media, web 2.0

Flexible Price Economy

Dirk Engelhardt und Goetz Hamann worry in Die Zeit that outsourcing is threatening the quality of the German press. I’d say yes and no.

Yes, replacing permanent contracts with temporary contracts on a massive scale (what outsourcing actually is) does reduce the journalists independence and is likely to increase the worlkload for many of them. There are areas in which this could possibly lead to weaker journalism.

But on the other hand, it could well turn out that the public is quite content with the cheaper version in many cases and that some people were having a cheap lunch before. I mean, there are quality newspapers in this country which seem to rely to large extent on unpaid interns for their local pages – without a significant reduction in quality, it seems.

compulsory reading, intellectual property rights, media, Political Theory, web 2.0

De-Merging Patriotism

Last year, Michael Wolf, a director in McKinsey�s New York office, published an article in the WSJ (here via McKinseyQuarterly) explaing that market forces – especially a sluggish advertising market and the general trend to digital distribution – would continue to pressure media companies to merge into ever larger entities. Mr Wolf’s article was triggered by a US appeals court decision to allow media companies to own both cable systems and local broadcasters in the same market, a decision which he seemingly supported on grounds of value creating synergies, while knowing very well that the media are not just one business among others –

“Critics of media concentration will now wonder how much more wheeling and dealing can go on before there are but one or two juggernauts controlling every image, syllable, and sound of information and entertainment.”

He also explained why he believed that more hierarchy would not yet pose a problem for the world –

“Actually, the industry has a long way to go yet before it reaches that point. There are more than 100 media companies worldwide, with more than $1 billion in revenues; and entertainment and media are still fragmented compared with other industries such as pharmaceuticals or aerospace.”

That was last year. Just when the whole Iraq thing started. And last year, I think I agreed with Mr. Wolf’s efficiency conclusion and pharmaceuticals analogy, arguing like he that

“[w]hile the media mogul archetype may be Charles Foster Kane, the better analogy is Jack Welch in his early GE days, in pursuit of strategic fit and maximum returns…” –

or, to make the argument more fun, along the lines of Michael Kinsley’s brilliant article “Six Degrees of America Online” (which is now premium, how surprising…).

Kinsley’s still rather useful point was that hierarchical control of today’s media conglomerates is probably not as dangerous as many may think because, well, it’s incestous and competitive at the same time. AOL owns a chunk of this parent of that joint venture with Microsoft who are in bed with Murdoch in Asia and cooperate with the state run television in Bulgaria. And never forget the promiscous EMI. Kinsley had a point. Upstream or downstream, the convergence value chain does look like a conglomerate soap opera. Or, if you prefer the same conclusion in McKinsey-speech –

For a German example of this just look at some of the people who are going to be on the ProSiebenSat1 Media oversight board once Haim Saban will have finalised his purchase of roughly 25% of the German eyeballs in early June this year. His Malibu neighbour Thomas Gottschalk, who’s a host on ZDF television, and Helmut Thoma, former CEO of RTL+, part of the Bertelsmann owned RTL group, for which he is still apparently still consulting.

But now, after seeing the enourmous power the media had in establishing what behavior is right or wrong on both sides of the transatlantic media rift, I no longer agree. Of course, it is not hierarchical control of large chunks of access to people’s brains per se that is problematic. But I’d say, it does become a huge problem if some big players succeed in setting the agenda for everyone else. Think of the American “WarNow!LetsGoAndKickSomeAss”, or its European antithesis, “NoWarEverBushIsSaddamInDisguise”.

There comes a point when deescalation is just no longer possible, when myths of reality established by the media become an imperative for themselves. When whatever could be true becomes true by pure repetition. And having more, and more smaller, media entitites will allow for a slowdown of this process.

Media is a content business where there are economies of scale primarily in the realm of risk structuring and distribution. Economics of scope primarily exist in cross-media publishing and promotion. So there are reasons for integration. But having witnessed the consequences of the described mechanism on a previously unintelligible scale, I believe efficiency considerations for media corpoations have to be looked at from a different angle if a merger is considered the appropriate therapy.

I am not proposing any policy here. But I’d say media concentration control has become more important now than ever. I am not proposing state interventionism per se – that would probably cause as many problems as it would be trying to solve – but there must be other ways to ease the economic pressures than merging. Less taxes for tv? I don’t know. But I think this is an issue that should be put on the public agenda here, there, and everywhere rather sooner than later.

