Media 2.0

The New Economics of Media Micromedia, Connected Consumption, and the Snowball Effect Umair Haque http://www.bubblegeneration.com Spring 2005

Media 1.0: Mass Media

Mass Media Value Chain
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
Production Publishing/ Marketing Distribution Attention Infra structure Retail

Two Sided Markets Media 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. Audience Advertiser Demand Supply Demand Supply Production Attention

Media Orthodoxy
The Media Industry’s First Law: attention is scarce
Is this accurate?
Attention has always been getting absolutely scarcer as media grows
But…
We’re 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?
It’s about to be
But it hasn’t always been…

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: media’s grown quantitatively and qualitatively, but attention hasn’t
Attention’s about to become relatively scarce (fast)
Let’s 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

Attention Abundance
Attention is directly unobservable…
… and traditional share-based metrics shed no light on relative abundance
But indirectly…
The industry’s actions reveal abundant attention
Following deregulation, network TV ad time per hour increased exponentially from 6:48 in 1982 to 12:04 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

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 isn’t scarce, since attention scarcity would increase marginal cost of lost viewers, offsetting marginal revenues from advertising

Mass Media Resource Dynamics
In a mass media world…
Downstream resources are scarce...
Distribution scarcity (Transport/inventory/broadcasting costs)
Retail scarcity (Spectrum scarcity, limited shelf/screen space)
Production scarcity (Infrastructure and human capital costs)
… and upstream resources are abundant
Attention isn’t scarce relative to other resources
Attention scarcity isn’t 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…

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 …

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

Quality Doesn’t Scale
The problem is…
At large scale, marketers and retailers have little incentive to invest in quality
Since production costs don’t 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
What’s the profit-maximizing strategy?
Invest in attention, don’t invest in production
Unintended consequences:
Quality drives popularity inefficiently
Because attention isn’t scarce, but production is

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:

Popularity and Quality Media 1.0 Quality Popularity … Quality drives popularity hyperefficiently Quality drives popularity inefficiently

The Blockbuster Effect

The Blockbuster Effect: Downstream Scarcity & Strategy
What’s 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

Mass Media Returns: The Blockbuster Effect Motion picture revenues Output Value Demand Cinema DVD, VHS Consumer goods tie-ins TV & Cable syndication

The Blockbuster Effect Example: Jurassic Park Revenues Output Value Demand Box Office: $480m Syndication: $50m Video: $405m Merchandising: $50m

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

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
Prisoner’s 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 erosion… everywhere!
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?

Attention & Production Costs at Large Scale Media 1.0 Attention Cost Production Cost Production is cheaper than attention Production and attention are equally costly Attention is cheaper than production

Attention & Production Costs in Rivalry Media 1.0 Attention Cost Production Cost Production is cheaper than attention Production and attention are equally costly Marketing cost wars make attention increasingly relatively costly

Attention & Production Costs Attention costs Output Value Production costs At high levels of output, investing in attention is profit-maximizing… 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 aren’t realized because of high costs of contractual completeness, which makes risk increase in output, and high technology costs. … And investing in production is dominated

Attention & Production Costs Attention costs Output Value Production costs 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 At low levels of output, investing in attention is dominated…

Attention & Production Costs Attention costs Output Value Production costs Attention is more expensive than production: invest in production Production is more expensive than attention: invest in attention 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… Marginal cost of production exceeds marginal cost of attention

Media 1.0 Total Cost Function Cost of all inputs Output Value The shapes of the attention and production cost curves… 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. … create an S-shaped total cost function

Marketing Spirals Erode Quality Attention costs Output Value Production costs Marketing wars increase the cost of attention… Marketer and retailer consolidation realizes economies of scope and scale in marketing. Production scale or scope economies aren’t 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. ..Since production costs don’t decline, production investment declines: fewer production inputs are used at equilibrium price

Popularity and Quality Media 1.0 Quality Popularity … Quality drives popularity hyperefficiently Marketing cost spirals mean quality erodes as relative investment in production declines, and becomes even less correlated with popularity

Summary: Mass Media Value Dynamics In a non-networked media world, retail & marketing capture the most value. Producers and distributors remain fragmented because production returns don’t scale: they don’t realize significant economies of scale or scope by consolidating. 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). Production Distribution Marketing Attention Infra structure Retail Attention Attention Attention Attention Attention Attention

Summary: Mass Media Value Dynamics Production Distribution Marketing Attention Infra structure Retail Attention Attention Attention Attention Attention 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. 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 doesn’t drive popularity.

