The New Economics of Media - PowerPoint PPT Presentation


Title: The New Economics of Media


1
The New Economics of Media
  • Micromedia, Connected Consumption, and the
    Snowball Effect

Umair Haque http//www.bubblegeneration.com Spring
2005
2
Media 1.0 Mass Media
3
Mass Media Value Chain
Production
Publishing/ Marketing
Distribution
Attention
Infra structure
Retail
  • 6 primary value activities
  • Infrastructure
  • Technology
  • Content
  • Creativity
  • Marketing
  • What media is bought and sold
  • Distribution
  • Transport logistics
  • Retail
  • Where and when media is consumed
  • Attention
  • Why is attention part of the value chain?
  • Most media markets are 2-sided markets they
    coordinate consumption by advertisers and
    audiences
  • Attention is how we will refer to this
    coordination process

4
Two Sided Markets
Production
Supply
Demand
Media
Audience
Advertiser
Demand
Supply
Attention
Supply coordinates demand on both sides of a
two-sided market and sets equilibrium prices.
Unlike in other markets, in the media
marketplace, attention is a critical part of the
value chain, because it is demanded by
advertisers and supplied by consumers. On the
other side of the two-side market, production is
demanded by consumers and supplied (funded) by
advertisers.
5
Media Orthodoxy
  • The Media Industrys First Law attention is
    scarce
  • Is this accurate?
  • Attention has always been getting absolutely
    scarcer as media grows
  • But
  • Were interested in
  • relative scarcity along the value chain
  • marginal scarcity at large scale
  • Relative and marginal scarcity are what count
    economically
  • because they define the structure, dynamics and
    expected value of differing strategies in the
    media industry
  • Is attention scarce?
  • Relatively
  • and at the margin?
  • Its about to be
  • But it hasnt always been

6
Media Heresy
  • In fact
  • Attention has remained relatively abundant for
    many years
  • What!? How can we prove this?
  • By asking how great the risk of losing audience
    actually is
  • The real problem facing the media industry
  • A zero-sum game medias grown quantitatively and
    qualitatively, but attention hasnt
  • Attentions about to become relatively scarce
    (fast)
  • Lets begin by rewinding
  • And examining a non-networked world of pure mass
    media
  • In order to understand how attention abundance
    has shaped industry dynamics
  • and led to the creation of core competences and
    strategies which become core rigidities and
    errors in a Media 2.0 world

7
Attention Abundance
  • Attention is directly unobservable
  • and traditional share-based metrics shed no
    light on relative abundance
  • But indirectly
  • The industrys actions reveal abundant attention
  • Following deregulation, network TV ad time per
    hour increased exponentially from 648 in 1982 to
    1204 in 2001
  • Similar figures for radio, newspapers and
    magazines (if we count special supplements and
    advertorials)
  • While production investment has increased
    linearly
  • Increasing ad time is equivalent to investing in
    attention
  • Because ad time is simply a marketing cost borne
    by players on the other side of the 2-sided
    market
  • The distinction between ad time and marketing
    cost is a figment of accounting unimportant
    economically

8
Attention Abundance
  • What does hypergrowth of ad time tell us?
  • If attention was scarce, increasing ad time would
    be a dominated strategy
  • Because marginal revenues from advertising would
    be less than marginal costs of viewers lost to
    rivals
  • And so returns to investing in attention
    (increasing ad time) would be dominated by
    investing in production (higher quality
    programming) or infrastructure (creating a
    technological cost advantage)
  • In fact, attention has been relatively abundant
    at the margin
  • Intuition buying attention via ads is cheaper
    than attracting it via quality content
  • Proposition can only hold if attention isnt
    scarce, since attention scarcity would increase
    marginal cost of lost viewers, offsetting
    marginal revenues from advertising

9
Mass Media Resource Dynamics
  • In a mass media world
  • Downstream resources are scarce...
  • Distribution scarcity (Transport/inventory/broadca
    sting costs)
  • Retail scarcity (Spectrum scarcity, limited
    shelf/screen space)
  • Production scarcity (Infrastructure and human
    capital costs)
  • and upstream resources are abundant
  • Attention isnt scarce relative to other
    resources
  • Attention scarcity isnt a driver of value
    creation, because barriers to media consumption
    are high
  • Limited supply of cinemas, radio stations,
    newspapers, tv channels, etc
  • Implication
  • Quality does not efficiently drive popularity
  • Because attention is cheaper than costly
    production, distribution, ideas, editing,
    finishing, etc

10
Mass Media Industry Structure
  • Abundance is no surprise, given industry
    structure
  • Mass media businesses are cash cows
  • at least in a Media 1.0 world
  • Ask Warren Buffett (whose fav investment was
    local papers)
  • because high entry barriers artificially or
    naturally limit rivalry
  • Broadcast media spectrum scarcity auctions
    impose huge entry costs
  • Print media natural monopoly dynamics average
    cost falls in circulation
  • So mass media players gain strong first-mover
    advantages
  • Which they use to acquire, pre-empt, or bankrupt
    competitors
  • Supply remains limited on both sides of the
    2-sided market
  • For advertisers, prices rise media inflation
  • Whose revenues are often used to drop prices on
    the other side of the market, and subsidize
    audience growth
  • Attention remains relatively abundant
  • Because total supply never grows

11
Mass Media Value Equation
  • Mass media value capture is a function of
  • Distribution and retail scarcity
  • Whoever controls these scarce resources
  • Can exert market power along the value chain
  • increase share and control how value is captured
  • Retailers and marketers achieve control via
    consolidation acquisitions, partnerships,
    alliances which realize economies of scale and
    scope in marketing
  • Retail marketing control how value is captured
  • By leveraging marketing economies of scale and
    scope to control downstream resources, they can
    exert market power along the value chain
  • Canonical examples vertically integrated
    Hollywood Studio System, major labels, broadcast
    networks 1950-1990

12
Quality Doesnt Scale
  • The problem is
  • At large scale, marketers and retailers have
    little incentive to invest in quality
  • Since production costs dont realize scale and
    scope economies, but marketing and retail costs
    do
  • Production costs grow in output because risk
    accelerates
  • Example films records going over budget
  • Marketing costs decrease in output because risk
    decelerates
  • Returns dominated by production scarcity, not
    attention scarcity
  • Highest returns to player who can most
    efficiently allocate scarce production resources
  • Whats the profit-maximizing strategy?
  • Invest in attention, dont invest in production
  • Unintended consequences
  • Quality drives popularity inefficiently
  • Because attention isnt scarce, but production is

13
Marketing Cost Explosion
Hollywood Nominal and Real Marketing Costs,
1981-2004
Real marketing expenditure has quadrupled, while
real production expenditure has only doubled
firms have cumulatively invested twice as much in
attention as production. Since this strategy has
persisted for 25 years, investing in attention
must realize superior returns to investing in
production. Why is this strategy dominant? In a
mass media world, producers realize marketing
economies of scale and scope, and production
diseconomies of scale and scope
14
Popularity and Quality
Quality drives popularity hyperefficiently
Media 1.0
Popularity
Quality
Quality drives popularity inefficiently
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The Blockbuster Effect
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The Blockbuster Effect Downstream Scarcity
Strategy
  • Whats the dominant strategy in a world driven by
    downstream scarcity?
  • Reuse the same expensive content across as many
    media as you can
  • And price discriminate while you do it
  • Film release windows Cinema, DVD, Video, TV, Ads
  • And across as many market spaces as you can
  • Via tie-ins, promotions, etc
  • Think Star Wars happy meal toys, action figures,
    books, posters, t-shirts, breakfast cereal
  • Aka Blockbusters
  • Blockbusters are a strategy to maximize returns
    on content
  • By reusing and leveraging it to realize marketing
    economies
  • Most efficient allocation of scarce production
    resources

17
Mass Media Returns The Blockbuster Effect
Consumer goods tie-ins
Motion picture revenues
TV Cable syndication
Value
Demand
Output
DVD, VHS
Cinema
18
The Blockbuster Effect Example Jurassic Park
Merchandising 50m
Revenues
Syndication 50m
Value
Demand
Output
Video 405m
Box Office 480m
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Blockbuster Economics
  • Blockbusters are a natural result of mass media
    economics
  • Downstream resources scarce, upstream resources
    abundant
  • Which is why we see this strategy emerge in all
    mass media
  • How do we maximize expected profits of costly
    production?
  • Diversify risk by expanding revenue streams
    across scarce retail and distribution channels
    (in audience segments)
  • Price discriminate by cost of retail and
    distribution channels relative to total segment
    value
  • Marketers and retailers realize scale and scope
    economies via these tactics
  • By reusing and leveraging marketing assets across
    segments
  • Which are implicit ways to allocate scarce
    production resources
  • by buying attention, which is cheaper than
    attracting it via investing in quality
  • Since attention is relatively abundant

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The Problem with Blockbusters
  • Buying attention marketing economies hit
    diminishing returns
  • Each segment is less and less valuable and
    saturated faster
  • But since attention is cheap
  • Rivalry to economize on production and invest in
    attention creates marketing cost spirals
  • Marketing wars between blockbuster marketers,
    each of whom thinks attention will be cheap
  • Prisoners dilemma each is better off marketing
    less
  • Quality erodes
  • As marketing costs spiral and relative production
    costs shrink
  • Where have we seen this dynamic?
  • Hollywood marketing cost explosion, major label
    sales declines, magazine subscription
    erosioneverywhere!
  • These unintended consequences are costless as
    long as attention is cheap, since quality does
    not drive popularity
  • But what happens if attention becomes more
    expensive
  • and returns to marketing decline?

