How I would monetize YouTube

Mark Cuban has a blog post, in which he discusses YouTube monetization. He talks about how much it costs for Google to operate YouTube (just upoading, downloading, storing costs), and thinks that it might be significant. I don’t know the numbers, but I am sure Google spends a lot of money to this free service now that they have to do some screening (of porn and piracy) as well.

I have criticized the extreme version of ‘freekonomics’ before, in which it is argued that a lot of online service including contents like YouTube should be free because the marginal cost is almost zero. See:

The marginal costs can go very low, but never to zero. And there are other costs that may not be directly marginal, but very real. They are fixed costs and upfront investments. You can read my posts above if you are interested.

So, how should YouTube monetize? At the moment, they are doing all kinds of advertisings. OK, do that. But I think they are missing more direct opportunities. Here are my ideas.

Charge viewing over certain amount

I suggest this, because I sometimes feel sorry to YouTube. I enjoy YouTube a lot, and sometimes use it as a background music player not even watching the video.

They can charge some dollars above certain threshold, and that will be reasonable to everyone. I am sure they have done some analysis, and my bet is that 80/20 applies here (a small % of users consume a significant % of the network and storage).

Enable priced contents

Again, I am suggesting this because I feel sorry to the content creators. I watch (or listen) music videos a lot, but I don’t think I pay back to the creators in any way.

So, give the content owners the option of making a content priced. YouTube can share certain % margin for this option. I have experienced some music videos disappearing, and I guess some of this may have to do with copyright issues. Right now, the only options for the content owner are either making it available for free or making it unavailable. I think if YouTube gives another option of making it available for a price, there will be more good contents.

Charge embedding copyrighted content

Some YouTube videos have embedding disabled. I don’t know for sure, but I guess they do this to preclude copyright infringement. But often they were the contents that I wanted to share. So, how do you make this work? Let me do it, but at a price.

There are some different ways to do this. First is to charge me (the embedder) directly. YouTube can charge a fixed fee, or they can invoice based on viewership.

Another way to do this is to charge the viewers. This needs integration with the priced-content model that I suggested above. Basically, YouTube can use me as the content retailer. In this case, I may be free to embed or even be paid to do it.

That’s about it now. I don’t know if Google has not thought about these direct models or not. But I hope Google to do now.

Good luck.


If everyone free-rides, free market may free-ride, too

A post at Marginal Revolution covered an interesting issue: http://www.marginalrevolution.com/marginalrevolution/2008/12/a-remarkable-qu.html

Here is a related question I have been thinking about the art market.

If people buy an artwork as a speculation, to sell later at a higher price, then they must be making the assumption that there will be people who ‘like’ the artwork.

But, if everyone thinks that way, that is they buy based on ‘other people’s preference’, how can the price be determined?

This seems similar to Keynesian beauty contest, in which entrants are asked to choose a set of six faces from photographs of women that were the "most beautiful" and those who picked the most popular face are then eligible for a prize. (source: http://en.wikipedia.org/wiki/Keynesian_beauty_contest)

My hypothesis is that the market will be unstable, prices swinging widly together. Because everyone is waiting for a signal that shows other people’s perception, a tiny fraction of people that moves before other people can influence the great majority. These early movers are buying based on their own aesthetic preference, unlike others. How few these independent buyers are, they are the total sample of the market and their influence can be huge.

Let’s say there is only 1 buyer who really likes a painting, and she is willing to pay $1000. Then the price that a speculative buyer would pay should not be higher than $1000. These are people who would not pay even $100 to buy the painting, without the speculative opportunity.

However, when there are a lot of speculative buyers, it does not seem to work like that. Speculative buyers guess what the price would be, based on their knowledge about people’s preference. Furthermore, it is also possible for some to try to ‘move’ the market.

Then, the voice of ‘real’ demand is mixed up with the voice of these ‘experts’. And the majority of free-riding speculators will put more weight on the experts’ opinion, because the experts represent the market, not just one buyer.

So, when things are good, they overshoot. And there is no ceiling in rising price. B hears from A that the price will go up, and tell C the same thing. C tells A that people are saying the price will go up. And it goes on. When there is few buyers buying for their own enjoying, this bubble grows itself.

When market turns pessimistic, things look opposite. When there is a real buyer, he could stop the decline of the price. He will buy when price has dropped sufficiently. But if there is no real, as opposed to speculative, buyer, there is no natural stopping of the fall. Only until the experts get bullish again.

The key difference between speculative buyers and real buyers is whether the price one is willing to pay is reasonably fixed or vary widly according to external influences. Not to make this post too long, my conclusion is that unless there are enough real buyers deciding independently the market will be very unstable.

There is another topic related to this, which I would like to write about later. That’s about ownership premium (or call it distributed ownership discount). I think distributed ownership of an asset or a business lowers the value of the asset. A company owned by many small % shareholders will be manages worse than one owned by a few large % shareholders, other things being equal.


I wish Bolt had done his best, for the Olympic 100 meter

I was very excited to see the news that Bolt had set a new record, amazing 9.69 seconds, for the 100 meters. See here.

But when I watched the game, I felt uncomfortable. He was fast, and it was apparent that he was a great athelete. But it was also clear that he did not do his best for the last 20-30 meters. Isn't the spirit of the olympics, and more generally sports, about doing one's best much more than deciding who is better?

I admire him for extending a human limit. I praise him for his speed. But I wish he had done his best, so that I could praise him wholeheartedly.