Media 2.0: The Age of Plasticity

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?
Let’s begin by understanding the economics of micromedia

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

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

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 aren’t 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

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 don’t 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 don’t 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?
It’s appropriated by consumers, who can consume more media more cheaply
Unintended consequences: this creates a further incentive for average quality to remain low

Attention & Production Costs at Large Scale Media 1.0 Attention Cost Production Cost Media 2.0 Production is cheaper than attention Production and attention are equally costly Attention is cheaper than production

Attention & Production Costs Attention costs Output Value Production costs At high levels of output, investing in production is profit-maximizing… 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. … And investing in attention is dominated

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

The Blockbuster Effect & Media Hyperdeflation Mass media revenues Output Value Hyperdeflated revenues Cinema TV & Cable syndication DVD, VHS Consumer goods tie-ins

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 don’t 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

A Quick Review

Media 1.0 Supply & Demand Demand Quantity Price Supply Inelastic demand… … And inelastic supply mean media spending stays stable as % of GDP

Understanding Media 2.0 Demand Demand Quantity Price Supply The Long Tail: cheap information shifts demand outwards by the value of distribution and search costs saved

Understanding Media 1.0 Supply Quantity Price Aggregate supply curve is inelastic… … because ownership of scarce production, distribution, and retail resources creates increasingly inelastic firm supply curves Clear Channel Indie record labels Pixar

Understanding Media 1.0 Supply Quantity Price … production costs dominate attention costs, because content, production, and retail resources are scarce, and attention is abundant Attention costs Production costs Because attention costs are relatively low, returns to marketing are economical, and marketing wars occur

Understanding Media 2.0 Supply Quantity Price … Micromedia supply curves are more inelastic than traditional media, because of hyperspecialization. Exampe: bloggers Pixar bloggers podcasters Aggregate supply curve shifts outwards

Understanding Media Hyperdeflation Demand Quantity Price Supply Micromedia explodes media supply more than cheap information shifts demand outwards… … and the equilibrium price of media falls: media hyperdeflation

Understanding Media 2.0 Returns & Scarcity Quantity Price Micromedia explodes media supply… Production costs Attention costs … 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

Media 2.0 Models: Aggregators, Platforms, and Reconstructors

Understanding Micromedia Microchunk Microchunk Microchunk Micromedia Entry Entry Entry Blog Track Track Track Playlist Snippet Snippet Snippet Podcast

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

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 doesn’t help…Bloglines helps a lil bit
Value captured is a function of efficiently allocating scarce attention…
… dumb aggregation is inefficient at attention allocation

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

Smart Aggregators
Smart Aggregators don’t 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 don’t leverage info about content to slash search and transaction costs
Where they remain dumb 1.0 aggregators
Canonical example: MNO services
EG Vodafone Live!

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 quality…Reconstructors are about both

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 you’ll like
EG Technorati tag search
Reconstructs a result set of cross-media objects by tag
EG re:Blog
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

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)

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

Understanding Micromedia Platforms Entry Entry Entry Blog Comment Comment Comment Link Citation Trackback Complements & Consumption Info

Understanding Smart Aggregators Entry Entry Entry Smart Aggregator Entry Entry Entry Blog Blog Entry Entry Complements & info Complements & info Complements & info Blog Blog Blog Complements & Info Complements & info Selected Micromedia

Understanding Reconstructors Entry Entry Entry Blog Reconstructor Entry Entry Entry Consumption info Consumption info Consumption info Blog Blog Entry Entry Entry Personal ‘Cast

Understanding The Media 2.0 Ecosystem Smart Aggregator Reconstructor Entry Entry Entry Microplatform Blog Blog Blog Comment Personal Cast Personal Cast Personal Cast Entry Entry Entry Entry Entry Entry Selected Micromedia Selected Micromedia Selected Micromedia Entry Entry Entry Blog Blog Personal Cast Entry Blog Comment

Media 2.0 Value Chain
5 primary value activities
Micromedia platforms
Technology
Production
Human capital
Aggregation
Intelligent distribution
Reconstruction
Personalization
Attention
Production Aggregation Attention Micro platform Re construction Production Production

Media 2.0 Strategy: Snowballs, Connected Consumption and Increasing Returns

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

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

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

Maximizing Value Creation Preference Continuum A Utility Distribution of preferences has fat tails A’s disutility increases in Z-ness Z B C D E Aggregate utility Z’s disutility increases in A-ness Efficiently allocating attention becomes vital when attention is scarce. Maximizing value creation by matching content with preferences.