21
Attention Production Costs at Large Scale
Production is cheaper than attention
Media 1.0
Production Cost
Production and attention are equally costly
Attention Cost
Attention is cheaper than production
22
Attention Production Costs in Rivalry
Production is cheaper than attention
Media 1.0
Production Cost
Production and attention are equally costly
Attention Cost
Marketing cost wars make attention increasingly
relatively costly
23
Attention Production Costs
At high levels of output, investing in attention
is profit-maximizing
Attention costs
Value
Production costs
And investing in production is dominated
Output
Why do attention and production costs scale
differently? Marketing economies of scale and
scope are the result of leveraging and reusing
content across distribution and retail channels
to achieve price discrimination and
diversification of risk. Production scale or
scope economies arent realized because of high
costs of contractual completeness, which makes
risk increase in output, and high technology
costs.
24
Attention Production Costs
At low levels of output, investing in attention
is dominated
Attention costs
Value
Production costs
Output
Why do some media firms invest in production, and
others in attention? Because the scale at which
they operate dictates different profit-maximizing
decisions about which inputs to invest in.
And investing in production is profit-maximizing
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Attention Production Costs
Production is more expensive than attention
invest in attention
Attention costs
Value
Production costs
Marginal cost of production exceeds marginal cost
of attention
Output
Attention is more expensive than production
invest in production
Media firms producing at different scales will
choose different inputs. Small scale producers
will invest in production, and large-scale
producers will invest in attention. Hollywood vs
Cannes
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Media 1.0 Total Cost Function
The shapes of the attention and production cost
curves
Cost of all inputs
Value
create an S-shaped total cost function
Output
The S-shaped total cost function means
large-scale producers are naturally more
efficient than small scale producers, because
attention costs diminish due to marketing
economies of scale of scope.
27
Marketing Spirals Erode Quality
Marketing wars increase the cost of attention
Attention costs
Value
Production costs
..Since production costs dont decline,
production investment declines fewer production
inputs are used at equilibrium price
Output
Marketer and retailer consolidation realizes
economies of scope and scale in marketing.
Production scale or scope economies arent
realized.
Marketing spirals act as an entry barrier. They
raise attention costs, while marketing economies
of scale and scope are still realized
proportionally (the flattening of the green
curve). The result is a shakeout and increased
industry concentration, because returns to
attention remain high only for large-scale
players. Quality erodes as production investment
is traded for marketing investment.
28
Popularity and Quality
Quality drives popularity hyperefficiently
Media 1.0
Popularity
Quality
Marketing cost spirals mean quality erodes as
relative investment in production declines, and
becomes even less correlated with popularity
29
Summary Mass Media Value Dynamics
Attention
In a non-networked media world, retail
marketing capture the most value. Producers and
distributors remain fragmented because production
returns dont scale they dont realize
significant economies of scale or scope by
consolidating.
Attention
Attention
Production
Distribution
Marketing
Attention
Infra structure
Retail
Attention
Marketing and retail returns do scale by
consolidating, retailers and marketers exert
power over downstream resources by realizing
economies of scale and scope in marketing and
retailing, and power over upstream resources by
limiting media supply (and consumption choices).
Attention
Attention
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SummaryMass Media Value Dynamics
Attention
Blockbuster strategies emerge due to the natural
economics of mass media production is costlier
than attention, so the dominant strategy is to
invest in attention (marketing cost wars), and
economize on production (quality erosion). The
result is a smaller and smaller number of
concentrated players, who are forced to invest
more and more heavily in marketing as attention
becomes scarcer.
Attention
Attention
Production
Distribution
Marketing
Attention
Infra structure
Retail
Attention
When attention is abundant and production,
distribution, and retail are scarce, blockbusters
achieve an efficient allocation of scarce
production resources, by supplying media valued
the most highly to the greatest number of
consumers within each retail/distribution
channel mass media. The unintended consequence
is that quality doesnt drive popularity.
Attention
Attention
31
Media 2.0 The Age of Plasticity
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The Age of Plasticity
  • Media 2.0 is plastic
  • atomized media be reshaped, remixed, tweaked,
    cut, split
  • and aggregated, filtered, distributed,
    delivered, stored
  • almost any way/to any time/at any place
    consumers prefer
  • Plasticity makes Media 2.0 personal
  • No clear distinction between professional and
    amateur media
  • because all media can be unbundled/rebundled
  • The distinction shifts from professional/amateur
    to mass/personal
  • Media will be unbundled and rebundled at the
    personal (not mass) level
  • Beyond narrowcasting, nichecasting personal
    control over the cast
  • In an atomized environment, what becomes
    valuable?
  • What are the economic effects of plasticity?
  • Or what does broadcatching really mean?
  • Lets begin by understanding the economics of
    micromedia

33
What is Micromedia?
  • Micromedia is
  • Media that can be consumed in unbundled
    microchunks
  • Microchunks of media unbundled from traditional
    media goods
  • Blogs vs newspaper articles
  • Tracks vs albums
  • Vlogs vs network news
  • ..and aggregated and reconstructed in
    hyperefficient ways
  • Blogs, vlogs, podcasts, mp3 tracks, RSS feeds
  • Micromedia can be unbundled and rebundled for
    consumers
  • EG Blog entries can be aggregated and
    reconstructed by topic
  • to create orders of magnitude more value than
    mass media
  • Micromedia explodes media supply
  • The total quantity of media goods explodes
  • And atomizes it
  • The average size of media goods shrinks

34
Micromedia Drivers
  • What drives the micromedia explosion?
  • And the shift from downstream to upstream
    scarcity?
  • Technology
  • Falling barriers to production
  • GarageBand
  • Unbundling Falling barriers to distribution
    retail
  • p2p, iTunes, BitTorrent, convergence of
    connectivity platforms, micropayment
  • And retail/distribution channel growth and
    fragmentation
  • Cinema vs VHS, DVD, VCD, MPEG
  • Regulation
  • Creative Commons
  • Fair Use (applicability grows in networked media)
  • Changing consumer preferences
  • The rise of connected consumption
  • The rise of peer production

35
Media 2.0 The Long Tail
  • Micromedia disrupts the media landscape
  • Upstream resources become scarce and downstream
    resources become abundant
  • Value capture is a function of attention scarcity
  • Retail and distribution are not drivers of value
    creation, because barriers to media consumption
    are low
  • Unlimited supply of tv channels, newspapers,
    radio stations, everything over IP, etc
  • Retail and distribution arent relatively scarce
  • Hypertargeted, microdifferentiated content is
    valuable
  • New market spaces emerge to control how value is
    captured
  • which will be won by players who can realize
    economies of scale and scope in production or
    distribution (not marketing) to efficiently
    allocate scarce attention

36
Media Hyperdeflation
  • What are the consequences of the micromedia
    explosion?
  • As micromedia explodes supply relative to demand,
    equilibrium prices fall
  • Production, distribution, and retail become
    relatively abundant
  • And attention becomes relatively scarce
  • Consumers can afford to consume greater
    quantities of smaller chunks of media
  • Assuming demand for media goods is relatively
    inelastic
  • Or falling prices dont command proportionally
    more attention
  • Or media spending/discretionary spending stays
    stable
  • As it has been for the last 20 years
  • And assuming industry cost structures dont
    adapt
  • Average returns fall
  • Where are we seeing the beginnings of media
    deflation? Everywhere
  • Falling ad revenues across mass media, falling
    circulation in newspapers, etc
  • Where does the value go?
  • Its appropriated by consumers, who can consume
    more media more cheaply
  • Unintended consequences this creates a further
    incentive for average quality to remain low

37
Attention Production Costs at Large Scale
Production is cheaper than attention
Media 1.0
Production Cost
Media 2.0
Production and attention are equally costly
Attention Cost
Attention is cheaper than production
38
Attention Production Costs
At high levels of output, investing in production
is profit-maximizing
Attention costs
Value
Production costs
And investing in attention is dominated
Output
Value shift in a Media 2.0 world, producers
realize production economies of scale and scope
in production, and marketing diseconomies of
scale and scope. Attention becomes more expensive
than production, because technology vaporizes
production (distribution, and retail) costs,
exploding media supply (relative to a mass media
world, where media supply is fixed), which
creates intense rivalry for attention.
39
Strategy Decay The Consequences of Hyperdeflation
  • What are the consequences of these economics?
  • Media 1.0 strategy decay
  • The blockbuster and all other dominant Media 1.0
    strategies fail in a Media 2.0 world
  • Why?
  • Blockbusters are a strategy to realize marketing
    scale scope economies
  • Which is dominant because cheap attention makes
    marginal returns to marketing more attractive
    than marginal returns to production
  • But blockbuster marketing costs increase in
    rivalry, because rivalry accelerates attention
    scarcity
  • Attention becomes more expensive than production,
    and returns to marketing erode
  • Implication marketing costs for blockbusters
    will explode and returns will implode, as
    micromedia explodes media supply and accelerates
    rivalry

40
The Blockbuster Effect Media Hyperdeflation
Consumer goods tie-ins
Mass media revenues
TV Cable syndication
Value
Hyperdeflated revenues
Output
DVD, VHS
Cinema
41
Value Shift and Strategy Decay
  • More simply
  • As competition explodes for attention from newer,
    cooler, hotter content, attention becomes
    relatively scarcer, so marginal marketing costs
    dont diminish in scale, but begin to increase in
    scale instead
  • Or price of media falls in a hyperdeflationary
    environment, which means costs must fall or
    margins must erode
  • Even more simply
  • As attention becomes scarcer, it becomes more
    costly
  • and so economies of scale and scope in marketing
    erode because returns fall
  • while production becomes more abundant and less
    costly, and so can realize greater returns
  • Value shift
  • Media 2.0 dominant strategies are based on
    economies of scale and scope in production,
    distribution, and search
  • Which can realize superior returns to relatively
    abundant and cheap production resources by
    efficiently allocating scarce attention