FirstPagr, your (growing) web sites on a page

Let me introduce our web app FirstPagr, a really simple tool to make a really simple website. It makes a static page that can contain lists. It does not do any automatic aggregation of your contents elsewhere or any interactive feature like commenting or RSS. You, no one or no machine else, enter everything you want on the page manually. Why such a primitive tool?

When you created a blog, you thought it would be your 'homepage'. You may have even bought a domain (yourname.com) and associated it with the blog. But things changed. Now, you may spend more time at Facebook or with Twitter. Even worse(?) you may create another blog, or a tumblog. So, what is your 'home' page? You wonder or you don't care, if you were like me.

A side effect of this is that you stop caring about giving your own domain name to your sites. Either you have no choice of putting a custom domain name (e.g. Facebook) or, even if you did, you are tired of coming up with and buying new domains.

You may have linked sites with each other. Your blog lists all your other sites, and your facebook profile lists all your other sites, and your friendfeed lists... Some people seem to think that(linking) is natural on the web. But in my eyes, that seems like 'over-linking'. (In fact, a recent fashion seems to be copying and pasting contents everywhere. That's ... over-loading.) I don't enjoy looking at all those small icons at a sidebar. It only gives me the impression that this person is another contributor/victim of information overload.

So we created FirstPagr to let us make the simplest site that can link to other sites of yours. You can only have one page. You type in the site name and create lists of your sites (with some descriptions, if you want). That's it.

So far, I am personally very happy as a user. I used to associate www.hyokon.com with my blog, but now with my FirstPagr. Have a look and try yourself.


Insuring high-risk customers.How?

Fred Wilson's 'Making My Personal Health Record Public' is inspirational, though I am not completely agreeing (or disagreeing). Privacy matters aside, I think the insurance issue is a very interesting one. The biggest project I did as a strategy consultant was about insurance, making the first online insurance in Korea (and one of the first globally, as we could not give the clients any success case when they strongly demanded one) and strengthening the existing agent-based insurance business. The project involved auto and life insurances.

This is same in the auto insurance. No one wants to insure a truck or a motorcycle in Korea. So a lot of them go uninsured, or get alloted to insurance companies by some rules (part government, part self regulation).

I have discussed with an exec that there may be a business opportunity to create an insurer who specializes in high-risk vehicles. Fundamentally, insurance exists because there are risks. Unless the risk is systematic (meaning accidents tend to happen together), they are insurable. The problem is, then the price may be quite high.

The other solution is to make an insurance company that says 'we have one price for everyone regardless of the risk profile'. The key will be to pool risks widely and to forego the costly underwriting process (which means they don't investigate your track records). The goal is hassle-free, simple, reasonably-priced insurance. The problem here is there might be adverse-selection. Because they give lower price for high-risk cars, you may attract only high-risk cars. The problem will be especially real when the competing insurer says "you are paying for high-risk motorcycles at that insurance company. Come to us and we will offer lower price." So the key is whether the saved underwriting-process costs of the 'one-price insurer' can be as large as saved claims of the 'discriminating insurer'.

The last solution is the government regulation. The government could create one big monopoly insurance company, or ban private insurance companies to discriminate the insured. I don't think this is a great idea. It will became politics, not business.

My example was about auto insurance, but the same is true for health insurance. And my personal opinion? The first one. The second one is attractive, but I am not very positive the cost saving can justify the claims difference.


In response to Will Prices's "Lost My Voice"

(This is a comment that I made on Will Price's recent blog post http://willprice.blogspot.com/2008/04/lost-my-voice.html)

I would rather think that you should feel free to promote your company in your blog. What needs more caution is when you write about other topics, including what you learned from your management experiences.

In this age of personal broadcasting tools, people broadcast even what needs to be communicated silently between individuals. The world will eventually find new ethics, but right now people seem overshooting. It's not different here in Korea. A politician recently said, "Stop talking to a microphone. Let's meet."


Crash of the longtail and the attention economy, and the solutions

I have about 20 rss feed subscriptions. That's how I get information about what's going on around the world. But it's hard to keep up with the pace of information coming out of them. In terms of writing, I have this blog, which I don't regularly write posts.

Amazingly, there are people who actively manage, in addition to reading and writing blogs much more than I do, all sorts of other web app accounts (Facebook, Twitter, Friendfeed, and so on). The result is that they produce and consume more and more information. And it seems that they are beginning to feel the pain to keep up.

I expected this crash of the longtail and the attention economy was coming. In plain words, it is a conflict of increasing variety and the scarcity of our mental capacity. I have a slide that I have been using for 2 years, which you can see here (note that the chapter itself is a mess and to be written and organized).

The long tail itself is a good thing. We'll have more choices. However, like all changes in human life, it brings some negatives as well. When you have more choices, you have to use your brain more to process the information and you have to make more decisions on what to consume and what to discard. And that can be very very painful.

The pain of decision making is so severe that the human society created a full-time job for decision making, the CEO (and other leadership positions at organizations). So, how should we deal with this growing pain? How should we handle variety overload (information overload being the most immediate for the Internet community)?

There are three solutions, as you see in my slide.

The first is to fractionize the consumption unit. That is, make the unit of consumption smaller. It happened in music (from CD albums to MP3 singles) and in video (from 2-hour movies to 2-minute YouTube videos). Though less apparent, it seems happening around the book (from 300-page books to 1-page blog posts to 1-line twitter messages). The purpose is for you to consume more variety, just like a buffet restaurant. We will see this happening in much more categories.