Maximizing Value Creation Preference Continuum A Utility Z B C D E Mass media producers don’t 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. Blockbuster 1 captures half Total value created Blockbuster 2 captures half Total value lost

Maximizing Value Creation Preference Continuum A Utility Z B C D E Micromedia producers can efficiently target content to each niche’s 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. Snowball 1 captures niche Total value created Snowball 2 captures niche

Value Creation and Plasticity Preference Continuum A Utility Z B C D E 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. Snowball 1 captures niche Total value created Snowball 2 captures niche

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

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

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

Connected Consumption
Isn’t 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 didn’t…
… 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

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 it’s 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 good’s 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

Mass Media Returns: The Blockbuster Effect Motion picture revenues Output Value Demand Cinema DVD, VHS Consumer goods tie-ins TV & Cable syndication

Micromedia Returns: The Snowball Effect Micromedia revenues Value Demand Published personally Aggregated by aggregator Output Syndicated by hi-traffic site Reviewed by hi-visibility pub

Snowball Example: Blog Micromedia revenues Value Demand Published on personal blog Syndicated by link aggregator Syndicated by Yahoo News Output Syndicated by Slashdot

Snowball Example: Podcast Value Published on website Aggregated by podcast aggregator Reviewed by the NYT Output Syndicated by BoingBoing Micromedia revenues Demand

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, it’s popularity in the niche will grow as it’s 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

Popularity and Quality Firm coordination costs Media 2.0 Quality Popularity Media 1.0 … Quality drives popularity hyperefficiently Quality drives popularity inefficiently

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

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

Micromedia at the Margin Firm coordination costs Traditional media returns PP is a More Efficient Producer Value Micromedia returns Traditional media realizes higher returns Micromedia realizes higher returns Micromedia marginal return exceeds traditional media return Output

Snowball Strategy
Whether you’re 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

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

Incumbent Inertia and RIP 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 they’ve produced goods for decades
AKA Incumbent inertia
… a lot of them won’t survive

Jack and Hilary
Don’t use the property rights metaphor
As an excuse for strategy
Here’s why:
The property rights metaphor
Only I have the right to use/benefit/exchange this piece of land
But what if you let others in…
… and they build you a house?
This is where the property rights metaphor ends up in a Media 2.0 world
This is what the economics of micromedia and peer production imply
The property rights metaphor itself is a block to thinking strategically about Media 2.0 economics

Snowballs and Beyond the Long Tail
Remember…
the Long Tail not a profit function
It’s an outward shifting of the demand curve
Due to cheap search and an end to distribution scarcity
We are thinking about profit, not just demand
Snowballs are the Long Tail (and beyond)
Not every flick is a blockbuster…
… and not every micromedia good is a snowball
The Long Tail is a mix of the Media 1.0 and Media 2.0 demand curves
Beginnings of the micromedia explosion are shifting the tail of the media demand curve up…
… by changing its composition
Some blockbusters, some snowballs
The Long Tail is the beginning – not the end
At the limit, the Media 2.0 demand curve replaces blockbusters with snowballs
What does this look like?

Beyond the Long Tail Demand Quantity Price Supply A smaller number of blockbusters… … And a growing number of snowballs … Create new value, which raises the equilibrium price of media, and also increase demand elasticity

Snowball Effect Implications
Leveraging the snowball effect…
Maximizes value creation within the niche
The industry can hit a sweet spot : a sustained period of media inflation
Equilibrium price will rise even as supply explodes
Because demand increases within the niche
Media properties can become classic cash cows…
… like during the mass media golden age 1950-1980
Eventually, imitation will erode margins
Two key implications:
First-mover advantage : snowball effect first-movers will realize a longer competitive advantage period of higher margins…
Lock out : late movers will be locked out of many niches due to increasing returns
The point: building a micromedia strategy now lays the groundwork for future competitive advantage

The New Dynamics of Media
Industry dynamics will evolve through 2 stages
Shakeout
Media deflation as micromedia explodes media supply: shakeout for traditional media across value chain
Blockbuster driven players most threatened
This phase is under way
Majority of traditional media reporting declines in key growth & profitability metrics
Growth
Media inflation as new players leverage snowballs
Demand explodes due to increasing returns
A post-Long Tail world 3-5 years away
The point:
Those players that get shakeout strategies right will realize significant competitive advantages during growth stage
By possessing strong, relevant core competences

Media 2.0 Strategy Building Blocks
How do you get shakeout strategy right?
Scale up new business models focused on investing in (not economizing on) production
Peer production models
Open access models
Sharing models
Scale down attention investment
Reduce dependence on blockbusters
Begin experimenting with snowball infrastructures
By generating connected consumption in your existing customer base
How??!
Divestment or refocusing of traditional media businesses…
… and acquisition or organic growth of new media businesses tightly targeting the above market spaces
That resemble Smart Aggregators, Microplatforms, or Reconstructors

Media 2.0 Core Competences
What resource & competences will this investment create?
Economies of speed
Blockbusters are slow, because quantity of media is small; snowballs are fast, because quantity of media explodes
Production economies of scale and scope
Leveraging technology to open up access to the means of production
Connected prosumers
Network FX build the snowball effect
Personal media
Maximizes value creation and increases switching costs
Microquality
Quality in the niche becomes significantly more valuable than quality in the mass market

