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Why Information Providers Need To Be Open To Sharing in Their Business Models

January 14, 2013 • BUSINESS & INNOVATION, Digital Transformation, Editor’s Choice, Unprotected Post

By Joshua Gans

Information content providers, especially publishers of media (including books, news, journals, music and video), have been concerned that “information wants to be free.” The reason is obvious. If information wants to be free, it may be hard to make it expensive and get people to pay for it. Digitization has only increased these concerns because, at the very least, information is now costless to disseminate and copy. The economics, therefore, appear to be consistent with the free possibility. However, as Stewart Brand noted there are forces pushing information to be expensive as well because it can be valuable. The issue has been reconciling that with the notion that many consumers believe that information can and should be free.

Economics does have much to say about what information might want and it is not necessary to be free. If information wants something, it wants to be shared. Sharing is a mechanism by which potential consumers of information are alerted to both its existence and its value. Sharing from the right people prioritizes information and helps individuals manage their attention. Sharing information is an active process that better matches information with the right people. Significantly, one of the most significant impacts of digital technologies is that they have enabled a new era of sharing.

There is both a demand and a supply side to the notion of information sharing. In this article I want to focus on the supply-side question: How do you fund information creation? The traditional approach is to restrict access to it. That will create an artificial wall on the use of information and, in theory, provide users with a reason to pay to breach that wall.

But the tragedy of that is that it doesn’t cost providers anything more to distribute information to one or a million users. By restricting use, demand is restricted and some users who would pay something for that information do not have the opportunity to do so. Economists refer to this as the public good nature of information and suggest that it would be better to find ways of getting all users who value information to contribute something towards the cost of its production rather than to hit them with a one size fits all stick.

It doesn’t cost providers anything more to distribute information to one or a million users. By restricting use, demand is restricted and some users who would pay something for that information do not have the opportunity to do so.

But is there another way? The horror writer, Stephen King, thought so and in 2000, he offered to distribute his latest novel exclusively over the Internet—bypassing publishers and printers altogether, a more radical notion at that time than it would be today. The issue was how he was going to get readers to pay for it, and, in typical King style, he opted for a somewhat elaborate game.

Here was his deal: You could download the first installment of King’s novel, The Plant. You could print it and give it to friends. All he asked was that you pay $1 for the privilege. The catch, however, was that the second installment and beyond would only be published if 75 percent of those who downloaded the previous one paid. As King said, “Pay and the story rolls. Steal and the story folds.”1

This mechanism has a few good properties. First, readers can try before they buy. If they download the installment and don’t want to read it, they won’t pay. Second, if everyone free-rides, then no one gets the next installment. Indeed, if a hundred people download the first installment, and, before you choose to pay or not, seventy-four paid, then you potentially control the destiny of the venture. Game theorists would describe you as pivotal because if you pay, you (and others) get the next installment; otherwise, you don’t.

Of course, this also highlights the problems. First, how do you know how many have paid? King did not provide that information, and so you and everyone else had to guess whether you were pivotal or not. Let’s face it, like your chance of breaking a tie in an election, your chances of being pivotal are slim. Second, if you are blindingly honest and pay, but less than 75 percent of others do, you have paid but receive nothing. That makes paying riskier. Third, why pick 75 percent? Why not pick a fixed number of sales? What if King had written a book that only appealed to 50 percent but there were a million downloads? Did he really want to withhold the chance for more installments? He may have weeded out the non-fans on the first round and after that had good prospects for getting the majority to pay. In any case, how would you be sure he just wouldn’t publish the completed novel later on?

So what happened? About 200,000 downloaded the first installment, and, indeed, over 75 percent paid2. This dropped to 70 percent on the second installment, and King in fact did not pull the plug. That was just as well because 75 percent again bought the third lot. The fourth installment was another story. King had said it would cost twice as much for twice the length. He had also promised to cap the total book cost at $13. However, the payment rate dropped to 46 percent of the downloads. King stopped publishing and never completed The Plant.

The venture might have been more successful had King provided information regarding the payment rate as well some insurance in the form of a refund should the enterprise end early. (That said, we can’t rule out that the mechanism was a stunning success and the reason the payment rate dropped off is that readers weren’t thrilled enough.)