42
A Quick Review
43
Media 1.0 Supply Demand
Inelastic demand
Demand
Price
Supply
Quantity
And inelastic supply mean media spending stays
stable as of GDP
44
Understanding Media 2.0 Demand
Demand
Price
Supply
Quantity
The Long Tail cheap information shifts demand
outwards by the value of distribution and search
costs saved
45
Understanding Media 1.0 Supply
Indie record labels
Pixar
Price
Clear Channel
Aggregate supply curve is inelastic
Quantity
because ownership of scarce production,
distribution, and retail resources creates
increasingly inelastic firm supply curves
46
Understanding Media 1.0 Supply
Price
Attention costs
Production costs
Quantity
Because attention costs are relatively low,
returns to marketing are economical, and
marketing wars occur
production costs dominate attention costs,
because content, production, and retail resources
are scarce, and attention is abundant
47
Understanding Media 2.0 Supply
bloggers
podcasters
Price
Pixar
Aggregate supply curve shifts outwards
Quantity
Micromedia supply curves are more inelastic than
traditional media, because of hyperspecialization.
Exampe bloggers
48
Understanding Media Hyperdeflation
Demand
Micromedia explodes media supply more than cheap
information shifts demand outwards
Price
Supply
Quantity
and the equilibrium price of media falls media
hyperdeflation
49
Understanding Media 2.0Returns Scarcity
Micromedia explodes media supply
Price
Production costs
Attention costs
Quantity
attention costs dominate production costs,
because technology ends production, distribution,
and retail scarcity, and so attention becomes
relatively scarce
Marketing wars become uneconomical because
returns to costly attention are low
50
Media 2.0 ModelsAggregators, Platforms, and
Reconstructors
51
Understanding Micromedia
Micromedia
Microchunk
Microchunk
Microchunk
Blog
Entry
Entry
Entry
Playlist
Track
Track
Track
Podcast
Snippet
Snippet
Snippet
52
New Market Spaces
  • Who fills the new market space
  • to efficiently allocate scarce attention
    resources?
  • Some old (failed) candidates
  • The Portal
  • Push (eg PointCast)
  • Interactive TV
  • Some new candidates
  • The PVR and EPG
  • The Personal Server
  • The Feedreader
  • A jumble of models referred to as
  • The Aggregator
  • Two more are emerging Micromedia Platforms and
    Reconstructors

53
The Aggregator vs the Aggregator
  • What is aggregation?
  • Rebundling of content from fragmented platforms
    formats, repurposing, delivery across new
    platforms standards
  • Does this create value in terms of allocating
    scarce attention?
  • No!
  • Dumb aggregation is a value destroyer
  • The economics of dumb aggregation are about
    achieving market power via scale economies in
    syndication
  • Scale economies in syndication will become less
    and less valuable
  • Due to open standards (eg RSS, Ogg)
  • Exploding the size of the mediaverse
  • Massively raising search and transaction costs
  • How do I find cool new music? Google doesnt
    helpBloglines helps a lil bit
  • Value captured is a function of efficiently
    allocating scarce attention
  • dumb aggregation is inefficient at attention
    allocation

54
Smart Aggregators
  • The Aggregator 2.0
  • Allows consumers to navigate complex media
    landscapes by efficiently allocating scarce
    attention according to preferences and
    expectations
  • What does this mean?
  • Smart Aggregators
  • Leverage deep information about content to
    predict utility derived by consumers, slashing
    search and transaction costs of consumption
  • Examples
  • Collaborative filters
  • Recommendation rating systems
  • Similarity difference filters
  • Etc
  • Smart aggregation is aggregation of content plus
  • Aggregation of information, expectations, and
    preferences about content

55
Smart Aggregators
  • Smart Aggregators dont just rebundle content
    from diverse platforms standards
  • They rebundle content, information about content
    and
  • The network
  • EG i-Mode menu system (top ranked services move
    to top of menu)
  • The application
  • EG Bloglines, a9, Amazon
  • The device
  • EG iPod (with iTunes)
  • Rebundling of distribution with content aligned
    with consumer preferences and expectations,
    efficiently allocating scarce attention
  • Where will aggregators fail?
  • Where they dont leverage info about content to
    slash search and transaction costs
  • Where they remain dumb 1.0 aggregators
  • Canonical example MNO services
  • EG Vodafone Live!

56
Micromedia Platforms
  • What are Micromedia platforms?
  • The microchunk itself becomes an open-access
    platform within the niche
  • An asset others can reuse to produce
    complementary goods
  • What kinds of complements can consumers produce?
  • Blogs, vlogs, podcasts comments, links, tags
  • Tracks playlists
  • Games mods
  • Films fan films (EG Star Wars)
  • In general
  • the value of complements is bounded by costs of
    production and coordindation costs of
    collaboration
  • Micromedia Platforms
  • Enable a cost advantage in microdifferentiation
  • Leverage Peer Production to accurately
    microdifferentiate your good from other
    micromedia
  • Smart Aggregators are about quantity, Micromedia
    Platforms are about qualityReconstructors are
    about both

57
Reconstructors and Personal Media
  • The Reconstructor is the aggregator 3.0
  • Makes media truly personal by leveraging
    plasticity
  • What do Reconstructors do?
  • Deconstruct micromedia by altering, remixing, and
    filtering microchunks
  • to reconstruct casts of personal media
  • Unbundle microchunks from micromedia
  • Blog entries from individual blogs, tracks from
    individual playlists
  • and rebundle info about microchunks,
    microchunks, and distribution
  • EG Last.fm
  • Unbundles tracks from albums and playlists to
    reconstruct new playlists the collaborative
    filter predicts youll like
  • EG Technorati tag search
  • Reconstructs a result set of cross-media objects
    by tag
  • EG reBlog
  • Unbundles blog entries from blogs to reconstruct
    cross-blog feeds by topic
  • Reconstructors will evolve naturally wherever
    media is plastic
  • Wherever microchunks can be unbundled from
    micromedia
  • Wherever contribution and aggregation of info
    about consumption is cheap

58
Media 2.0 Market Dynamics
  • Smart Aggregators, Micromedia Platforms, and
    Reconstructors will consolidate horizontally and
    then fragment vertically
  • Consolidate across media
  • Horizontal consolidation realizes economies of
    scope
  • Fragment and specialize by industry or market
    space
  • Vertical consolidation realizes specialization
    gains
  • Their evolution will mirror search evolution
  • A dominant player horizontalizes
  • EG Google moves across media (Web, Images, News,
    Blogs, Video)
  • and nimbler, more specialized competitors
    fragment the market vertically
  • EG Google challenged by Become (product reviews),
    Mobissimo (travel search), FindWhat (article
    search), Technorati (blog search)

59
A Side Note on Broadcatching
  • Broadcatching
  • People will consume the media they like best
  • Of course they will in a perfect world
  • In the real world
  • there are search costs, transaction costs,
    coordination costs, etc
  • A simplistic model of a complex reality
  • Not a useful concept for strategists, because it
    ignores costs and benefits
  • Instead, think about the economics behind it
  • Smart Aggregators, Micromedia Platforms, and
    Reconstructors
  • Are ways to broadcatch economically
  • They operate at different levels
  • and have different dynamics
  • (The key point)
  • and realize different kinds of economies
  • Micromedia platforms exploit peer production
    coordination economies
  • Smart Aggregators exploit cheap information
    search economies
  • Reconstructors exploit open standards
    distributed economies of scale

60
Understanding Micromedia Platforms
Blog
Entry
Entry
Entry
Complements Consumption Info
Comment
Comment
Comment
Link
Citation
Trackback
61
Understanding Smart Aggregators
Blog
Blog
Blog
Entry
Entry
Entry
Entry
Entry
Entry
Complements info
Complements info
Complements info
Smart Aggregator
Selected Micromedia
Blog
Blog
Entry
Entry
Complements Info
Complements info
62
Understanding Reconstructors
Blog
Blog
Blog
Entry
Entry
Entry
Entry
Entry
Entry
Consumption info
Consumption info
Consumption info
Reconstructor
Personal Cast
Entry
Entry
Entry
63
Understanding The Media 2.0 Ecosystem
Microplatform
Blog
Blog
Blog
Blog
Entry
Entry
Entry
Entry
Comment
Comment
Reconstructor
Personal Cast
Personal Cast
Personal Cast
Entry
Entry
Entry
Entry
Entry
Entry
Smart Aggregator
Selected Micromedia
Selected Micromedia
Selected Micromedia
Blog
Blog
Personal Cast
Entry
Entry
Entry
64
Media 2.0 Value Chain
Production
Production
Aggregation
Attention
Micro platform
Re construction
Production
  • 5 primary value activities
  • Micromedia platforms
  • Technology
  • Production
  • Human capital
  • Aggregation
  • Intelligent distribution
  • Reconstruction
  • Personalization
  • Attention

65
Media 2.0 StrategySnowballs, Connected
Consumption and Increasing Returns
66
Hyperdeflation Strategy
  • Does media hyperdeflation mean zero margins for
    content?
  • No!
  • Zero margins for average content
  • Single blogger, average film, single, or article
  • Strategy continuum
  • Quantity
  • Aggregate more content than competitors
  • Quality
  • Microdifferentiate more narrowly than competitors
  • The point
  • Dominant Media 2.0 strategies reverse the effects
    of hyperdeflation
  • By limiting the expansion of supply faster than
    demand
  • Or accelerating demand to catch up with supply
  • .and leverage the natural economics of
    micromedia to create increasing returns to
    adoption

67
Media 2.0 Strategy
  • How do dominant Media 2.0 strategies reverse the
    effects of hyperdeflation?
  • Production
  • Leveraging relatively abundant production
    resources to cheaply produce microdifferentiated
    and hypertargeted content
  • Distribution
  • Leveraging relatively abundant distribution
    resources to cheaply and intelligently distribute
    microdifferentiated content to niches
  • And search economies
  • Using frictionless information-sharing mechanisms
    to cheaply reveal aggregate expectations,
    preferences, and satisfaction within the niche
  • In combination, these three mechanisms
  • Create more value than mass media can
  • And allocate scarce attention to it more
    efficiently than costly marketing or retail
    resources can
  • By maximizing aggregate utility derived from
    content
  • And slashing transaction and search costs of
    niche consumption

68
Media 2.0 Value Creation
  • Why is efficient allocation of attention
    important?
  • Content is frictionlessly matched with highest
    value consumer preferences and expectations
  • Value creation is maximized
  • Maximizing value creation
  • Explodes demand or inflates value of supply
  • reversing damaging hyperdeflation by raising
    equilibrium price
  • What bounds value creation?
  • Niche size
  • Because disutility increases in niche size
  • Search costs
  • Of finding goods within the niche
  • Transaction costs
  • Of consuming goods within the niche
  • How do you maximize value creation in the real
    world?
  • By leveraging connected consumption to slash
    search and transaction costs, and kickstart
    increasing returns
  • ..And leveraging media plasticity to reduce niche
    size