The second is to improve filtering. Google and Amazon use algorithms for filtering, and there are attempts to make even better algorithms. However, as we have more and more variety, people will look for more human filtering. Digg and Delicious are more human filters, and, more narrowly, crowd filters. Yet, another form of filtering will be also needed, which is the expert filtering. I often read only Techcrunch among web2.0 blogs and news, when I don't have much time. When I do so, I am trusting that TC must have done a good job of selecting the right news.

This is a bit strange. The information is increasing exponentially so that any individual expert could never compete with algorithms or crowds. But the reality is that overwhemled by information overload, people seem looking for experts more. Though they can always find the best books about innovation, I am very often asked to recommend books about innovation.

The two solutions above help people be more productive. They make you enjoy more variety and filter out less important things. Wouldn't these two be enough, especially now that contents are getting smaller and smaller and there are many new approaches in filtering? No, I don't think so.

The ultimate solution will be simply to slow down. As a human being, your brain have certain limits no matter what tools you use. You will realize this sooner or later, and then have to rethink what your focus area should be.

I think the reason why many people try to keep up with a lot of information is that we have not adjusted to the variety economy yet. Our economic life in 20th century was governed by the Mass Production model. We did not have much variety in products and information. In this age, an educated person was supposed to know 'all that's important'. If you were a college-educated professional, you were expected to know the headline news of the day, to have read the best-selling book that other professionals all seem to have read, and to have watched the movies of the year.

A lot of tech leaders, as Alexander van Elsas wrote, may be the best examples of this symptom. They seem to think they should know whatever is being said in the tech world. They are living the web2.0 longtail world with the mentality of 20th century professionals. I don't mean they are doing wrong things. Their paranoid makes them good human expert filters right now. I just mean that they represent stressed 20th century info worker adopting to 21st century variety economy. I feel that, too. I try to calm myself down saying that I am normal. But inside of me, I often feel I am not doing the homework.

But sooner or later, all these busy bloggers will have to redefine their coverage if information increases at this pace. You just cannot keep up. To help people to define coverage narrowly, I predict that there will be more niche aggregators. At the moment, we have a lot of general aggregators, equipped with powerful filters. You start at Google or Yahoo, and try to read all the important news there, and search and browse to your areas of interests. But if you already know that you are interested in Japanese Manga, why not start at an aggregator specialized in Manga?

There is another (and the last) reason why we should slow down. By slowing down, we will recover depth. At the moment, information is like disposable cameras. They are consumed once and forgotten (by the writer as well as readers). This is too much waste and in a way non-sensical. You write everyday, because people won't read your post a day ago. You produce more, just because you will throw away more. By following that trend, we lose depth. We become shallow and trendy. It is true that the world is changing faster so that the shelf life of information is decreasing. But does it apply to all information? Of course not. But because of this trend, because there are more innovation for fast-pace tools, we seem to treat information that are worth staying longer just like daily news.

This is partly why we started paragraphr and rankrz. They are tools for revision and updates. They are tools for slow writing and reading. We don't know whether and how these will be used, but I am very confident that the world needs to do something for slow and deep writing, reading, and thinking.


Internet is not free

An AT&T excecutive said that due to surge in online content, expecially video, the Internet will hit full capacity by 2010. According to him, $130 billion is needed to improve the global Internet infrastructure.


Certainly, the Internet is not free. The marginal cost argument ("as the marginal cost approaches zero, the product will naturally become free") misses a basic truth in business and economics.

Let's assume the marginal cost of operation is zero, as pro-free people seem to argue (which can never be true by the way). Even at the zero marginal cost, you cannot price the product zero, because then you cannot recover your investment.

A roller coster in a theme park requires a large investment to build, but once it is built the marginal cost of running it another round is almost zero. So, the theme park should take customers for free? Of course not. (If you can make money elsewhere, you might do this. This is another area where pro-freers are misleading, which I want to talk about some time.)

The Internet economics cannot be understood correctly if you only look at the marginal cost during the operation stage. Whether you are an ISP, a web service, or a content provider, your cost is concentrated in the investment and fixed costs as opposed to the marginal costs. And when you were deciding to invest in it or not, you certainly assumed some revenue. Don't forget that.


The Tipping Point vs. The Wisdom of Crowds

(A comment on a ReadWriteWeb post titled "Study: There is No Tipping Point, Blog Readers Are Skeptical". I think I just found out what was wrong with my cocomment setting. Hopefully it will work from now.)

"Gladwell's arguments in the 2000 book The Tipping Point had reached levels of cliche approaching The Wisdom of Crowds, in large part because of its seductiveness to marketers."

I find the statement very misleading. It should be the other way around. The Wisdom of Crowds was published a few years later than The Tipping Point. And it has not made people think and debate as much as The Tipping Point has.


Music labels and division of labor

(This is another comment on Techcrunch post about labels' trying to charge a flat fee for accessing music. I wonder if it is my mistake or Cocomment's problem...
I may write about Soribada, Korean P2P file sharing company, which could be a helpful benchmark for the US music industry.)

I agree with #1 bs. It is easy (and perhaps popular) to say music is only created by musicians. But it is not. There are instruments, road crew, concert halls, marketers, music retailers, reviewers, etc. No one seems to say road crew do not create value, but what’s so different about road crew vs. labels? Neither writes or performs music. I guess one looks cool and the other greedy and big? My business is tiny, but I don’t think being big is a sin.