The key point, however, is that King was trying to get an agreement out of users in order to keep the content coming. When dealing with a lack of intellectual property protection, he made an offer of a price whereby sufficient “agreement” would generate future information production. Recently, Louis CK, a comedian, tried something similar but more straightforward.

In 2011, Louis CK funded and recorded a one-hour concert video, which he put up for sale at $5 per download on his website. He accompanied the video with a plea to consumers asking them not to “torrent” the file (i.e., make it available on file-sharing servers). The plea apparently worked. More than 250,000 paying customers, enough to give Louis CK a profit well above his opportunity cost (of, say, allowing HBO to record a special), paid for the video. Louis CK was better off, and his audience received more value.

The not so implicit deal was that, if Louis CK covered his costs, there would be more where this came from. Indeed, Louis CK made considerable profits and ended up sharing those profits with those who helped make his video as well as making a sizable charitable donation. And, in May 2012, he returned the favor to consumers by offering up more videos and audio files for download.

Both Stephen King and Louis CK offered their fans a product that allowed them to choose whether to contribute or not and relied on a notion of “sufficient agreement” to generate future content.

So both Stephen King and Louis CK offered their fans a product that allowed them to choose whether to contribute or not and relied on a notion of “sufficient agreement” to generate future content. However, in each case, the costs they were expecting to cover were not explicit (at least initially). But each was operating in an environment where it was likely that the number of contributors rather than a disproportionate contribution from consumers with a high valuation was the tough sell for participation.

Recently, some ventures have arisen that make explicit the notion of a shared contribution in return for provision of some good. Consider how Kickstarter gets it done. Kickstarter is a platform that allows people with projects that need funding to get it from crowds. A typical example is The Broadway Warm-Up from two singers, Kim Stern and Deidre Goodwin. They had an idea for a vocal “warm-up” program and intend to develop and market computer programs and videos to effectively coach aspiring performers. This is not a mass-market idea and is likely to appeal only to a select few. But they needed some funding and so turned to Kickstarter.

Of course, they didn’t have the product to sell—that would come after they had some funding—but they did have their own complementary talents as vocal teachers. So they set a target of $20,000 on Kickstarter with differing pledges offering free classes, private tutoring, and, of course, a supply of the eventual product. Stern and Goodwin easily met their goal, with most backers choosing an intermediate option, although almost a quarter of the funds came from one person who wanted the whole package (short of actually being in the video).

While Kickstarter covers more than just information, you can find plenty of calls for funding for books, movies, and apps. Kickstarter’s model was the same as Stephen King’s, but with a safety net (you only pay if the project is going ahead: funds were pledged, not handed over) and information (you could see how close the project was to being funded and whether you might be pivotal). In this case, though, you were either part of it or not. There would be no free-riding, as there was for King’s novel.

Kickstarter co-ordinates individuals into a crowd to facilitate the sharing of costs. But there are other ways of doing this. The problem with the Lindahl mechanism is a lack of knowledge regarding people’s value of information. While a seller may lack that knowledge, within people’s networks—particularly social networks—that knowledge may flow more freely. The way a seller would tap into this would be to sell information goods but then allow some degree of sharing among users.

Specifically, this sharing could take place among family and friends. Music or video could be copied, books lent, apps gifted. Even absent other considerations, one key advantage of this is that it may be cheaper for friends to distribute extra copies among themselves than it is for the seller to distribute copies to consumers3. In this case, a seller allows consumers to form clubs to share the goods. The seller charges a price that reflects the value of all the club members that is correspondingly higher than what they would charge to individuals. In effect, the seller outsources the task of obtaining agreement.

But aside from potential cost savings in distribution, sharing can be more profitable for sellers if it effectively reduces the diversity of valuations its consumers have. For instance, while individual members of a household may have certain music preferences, the demographic mixture (e.g. of young and old) may actually smooth that out4. I may like Fleetwood Mac and place a high value on it relative to Lady Gaga, while my teenager might have the opposite preferences. By allowing us to share all music, music publishers do not have to try and distinguish between individuals with high valuations and individuals with low valuations but can instead price to the average. Such pooling allows them to achieve a greater volume of sales than effectively targeting a whole lot of individual niche markets.