69
Maximizing Value Creation
Aggregate utility
Distribution of preferences has fat tails
Utility
A
Z
B
C
D
E
Preference Continuum
As disutility increases in Z-ness
Zs disutility increases in A-ness
Efficiently allocating attention becomes vital
when attention is scarce. Maximizing value
creation by matching content with preferences.
70
Maximizing Value Creation
Total value lost
Total value created
Utility
Blockbuster 1 captures half
Blockbuster 2 captures half
A
Z
B
C
D
E
Preference Continuum
Mass media producers dont realize production
economies, but realize marketing economies. The
dominant strategy is single products that satisfy
the greatest number of people blockbusters
opposite the center. Since each niche values
targeted content most, marginal disutility from
mass consumption limits value creation
attention is inefficiently allocated.
71
Maximizing Value Creation
Total value created
Utility
Snowball 1 captures niche
Snowball 2 captures niche
A
Z
B
C
D
E
Preference Continuum
Micromedia producers can efficiently target
content to each niches utility function by
realizing production economies, which allow the
cheap production of targeted content. The
dominant strategy is a range of goods that
satisfies niches with similar utility functions
snowballs within each niche. Since each niche
values targeted content most, marginal disutility
is minimized and value creation is maximized
attention is efficiently allocated.
72
Value Creation and Plasticity
Total value created
Utility
Snowball 1 captures niche
Snowball 2 captures niche
A
Z
B
C
D
E
Preference Continuum
How small can your niches get? Niche size is a
function of media plasticity how costly it is
to unbundle media elements. The more plastic
media is, the less costly it is to build Smart
Aggregators and Reconstructors to filter and
remix it. For example, reconstructors for
Hollywood flicks are costly, because unbundling
them is difficult. What increases plasticity?
Lightweight, open standards, like RSS and
modular architectures, like blog entries.
73
Disconnected Consumption
  • Disconnected consumption
  • Media 1.0 goods are disconnected in consumption
  • centralized mechanisms inform expectations about
    utility derived from consumption
  • Your local paper reviews books, movies, music
  • Bestseller lists, Top 40 charts
  • Information distortion these mechanisms are
    easily gamed
  • EG Top 40 charts gamed by radio payola
  • Bestseller lists gamed by publishers buying own
    books
  • True aggregate preferences are never revealed
  • Short term gains have long term costs
  • Value creation is minimized because attention
    allocation is inefficient
  • Consumer skepticism grows search and transaction
    costs rise and expected utility falls

74
Centralized Decentralized Information
  • Centralized preference information
  • is uneconomical for micromedia
  • Siskel Ebert can review 10,000 movies, but not
    1,000,000 blogs
  • Search and transaction costs are too high
  • Micromedia goods require connected consumption
  • For efficient attention allocation
  • because it informs expectations economically
  • By decentralizing information transmission and
    processing
  • How?
  • Consumers can explicitly share expectations,
    preferences, and satisfaction
  • Or share complementary goods which implicitly
    reveal expectations, preferences, and
    satisfaction
  • Attention allocation is efficient because
    transparent info sharing removes information
    distortion
  • Decentralized trading of cheap information
    reveals most valued goods

75
Connected Consumption
  • Connected consumption your consumption is
    complementary to mine
  • Why?
  • Consumption externality
  • When you consume micromedia, you reveal or
    contribute private info
  • which is valuable to me when aggregated and made
    public
  • How?
  • 2 mechanisms
  • By indirectly reducing my search and transaction
    costs tags playlists
  • By directly increasing my consumption gains mods
    complementary goods
  • Network FX my marginal utility increases in
    number of connected consumers
  • Blog commenters, playlisters, tag contributors

76
Connected Consumption
  • Isnt a new thing
  • An emergent countercultural response to mass
    media homogeneity
  • Canonical example Underground music, DJs, and
    the rise of club culture
  • DJ plays a selection of tracks
  • Audience reveals preferences, expectations, and
    satisfaction with their feet private info is
    made public
  • Consumption externality your dancing reduces my
    search and transaction costs
  • Tracks which maximize aggregate utility are
    efficiently revealed, and value creation is
    maximized
  • across multiple niches/different genres of club
    music
  • Music listeners are a connected network DJs
    realized it, the music industry didnt
  • Now, dance music is the fastest growing segment
    of the music industry and the segment which most
    regularly produces snowballs
  • We will return to this example later

77
Connected Consumption the Snowball Effect
  • Putting it all together The Snowball Effect
  • Marginal utility can increase in consumption for
    a microchunk
  • Under 2 conditions
  • as long as consumers can contribute information
    about it
  • as long as its relative quality is high
  • because of connected consumption
  • Smart aggregators reveal aggregate satisfaction
    in the niche
  • Your consumption has an externality your private
    info is revealed
  • which helps me predict this goods quality and
    slashes my search costs
  • EG Technorati Link Cosmos, Flickr/del.icio.us
    tags
  • or Micromedia platforms allows consumers to add
    more complex info, like comments, reviews, karma,
    etc
  • You directly increase my consumption gains by
    producing sharing complementary goods, whose
    value is internalized by the aggregator
  • EG Blogger comments, games mods, Winamp
    playlists, RSS shared subscriptions

78
Mass Media Returns The Blockbuster Effect
Consumer goods tie-ins
Motion picture revenues
TV Cable syndication
Value
Demand
Output
DVD, VHS
Cinema
79
Micromedia Returns The Snowball Effect
Syndicated by hi-traffic site
Micromedia revenues
Reviewed by hi-visibility pub
Value
Demand
Output
Aggregated by aggregator
Published personally
80
Snowball Example Blog
Syndicated by Yahoo News
Micromedia revenues
Syndicated by Slashdot
Value
Demand
Output
Syndicated by link aggregator
Published on personal blog
81
Snowball Example Podcast
Reviewed by the NYT
Value
Micromedia revenues
Syndicated by BoingBoing
Demand
Output
Aggregated by podcast aggregator
Published on website
82
Snowballs and Increasing Returns
  • The more a high-quality microchunk is consumed
  • the more value is added by consumers
  • the more that microchunk is consumed
  • Because Smart aggregators collect and filter
    preference info
  • or Micromedia platforms allow complement
    production
  • Value snowballs via increasing returns to
    adoption
  • Positive feedback if a product Is high-quality,
    its popularity in the niche will grow as its
    consumed
  • Quality drives popularity hyperefficiently
  • The downside
  • Decentralized info also allows transparency in
    quality
  • Aggregate satisfaction for microchunks is visible
  • Implication only high quality microchunks can
    become snowballs
  • And
  • Not all high quality microchunks will become
    snowballs
  • Snowballs are high quality microchunks that also
    maximize utility derived within the niche

83
Popularity and Quality
Quality drives popularity hyperefficiently
Firm coordination costs
Popularity
Media 1.0
Media 2.0
Quality
Quality drives popularity inefficiently
84
Snowball Economics
  • What does this mean?
  • Snowball economics
  • Niche demand curve for microchunks slopes upwards
  • Why?
  • The economics of connected consumption
    Increasing returns to adoption
  • Quantity demanded increases in price
  • As a microgood is consumed more and more,
    consumption externalities add value by slashing
    search and transaction costs
  • and/or complements add value by increasing
    consumption gains
  • which raises the price to later adopters
  • Inversion of Media 1.0 price discrimination,
    where early adopters pay more
  • Example Club music track
  • Gets played at clubs, lounges, etc
  • Remixed, re-edited
  • Republished by major label

85
Snowball Economics
  • The snowball effect means
  • successful aggregator or microdifferentiator
    micromedia models can realize higher returns than
    traditional media
  • Why?
  • Because snowballs create more total value
  • Because micromedia are targeted to niches, and
    realize less disutility than mass media
  • And capture relatively more of value created
  • Because niches become winner-take-all markets
  • so margins explode snowball prices rise in
    consumption, while costs remain constant
  • This is a form of natural price discrimination
    which means micromedia producers can exert
    greater pricing power within niches
  • And is the inverse of Media 1.0 price
    discrimination, where prices fall in consumption

86
Micromedia at the Margin
Micromedia realizes higher returns
Firm coordination costs
Value
Micromedia returns
Traditional media returns
Micromedia marginal return exceeds traditional
media return
Output
Traditional media realizes higher returns
PP is a More Efficient Producer
87
Snowball Strategy
  • Whether youre using Smart Aggregators or
    Micromedia Platforms to lay the infrastructure
    for snowballs
  • The dominant Media 2.0 product strategy is the
    same
  • Open up your goods
  • To let others add value and accelerate returns
    the snowball effect
  • Extend openness as far as possible up and down
    your value chain
  • Give prosumers access to means of production for
    complementary goods
  • Comments are the most primitive example
  • Give prosumers access to preference and
    expectation info about your goods
  • Tags are the most primitive example
  • This is the polar opposite of Media 1.0 product
    strategies
  • Protect your good with rigid IP to exclude
    non-payers from consumption
  • Without open access
  • No decentralized info sharing, no connected
    consumption, no increasing returns, no snowball
    effect
  • supply explodes faster than demand, equilibrium
    price falls, margins erode

88
Snowball Strategy and Property Rights
  • Media 1.0 strategy is built around exclusion
  • Media 1.0 goods are heavily protected
  • by all sorts of IPR
  • which function as effective barriers to
    imitation
  • because the opportunity cost is less than the
    monopoly right to benefit
  • IPR are not effective barriers to imitation in a
    Media 2.0 world
  • Even if they work (ie, prevent piracy)
  • Because the opportunity cost is greater than the
    monopoly right to benefit
  • Why?
  • Rigid protection builds barriers to
    complementarity
  • It stops you from realizing new kinds of
    economies, which are the heart of dominant Media
    2.0 strategies
  • Distributed economies of scale
  • Economies of scale and scope in production
  • Coordination economies
  • All depend critically on complementarity between
    microchunks or microgoods

89
Incumbent Inertia andRIP Media 1.0
  • Media 2.0 strategy is built around inclusion
  • failing to understand that long-term value
    creation depends critically on openness
  • and that Media 1.0 imitation barriers become
    Media 2.0 value traps
  • is going to be the single biggest cause of
    (fatal) strategic errors Media 1.0 firms make in
    transitioning to Media 2.0
  • Because protectionism is such a deeply rooted
    part of how theyve produced goods
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The New Economics of Media