Having said that, I predict that more and more of what music labels do will be crowdsourced. Thanks to technology, division of labor can be done outside of organizational boundaries more easily than before.


Michale Arrington hates music labels and paid music...

(I normally track and save my comments at other blogs using cocomment. But cocomment did not seem to have worked this time and I am copying my comments here. This is my comment to Michael Arrington's post about music label's new business model, which had a scary title originally.)

I take a minority opinion. Let the creators (artists and their helpers) decide whether to release their music as paid or free. It is always better to have choices and currently what is lacking is the ‘paid’ choice.

One thing I found very interesting at the end of the portfolio.com article: “Apple is reportedly negotiating with the major record labels to offer consumers free access to the entire iTunes library in exchange for paying a premium for Apple hardware.”

If Apple pays labels (that is, ultimately to musicians) based on downloads, that is close to my idea of alternative free model, even though I did not expect the hardware manufactures to increase the hardware price.

We should understand that whether you are charged by Apple or the label is economically not very different. All of them need to make money to exist. There is no particular reason why you should prefer paying $110 to apple and zero to labels than paying $100 to apple and $10 to labels. If you don’t think labels worth existing, that’s a different topic. But as long as they add value, they should get paid, too. Personally, I think many musicians will look for help of others who will take care of non-music works so that they can focus on creating and performing music. I don’t know whether the they will look like current labels or different (smaller?), but they will be there. It is called division of labor, which I also wrote about most recently.

By the way, I don’t like the term ‘tax’. Someone made a mistake by calling it tax rather than paid subscription. That sounds terrible.


Division of labor is alive and well in web 2.0

I found an article, which questioned the democracy of web 2.0.

Digg, Wikipedia, and the myth of Web 2.0 democracy. - By Chris Wilson - Slate Magazine

I agree with the content of the article, but not with the definition of democracy. It seems that some people think that democracy is a system in which people share the same responsibilities. They say it is not democratic when some people do most of the content contribution at Youtube of Wikipedia.

However, I think 'that' is really democratic. What they call 'democracy' sounds like mechanical equality.

In democracy, people are not required to do the same things. People do what they choose to. And this freedom tends to lead to division of labor, because people differ in what they like to do as well as what they do well.

I think the Digg and Wikipedia are great examples of why the free market economy is a very natural system for a human society. Many web 2.0 sites give equal property for everyone. Everyone is given a free asset. For example, everyone is given the same free blog account. Even so, the outcome is not equal. Someone becomes a celebrity blogger, while many others remain a blog without a reader.

However, a celebrity blogger, who belong to the top 1% of the pyramid, can be one of 99% who are mere consumers at a restaurant. No one can be the 1% in all aspects of our life. Sometimes you lead, and other times you follow.

This is not complicated. It is a simple truth arising from the fact that people differ in their passion and capability. Then we should be doing different, not same, things.

What is this called? It is called division of labor.


Communist manifesto at paragraphr.com

We (Innomove Lab) just posted "Communist Manifesto" by Karl Marx and Friedrich Engels at paragraphr.com, which is a web app being developed by Innomove Lab.

I am not a communist. To be honest, I have never read Marx properly. First of all, I did not want to ruin my family by becoming another socialist when I was in college during the time of military government. Another reason, which is more important, has to do with my reading habbit. When I read anything, I try to understand the key messages and decide to continue or stop. I tend to continue when I see something counterintuitive and non-linear. Innovator's Dilemma, one of my favorite business books, was such a kind. "Good management is exactly the reason why good companies fail." How can I resist?

When I tried reading Marx or Marxist literature, I have not seen any such thing. I felt it would be very linear. It would be "What you see is what you get" analysis of capitalist society.

By the way, I think "capitalism" is a misleading term. I think the core of free market economy (my preferred term) is freedom to innovate. To tell you what I mean, assume you are an employee at a supermarket in 1992. Having seen the Internet, you really get excited. You have a lot of happy thoughts, imaginations. Then you tell your boss, the supermarket manager, that they should make an online shop. He does not agree and declines your proposal. He says "this is good enough". What do you do?

Well, here is the critical difference. If you were in a communist society, you should just give up. It is a "community" decision that you should follow, whether it is democratic or (more likely) dictated by the elites. What if you were in a free market economy? You can leave and start up! I believe that this freedom of pursuing your own venture is the critical difference of the two systems. Everything else must be details.

You may say that I did not compare apple to apple. You are right. We need to additionally explain what the core assets of a free market economy. I think it is the idea, which you as a supermarket employee had. So, ultimately a free market economy is an economy which compensates for (successful) creativity. Unlike any other assets, including the capital, idea does not have a limit. An innovation gives a good environment for another innovation. And as long as we give indiciduals the freedom to do something at your own risk, there will be people who disagree with status quo and start a revolution. And some will always succeed. So, wait forever for the market economy to reach an end. I bet it won't come, though the society will be more equal than now (I will write more about this in Mass Niche). That's my view of the free market economy.

Back to the Communist Manifesto. Anyway, I did not have a chance to read a Marx book completely. And here we have Paragraphr, a platform to discuss a writing and a project in need of usage and feedback. So, why not put a Marx writing on it and read it there. Hopefully we get some feedback on rankrz.com, which I am realizing is quite difficult as a company outside the US, and I get to read and test commenting myself (slowly). Lastly, though I want to avoid any political or ideological discussions, my feeling is that the recent "Free" issues and so on have non-business, non-economic implications. If that is really the case, why not have two tracks: current and trendy Free and digital goods on one hand, and classical and fundamental thoughts on the other.