Aside from potential cost savings in distribution, sharing can be more profitable for sellers if it effectively reduces the diversity of valuations its consumers have.

Netflix, with its “all you can eat” subscription model potentially permits the same thing for movies and television shows (as does Amazon in that same domain but also with books for the Kindle Lending Library). But these models often come with restrictions; for example, with Netflix, concurrent streaming is limited to two at a time, which prevents sharing beyond the household. However, such limitations can also protect the business model by restricting the diversity of groups. The aggregation effect only works if it transforms the primary buyers into a more homogenous set (by pooling diverse values at the group level). If groups are more different than individuals, this breaks down, and allowing sharing makes things worse for the seller. Limiting group size minimizes this latter effect.

From this perspective, providing blanket licenses for sets of information goods can facilitate agreements—a common practice among copyright collecting societies. These societies are charged with collecting fees for the public use of, say, music. They negotiate with organizations that play music publicly—from radio stations to hairdressers. In effect, they are dealing with organizations that are sharing music and determining the fee associated with the sharing option. Typically, what they provide is a license to cover all works under the charge of their society rather than negotiating individually over specific ones. This has the effect of homogenizing values while at the same time allowing sufficient flexibility in license negotiations to take into account the individual circumstances of each group. To be sure, public license collections sometimes create great concern regarding over intrusive copyright enforcement. However, their existence and terms, to some extent, reflect an embrace of sharing as a means of distributing information goods.

Others have proposed the idea that an intermediary could facilitate sharing. Boing Boing blogger and author, Cory Doctorow wondered whether music publishers should do deals with ISPs for a blanket license. Doctorow wrote, “ISPs could opt into [a blanket license scheme] that entitled the ISP’s customers to download and share all the music they wanted would deliver evergreen profits to the record industry—without necessitating spying, lawsuits, and threats of disconnection from the internet.”5 This would divert resources away from copyright enforcement and toward mechanisms for compensating artists based on use. Indeed, we see this occurring already with the integration of Netflix-style licenses into Internet and cable TV contracts. But beyond digital media, this may be a solution for others like Encyclopedia Britannica that could offer ISPs blanket content licenses and earn revenues from larger groups rather than from individuals.

When content providers think that what they are trying to sell has costs that they want users to contribute to, this changes their perspective and their relationship with those users. Instead of trying to exclude, content providers can use models that allow users to agree to fund the costs of information creation. In the process, new business models are opened up and new opportunities for creating and capturing value.

This article is, in part, an abstract from the book ‘Information Wants to be Shared’, published by Harvard Business Review Press in 2012.

About the Author

Joshua Gans is a Professor of Strategic Management and holder of the Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship at the Rotman School of Management, University of Toronto (with a cross appointment in the Department of Economics). In 2012, Joshua was appointed as a Research Associate of the NBER in the Productivity, Innovation and Entrepreneurship Program. He has also co-authored (with Stephen King and Robin Stonecash) the Australasian edition of Greg Mankiw’s Principles of Economics (published by Cengage), Core Economics for Managers (Cengage), Finishing the Job (MUP) and Parentonomics (New South/MIT Press). Most recently, he has written an eBook, Information Wants to be Shared(Harvard Business Review Press). For more details visit joshuagans.com.

References

1. Stephen J. Dubner, “What Is Stephen King Trying to Prove?,” New York Times Magazine, August 13, 2000.


2. http://en.wikipedia.org/wiki/The_Plant.


3. S. Besen and S. Kirby, “Private Copying, Appropriability, and Optimal Copying Royalties,” Journal of Law and Economics 32 (1989): 255–273; and Hal Varian, “Buying, Sharing and Renting Information Goods,” Journal of Industrial Economics 48, no. 4 (2000): 473–488.


4. This is termed “aggregation” by Yannis Bakos, Erik Brynjolfsson, and Douglas Lichtman, “Shared Information Goods,” Journal of Law and Economics 42, no. 117 (1999).


5. http://www.guardian.co.uk/technology/2010/nov/23/copyright-digital-rights-cory-doctorow.

 

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