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Title: The New Economics of Media


1
The New Economics of Media
  • Micromedia, Connected Consumption, and the
    Snowball Effect

Umair Haque http//www.bubblegeneration.com Spring
2005
2
Media 1.0 Mass Media
3
Mass Media Value Chain
Production
Publishing/ Marketing
Distribution
Attention
Infra structure
Retail
  • 6 primary value activities
  • Infrastructure
  • Technology
  • Content
  • Creativity
  • Marketing
  • What media is bought and sold
  • Distribution
  • Transport logistics
  • Retail
  • Where and when media is consumed
  • Attention
  • Why is attention part of the value chain?
  • Most media markets are 2-sided markets they
    coordinate consumption by advertisers and
    audiences
  • Attention is how we will refer to this
    coordination process

4
Two Sided Markets
Production
Supply
Demand
Media
Audience
Advertiser
Demand
Supply
Attention
Supply coordinates demand on both sides of a
two-sided market and sets equilibrium prices.
Unlike in other markets, in the media
marketplace, attention is a critical part of the
value chain, because it is demanded by
advertisers and supplied by consumers. On the
other side of the two-side market, production is
demanded by consumers and supplied (funded) by
advertisers.
5
Media Orthodoxy
  • The Media Industrys First Law attention is
    scarce
  • Is this accurate?
  • Attention has always been getting absolutely
    scarcer as media grows
  • But
  • Were interested in
  • relative scarcity along the value chain
  • marginal scarcity at large scale
  • Relative and marginal scarcity are what count
    economically
  • because they define the structure, dynamics and
    expected value of differing strategies in the
    media industry
  • Is attention scarce?
  • Relatively
  • and at the margin?
  • Its about to be
  • But it hasnt always been

6
Media Heresy
  • In fact
  • Attention has remained relatively abundant for
    many years
  • What!? How can we prove this?
  • By asking how great the risk of losing audience
    actually is
  • The real problem facing the media industry
  • A zero-sum game medias grown quantitatively and
    qualitatively, but attention hasnt
  • Attentions about to become relatively scarce
    (fast)
  • Lets begin by rewinding
  • And examining a non-networked world of pure mass
    media
  • In order to understand how attention abundance
    has shaped industry dynamics
  • and led to the creation of core competences and
    strategies which become core rigidities and
    errors in a Media 2.0 world

7
Attention Abundance
  • Attention is directly unobservable
  • and traditional share-based metrics shed no
    light on relative abundance
  • But indirectly
  • The industrys actions reveal abundant attention
  • Following deregulation, network TV ad time per
    hour increased exponentially from 648 in 1982 to
    1204 in 2001
  • Similar figures for radio, newspapers and
    magazines (if we count special supplements and
    advertorials)
  • While production investment has increased
    linearly
  • Increasing ad time is equivalent to investing in
    attention
  • Because ad time is simply a marketing cost borne
    by players on the other side of the 2-sided
    market
  • The distinction between ad time and marketing
    cost is a figment of accounting unimportant
    economically

8
Attention Abundance
  • What does hypergrowth of ad time tell us?
  • If attention was scarce, increasing ad time would
    be a dominated strategy
  • Because marginal revenues from advertising would
    be less than marginal costs of viewers lost to
    rivals
  • And so returns to investing in attention
    (increasing ad time) would be dominated by
    investing in production (higher quality
    programming) or infrastructure (creating a
    technological cost advantage)
  • In fact, attention has been relatively abundant
    at the margin
  • Intuition buying attention via ads is cheaper
    than attracting it via quality content
  • Proposition can only hold if attention isnt
    scarce, since attention scarcity would increase
    marginal cost of lost viewers, offsetting
    marginal revenues from advertising

9
Mass Media Resource Dynamics
  • In a mass media world
  • Downstream resources are scarce...
  • Distribution scarcity (Transport/inventory/broadca
    sting costs)
  • Retail scarcity (Spectrum scarcity, limited
    shelf/screen space)
  • Production scarcity (Infrastructure and human
    capital costs)
  • and upstream resources are abundant
  • Attention isnt scarce relative to other
    resources
  • Attention scarcity isnt a driver of value
    creation, because barriers to media consumption
    are high
  • Limited supply of cinemas, radio stations,
    newspapers, tv channels, etc
  • Implication
  • Quality does not efficiently drive popularity
  • Because attention is cheaper than costly
    production, distribution, ideas, editing,
    finishing, etc

10
Mass Media Industry Structure
  • Abundance is no surprise, given industry
    structure
  • Mass media businesses are cash cows
  • at least in a Media 1.0 world
  • Ask Warren Buffett (whose fav investment was
    local papers)
  • because high entry barriers artificially or
    naturally limit rivalry
  • Broadcast media spectrum scarcity auctions
    impose huge entry costs
  • Print media natural monopoly dynamics average
    cost falls in circulation
  • So mass media players gain strong first-mover
    advantages
  • Which they use to acquire, pre-empt, or bankrupt
    competitors
  • Supply remains limited on both sides of the
    2-sided market
  • For advertisers, prices rise media inflation
  • Whose revenues are often used to drop prices on
    the other side of the market, and subsidize
    audience growth
  • Attention remains relatively abundant
  • Because total supply never grows

11
Mass Media Value Equation
  • Mass media value capture is a function of
  • Distribution and retail scarcity
  • Whoever controls these scarce resources
  • Can exert market power along the value chain
  • increase share and control how value is captured
  • Retailers and marketers achieve control via
    consolidation acquisitions, partnerships,
    alliances which realize economies of scale and
    scope in marketing
  • Retail marketing control how value is captured
  • By leveraging marketing economies of scale and
    scope to control downstream resources, they can
    exert market power along the value chain
  • Canonical examples vertically integrated
    Hollywood Studio System, major labels, broadcast
    networks 1950-1990

12
Quality Doesnt Scale
  • The problem is
  • At large scale, marketers and retailers have
    little incentive to invest in quality
  • Since production costs dont realize scale and
    scope economies, but marketing and retail costs
    do
  • Production costs grow in output because risk
    accelerates
  • Example films records going over budget
  • Marketing costs decrease in output because risk
    decelerates
  • Returns dominated by production scarcity, not
    attention scarcity
  • Highest returns to player who can most
    efficiently allocate scarce production resources
  • Whats the profit-maximizing strategy?
  • Invest in attention, dont invest in production
  • Unintended consequences
  • Quality drives popularity inefficiently
  • Because attention isnt scarce, but production is

13
Marketing Cost Explosion
Hollywood Nominal and Real Marketing Costs,
1981-2004
Real marketing expenditure has quadrupled, while
real production expenditure has only doubled
firms have cumulatively invested twice as much in
attention as production. Since this strategy has
persisted for 25 years, investing in attention
must realize superior returns to investing in
production. Why is this strategy dominant? In a
mass media world, producers realize marketing
economies of scale and scope, and production
diseconomies of scale and scope
14
Popularity and Quality
Quality drives popularity hyperefficiently
Media 1.0
Popularity
Quality
Quality drives popularity inefficiently
15
The Blockbuster Effect
16
The Blockbuster Effect Downstream Scarcity
Strategy
  • Whats the dominant strategy in a world driven by
    downstream scarcity?
  • Reuse the same expensive content across as many
    media as you can
  • And price discriminate while you do it
  • Film release windows Cinema, DVD, Video, TV, Ads
  • And across as many market spaces as you can
  • Via tie-ins, promotions, etc
  • Think Star Wars happy meal toys, action figures,
    books, posters, t-shirts, breakfast cereal
  • Aka Blockbusters
  • Blockbusters are a strategy to maximize returns
    on content
  • By reusing and leveraging it to realize marketing
    economies
  • Most efficient allocation of scarce production
    resources

17
Mass Media Returns The Blockbuster Effect
Consumer goods tie-ins
Motion picture revenues
TV Cable syndication
Value
Demand
Output
DVD, VHS
Cinema
18
The Blockbuster Effect Example Jurassic Park
Merchandising 50m
Revenues
Syndication 50m
Value
Demand
Output
Video 405m
Box Office 480m
19
Blockbuster Economics
  • Blockbusters are a natural result of mass media
    economics
  • Downstream resources scarce, upstream resources
    abundant
  • Which is why we see this strategy emerge in all
    mass media
  • How do we maximize expected profits of costly
    production?
  • Diversify risk by expanding revenue streams
    across scarce retail and distribution channels
    (in audience segments)
  • Price discriminate by cost of retail and
    distribution channels relative to total segment
    value
  • Marketers and retailers realize scale and scope
    economies via these tactics
  • By reusing and leveraging marketing assets across
    segments
  • Which are implicit ways to allocate scarce
    production resources
  • by buying attention, which is cheaper than
    attracting it via investing in quality
  • Since attention is relatively abundant

20
The Problem with Blockbusters
  • Buying attention marketing economies hit
    diminishing returns
  • Each segment is less and less valuable and
    saturated faster
  • But since attention is cheap
  • Rivalry to economize on production and invest in
    attention creates marketing cost spirals
  • Marketing wars between blockbuster marketers,
    each of whom thinks attention will be cheap
  • Prisoners dilemma each is better off marketing
    less
  • Quality erodes
  • As marketing costs spiral and relative production
    costs shrink
  • Where have we seen this dynamic?
  • Hollywood marketing cost explosion, major label
    sales declines, magazine subscription
    erosioneverywhere!
  • These unintended consequences are costless as
    long as attention is cheap, since quality does
    not drive popularity
  • But what happens if attention becomes more
    expensive
  • and returns to marketing decline?