Would you join me reading the mind of Marx?


Is free special?

There are two things I accept as special about free: much less transactional costs/efforts (as I can skip the payment process entirely) and the psychological appeal (of not having to pay any!). Other than that, there is nothing special about free. But it seems that free is gaining the status as a very special price. Here are quotes from Chris Anderson's Wired article "Free! Why $0.00 Is the Future of Business" and my thoughts.

“The new model is based not on cross-subsidies — the shifting of costs from one product to another — but on the fact that the cost of products themselves is falling fast.”

This is misleading. I wonder any of Google exec believes that they give away Gmail mainly because it does not cost anything to them. They do it because it helps their business. You have to make money somewhere. You cannot offer something for free forever no matter how low your cost is, unless you can make profits somewhere. You should somehow shift to or bundle with another profitable business, Whether it is very visible (buy A and get B free) or not (Google’s Gmail and Adwords).

“This difference between cheap and free is what venture capitalist Josh Kopelman calls the "penny gap." People think demand is elastic and that volume falls in a straight line as price rises, but the truth is that zero is one market and any other price is another. In many cases, that's the difference between a great market and none at all.”

I agree that free does have certain psychological appeal to people, making the demand jump at the price zero. There is a research-based book by behavioral economist Dan Ariely (http://www.predictablyirrational.com/). You may want to have a look.

“The huge psychological gap between "almost zero" and "zero" is why micropayments failed.”

No, I would not extend the psychological magic of zero price to this far. I think we just do not have a micropayment model yet that is very convenient, like cash. The price may be just one dollar, but I have to go through the hassle of entering this and that information. I actually listed this as a factor for paid music to be popular again. See http://hyokon.com/2008/02/in-addition-to-free-part-2-how-to.html. I bet we'll have more convenient micropayment toold in the future, and we'll have much more small transactions.

“Free music is just publicity for a far more lucrative tour business. Nobody thinks of this as piracy.”

No, I don't think so. I think the reason why a lot of musicians are turning to free model is that they lost the alternative. The musicians think “Why not give away our songs? They won’t pay anyway. Let’s just think of it as a promotion, and do a tour to make money.” Touring is more profitable? I am surprised. When people actually did pay for music, tour was a promotion. Not the other way around.

“Some artists give away their music online as a way of marketing concerts, merchandise, licensing, and other paid fare. But others have simply accepted that, for them, music is not a moneymaking business. It's something they do for other reasons, from fun to creative expression. Which, of course, has always been true for most musicians anyway.”

I was worried some would bring this up someday. Maybe my concerns are becoming real. Before, the pro-free argument was ‘make it free, and you will make more money.’ Now, it is ‘Don’t be sad that you don’t make money. It is not about the money, right?’ I am very sad. I want a world, where you can succeed just by being a good musician. I want to see more Beatles, more Queen, more Stevie Wonder. Someone out of nowhere becoming a star and becoming rich. I think some of the pro-free arguments are heading towards discounting the division of labor, by saying you do multiple things to make a living (or if you are lucky one thing as a job and the others as a hobby). Do we want it to happen? It is one thing that we can do multiple things, which I like, but it is an entirely different thing that we ‘should’ do multiple things. I mentioned it also at In addition to free (Part 1- Free is not a cure-all).

“In each case, the act of using the service creates something of value, either improving the service itself or creating information that can be useful somewhere else.”

I agree that this will reduce the price for the users, just like self-service hamburger can be cheaper. This is every web entrepreneur’s dream - Users doing the work for free. But is this implying that this will ultimately create a perpetual money-making machine where you as a company does not have to incur any cost? Otherwise, I wonder why this is mentioned related with the free issue.

Enabled by the miracle of abundance, digital economics has turned traditional economics upside down. Read your college textbook and it's likely to define economics as "the social science of choice under scarcity." The entire field is built on studying trade-offs and how they're made. Milton Friedman himself reminded us time and time again that "there's no such thing as a free lunch." But Friedman was wrong in two ways. First, a free lunch doesn't necessarily mean the food is being given away or that you'll pay for it later — it could just mean someone else is picking up the tab. Second, in the digital realm, as we've seen, the main feedstocks of the information economy — storage, processing power, and bandwidth — are getting cheaper by the day. Two of the main scarcity functions of traditional economics — the marginal costs of manufacturing and distribution — are rushing headlong to zip. It's as if the restaurant suddenly didn't have to pay any food or labor costs for that lunch.

I was shocked. I could not believe that the most fundamental of economics is being declined here. I don't know how to respond. Let me just say that I do believe that there is no free lunch. Even the most low-cost Internet business of the world cannot go on very long providing 'only' free products. They do have trade-offs. (By the way, Friedman did say that there is free lunch, which is free markets and private property. http://www.cato.org/speeches/sp-mf050693.html And on this free lunch, I agree with him.)

Two last points. First, free is not the lowest price. There can even be negative price. Heard about ‘get paid to use’? Try search it on the web, and you’ll find quite a few. When a customer is more valuable to you than your product is to your customer, you’ll even pay the customers. As traditional mass marketing becomes less and less effective, businesses will try to spend money directly to customers. And we'll see more of these.

