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Roger Clarke's 'Business Models, Incentives, Open Content'

Business Models providing Incentive to Open Content

Roger Clarke **

Presentation to the Unlocking IP Conference, UNSW, Sydney, 11 July 2006

Notes of 4 July 2006

© Xamax Consultancy Pty Ltd, 2006

Available under an AEShareNet Free
for Education licence or a Creative Commons 'Some
Rights Reserved' licence.

This document is at http://www.anu.edu.au/people/Roger.Clarke/EC/BMIOC-0607.html

The accompanying slide-set is at http://www.anu.edu.au/people/Roger.Clarke/EC/BMIOC-0607.ppt


Introduction

The intellectual question is 'what business models are appropriate in order to provide sufficient incentives to content-developers to make their materials available under open content licences with reasonably liberal terms?'.

The pragmatic question is 'how do I make a quid out of the content I produce?'.

The Challenge

[slide 3] The contemporary context features:

What's a Business Model?

[slide 4] An eBusiness Model is an answer to the question 'Who Pays? For What? To Whom? And Why?'.

Big and medium-sized business has been struggling since about 1995, trying to understand how to make money in the digital era. But the small and fleet-of-foot, who are more interested in earning from new content than from squeezing revenue from their portfolio of old content, have plenty to teach big business.

To make money in the new era, we need to examine three broad areas:

Old Wine

[slide 5] Despite the ravages of the digital era, it's still feasible to make money the old ways. If you're in any doubt about that, consider this: bootleg copies of proprietary software have been available for years, Napster has come and gone, Kazaa has run successfully for a long time now, many other P2P networks are busily at work, and there are plenty of countries that host web-sites from which software, music and now video can be downloaded for low fees, without royalties to the copyright owners. And yet Microsoft still makes super-profits, and none of the music or film houses have filed for bankruptcy.

To do things the old way, first get yourself a monopoly. It might be small, and might be short-lived, but you need a monopoly to exploit, in order to extract super-profits from it, i.e. charge over the odds. If you're clever, you find ways to 'leverage' the monopoly, and to sustain the monopoly. To do this well, you'll need a lot of help from the law and from lawyers.

For most small businesses, it isn't feasible to leverage and sustain monopolies. But small businesses shouldn't lose sight of the basic principles. In particular, content-providers need to make sure that the content that they give or trade away doesn't rob them of the expertise that they need to use again and again, and doesn't transfer knowledge to others too rapidly and thereby destroy the originator's competitive advantage.

Old Wine in New Bottles

[slide 6] The key concept is 'differentiated products'. There are many ways in which any good or service can be differentiated from other similar products, including from other versions of itself. The timeliness of release, the provision of extras, bundling with products from strategic partners, and search-facilities on archives are examples straight out of the text-book. See Shapiro & Varian's 'Information Rules', 1999, in particular Chapter 4.

[slide 7] An important principle is that there are times when it's best to let the market grow, without much attempt to extract revenue. Once a lot of people want one, their price-resistance is lower. If a bank can increase ATM fees once you're habituated to it, a digital content provider can do likewise. The music industry has tried to avoid learning that simple rule for far too long, but years too late it's starting to pursue the path that many of us proposed a long time ago: make music available in digital form, for prices that most consumers are prepared to pay.

[slide 8] The music industry debacle of the last 5-7 years teaches another lesson too: a content-provider needs to be confident that they are delivering value-add, and that customers will understand that and pay for it. There's a whole host of functions that publishers perform, and open content providers have to ensure that each of the various customers for their product is getting the value-added content that they need.

New Wine

[slide 9] The Internet era has seen a flood of new ways of doing business, some utterly silly, some awkward but interesting, and some sustainable. Rappa offers a catalogue of them. What I'm going to do in my remaining slides is to provide a structure within which those many case-studies can be analysed, and highlight some that I think are particularly promising for open content providers.

[slide 10] Of the four parts to the question that defines a Business Model, I'll deal with the easy one first. Sometimes it's best to collect revenue directly from the ultimate payor, and sometimes it's better to let some intermediary 'own the customer', and collect from them. If they're adding value, they're taking a cut; but if they're saving you effort, or applying expertise you haven't got, or taking risks you don't understand and aren't insured against, or extending your reach into distant territories you can't reach, pay them.

[slide 11] The 'Who Pays?' question is most commonly answered 'Customers', or 'The Ultimate Customers via an Intermediary'. This isn't dead, despite the moaning we've had to put up with from copyright-dependent corporations. You have to identify customers or customer-segments, satisfy their needs, and gently discourage them from over-using gratis sources of much the same product by delivering value-add.

