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Did you say new economy?

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  • 1. IPADE International Week October 2005 Who’s Afraid of the Big Bad Wolf?: Internet and the Content Industry in the New(?) Economy Eric Briys
  • 2. Not to be reproduced or quoted without the author’s prior consent Content Sharing Knowledge Flashback: The elusive quest for prosperity: What history has in its bag for us n The New Economy: From perspiration to inspiration: The economics of ideas n Consequences: From the optimizing manager to the adaptative manager n The content/media industry: Wrong or right? n Paving the way to the future: Some guidelines n Cyberlibris, The First European Digital Library -2
  • 3. Not to be reproduced or quoted without the author’s prior consent The quest for prosperity Sharing Knowledge Whatever the perspective taken, the paramount question is that of wealth: n The wealth of nations, shareholders’ wealth, managing for value etc… This is a challenging quest: Why is it that some are wealthy and successful, n and some fail and stay poor? Yali’s question and the cargo cult: « How is that you have so much cargo n Jared Diamond and we so little? » Cyberlibris, The First European Digital Library -3
  • 4. Not to be reproduced or quoted without the author’s prior consent The quest for prosperity Sharing Knowledge Yali’s question haunts also corporate boards. n Tons of acronyms and buzzwords were crafted that define value metrics: n SVA, EVA, ROI, EBIT, CFROI, balanced scorecards, value chain, corporate governance… Joel Stern Cyberlibris, The First European Digital Library -4
  • 5. Not to be reproduced or quoted without the author’s prior consent Back to basics Sharing Knowledge Let’s get back to basics: n « Put simply, prosperity is the consequence of one thing and one only: Matching talent with capital, and holding both sides accountable. Reuven Brenner In a nutshell: n K T Cyberlibris, The First European Digital Library -5
  • 6. Not to be reproduced or quoted without the author’s prior consent Flashback: The history of prosperity Sharing Knowledge Change is a new phenomenon indeed! Malthus was right for 55 centuries out of the last 57. Cyberlibris, The First European Digital Library -6
  • 7. Not to be reproduced or quoted without the author’s prior consent Flashback: A parsimonious model Sharing Knowledge Robert Solow’s model (1956, Nobel Prize 1987) n K = Capital n L = Labor n Y = GDP = F(K, L) = Production Function Max Y - rK - wL with respect to K et L . Robert Solow Outcome: Production grows with population in the steady-state: Hence, no n wealth per capita growth. Does yield cross-country differences n But this is more a model of « perspiration » than « inspiration ». n Cyberlibris, The First European Digital Library -7
  • 8. Not to be reproduced or quoted without the author’s prior consent Flashback: « Perspiration economics » Sharing Knowledge n Industrial Revolution: Muscle Power: « Why is that whenever I ask for a pair of hands, a brain comes attached? » Henry Ford n In Henry Ford’s days, capital was the scarce resource that organisations were designed to use efficiently, as his assembly lines did: OPTIMIZATION n Alfred Marshall: Principles of Economics: Optimization, Calculus, Marginalism… Henry Ford Alfred Marshall n Gilded Age/Robbing Barons: Yes, the Industrial Revolution was also « inspired ». But, this inspiration, this knowledge was « pegged » to capital. Lots of people had a thorough knowledge of chemistry, few corporations were producing chemical products though. Hence knowledge was not « free »!!! Cyberlibris, The First European Digital Library -8
  • 9. Not to be reproduced or quoted without the author’s prior consent Perspiration is not enough! Sharing Knowledge K T Hence: In a perspiration world: n The only way to genuine prosperity is to have technological improvements, n that is inspiration, namely IDEAS. This leads us to the Economics of Ideas and the New Economy n Cyberlibris, The First European Digital Library -9
  • 10. Not to be reproduced or quoted without the author’s prior consent New economy: Inspiration leads! Sharing Knowledge How to best define the new economy? n Ideas: Ideas improve the technology of production. A new idea allows a given bundle of inputs to produce more or better output Two Keys n Atypical cost structure: The first unit is costly to produce (significant initial outlay), the next units have a low or zero marginal cost Cyberlibris, The First European Digital Library - 10
  • 11. Not to be reproduced or quoted without the author’s prior consent New economy: Ideas Sharing Knowledge Are ideas a good just like any other economic good? n Excludability-Rivalry scales n Rivalrous/Divisible Non rivalrous/Non Shapiro / Varian divisible Excludable CD PLAYER TV CABLE Mildly excludable SOFTWARE Non excludable FISH IN THE SEA PYTHAGORE THEOREM Cyberlibris, The First European Digital Library - 11
  • 12. Not to be reproduced or quoted without the author’s prior consent New Economy: Atypical cost structure Sharing Knowledge What defines New Economy, according to Daniel Cohen, is its atypical cost n structure, namely a significant (not to say massive) initial outlay and a low marginal cost for the next units Consequence: The pure and perfect competition model falls apart. Firms will n enter only if they can charge a price higher than marginal cost, hence a move away from perfect competitition. Daniel Cohen Why?: n – With increasing returns to scale average cost is always greater than marginal cost Cyberlibris, The First European Digital Library - 12