Second, digital products are not always different from physical products in terms of marginal costs. Let’s say you are a car manufacturer. You just produced 1000 cars and have them as inventory. What is the marginal cost of giving away the car? (I am ignoring the opportunity cost here, which by the way is present even in the case of free-to-produce digital products.) Zero. Internet is not really different at all. When do you occur your costs? When you bought servers and hired people to develop your service. After that? Yes, it is near zero. But you still have the ultimate marginal cost, that is keeping vs. shutting down your business. There is no such thing as no-cost business. If you give away all your products thinking "The marginal cost is zero. Therefore I am OK", you will go bankrupt sooner or later. Even if all you have is just some magically free servers and no staff, you still have costs. That is, 'you' have to eat. There is nothing magical here.

To be fair, I do accept that free has some special qualities. One, it has psychological appeal that seems to boost demand. Two, when you buy a free product, usually you don't have to go through the payment process. Which makes it cheaper than free otherwise.

Still, we are not having another new economy. We don't have to write the economics again. We do live with trade-offs, no matter how cheap microprocessors become. Or, maybe we do have a new economy, only until when we enter a negative-price economy.


In addition to free (Part 3: An alternative free model idea)

In Part1, I said that a few issues with the current free models. Now I would like to propose an alternative free business model. The goal is not to replace all the current free models, but to complement them. Done right, this could be the main free model, and the current models could be the source of extra income for more dilligent and multi-talented ones.

Here is the idea.

  • Your new content is distributed for free.
  • You (or someone) monitor usage of your content. By usage, I mean using a storage (PC, iPod, hosted storage, etc.) or transferring online (streaming, downloading, p2p transfer). You probably cannot cover all these in the beginning, but will increase coverage over time.
  • With the usage index, revenues of the hardware/service/network companies are shared with you and then divided among creators, based on agreed-upon formula (e.g. % of revenue for all contents times % of usage among contents).
  • For efficiency, you may need to have a central agency who does monitoring, overall negotiation with hardware and service companies for content creators, and distribution of the revenue to content creators based on the usage statistics.

I have a theory that when there is a demand, there is a profit. It is a matter of where in the overall value net, which is all the players involved to provide certain goods. Profits tend to move around. When ecommerce began booming up in Korea, the first online shops made money without much competition. Then came a lot of new entrants, and the profits disappeared. However, because of the growing online shopping industry, courier service businesses were making a lot of money behind the curtain. Once people realized that courier services were the beneficiary, a lot of entrants came in and the profits were gone.

You may not think the courier example is relevant to the free issue here. But free is nothing special but a zero price. It is not even the lowest price. We have negative prices as well. Try googling "Get paid to try", and you will find that there are companies who pay you for using their new products. Price is determined by supply and demand. And when you need customers more than they need you, it is absolutely natural that you pay them. I have done it myself, and probably will do it again.

(Note: The lowered price of computers is not fundamentally different from the zero price of contents. I would actually argue that in both cases they have set 'the price for their ideas' zero. It just happens that physical products have more material ingredients to be paid for than contents do. This is another topic itself. Let me just say that I believe a price of any goods and services include the share for the ideas, of which creation is the role of entrepreneurs, creators included. I think 'idea' is a better representative of the market economy than capital.)

So, what I am saying is that there should be profits around free contents, as we know there is demand. The issue is where.

(Note: Years ago, when Cysco was the hottest company, I used to joke that Cysco may be funding the porn industry, which was contributing a big chunk of the Internet traffic. Not real... right?)

Now, it is apparent who is profiting from free, legal or illegal, contents. You need an access to Internet to begin with. So, ISPs are profiting. You buy MP3 players, PCs, external hard drives. So, hardware companies are. You subscribe to storage services. So, hosting companies are (and the ISPs and hardware vendors who profit from them are). Presumably, the free digital contents contributed to the growth of Internet usage in general.

According to this post, P2P is making up more than 50% of Internet traffic. And video is the most popular category downloaded with P2P, followed by software and audio. I am actually surprised at the average file size of 1 gigabytes. I guess the entire movies are travelling.

I saw a lot of criticism against Paul McGuinness, U2 manager, who spoke about digital music in Cannes. I finally read it today, and found little that is very wrong or evil, as I imagined after reading some critical blog posts, in his arguments. Maybe his using the words like theft and police annoyed some, but if you read carefully his main point is that the tech companies who are benefiting a lot from free, unintended by the music creators, music should share revenue with music creators.

Anyway, presumably huge profits are being contributed to ISPs and hardware vendors by free contents. (In fact, ISPs seem to think they incur losses from top p2p users, but let's not get into too much details and just take the aggregate demand here.) Let the creators share some! I have seen some discussions titled like music tax. I don't like the term tax to begin with (no government regulation please), but the idea seems to share some similarity to mine. ISPs are not the only one. Your iPod does not care whether your file is free or not. So, why not share profits with hardwares as well? And music is not the only one. All digital contents are in the same position.

If this is possible, free content will be a very compelling business model for the creators. They can focus on creating contents that people like. And they have the viable choices of making it free or non-free. If they want to make extra income, they could still do other things. But a shy studio musician can have the hope that he could make a living as a musician.

The difficulty is whether we can efficiently monitor the usage. This is a bigger issue if you have to measure at the final consumer level, such as iPod usage. So, it would be better to measure at the business level, like ISPs, music sites, file sharing sites, etc. If we indeed need to measure at the final consumer level, there are two ways. One is to measure all usage, and the other sampling. I don't know if there are good technologies for tracking all usage available now. If not, sampling could be done. As long as the content creators can agree and trust with each other in dividing the pie based on sampled data, sampling may work fine.