21
Attention Production Costs at Large Scale
Production is cheaper than attention
Media 1.0
Production Cost
Production and attention are equally costly
Attention Cost
Attention is cheaper than production
22
Attention Production Costs in Rivalry
Production is cheaper than attention
Media 1.0
Production Cost
Production and attention are equally costly
Attention Cost
Marketing cost wars make attention increasingly
relatively costly
23
Attention Production Costs
At high levels of output, investing in attention
is profit-maximizing
Attention costs
Value
Production costs
And investing in production is dominated
Output
Why do attention and production costs scale
differently? Marketing economies of scale and
scope are the result of leveraging and reusing
content across distribution and retail channels
to achieve price discrimination and
diversification of risk. Production scale or
scope economies arent realized because of high
costs of contractual completeness, which makes
risk increase in output, and high technology
costs.
24
Attention Production Costs
At low levels of output, investing in attention
is dominated
Attention costs
Value
Production costs
Output
Why do some media firms invest in production, and
others in attention? Because the scale at which
they operate dictates different profit-maximizing
decisions about which inputs to invest in.
And investing in production is profit-maximizing
25
Attention Production Costs
Production is more expensive than attention
invest in attention
Attention costs
Value
Production costs
Marginal cost of production exceeds marginal cost
of attention
Output
Attention is more expensive than production
invest in production
Media firms producing at different scales will
choose different inputs. Small scale producers
will invest in production, and large-scale
producers will invest in attention. Hollywood vs
Cannes
26
Media 1.0 Total Cost Function
The shapes of the attention and production cost
curves
Cost of all inputs
Value
create an S-shaped total cost function
Output
The S-shaped total cost function means
large-scale producers are naturally more
efficient than small scale producers, because
attention costs diminish due to marketing
economies of scale of scope.
27
Marketing Spirals Erode Quality
Marketing wars increase the cost of attention
Attention costs
Value
Production costs
..Since production costs dont decline,
production investment declines fewer production
inputs are used at equilibrium price
Output
Marketer and retailer consolidation realizes
economies of scope and scale in marketing.
Production scale or scope economies arent
realized.
Marketing spirals act as an entry barrier. They
raise attention costs, while marketing economies
of scale and scope are still realized
proportionally (the flattening of the green
curve). The result is a shakeout and increased
industry concentration, because returns to
attention remain high only for large-scale
players. Quality erodes as production investment
is traded for marketing investment.
28
Popularity and Quality
Quality drives popularity hyperefficiently
Media 1.0
Popularity
Quality
Marketing cost spirals mean quality erodes as
relative investment in production declines, and
becomes even less correlated with popularity
29
Summary Mass Media Value Dynamics
Attention
In a non-networked media world, retail
marketing capture the most value. Producers and
distributors remain fragmented because production
returns dont scale they dont realize
significant economies of scale or scope by
consolidating.
Attention
Attention
Production
Distribution
Marketing
Attention
Infra structure
Retail
Attention
Marketing and retail returns do scale by
consolidating, retailers and marketers exert
power over downstream resources by realizing
economies of scale and scope in marketing and
retailing, and power over upstream resources by
limiting media supply (and consumption choices).
Attention
Attention
30
SummaryMass Media Value Dynamics
Attention
Blockbuster strategies emerge due to the natural
economics of mass media production is costlier
than attention, so the dominant strategy is to
invest in attention (marketing cost wars), and
economize on production (quality erosion). The
result is a smaller and smaller number of
concentrated players, who are forced to invest
more and more heavily in marketing as attention
becomes scarcer.
Attention
Attention
Production
Distribution
Marketing
Attention
Infra structure
Retail
Attention
When attention is abundant and production,
distribution, and retail are scarce, blockbusters
achieve an efficient allocation of scarce
production resources, by supplying media valued
the most highly to the greatest number of
consumers within each retail/distribution
channel mass media. The unintended consequence
is that quality doesnt drive popularity.
Attention
Attention
31
Media 2.0 The Age of Plasticity
32
The Age of Plasticity
  • Media 2.0 is plastic
  • atomized media be reshaped, remixed, tweaked,
    cut, split
  • and aggregated, filtered, distributed,
    delivered, stored
  • almost any way/to any time/at any place
    consumers prefer
  • Plasticity makes Media 2.0 personal
  • No clear distinction between professional and
    amateur media
  • because all media can be unbundled/rebundled
  • The distinction shifts from professional/amateur
    to mass/personal
  • Media will be unbundled and rebundled at the
    personal (not mass) level
  • Beyond narrowcasting, nichecasting personal
    control over the cast
  • In an atomized environment, what becomes
    valuable?
  • What are the economic effects of plasticity?
  • Or what does broadcatching really mean?
  • Lets begin by understanding the economics of
    micromedia

33
What is Micromedia?
  • Micromedia is
  • Media that can be consumed in unbundled
    microchunks
  • Microchunks of media unbundled from traditional
    media goods
  • Blogs vs newspaper articles
  • Tracks vs albums
  • Vlogs vs network news
  • ..and aggregated and reconstructed in
    hyperefficient ways
  • Blogs, vlogs, podcasts, mp3 tracks, RSS feeds
  • Micromedia can be unbundled and rebundled for
    consumers
  • EG Blog entries can be aggregated and
    reconstructed by topic
  • to create orders of magnitude more value than
    mass media
  • Micromedia explodes media supply
  • The total quantity of media goods explodes
  • And atomizes it
  • The average size of media goods shrinks

34
Micromedia Drivers
  • What drives the micromedia explosion?
  • And the shift from downstream to upstream
    scarcity?
  • Technology
  • Falling barriers to production
  • GarageBand
  • Unbundling Falling barriers to distribution
    retail
  • p2p, iTunes, BitTorrent, convergence of
    connectivity platforms, micropayment
  • And retail/distribution channel growth and
    fragmentation
  • Cinema vs VHS, DVD, VCD, MPEG
  • Regulation
  • Creative Commons
  • Fair Use (applicability grows in networked media)
  • Changing consumer preferences
  • The rise of connected consumption
  • The rise of peer production

35
Media 2.0 The Long Tail
  • Micromedia disrupts the media landscape
  • Upstream resources become scarce and downstream
    resources become abundant
  • Value capture is a function of attention scarcity
  • Retail and distribution are not drivers of value
    creation, because barriers to media consumption
    are low
  • Unlimited supply of tv channels, newspapers,
    radio stations, everything over IP, etc
  • Retail and distribution arent relatively scarce
  • Hypertargeted, microdifferentiated content is
    valuable
  • New market spaces emerge to control how value is
    captured
  • which will be won by players who can realize
    economies of scale and scope in production or
    distribution (not marketing) to efficiently
    allocate scarce attention

36
Media Hyperdeflation
  • What are the consequences of the micromedia
    explosion?
  • As micromedia explodes supply relative to demand,
    equilibrium prices fall
  • Production, distribution, and retail become
    relatively abundant
  • And attention becomes relatively scarce
  • Consumers can afford to consume greater
    quantities of smaller chunks of media
  • Assuming demand for media goods is relatively
    inelastic
  • Or falling prices dont command proportionally
    more attention
  • Or media spending/discretionary spending stays
    stable
  • As it has been for the last 20 years
  • And assuming industry cost structures dont
    adapt
  • Average returns fall
  • Where are we seeing the beginnings of media
    deflation? Everywhere
  • Falling ad revenues across mass media, falling
    circulation in newspapers, etc
  • Where does the value go?
  • Its appropriated by consumers, who can consume
    more media more cheaply
  • Unintended consequences this creates a further
    incentive for average quality to remain low

37
Attention Production Costs at Large Scale
Production is cheaper than attention
Media 1.0
Production Cost
Media 2.0
Production and attention are equally costly
Attention Cost
Attention is cheaper than production
38
Attention Production Costs
At high levels of output, investing in production
is profit-maximizing
Attention costs
Value
Production costs
And investing in attention is dominated
Output
Value shift in a Media 2.0 world, producers
realize production economies of scale and scope
in production, and marketing diseconomies of
scale and scope. Attention becomes more expensive
than production, because technology vaporizes
production (distribution, and retail) costs,
exploding media supply (relative to a mass media
world, where media supply is fixed), which
creates intense rivalry for attention.
39
Strategy Decay The Consequences of Hyperdeflation
  • What are the consequences of these economics?
  • Media 1.0 strategy decay
  • The blockbuster and all other dominant Media 1.0
    strategies fail in a Media 2.0 world
  • Why?
  • Blockbusters are a strategy to realize marketing
    scale scope economies
  • Which is dominant because cheap attention makes
    marginal returns to marketing more attractive
    than marginal returns to production
  • But blockbuster marketing costs increase in
    rivalry, because rivalry accelerates attention
    scarcity
  • Attention becomes more expensive than production,
    and returns to marketing erode
  • Implication marketing costs for blockbusters
    will explode and returns will implode, as
    micromedia explodes media supply and accelerates
    rivalry

40
The Blockbuster Effect Media Hyperdeflation
Consumer goods tie-ins
Mass media revenues
TV Cable syndication
Value
Hyperdeflated revenues
Output
DVD, VHS
Cinema
41
Value Shift and Strategy Decay
  • More simply
  • As competition explodes for attention from newer,
    cooler, hotter content, attention becomes
    relatively scarcer, so marginal marketing costs
    dont diminish in scale, but begin to increase in
    scale instead
  • Or price of media falls in a hyperdeflationary
    environment, which means costs must fall or
    margins must erode
  • Even more simply
  • As attention becomes scarcer, it becomes more
    costly
  • and so economies of scale and scope in marketing
    erode because returns fall
  • while production becomes more abundant and less
    costly, and so can realize greater returns
  • Value shift
  • Media 2.0 dominant strategies are based on
    economies of scale and scope in production,
    distribution, and search
  • Which can realize superior returns to relatively
    abundant and cheap production resources by
    efficiently allocating scarce attention