The Three Sources of Media 2.0 Value
Revelation
Discovering which content is valuable
DJ’s – everyone’s John Peel
Publishing 2.0
Aggregation
Centralizing and storing the huge amounts of microcontent…
Distribution 2.0
Plasticity
Creating value by modularizing, standardizing, or extending content
So prosumers can remix, tweak, cut, merge, split it…
… or cheaply produce complementary goods
Infrastructure 2.0
These 3 mechanisms allocate scarce attention efficiently
Scarce attention is the fundamental source of Media 2.0 value
Smart Aggregators do 1 and 2, Microplatforms do 3, Reconstructors do all 3

Media 2.0 Value Traps
The Media 2.0 demand curve
Is much less elastic than the Media 1.0 demand curve
Consumers are very price sensitive in a Media 2.0 world
Be careful of overloading consumers with ads
Aggregation
Is only a source of value on it’s own when you can erect barriers to imitation…
… which are tough to build as open standards replace more and more of the Media 1.0 infrastructure
Snowballs
Not every bit of microcontent is a snowball…
… and snowballs are not ‘microblockbusters’…
… because there are few Media 2.0 marketing scale or scope economies

Media 2.0 Value Traps
Popularity
… is driven hyperefficiently by quality…
Not marketing
… high-quality content will realize increasing returns (fast)
Conversely, low-quality content will realize significantly poorer returns than in a Media 1.0 world
… because each niche is a winner-take-all market
Invest in production, not in attention
Protection
The micromedia explosion does not mean you should rigidly protect your goods
… instead, use leverage to make micromedia work for you…
… by opening up your goods to realize new economies

An Instructive Case Study
House music, 1980 - 2005
Micromedia explosion
Cheap production technology
Thrift store bought drum machines and synths
Open access distribution channels
Clubs, warehouse parties, etc
For 25 years, house music producers have released tracks using numbers of different aliases
Paradox : why use aliases if goal is to sell records?
Aliases are a kind of antibranding which raise mass market search costs
Strategy has persisted for a very long time – must lead to some kind of gains, otherwise would have been dominated
Explaining this helps us understand a radically different kind of media economics

Why aliases?
Consumers are DJs – niche, not mass market
DJs are Smart Aggregators who arose because of a micromedia explosion and provide specialized knowledge about different genres to listeners
Successful producers release tracks under aliases on their own record labels: labels are important, individual tracks not
Why?
Labels are like tags
They lay the infrastructure for snowballs by allocating scarce attention according to expected utility
Just like tags lay the infrastructure than Smart Aggregators
… allowing DJs to cheaply find tracks they’ll probably like…
… and then play them, remix them, and sample them…
Increasing their attractiveness to other DJs and listeners
This should sound familiar…

The snowball effect
Increasing returns to adoption within the niche
Demand for high-quality tracks increases in consumption
How?
Labels allocate scarce attention efficiently, maximizing value creation within the niche
Listeners vote with their feet – cheap information sharing about utility derived from track (and, by extension, label)
High quality tracks become Micromedia Platforms
Other producers add complements – remixes, edits, samples, etc
Value snowballs
The same dynamics as Media 2.0…
… but 20 years earlier
Smart Aggregators help listeners discover high-quality micromedia, whose returns can snowball, because they’re open platforms for others to produce complements to

4 crucial lessons, 1 point:
A radically different kind of media economics…
… Is responsible for the value creation (and capture) hypergrowth of House music
Open access product strategies
House producers don’t get the RIAA to sue remixers and samplers
Smart Aggregation
DJ’s leveraging label info to predict value of tracks maximizes value creation within the niche
Decentralized preference information
Listeners vote with their feet – Billboard doesn’t tell them what to dance to
Connected consumption
My value increases when you dance…
Dominant product strategies:
Openness, intelligence, decentralization, connectedness

An Instructive Case Study DJ Clubbers Producer Demand Supply Demand Supply

Some Recommendations
Get involved with at least one form of underground media
To understand the snowball effect
House music, outsider art, propaganda films
Get directly involved with at least one kind of connected consumption
Blogs, networked games, vlogs, podcasts
Know the difference between dumb and smart Media 2.0 models
MSO EPGs vs TiVo, iTunes vs Soulseek, MSN Spaces vs Bloglines
Really understand the Long Tail
A demand curve which shifts outwards due to cheap information and production…
… not a profit function

Conclusion: Summary
The three sources of Media 2.0 value creation…
Revelation
Aggregation
Plasticity
… Give rise to fundamentally new kinds of economies…
Distributed economies of scale
Coordination economies
Production economies of scale and scope...
… which require radically different product strategies…
Openness
Intelligence
Decentralization
Connectedness
… in order to realize these economies and produce the dominant Media 2.0 strategy…
… The snowball effect
And realize increasing returns to adoption within the niche
… which is a total inversion of the dominant Media 1.0 strategy
The blockbuster effect

Thank You

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Media 2.0

by papadavo

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Media 2.0

by papadavo

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