  • 13. Not to be reproduced or quoted without the author’s prior consent New Economy: Wrap-up Sharing Knowledge Ideas ---> Non Rivalry ---> Increasing returns ---> Imperfect competition Brad DeLong: « We now have an economy that is more specialized in the n high-value added role of creating and commercializing ideas. » In a nutshell: n Bradford DeLong T K Cyberlibris, The First European Digital Library - 13
  • 14. Not to be reproduced or quoted without the author’s prior consent Managerial consequences Sharing Knowledge Consequences for the manager: optimisation vs adaptation OPTIMISATION ADAPTATION Alfred Marshall Brian Arthur Perspiration Inspiration Value Chain Value constellation, networks Producers --> Consumers Producers competing or co-opeting with consumers Decreasing returns Increasing returns Victorian values of stability Non-linearity, instability, winner take-all Cyberlibris, The First European Digital Library - 14
  • 15. Not to be reproduced or quoted without the author’s prior consent Managerial consequences Sharing Knowledge To put it in John Kay's words quot; goals are most likely to be achieved when n pursued indirectly .quot; Obliquity is the name for this. What does it tell us about businesses and the goals they shoud be pursuing? The current fad is for businesses to concentrate on maximizing shareholders n value. Metrics have been crafted that supposedly measure the failure of success in achieving this target. John Kay Cyberlibris, The First European Digital Library - 15
  • 16. Not to be reproduced or quoted without the author’s prior consent Managerial consequences Sharing Knowledge The increasing-returns world is a world were things tend to wander off, n where things that get ahead, get further ahead, where things that get down, get further down. How do people, corporations behave in such a world? Should they optimize à n la Marshall, strive for the maximization of some metrics such as EVA or rather shoot for more holistic approaches à la forest rangers? Well, it seems that the best option you can go for in a complex world (which is n a mixture of Marshall's and increasing returns') is to develop a strong sense of adaptation. After all, when you look at earthquakes or floods, rather complex phenomena n indeed, it is hard to predict them but easy to avoid building your house in an earthquake or flood prone area. Cyberlibris, The First European Digital Library - 16
  • 17. Not to be reproduced or quoted without the author’s prior consent Examples Sharing Knowledge Dilbert: Scott Adams and his e-mail n Intel: Andy Grove: Only paranoïds survive! n Cyberlibris, The First European Digital Library - 17
  • 18. Not to be reproduced or quoted without the author’s prior consent In a nutshell Sharing Knowledge « Anything can happen! » n « No one knows anything! » n A good metaphor is the Call Option metaphor: Convexity effects n Cyberlibris, The First European Digital Library - 18
  • 19. Not to be reproduced or quoted without the author’s prior consent Content industry in the new economy Sharing Knowledge Tech Industry (Infrastructure We, the people Hardware Software) Content Industry (Culture/Media) Cyberlibris, The First European Digital Library - 19
  • 20. Not to be reproduced or quoted without the author’s prior consent Content industry Sharing Knowledge The moguls • Vertical view of the world • From producer to consumer • Copyright / Litigation We Cyberlibris, The First European Digital Library - 20
  • 21. Not to be reproduced or quoted without the author’s prior consent Tech industry Sharing Knowledge The techies This is a fast growing industry including: -Infrastructure: Fiber optic, cable networks, satellites etc… -Hardware: Computers, mp3 players, DVD players, CD burners, cellphones, digital cameras etc… -Software: Media and publishing softwares, XML, RSS, blogs, wikis, VoIP etc… Cyberlibris, The First European Digital Library - 21
  • 22. Not to be reproduced or quoted without the author’s prior consent Content industry vs. Tech Industry Sharing Knowledge Content Sales 2003 industry ($Bn) Television 260 Newspaper 220 Sales 2003 Tech industry (†Bn) Movie 90 (except TV) Telecom 1182 Radio 45 Software 1328 Music 38 Video games 32 Retail 280 electronic Content 2 websites Sources: Bureau of Census, Sreen Digest Source: Idate World Bank, Idate Content Industry = less than 1/5 th of Tech industry Cyberlibris, The First European Digital Library - 22
  • 23. Not to be reproduced or quoted without the author’s prior consent We the consumers Sharing Knowledge Technology has given us tools that allow us to do things that the content n industry does not like: – Peer to peer networks: Napster, Kazaa – Skype – Blogs – Wikis…. As a matter of fact, boundaries are blurring: consumers become producers, n worse they compete with them. The traditional notion of value chain becomes obsolete. Dan Gillmor goes as far as to title his latest book: We The Media n Cyberlibris, The First European Digital Library - 23
