One fall to the finish, no count-outs, no disqualifications, for the World Heavyweight Guru Championship of the World. Two gurus locked inside a steel cage.
Malcolm "Outlier" Gladwell reviews Chris "Long Tail" Anderson's new book, Free: The Future of a Radical Price
There are four strands of argument here: a technological claim (digital infrastructure is effectively Free), a psychological claim (consumers love Free), a procedural claim (Free means never having to make a judgment), and a commercial claim (the market created by the technological Free and the psychological Free can make you a lot of money). The only problem is that in the middle of laying out what he sees as the new business model of the digital age Anderson is forced to admit that one of his main case studies, YouTube, "has so far failed to make any money for Google."
Why is that? Because of the very principles of Free that Anderson so energetically celebrates. When you let people upload and download as many videos as they want, lots of them will take you up on the offer. That's the magic of Free psychology: an estimated seventy-five billion videos will be served up by YouTube this year. Although the magic of Free technology means that the cost of serving up each video is "close enough to free to round down," "close enough to free" multiplied by seventy-five billion is still a very large number. A recent report by Credit Suisse estimates that YouTube's bandwidth costs in 2009 will be three hundred and sixty million dollars. In the case of YouTube, the effects of technological Free and psychological Free work against each other.
Overall, I'll give this round to Gladwell. He definitely sees the weaknesses in Anderson's arguments and is able to pick them apart fairly easily. He can easily distinguish between a case of real abundance and a case of fake abundance -- in other words, the appearance of abundance is only superficial.
The weakness, of course, is more due to Anderson's overweaning hypiness and guruhood than anything else. He wants to make his ideas on business models based on free digital content some sort of Grand Unification Theory of markets, digital and otherwise rather than honing in on cases where it actually makes sense. He has to shoe horn everything into his model.
And don't get me wrong, I think Anderson's ideas on how abundance of digital materials will transform markets, particularly for cultural production where the products have some of the aspects of commodities: most text, news, popular music. I just don't think Anderson's ideas generalize to everything: if I want to watch a good action movie, I'll probably have to pay to cover very high production costs. If I want to read a good novel, I'll probably have to make sure some of my cash gets to the author.
In the end, I think Free will be a very important book, not because he's right on every point because I doubt it will be. Rather it will be important for moving forward a conversation about business models for cultural expression that needs to happen. And I think he'll be right on enough that it's worth paying attention to.
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..."close enough to free" multiplied by seventy-five billion is still a very large number. A recent report by Credit Suisse estimates that YouTube's bandwidth costs...
Is this the full picture, though? Credit Suisse's analysis has received some criticism as being short-sighted, and although there is a dearth of hard data, some of these critiques seem reasonably plausible to me.
See, e.g. Google's real YouTube strategy (abstract follows):
The debate has focused upon YouTube as a standalone service and little attention has been given to the spin-off benefits accruing to the parent. Google controls a significant and growing share of the means of production of the entire internet industry. We argue that ownership of YouTube is a crucial ingredient for Googleâs control of the economic rent that Google extracts from the whole of the Internet value chain.
We believe that YouTube is used indirectly to drive profits at the parent, and that Google is currently incentivised to keep these profits hidden from prying eyes. The key indirect benefits accruing to Google of owning YouTube are as follows:
1. YouTube gains Google a critical slice of growing online video eyeballs, which will attract more marketing dollars to the Internet as a whole. This is much more important in the USA, where the main competitor Hulu is ad-funded than the UK, where the BBC iPlayer is taxpayer funded;
2. YouTube gains Google yet more important meta-data which can be cross-pollinated with data from other Google services;
3. YouTube traffic strengthens Google specifically in peering negotiations and generally in network design;
4. YouTube is probably a small fraction of Googleâs overall cost base, and the spin-off benefits from lower overall unit costs;and
5. YouTube positions Google very powerfully for a key role as a gatekeeper in the copyright world.
This article explains these indirect benefits in detail and explains a strategy for telcos to adopt in the online video world.
melior, for sure, the reason Google hasn't shut down YouTube is because it's part of their plan for world domination. I think the point is that the service isn't viable as a free service on it's own, not by a long shot. It's unlikely any company but Google (and maybe one or two others) could run YouTube for that reason. And that's because bandwidth is still at least somewhat scarce. Can Google hold on until bandwidth/computing power/electricity costs come in line with potential ad revenue. Probably.
Strickly speaking, I guess the business model for Youtube is world domination. To quote myself from Friendfeed: "Scarcity is what makes people pay for stuff. Incentive is what drives people to create. Not all (or even most) incentive is money but there needs to be money infused into a system for it to be sustainable. Where does the money come from if there's no scarcity? Is it possible that abundance can drive down the incentive to create so much that you circle back around to scarcity, and thus have incentive again? Probably not, but it's a thought."
The question at base is, can anything that exists in digital format be said to be scarce? At very least, Google is hoping so for the Google Books Search service which they plan to sell to libraries and to sell ebooks to consumers.
The next couple of years could be very interesting.
To me, the problem with Anderson's theories is that they are failing in the business he is trying to run (Wired Magazine). As the NY Times points out:
I expect a business guru to eat his own dogfood as it were. There are also the problems of plagiarism, and even if you accept Anderson's explanations for the lack of attribution, how much do you want to pay for a book that includes so many long word-for-word passages taken from Wikipedia?
We argue that ownership of YouTube is a crucial ingredient for Googleâs control of the economic rent that Google extracts from the whole of the Internet value chain.