42
A Quick Review
43
Media 1.0 Supply Demand
Inelastic demand
Demand
Price
Supply
Quantity
And inelastic supply mean media spending stays
stable as of GDP
44
Understanding Media 2.0 Demand
Demand
Price
Supply
Quantity
The Long Tail cheap information shifts demand
outwards by the value of distribution and search
costs saved
45
Understanding Media 1.0 Supply
Indie record labels
Pixar
Price
Clear Channel
Aggregate supply curve is inelastic
Quantity
because ownership of scarce production,
distribution, and retail resources creates
increasingly inelastic firm supply curves
46
Understanding Media 1.0 Supply
Price
Attention costs
Production costs
Quantity
Because attention costs are relatively low,
returns to marketing are economical, and
marketing wars occur
production costs dominate attention costs,
because content, production, and retail resources
are scarce, and attention is abundant
47
Understanding Media 2.0 Supply
bloggers
podcasters
Price
Pixar
Aggregate supply curve shifts outwards
Quantity
Micromedia supply curves are more inelastic than
traditional media, because of hyperspecialization.
Exampe bloggers
48
Understanding Media Hyperdeflation
Demand
Micromedia explodes media supply more than cheap
information shifts demand outwards
Price
Supply
Quantity
and the equilibrium price of media falls media
hyperdeflation
49
Understanding Media 2.0Returns Scarcity
Micromedia explodes media supply
Price
Production costs
Attention costs
Quantity
attention costs dominate production costs,
because technology ends production, distribution,
and retail scarcity, and so attention becomes
relatively scarce
Marketing wars become uneconomical because
returns to costly attention are low
50
Media 2.0 ModelsAggregators, Platforms, and
Reconstructors
51
Understanding Micromedia
Micromedia
Microchunk
Microchunk
Microchunk
Blog
Entry
Entry
Entry
Playlist
Track
Track
Track
Podcast
Snippet
Snippet
Snippet
52
New Market Spaces
  • Who fills the new market space
  • to efficiently allocate scarce attention
    resources?
  • Some old (failed) candidates
  • The Portal
  • Push (eg PointCast)
  • Interactive TV
  • Some new candidates
  • The PVR and EPG
  • The Personal Server
  • The Feedreader
  • A jumble of models referred to as
  • The Aggregator
  • Two more are emerging Micromedia Platforms and
    Reconstructors

53
The Aggregator vs the Aggregator
  • What is aggregation?
  • Rebundling of content from fragmented platforms
    formats, repurposing, delivery across new
    platforms standards
  • Does this create value in terms of allocating
    scarce attention?
  • No!
  • Dumb aggregation is a value destroyer
  • The economics of dumb aggregation are about
    achieving market power via scale economies in
    syndication
  • Scale economies in syndication will become less
    and less valuable
  • Due to open standards (eg RSS, Ogg)
  • Exploding the size of the mediaverse
  • Massively raising search and transaction costs
  • How do I find cool new music? Google doesnt
    helpBloglines helps a lil bit
  • Value captured is a function of efficiently
    allocating scarce attention
  • dumb aggregation is inefficient at attention
    allocation

54
Smart Aggregators
  • The Aggregator 2.0
  • Allows consumers to navigate complex media
    landscapes by efficiently allocating scarce
    attention according to preferences and
    expectations
  • What does this mean?
  • Smart Aggregators
  • Leverage deep information about content to
    predict utility derived by consumers, slashing
    search and transaction costs of consumption
  • Examples
  • Collaborative filters
  • Recommendation rating systems
  • Similarity difference filters
  • Etc
  • Smart aggregation is aggregation of content plus
  • Aggregation of information, expectations, and
    preferences about content

55
Smart Aggregators
  • Smart Aggregators dont just rebundle content
    from diverse platforms standards
  • They rebundle content, information about content
    and
  • The network
  • EG i-Mode menu system (top ranked services move
    to top of menu)
  • The application
  • EG Bloglines, a9, Amazon
  • The device
  • EG iPod (with iTunes)
  • Rebundling of distribution with content aligned
    with consumer preferences and expectations,
    efficiently allocating scarce attention
  • Where will aggregators fail?
  • Where they dont leverage info about content to
    slash search and transaction costs
  • Where they remain dumb 1.0 aggregators
  • Canonical example MNO services
  • EG Vodafone Live!

56
Micromedia Platforms
  • What are Micromedia platforms?
  • The microchunk itself becomes an open-access
    platform within the niche
  • An asset others can reuse to produce
    complementary goods
  • What kinds of complements can consumers produce?
  • Blogs, vlogs, podcasts comments, links, tags
  • Tracks playlists
  • Games mods
  • Films fan films (EG Star Wars)
  • In general
  • the value of complements is bounded by costs of
    production and coordindation costs of
    collaboration
  • Micromedia Platforms
  • Enable a cost advantage in microdifferentiation
  • Leverage Peer Production to accurately
    microdifferentiate your good from other
    micromedia
  • Smart Aggregators are about quantity, Micromedia
    Platforms are about qualityReconstructors are
    about both

57
Reconstructors and Personal Media
  • The Reconstructor is the aggregator 3.0
  • Makes media truly personal by leveraging
    plasticity
  • What do Reconstructors do?
  • Deconstruct micromedia by altering, remixing, and
    filtering microchunks
  • to reconstruct casts of personal media
  • Unbundle microchunks from micromedia
  • Blog entries from individual blogs, tracks from
    individual playlists
  • and rebundle info about microchunks,
    microchunks, and distribution
  • EG Last.fm
  • Unbundles tracks from albums and playlists to
    reconstruct new playlists the collaborative
    filter predicts youll like
  • EG Technorati tag search
  • Reconstructs a result set of cross-media objects
    by tag
  • EG reBlog
  • Unbundles blog entries from blogs to reconstruct
    cross-blog feeds by topic
  • Reconstructors will evolve naturally wherever
    media is plastic
  • Wherever microchunks can be unbundled from
    micromedia
  • Wherever contribution and aggregation of info
    about consumption is cheap

58
Media 2.0 Market Dynamics
  • Smart Aggregators, Micromedia Platforms, and
    Reconstructors will consolidate horizontally and
    then fragment vertically
  • Consolidate across media
  • Horizontal consolidation realizes economies of
    scope
  • Fragment and specialize by industry or market
    space
  • Vertical consolidation realizes specialization
    gains
  • Their evolution will mirror search evolution
  • A dominant player horizontalizes
  • EG Google moves across media (Web, Images, News,
    Blogs, Video)
  • and nimbler, more specialized competitors
    fragment the market vertically
  • EG Google challenged by Become (product reviews),
    Mobissimo (travel search), FindWhat (article
    search), Technorati (blog search)

59
A Side Note on Broadcatching
  • Broadcatching
  • People will consume the media they like best
  • Of course they will in a perfect world
  • In the real world
  • there are search costs, transaction costs,
    coordination costs, etc
  • A simplistic model of a complex reality
  • Not a useful concept for strategists, because it
    ignores costs and benefits
  • Instead, think about the economics behind it
  • Smart Aggregators, Micromedia Platforms, and
    Reconstructors
  • Are ways to broadcatch economically
  • They operate at different levels
  • and have different dynamics
  • (The key point)
  • and realize different kinds of economies
  • Micromedia platforms exploit peer production
    coordination economies
  • Smart Aggregators exploit cheap information
    search economies
  • Reconstructors exploit open standards
    distributed economies of scale

60
Understanding Micromedia Platforms
Blog
Entry
Entry
Entry
Complements Consumption Info
Comment
Comment
Comment
Link
Citation
Trackback
61
Understanding Smart Aggregators
Blog
Blog
Blog
Entry
Entry
Entry
Entry
Entry
Entry
Complements info
Complements info
Complements info
Smart Aggregator
Selected Micromedia
Blog
Blog
Entry
Entry
Complements Info
Complements info
62
Understanding Reconstructors
Blog
Blog
Blog
Entry
Entry
Entry
Entry
Entry
Entry
Consumption info
Consumption info
Consumption info
Reconstructor
Personal Cast
Entry
Entry
Entry
63
Understanding The Media 2.0 Ecosystem
Microplatform
Blog
Blog
Blog
Blog
Entry
Entry
Entry
Entry
Comment
Comment
Reconstructor
Personal Cast
Personal Cast
Personal Cast
Entry
Entry
Entry
Entry
Entry
Entry
Smart Aggregator
Selected Micromedia
Selected Micromedia
Selected Micromedia
Blog
Blog
Personal Cast
Entry
Entry
Entry
64
Media 2.0 Value Chain
Production
Production
Aggregation
Attention
Micro platform
Re construction
Production
  • 5 primary value activities
  • Micromedia platforms
  • Technology
  • Production
  • Human capital
  • Aggregation
  • Intelligent distribution
  • Reconstruction
  • Personalization
  • Attention

65
Media 2.0 StrategySnowballs, Connected
Consumption and Increasing Returns
66
Hyperdeflation Strategy
  • Does media hyperdeflation mean zero margins for
    content?
  • No!
  • Zero margins for average content
  • Single blogger, average film, single, or article
  • Strategy continuum
  • Quantity
  • Aggregate more content than competitors
  • Quality
  • Microdifferentiate more narrowly than competitors
  • The point
  • Dominant Media 2.0 strategies reverse the effects
    of hyperdeflation
  • By limiting the expansion of supply faster than
    demand
  • Or accelerating demand to catch up with supply
  • .and leverage the natural economics of
    micromedia to create increasing returns to
    adoption

67
Media 2.0 Strategy
  • How do dominant Media 2.0 strategies reverse the
    effects of hyperdeflation?
  • Production
  • Leveraging relatively abundant production
    resources to cheaply produce microdifferentiated
    and hypertargeted content
  • Distribution
  • Leveraging relatively abundant distribution
    resources to cheaply and intelligently distribute
    microdifferentiated content to niches
  • And search economies
  • Using frictionless information-sharing mechanisms
    to cheaply reveal aggregate expectations,
    preferences, and satisfaction within the niche
  • In combination, these three mechanisms
  • Create more value than mass media can
  • And allocate scarce attention to it more
    efficiently than costly marketing or retail
    resources can
  • By maximizing aggregate utility derived from
    content
  • And slashing transaction and search costs of
    niche consumption

68
Media 2.0 Value Creation
  • Why is efficient allocation of attention
    important?
  • Content is frictionlessly matched with highest
    value consumer preferences and expectations
  • Value creation is maximized
  • Maximizing value creation
  • Explodes demand or inflates value of supply
  • reversing damaging hyperdeflation by raising
    equilibrium price
  • What bounds value creation?
  • Niche size
  • Because disutility increases in niche size
  • Search costs
  • Of finding goods within the niche
  • Transaction costs
  • Of consuming goods within the niche
  • How do you maximize value creation in the real
    world?
  • By leveraging connected consumption to slash
    search and transaction costs, and kickstart
    increasing returns
  • ..And leveraging media plasticity to reduce niche
    size

