially more productive, uses.

Filed Under: economics, ripple effects
Companies: microsoft

Android, Economic Moats, And How Zero Marginal Cost Defenses Can Also Be Great Offenses

from the ain't-just-defensive dept

Venture capitalist Bill Gurley has another excellent economic analysis of how powerful Android is and what it really means for Google. I have one (somewhat serious) quibble with it, in that I actually think Gurley misses the key economic point that would have made his argument even more convincing, but I’ll get to that later on. The key points he makes are dead on, and should be recognizable to regular readers of this blog on our economic analysis of zero marginal cost products.

He kicks it off with a general business observation from Warren Buffet:

One of Warren Buffet’s most famous quotes is that “In business, I look for economic castles protected by unbreachable ‘moats’.” An “economic castle” is a great business, and the “unbreachable moat” is the strategy or market dynamic that heightens the barriers-to-entry and makes it difficult or ideally impossible to compete with, or gain access to, the economic castle….

For Google, the economic castle is clearly the search business, augmented by its amazing AdWords monetization framework. Because of its clear network effect, and amazing price optimization (though the customer bidding process), this machine is a monster. Also, because of its far-reaching usage both on and off of Google, AdWords has a volume advantage as well. Perhaps the most telling map with regards to the location of the castle can be found in Jonathan Rosenberg’s “Meaning of Open” blog post. In this open manifesto, Jonathan opines over and over again that open systems unquestionably result in the very best solutions for end customers. That is with one exception. “In many cases, most notably our search and ads products, opening up the code would not contribute to these goals and would actually hurt users.” As Rodney Dangerfield said in Caddyshack, “It looks good on you, though.”

From there, Gurley points out that pretty much all of Google’s other products are effectively that “moat.” They’re the things that keep bringing you back to Google’s search and ad products. And that’s where Android fits in:

So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.

From there, he points out, that this makes it difficult for anyone else “trying to extract economic rent for a competitive product in the same market.” Indeed. And while that may raise some antitrust alarm bells, Gurley later points out why it should not:

One might yearn to suggest that there is a market unjust here that should be investigated by some government entity, but let us not forget that the consumer is not harmed here — in fact far from it. The consumer is getting great software at the cheapest price possible. Free. The consumer might be harmed if this activity were prevented. And as we just suggested above, the market is finally driving towards software pricing that represents “perfect competition.”

I actually think there’s a decent retort to this, which is that someone could say that this moat situation means that others cannot get into the market at all, and thus consumers could be hurt in the decrease of competition, which could mean that certain innovations don’t make the market and/or that Google begins to stagnate on innovation as it faces no serious competition in those areas. To date, however, I don’t believe there’s much evidence that this is happening with Google (though, it is an area worth watching carefully).

But, really, what Gurley is describing is the same stuff that we’ve been talking about for over a decade: it’s the natural economics of digital goods. Over time, someone will figure out a way to price those goods at the marginal cost of zero, and use that to support some other business. So, if you’re sitting around hoping to charge for those goods, you’re going to be left out in the cold. We know that argument and live that argument, though it’s always nice to see it being validated yet again in real life.

But here’s the key point that I think Gurley is missing, and which would have made his argument even stronger. Above, I bolded the line in his writeup that said that “Google’s aim is defensive not offensive,” with these products. I think he’s actually underestimating Google here. These moves are both defensive and offensive (the best offense is a good defense, right?), though not in the traditional way of trying to directly monetize those offerings. It’s that those “free” or abundant goods don’t just act as a defensive shield, but they can also make the scarce “castle” good much more valuable. If we’re sticking with the moat analogy, it’s a situation where the moat not only acts as a defense, but it also serves to float the castle to even higher levels.

We’ve described this in other fields many times. For example, in a simplistic example, with music, freeing up the music makes it easier to spread the music, build a bigger fan base, and then increase the value of the scarcities around the musician (so they can make more on tour or through merch or more creative business models).

And I think that’s certainly true with Android as well. It doesn’t just build a “moat” around Google search/AdWords that protects that business, but it actually enhances those businesses and makes them more valuable directly. It does those things by extending the availability and usage of such businesses (I do searches on the go from my phone all the time these days), but also opens up those businesses to scenarios where they never would have been useful before at all.