And Third Parties are relevant of course, for example via sponsorship. And some people are prepared to accept the terrible terms offered by Google's Adsense and its ilk, and accept advertising as one source of revenue. But what I particularly want to draw attention to is Fairy Godmothers.

[slide 12] Economists have tried to condition us to dislike 'subsidies' and 'patronage', despite the fact that much of the world's art has been, is being, and will be, funded that way. Where 'market failure' exists, even reasonably conservative economists support the idea.

The term 'cross-subsidy' refers to an individual or organisation funding one 'losing' activity from the proceeds of another, more financially successful activity. This notion is less distasteful to economists than 'subsidy', although still not beloved of them.

But what's very often overlooked is that a particular version of 'cross-subsidy' is precisely how all 'big business' works. In the terms used by the Boston school of consultancy, 'cash cows' (parts of the business currently exploiting monopolies to extract super-profits) are used to fund 'rising stars' (which currently need cash injections but which are expected to become future 'cash cows').

So a particular version of 'Fairy Godmother funding' works very well for big business in the old world of atoms; and it works fine in the new digital world too. There are many circumstances in which it can work for small business as well.

[slide 13] To the 'What are they paying for?' question, it's too easy to answer 'the content'. Sometimes it is, but that's precisely what they can get gratis from somewhere else. To find a business model that works for you, you need to focus on things that are harder to nick than mere bits. For example, expertise in applying eLearning materials may be harder to replicate than eLearning materials themselves.

Other opportunities exist in the timely delivery of new versions. And many products don't have to be ephemeral, so they can be renewed, and the theme re-worked and made to appear relevant weeks, months and years later. (Think how regional newspapers get their content. Neither NYT nor Google News has rendered old news unusable).

Something else people pay for is assured quality. Quality is relevant when content first becomes available, but also progressively over time. Many kinds of content need correcting, updating, enhancing, and integrating with other content.

And then there are complementary goods and services.

[slide 14] There are many ways in which revenue can be gained in return for things adjacent to the gratis product. Customisation comes in many forms, and there's always scope for consultancy advice about your (and other people's) products. Your freebee can be a 'trojan horse' for your or someone else's products. And many kinds of content have ongoing value if they're looked after. Maybe the customer could maintain it themselves, but the customer is busy doing the things that they're good at and that make them money; so the customer may be willing to pay you to do it.

[slide 15] And the 'Why?'. There are old-world reasons why people pay, and they haven't died, and are unlikely to. Madonna's next song will probably become available gratis pretty quickly, but right now it isn't, and there are people with money in their hand when it's released.

And there are more positive reasons why people will pay. It may be because they know they can get the quality they need, or because the 'total acquisition cost' or the 'whole of life' cost is lower that way (e.g. they don't have to search the net, download 10 copies to find 1 copy that works, then scrub their machine to get rid of the malware that came with a couple of the more dubious copies). And don't forget the allure of the personal signature, the 'first day cover' and the 'original record-sleeve'.

[slide 16] A couple of extra observations. Firstly, in many areas of digital content, Reputation is and remains a big factor. There are many ways to achieve it, and many of them involve 'open content'. I can actually charge for what I'm doing here. This presentation is a 'loss-leader' and cheap advertising, and gives away only as much of my expertise as I can afford to put out in the commons.

And it's not just this presentation that's a calculated 'give-away'. My personal web-site started in February 1995 as pure 'vanity press'. Then it became 'collateral', as people checked me out before they bought my services. With between 3 and 4 million hits p.a., it isn't just collateral any more. Clients appear at my digital doorstep who'd never heard of me until Google put me on their screens. That effect has been so strong that I fear that I've forgotten how to do old-fashioned selling.

[slide 17] So don't overlook the 'freeware' option. And don't overlook the gratis advice that other people are happy to offer you. You can depend on consultants, or you can engage your public directly, and harness their insights, as customers and prospects.

[slide 18] And one thing that the music companies are desperately hoping consumers won't do is notice that a huge slab of costs has been disappearing as music production and reticulation convert to digital. (Why Australian music consumers accept such an extraordinarily high per-track price is beyond me).

And beyond cost-reduction, there are many circumstances in which costs can be transferred from the producer to the consumer. If banks and government agencies can get you to type data into their computers and save them the data capture costs, why shouldn't you look for similar opportunities??

Conclusions

Content-creators have always needed 'business smarts', and they still do. If your aspiration is to starve in a garret, ignore what I've said here. But if you want to find a business model that works in the context of digital data and open content, there's a rich set of possibilities.