69
Maximizing Value Creation
Aggregate utility
Distribution of preferences has fat tails
Utility
A
Z
B
C
D
E
Preference Continuum
As disutility increases in Z-ness
Zs disutility increases in A-ness
Efficiently allocating attention becomes vital
when attention is scarce. Maximizing value
creation by matching content with preferences.
70
Maximizing Value Creation
Total value lost
Total value created
Utility
Blockbuster 1 captures half
Blockbuster 2 captures half
A
Z
B
C
D
E
Preference Continuum
Mass media producers dont realize production
economies, but realize marketing economies. The
dominant strategy is single products that satisfy
the greatest number of people blockbusters
opposite the center. Since each niche values
targeted content most, marginal disutility from
mass consumption limits value creation
attention is inefficiently allocated.
71
Maximizing Value Creation
Total value created
Utility
Snowball 1 captures niche
Snowball 2 captures niche
A
Z
B
C
D
E
Preference Continuum
Micromedia producers can efficiently target
content to each niches utility function by
realizing production economies, which allow the
cheap production of targeted content. The
dominant strategy is a range of goods that
satisfies niches with similar utility functions
snowballs within each niche. Since each niche
values targeted content most, marginal disutility
is minimized and value creation is maximized
attention is efficiently allocated.
72
Value Creation and Plasticity
Total value created
Utility
Snowball 1 captures niche
Snowball 2 captures niche
A
Z
B
C
D
E
Preference Continuum
How small can your niches get? Niche size is a
function of media plasticity how costly it is
to unbundle media elements. The more plastic
media is, the less costly it is to build Smart
Aggregators and Reconstructors to filter and
remix it. For example, reconstructors for
Hollywood flicks are costly, because unbundling
them is difficult. What increases plasticity?
Lightweight, open standards, like RSS and
modular architectures, like blog entries.
73
Disconnected Consumption
  • Disconnected consumption
  • Media 1.0 goods are disconnected in consumption
  • centralized mechanisms inform expectations about
    utility derived from consumption
  • Your local paper reviews books, movies, music
  • Bestseller lists, Top 40 charts
  • Information distortion these mechanisms are
    easily gamed
  • EG Top 40 charts gamed by radio payola
  • Bestseller lists gamed by publishers buying own
    books
  • True aggregate preferences are never revealed
  • Short term gains have long term costs
  • Value creation is minimized because attention
    allocation is inefficient
  • Consumer skepticism grows search and transaction
    costs rise and expected utility falls

74
Centralized Decentralized Information
  • Centralized preference information
  • is uneconomical for micromedia
  • Siskel Ebert can review 10,000 movies, but not
    1,000,000 blogs
  • Search and transaction costs are too high
  • Micromedia goods require connected consumption
  • For efficient attention allocation
  • because it informs expectations economically
  • By decentralizing information transmission and
    processing
  • How?
  • Consumers can explicitly share expectations,
    preferences, and satisfaction
  • Or share complementary goods which implicitly
    reveal expectations, preferences, and
    satisfaction
  • Attention allocation is efficient because
    transparent info sharing removes information
    distortion
  • Decentralized trading of cheap information
    reveals most valued goods

75
Connected Consumption
  • Connected consumption your consumption is
    complementary to mine
  • Why?
  • Consumption externality
  • When you consume micromedia, you reveal or
    contribute private info
  • which is valuable to me when aggregated and made
    public
  • How?
  • 2 mechanisms
  • By indirectly reducing my search and transaction
    costs tags playlists
  • By directly increasing my consumption gains mods
    complementary goods
  • Network FX my marginal utility increases in
    number of connected consumers
  • Blog commenters, playlisters, tag contributors

76
Connected Consumption
  • Isnt a new thing
  • An emergent countercultural response to mass
    media homogeneity
  • Canonical example Underground music, DJs, and
    the rise of club culture
  • DJ plays a selection of tracks
  • Audience reveals preferences, expectations, and
    satisfaction with their feet private info is
    made public
  • Consumption externality your dancing reduces my
    search and transaction costs
  • Tracks which maximize aggregate utility are
    efficiently revealed, and value creation is
    maximized
  • across multiple niches/different genres of club
    music
  • Music listeners are a connected network DJs
    realized it, the music industry didnt
  • Now, dance music is the fastest growing segment
    of the music industry and the segment which most
    regularly produces snowballs
  • We will return to this example later

77
Connected Consumption the Snowball Effect
  • Putting it all together The Snowball Effect
  • Marginal utility can increase in consumption for
    a microchunk
  • Under 2 conditions
  • as long as consumers can contribute information
    about it
  • as long as its relative quality is high
  • because of connected consumption
  • Smart aggregators reveal aggregate satisfaction
    in the niche
  • Your consumption has an externality your private
    info is revealed
  • which helps me predict this goods quality and
    slashes my search costs
  • EG Technorati Link Cosmos, Flickr/del.icio.us
    tags
  • or Micromedia platforms allows consumers to add
    more complex info, like comments, reviews, karma,
    etc
  • You directly increase my consumption gains by
    producing sharing complementary goods, whose
    value is internalized by the aggregator
  • EG Blogger comments, games mods, Winamp
    playlists, RSS shared subscriptions

78
Mass Media Returns The Blockbuster Effect
Consumer goods tie-ins
Motion picture revenues
TV Cable syndication
Value
Demand
Output
DVD, VHS
Cinema
79
Micromedia Returns The Snowball Effect
Syndicated by hi-traffic site
Micromedia revenues
Reviewed by hi-visibility pub
Value
Demand
Output
Aggregated by aggregator
Published personally
80
Snowball Example Blog
Syndicated by Yahoo News
Micromedia revenues
Syndicated by Slashdot
Value
Demand
Output
Syndicated by link aggregator
Published on personal blog
81
Snowball Example Podcast
Reviewed by the NYT
Value
Micromedia revenues
Syndicated by BoingBoing
Demand
Output
Aggregated by podcast aggregator
Published on website
82
Snowballs and Increasing Returns
  • The more a high-quality microchunk is consumed
  • the more value is added by consumers
  • the more that microchunk is consumed
  • Because Smart aggregators collect and filter
    preference info
  • or Micromedia platforms allow complement
    production
  • Value snowballs via increasing returns to
    adoption
  • Positive feedback if a product Is high-quality,
    its popularity in the niche will grow as its
    consumed
  • Quality drives popularity hyperefficiently
  • The downside
  • Decentralized info also allows transparency in
    quality
  • Aggregate satisfaction for microchunks is visible
  • Implication only high quality microchunks can
    become snowballs
  • And
  • Not all high quality microchunks will become
    snowballs
  • Snowballs are high quality microchunks that also
    maximize utility derived within the niche

83
Popularity and Quality
Quality drives popularity hyperefficiently
Firm coordination costs
Popularity
Media 1.0
Media 2.0
Quality
Quality drives popularity inefficiently
84
Snowball Economics
  • What does this mean?
  • Snowball economics
  • Niche demand curve for microchunks slopes upwards
  • Why?
  • The economics of connected consumption
    Increasing returns to adoption
  • Quantity demanded increases in price
  • As a microgood is consumed more and more,
    consumption externalities add value by slashing
    search and transaction costs
  • and/or complements add value by increasing
    consumption gains
  • which raises the price to later adopters
  • Inversion of Media 1.0 price discrimination,
    where early adopters pay more
  • Example Club music track
  • Gets played at clubs, lounges, etc
  • Remixed, re-edited
  • Republished by major label

85
Snowball Economics
  • The snowball effect means
  • successful aggregator or microdifferentiator
    micromedia models can realize higher returns than
    traditional media
  • Why?
  • Because snowballs create more total value
  • Because micromedia are targeted to niches, and
    realize less disutility than mass media
  • And capture relatively more of value created
  • Because niches become winner-take-all markets
  • so margins explode snowball prices rise in
    consumption, while costs remain constant
  • This is a form of natural price discrimination
    which means micromedia producers can exert
    greater pricing power within niches
  • And is the inverse of Media 1.0 price
    discrimination, where prices fall in consumption

86
Micromedia at the Margin
Micromedia realizes higher returns
Firm coordination costs
Value
Micromedia returns
Traditional media returns
Micromedia marginal return exceeds traditional
media return
Output
Traditional media realizes higher returns
PP is a More Efficient Producer
87
Snowball Strategy
  • Whether youre using Smart Aggregators or
    Micromedia Platforms to lay the infrastructure
    for snowballs
  • The dominant Media 2.0 product strategy is the
    same
  • Open up your goods
  • To let others add value and accelerate returns
    the snowball effect
  • Extend openness as far as possible up and down
    your value chain
  • Give prosumers access to means of production for
    complementary goods
  • Comments are the most primitive example
  • Give prosumers access to preference and
    expectation info about your goods
  • Tags are the most primitive example
  • This is the polar opposite of Media 1.0 product
    strategies
  • Protect your good with rigid IP to exclude
    non-payers from consumption
  • Without open access
  • No decentralized info sharing, no connected
    consumption, no increasing returns, no snowball
    effect
  • supply explodes faster than demand, equilibrium
    price falls, margins erode

88
Snowball Strategy and Property Rights
  • Media 1.0 strategy is built around exclusion
  • Media 1.0 goods are heavily protected
  • by all sorts of IPR
  • which function as effective barriers to
    imitation
  • because the opportunity cost is less than the
    monopoly right to benefit
  • IPR are not effective barriers to imitation in a
    Media 2.0 world
  • Even if they work (ie, prevent piracy)
  • Because the opportunity cost is greater than the
    monopoly right to benefit
  • Why?
  • Rigid protection builds barriers to
    complementarity
  • It stops you from realizing new kinds of
    economies, which are the heart of dominant Media
    2.0 strategies
  • Distributed economies of scale
  • Economies of scale and scope in production
  • Coordination economies
  • All depend critically on complementarity between
    microchunks or microgoods

89
Incumbent Inertia andRIP Media 1.0
  • Media 2.0 strategy is built around inclusion
  • failing to understand that long-term value
    creation depends critically on openness
  • and that Media 1.0 imitation barriers become
    Media 2.0 value traps
  • is going to be the single biggest cause of
    (fatal) strategic errors Media 1.0 firms make in
    transitioning to Media 2.0
  • Because protectionism is such a deeply rooted
    part of how theyve produced goods
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