So I agree with Gurley’s basic premise, that making use of such zero marginal cost infinitely available goods by embracing their free nature acts as a very powerful moat, but I think he underestimates how much of an offensive play it is in not just protecting the castle, but vastly enhancing the castle’s offensive power as well.

Filed Under: android, competition, economics, free, marginal cost
Companies: google

FDA Suddenly Bans Drugs That Have Been On The Market For Decades

from the perfect-gin-and-tonic-for-fun-and-profit dept

As Techdirt recently discussed, the drug pipeline is running dry, as Big Pharma’s patents are beginning to expire, and the drug companies are freaking out. For years they have been spending more money on research and testing and getting fewer results. This year alone they are going to have 11 patents expire on drugs that bring in approximately $50 billion in revenue to the big pharma firms. Of course, the flip side to this is that consumers can start saving about 95% on the price of those drugs, as generics hit the market. The drug companies have gotten to a point where the incremental increases in efficiencies are so small as to be meaningless. What is coming is more personalized and targeted treatments for diseases — treatments that do not require bulk production of a specific chemical, but individual testing and personalized care, and not lifetime treatments and repeat sales, but cures. The treatments will be expensive to begin with, but they will become less expensive over time. The business model of healthcare is about to change dramatically, and Big Pharma needs to do something to maintain their profits. Unfortunately, they seem to have chosen the path of regulating the competition out of existence, rather than competing and innovating.

One way the drug companies have been coping is to repackage and rebrand health food supplements. Drugs like Lovaza, which is nothing more than the fish oil you can get in health food stores, and lovastatin which has been in use for roughly a thousand years (800 AD) in the form of red yeast rice. In the case of lovastatin, the FDA banned the supplements because they are “identical to a drug and, thus, subject to regulation as a drug.” That is very convenient for the drug company, which now charges monopoly rents on the product — which can increase prices at ridiculous levels.

More recently, the FDA banned 500 prescription drugs that had been on the market and working for years. To be fair, it was really 50-100 drugs (pdf), made by different companies, but that just highlights how there was actual competition in the marketplace for these drugs, which has now been removed. For all of the drugs, there is either a high-priced prescription version, or all the small manufacturers have been removed, leaving a virtual monopoly for one or more larger companies. This process began in 2006 when the FDA decided to remove marketed unapproved drugs (pdf).

The reasoning is that these drugs weren’t ever technically “approved” by the FDA. While the FDA has been around for about a century, the business of having the FDA first approve drugs before they could go on the market came about closer to fifty years ago, and a bunch of “unapproved drugs” that were in common usage before that never got approved. The FDA is targeting many of those, even if they have a long history in the marketplace. Conveniently, of course, there always seems to be a pharma company with a monopolized substitute ready.

In 2006 the first “new” monopoly that was created by this FDA process was for the malaria drug quinine sulfate. This left only Mutual Pharmaceutical Company to manufacture quinine in the US (pdf). While malaria is not a disease that affects many people in the US, it is big business worldwide. Malaria causes 300 to 500 million infections and over 1 million deaths each year. Treating this disease with quinine used to cost pennies a day. In fact, the British turned this treatment into a cocktail, the gin and tonic (quinine water).

Another drug removed was the antihistamine carbinoxamine, which was created prior to needing FDA approval, in the early 1950s. It was approved by the FDA in a slightly modified form in 2006. It is now sold exclusively by Mikart, Inc and Pamlab, LLC with no future competition because the FDA has banned all 120 other versions of carbinoxamine. You can imagine just how much that must increase the profits for Mikart and Pamlab on carbinoxamine, though that seems to come at the expense of consumers.

It’s really nice being granted a government monopoly.

As for the drugs now being banned in this latest purge, you can argue that it’s not really 500 drugs, because many are different combinations of the same 50 to 100 drugs. To be sold, these disapproved drugs will require drug trials and certification — a massive and expensive process. Under current law, after successful completion of FDA trials these drugs will be granted approval. But in every case these trials are almost certainly not necessary. And, “coincidentally” in almost every case, there is a chemically similar patented version ready to go. This is a pure money grab: replacing old tried and true drugs, with monopoly priced prescription drugs. It just requires removing competing drugs from the market to increase profits.

And with that, I’m off to go have a gin and tonic, while it’s still legal…

Filed Under: drugs, fda, health care, monopolies