In addition to free (Part 2: How to revive non-free)

We need to have the 'paid' business model as well. In most cases, if not all, more choices are better than fewer in a market. Here are some things that I think we need to do to make it viable.

We should control piracy.

I have not had this conclusion for a long time, ever since I got interested in the digital content business model around 2000. Not because I was not sure about the value of intellectual property, but because I thought that the cost of stopping piracy would be too high.

But now I believe that with proper measures, piracy can be effectively contained. We won't be able to remove all piracy. We don't need to. We only need to make 90% (or 95%... Suffice to say "high enough") of the market safe to protect creators' (of paid contents, of course) compensation from being materially affected.

Based on experiences of Korea (see the table in part 1), which is still far and probably farther than the US or Japan from piracy-free, piracy control does increase the total content markets. I have read Sheryl Crow interview, but it is much worse in Korea. Here is Haechul Shin, who is a well-known rock singer in Korea

"Let's say we harvested 10 crops. Thieves steal 9, and the 1 left is divided and distributed. And the thieves sometimes give us a lecture." Also, "They call the buyers of CDs fools, but they are the ones musicians really thank. But we have so few of them. I wish there were at least 2 or 3 times of them who could be guards to keep the minimum."

I don't think it is a good idea for us, the audience, to make the musicians frustrated and angry.

(He also said that some musicians just use a Melodeo instrument, which seems like a kind of a musical synthesizer, to make a song targeted at the ring-tone, the most commercially viable format for the past few years in Korea. No orchestra, no band because you cannot tell the difference anyway in the ring-tone. Having played guitar in a rock band myself, I will be very disappointed if this is the future of music.)

We should have more standardized copyright options.

One point I want to make clear again is that I am not against 'free' models. Innomove Lab, which is my business, has free web services. And I am personally writing Mass Niche openly. I am just against using non-free contents without paying the price.

I like Creative Commons concept in that it gives more options than "nothing can be done" or "you can do anything". I am still learning about it, but it seems to me that we need more licenses. All CC licenses seem to allow non-commercial use of the entire content (and grant some other rights or not). However, for many musicians and other creators, this may not work, as I said in part 1.

I think we need to have something like "Sampling/quotation is fine. But using the whole work, for commercial or non-commercial purposes, is not." That way, creators who want to encourage people to create more creative works using parts of their work (quoting paragraphs of a book, sampling a melody of a song, etc.) without going through complex clearance process. Creators may apply this to non-commercial and/or commerical purposes.

If we have this kind of license and probably more options, I am certain that there will be much less tension between free vs. non-free camps. "We have all spectrum, now it is your choice."

Another reason why I like CC initiative is that it makes copyrights understandable to people. I guess you could custom make your own copyright terms, but small businesses or individuals don't have that kind of knowledge or resources. Having standardized licenses from which one can pick is such a great thing for them.

We need a DRM (or call it differently, if you hate the term) that is associated with a person, not a device.

One interesting survey I found was done by mybytes.com. If you look at week2 poll, you will find that most students think they should be allowed to burn a CD whenever they can.

I am with them. If you don't want me to make copies and give them away to other people, I would not (maybe other than to my family. Maybe another license for 'sharing with family allowed' needed?). But, if you say I cannot burn a CD so that I can enjoy it in my car, I am going to say 'you know what'.

But it seems many of current DRM solutions do not allow you to move your content around between different devices. I can understand what they are worried about, but it is just so inconvenient. In this case, the price of an MP3 music, which is usually lower than that of a CD, suddeny appear too high. Rather than trying to change our behavior and sense of what is right and wrong, I recommend developing solutions that are more in line with our common sense.

I know that there are people who want to remove DRM completely. They seem to think protecting something, which otherwise can be shared by everyone is wrong or at least a waste. I would like to point that people like to share but not everything. Sometimes we want to get compensated for sharing something, and other times we don't want to share at any price (e.g. privacy). And talking about waste, there are so many wastes we would not need if we could change our protective behavior: fence, your locker in the gym, private meeting rooms, and to some degree your bank accounts.

If you think that kind of behavior is wrong and we should be educated or forced to share more, I have nothing to say. That is a topic for politics or philosophy. I am just thinking about business models to satisfy existing needs. If you want to change (or regulate) people's needs, go ahead and do it. But meanwhile, please allow solutions for them to be developed.

We need a more user-friendly micropayment solution.

I often meet contents, that are priced like 5 dollars. I am tempted to buy, but often do not. And the primary reason is not that I think the price is too high. I don't like to spend time taking out credit card from my wallet and entering my information. In my mind, that time costs a lot more than 5 dollars. Also, I don't like giving out those sensitive information here and there. I am sure many of you are similar.

I wish there were something like offline cash on the Internet. Take out my cash, give it, and I am gone with the purchase. It takes just a few clicks and there is no sensitive information given. It is just like you going into a convenience store and buying a can of cola with cash.

I know there have been a lot of attempts at micropayment business models, but haven't heard anything successful yet. PayPal is probably close, but not efficient enough. Companies like Mobilians and Danal (at which my colleague Chihyung worked) in Korea provide simple mobile phone payment which is quite close to my ideal solution. The problem is that they are widely used in Korea but not globally available yet. I hear they are developing businesses in China, the US, etc.

Anyway, if there were such a solution, I would certainly be buying a lot more contents. And I believe there are many people like me.

Other parts:


In addition to free (Part 1: Free is not a cure-all)

"Digital contents should be free. Anyone who resists is clueless."