  • 24. Not to be reproduced or quoted without the author’s prior consent We The Media Sharing Knowledge At the end of his life, famous movie actor Jean Gabin sang a song where he n said that at last he knew that he knew nothing but this he knew!. As a matter of fact, what he should have said is that we all know something n but more often than not we do not realize it or more precisely that what we know has value to some people. This is for instance what blogs are about among other things. n Cyberlibris, The First European Digital Library - 24
  • 25. Not to be reproduced or quoted without the author’s prior consent The squeeze of the content industry Sharing Knowledge The content industry is squeezed between a fast evolving tech industry that n empowers consumers and consumers that compete with it. All this is very reminiscent of the gradual erosion of the market power of the n Robbing Barons. When financial markets and funding became easily available, talent could go his own way and start its own ventures. The financial revolution made it possible (see Luigi Zingales, U of Chicago) Other things being equal, consumers have been empowered by the tech n revolution ( + the massive wealth surplus transfer from shareholders to consumers during the Internet bubble). This has helped them challenge the Media Robbing Barons. Cyberlibris, The First European Digital Library - 25
  • 26. Not to be reproduced or quoted without the author’s prior consent The squeeze of the content industry Sharing Knowledge How has the industry tackled the challenges it is facing? As usual, in the n wrong (vertical) way! – First, litigate, litigate, litigate: Sue your customer! Don’t listen to him or her. – Next, merge!: AOL/Time Warner, Vivendi/Universal: Namely vertical integration: Content + Pipes But, this is exactly what should not have been done: Content wants to be seen, n listened to by as many people as possible and pipes need content as varied as possible. In a nutshell: They played vertical when they should have played horizontal. n They did not adapt, they just tried to optimize under constraints. n Cyberlibris, The First European Digital Library - 26
  • 27. Not to be reproduced or quoted without the author’s prior consent The squeeze of the market industry Sharing Knowledge To put it in Andy Grove’s words: n « How many years of sequential 5 percent revenue declines will the music industry take before they’re going to scratch their heads and say: You know, maybe we ought to get serious about digital distribution of music ? » « And, they will discover what is obvious to the ponytail folks. » Cyberlibris, The First European Digital Library - 27
  • 28. Not to be reproduced or quoted without the author’s prior consent Paving the way to a new future: Some guidelines Sharing Knowledge Pricing: How and how much? n Content versioning: What? n Copyright management: Where? n Loyalty / Lock-in: Be adaptative n Network effects: Critical mass n More on this in Hal R. Varian, Joseph Farrell and Carl Shapiro « The Economics of Information Technology », Raffaele Mattioli Lectures, Cambridge University Press 2004 Cyberlibris, The First European Digital Library - 28
  • 29. Not to be reproduced or quoted without the author’s prior consent Pricing content Sharing Knowledge Understand cost structure n Be aggressive not greedy n (Share of the pie vs. Growing the pie) Differentiate product and price n Understand consumer and personnalize n Yahoo Unlimited Sell to groups n Cyberlibris, The First European Digital Library - 29
  • 30. Not to be reproduced or quoted without the author’s prior consent Versioning content Sharing Knowledge The automobile industry vs. the digital content industry n Versioning north vs versioning south n – Adjust characteristics of content products to extract clients’ surplus – Strengthen editorial skills – Version along multiple dimensions (delay, interface, speed, support etc…) – Add value to bits – Explore the Long Tail: Aggregate thin demands Cyberlibris, The First European Digital Library - 30
  • 31. Not to be reproduced or quoted without the author’s prior consent Rights management Sharing Knowledge Reproduction/Distribution costs: use cheapness to your n advantage Be open and flexible: Maximize the value of your n intellectual property, do not maximize protection Lawrence Lessig Creative Commons: From All Rights Reserved to Some Rights Reserved) Cyberlibris, The First European Digital Library - 31
  • 32. Not to be reproduced or quoted without the author’s prior consent Lock-in Sharing Knowledge Value constellation approach n Get your customer to invest in you (remember he/she knows things too!): n Books and blogs, movie reviews etc… Sell complementary products n Cyberlibris, The First European Digital Library - 32
  • 33. Not to be reproduced or quoted without the author’s prior consent Networks and positive feedbacks Sharing Knowledge Positive feedbacks: get bigger, get stronger n Cyberlibris, The First European Digital Library - 33
  • 34. Not to be reproduced or quoted without the author’s prior consent Conclusion 1 : Adapt ! Sharing Knowledge Cyberlibris, The First European Digital Library - 34
  • 35. Not to be reproduced or quoted without the author’s prior consent Conclusion 2 : Stay tune! Sharing Knowledge Cyberlibris, The First European Digital Library - 35