My Papers in the Area

Clarke R. (1997) 'Electronic Publishing: A Specialised Form of Electronic Commerce' Proc. 10th Int'l Electronic Commerce Conf., Bled, Slovenia, June 1997, at http://www.anu.edu.au/people/Roger.Clarke/EC/Bled97.html

Clarke R. (1998) 'Key Issues in Electronic Commerce and Electronic Publishing' Proc. Information Online and On Disc 99, Sydney, 19 - 21 January 1999, at http://www.anu.edu.au/people/Roger.Clarke/EC/Issues98.html

Clarke R. (1999a) 'Electronic Trading in Copyright Objects and Its Implications for Universities' Proc. Austral. EDUCAUSE'99 Conf., Sydney, 18-21 April 1999, at http://www.anu.edu.au/people/Roger.Clarke/EC/ETCU.html

Clarke R. (1999b) '"Information Wants to be Free"' Xamax Consultancy Pty Ltd, August 1999, at http://www.anu.edu.au/people/Roger.Clarke/II/IWtbF.html

Clarke R., Higgs P.L. & Dempsey G. (2000) 'Key Design Issues in Marketspaces for Intellectual Property Rights' Proc. 13th International EC Conference, in Bled, Slovenia, 19-21 June 2000, at http://www.anu.edu.au/people/Roger.Clarke/EC/Bled2K.html

Clarke R. & Nees S. (2000) 'Technological Protections for Digital Copyright Objects' Proc. 8th Euro. Conf. Infor. Sys. (ECIS'2000), July 2000, at http://www.anu.edu.au/people/Roger.Clarke/II/TPDCO.html

Clarke R. (2003a) 'Copyright: The Spectrum of Content Licensing' Xamax Consultancy Pty Ltd, June 2003, at http://www.anu.edu.au/people/Roger.Clarke/EC/CCLic.html

Clarke R. (2003b) 'To Share and To Profit' Presentation at a Debate on 'To Share or Not to Share', a plenary session of the Queensland TAFE `Shooting the Tube' Conference, Griffith Uni., 4 July 2003, at http://www.anu.edu.au/people/Roger.Clarke/EC/TAFECD030704.html

Clarke R. (2004a) 'Open Source Software and Open Content As Models for eBusiness' Proc. 17th Int'l eCommerce Conf., Bled, Slovenia, 21-23 June 2004, at http://www.anu.edu.au/people/Roger.Clarke/EC/Bled04.html

Clarke R. (2004b) 'eBusiness Models for Content: The Closed v. The Open Approaches' Expert Address to the ECOM-ICOM Programme of the University of Hong Kong, 9 September 2004, at http://www.anu.edu.au/people/Roger.Clarke/EC/eBusContent.html

Clarke R. (2004c) 'Open Content Licensing for Research Paper (Pr)ePrints' Xamax Consultancy Pty Ltd, September 2004, at http://www.anu.edu.au/people/Roger.Clarke/EC/OCLRPP0409.html

Clarke R. (2004d) 'eBusiness Models for Sharing Content' Invited Presentation to the conference on 'Unlocking I.P.: New models for sharing and trading intellectual property', U.N.S.W. Sydney, 18-19 November 2004, at http://www.anu.edu.au/people/Roger.Clarke/EC/BMUIP0411.html

Clarke R. (2005a) 'P2P Technology's Strategic & Policy Implications' Abstract of an address in ECom-IComp Experts Address Series at the University of Hong Kong, September 2005, at http://www.anu.edu.au/people/Roger.Clarke/EC/P2P-StratPol-0509.html

Clarke R. (2005b) 'IP Business Models for the TAFE Sector' Prepared for a Professional Learning Seminar for the Victorian TAFE Development Centre, Melbourne, 20 September 2005, at http://www.anu.edu.au/people/Roger.Clarke/EC/IPBusTAFE-0509.html

Clarke R. (2006a) 'Open Content Licensing and a 'Fair Go' for Creatives in a Digital Environment' Notes for a Panel Session at an seminar on Making the Most of Creativity: In the Public Interest! Sharing Knowledge and Rewarding Innovation, AEShareNet, Sydney, 2 March 2006, at http://www.anu.edu.au/people/Roger.Clarke/EC/DFG0603.html

Clarke R. (2006b) 'ePublishing Business Models in the P2P Era' Seminar at the Norwegian School of Economics and Business Administration, Bergen, 22 May 2006, at http://www.anu.edu.au/people/Roger.Clarke/EC/P2P-BM-Bergen.html


Author Affiliations

Roger Clarke is Principal of Xamax Consultancy Pty Ltd, Canberra. He is also a Visiting Professor in the Cyberspace Law & Policy Centre at the University of N.S.W., a Visiting Professor in the E-Commerce Programme at the University of Hong Kong, and a Visiting Professor in the Department of Computer Science at the Australian National University.



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Created: 4 July 2006 - Last Amended: 4 July 2006 by Roger Clarke - Site Last Verified: 15 February 2009
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