That was the overall impression I got after reading various blog posts recently. Here are some of those blog posts.

Many of the suggested business models are basically giving away digital contents for free and get compensated for something else like paper books, lectures, consulting services, etc. This does work. In many cases, it could be better than selling digital contens for a price. However, I don't think this is a cure for all. It works only in certain conditions. Here are some of them.

It works when the paid market is large and highly correlated with the free market.

This is obvious. The after market should be big enough to keep you motivated, and hopefully bigger than the 'free' market so that you have not given away too much. However, I wonder if all contents markets have enough after markets. What about comics, novel, poem or photo? It would be interesting to see a research based on many (not just a few eye-catching experiments of an already well-known people) cases.

In addition, the paid market popularity should be correlated with the free market popularity. If you are sure that more popular free contents result in more revenue in the after market, many people will go this route. The problem is, it is only 'expected' to be correlated. On average it can be fair and correlated. But it is not like the old model of selling CDs or paper books for a price, in which popularity 'is' revenue.

It works when your market is segmented in a way that the free digital market is different enough from the paid markets. (Differences of demands)

It is easy to imagine this case. You are a digital generation, but your father is not. He is not used to downloading MP3 files or using music services or reading on screen. Ideally, the market is different, but not entirely separate so that the consumers in the paid market can 'hear about' what is hot from the free users. Effectively, you used the free market users as marketing agents to promote your products in the paid market.

However, this tends to be temporary. Usually it relies on the fact that certain people are effectively blocked from a new market because they have not heard about it or do not have the skills to use it. Over time, this separation will probably decrease.

It works when your paid product has significantly different value propositions than the free contens. (Differences of supplied products)

In this case, 'you' are two markets. You buy the paid version when you already have the free version. You heard "The band is so good at live concerts. You cannot get it by listening to the recording". Or you want the feeling of seeing your favorite book on the bookshelf, though you have read it online already. Or you read a free book about tax-saving principles, and seek for a consulting from the author. (By the way, the book you read was titled 'All you need to know to save tax by 30%'. Realizing you cannot do it yourself, you pay the author to do that. How generous...)

I predict the different value propositions that atom-made contents have won't last long. A CD has many other values that an MP3 file or an online music do not have: sounds better, looks good when you have CDs in your living room (or wherever is your home theatre), and has beautiful jacket design (though it was already diminished compared to LP). Nevertheless, people are not buying CDs. Certainly not in Korea, where CD market decreased to about 15% of what it used to be in 2000. See the table below.

Korean music market size (Billion Korean Won. 950 won = 1 USD)

  2000 2001 2002 2003 2004 2005 2006 2007
CD/LP 410 373 286 183 134 109 85 65
Mobile (ring tone, etc.)   89 129 177 191 225 230 220
Online   2.1 3.8 4.4 20 37 120 150

If you were a musician, would you give away your online music for free and get paid with CDs? I wouldn't. What if the same thing happens to the book? At the moment, we are lucky. People seem to love paper books much more than music CDs. As the displays quality improves and we have more books digitized, however, it will be a matter of how quick and how much.

By the way, you see the rapid increase of online music in Korea in 2006? That is about the time when Korea became tough on illegal download/p2p sites, thereby removing a lot of free option for people. And yes, there are still a lot of piracy.

It works when it is doable for creators to use the after market.

Currently used and suggested models require extra work in addition to making the original contents. I believe that the more efficient market is in which division of labor is well-developed so that each of us can focus on what we have a passion for and what we do best. There, people who do not have multiple skills or affluence will have a better chance. Of course, if you want, you could do multiple things. I am just saying you 'can' do onething well and still get paid, not you 'should' do one thing only.

Division of labor is a great thing. Because we don't have to build blogging software (and manage servers, manage network, and on and on) ourselves, we can enjoy reading so many interesting writers around. Because YouTube does the nitty-gritty job of showing a video, we are impressed by creative people. I call this kind of market, which is driven by creative crowds, Mass Niche (or longtail by longtail), which I believe is, and hope to be, the future of market economy.

I wonder how easy it is for a poor and unknown artist, not a Harvard Professor or a famous rock band, to plan and execute after-market activities. Is having live concerts easy for an unknown musician? Is lecturing (not to mention consulting) easy? First of all, you may not be able to afford the time it takes from creating the content to monetizing in the paid market.

Even if you have a day job so that you can wait longer, you need to have extra skills. I have done consulting for over 10 years, and I know I can do that but writing a short book, though the topic was business, was horribly difficult. Any extra work requires extra skills. Should we all become talented in multiple things in the future?

To be continued:


Re(?)starting this blog

It seems that I opened this blog on May 26th, 2003, as I have a post as of that date. But I have not done anything with it ever since then. I have done some writing and blogging (mostly with my company blog), but not with this one.

Now, I would like to start blogging with this in English. I like the idea of being part of broader and more diverse global community, which means better chance of engaging in exchange of interesting ideas and viewpoints. Also, as I have some web application projects that are (hopefully) for anyone in the world, I thought I needed a communication channel with which to have conversations with people on the net.

I am amazed at people, except full-time bloggers, who post several times a week, not to mention who post more than once everyday. I don't think I can do that, except for when I am very inspired or angry. I am also amazed by the pace of an issue rising and falling. I also like to talk about current topics, but I usually need some time to think (and to have the courage to publish in English) to express my thought on that. So, I may often respond to someone's thought after most people left the issue already.

Enough introduction and time to start blogging. Welcome to my blog!