Having just written this, I can already hear people scream – yeah, but what about the end of the bandwidth restriction, what about the internet, what about those amazing new context filtering technology, blogging – isn’t that offsetting the Murdochs of this world?

Hmm, well. As much as I like doing this, I’d have to say ‘blogging-schmogging‘. The internet is not as decentralised as one would believe (how many internet booksellers do you know off-hand?), and for the time being – despite all the blog-bubble-induced discussion how it is changing the face of journalism on this planent – much of blogging is predominantly a different, extremely useful, qualitative (ie, non statistical) kind of collaborative filtering (like the amazon recommendations), bringing together people – “Other people who looked at this blog also read this article in the NYTimes.” I’m not saying it can’t work.

But it cannot offset the reality shaping power of conventional publishing. At least not yet.

media, web 2.0

Useful Addictions.

Yesterday’s New York Times featured a portray of Glenn Reynolds, whose blog,, has become one of the most widely read and thus most influential ones in the US.

But as everyone knows, there’s no free lunch. Mr Reynold’s said he has begun to suffer from his successes in the blogosphere – admitting and warning that blogging can easily become an addition – “Today, I was in the gym, on the treadmill, watching CNN […] And as I was watching it, I was composing a blog entry in my head. Then I thought, ‘This really isn’t normal.'”.

Well, it may not be normal yet. But there’s a good reason why it should: Blogging does make a difference.

More precisely, blogging makes the difference between speaking and writing – for two reasons. Firstly, in a personal conversation, people will often say things they haven’t really thought through. That’s because speaking is such a fast, and flexible, way of communicating. Writing usually does take longer than speaking – time usually used to think about what one is actually writing. Thus, once people decide to put their opinions into writing, these opinions will very likely become better formulated as well as better thought through, simply because they spend more time thinking about them.

Secondly, I suppose, forming opinions on the treadmill is more common than Glenn Reynolds thinks. I believe most people will form some sort of opinion when watching CNN in the gym – well, let’s say there was a time when people could rely on CNN to supply sufficient reliable information to be able to form some sort of opinion while watching it in the gym. Thoughts are still free – so as long as they keep their opinions to themselves, they do not need to be neither coherent, nor correct nor concise. But as soon as they tell a friend about an opinion, it is out there, and it might be challenged. They put themselves on the spot.

Enter blogging: In the Blogosphere, they might just talk to a friend over a virtual pint. But chances are their opinions will (possibly) be read by more people than they would talk to in a gym. And chances are, they will be challenged by a larger and therefore more informed public than will usually available in a gym. And once again, I need a better argument to make a point.

Of course, the proliferation of blogging might counteract this effect to a certain extent. Emailing is not considered equal to a hand written letter. So blogging will probably not create the same incentives that writing a comment for the NYTimes would. But nonetheless – if blogging is actually addictive, it is certainly a socially useful addiction. So c’mon. Go and get your fix. Sign up and start writing today.

compulsory reading, web 2.0

New Economy. Does it really look that old?

Sometimes I am simply depressed to which extent indirect perception, ie the way we think about the stuff out there which we can’t sense ourselves, is shaped by people whose perceptions are themselves shaped by the very same mechanism.

Let’s face it, it’s not really the case that the amount of possible interpretations of “reality” increase proportionally with the amount of people transmitting and reshaping them. Of course, it’s probably true that some interpretations are plainly wrong and proportionality should not be expected if those we rely on to present a fair picture are actually worth their price. But I would argue that instead of mutual control and even possible cross-fertilisation we can witness a lot of autocatalytic feedbackslopes.

As soon as one possible scheme of interpretation has become predominant, it becomes indeed very difficult to argue against it. This is as true for general media, as it is for scientific paradigms. This is basically what Thomas Kuhn said about scientific progress – it’s about being on the right side of the argument at the right time, not about being right. Because there is no truth apart from what we make true. Now consider the opportunity a general media hype presents for a scientific community in search of outlets for their vision of the world. What would happen?

One possibility is the “New Economy“. Whatever the possible economic content embodied in that concept, there was a time in the late 1990s when everybody wanted to believe that humanity had indeed reached “Business 2.0” (I’d say, if anything, it should have been business 4.0, version 1 being hunting and gathering, 2 the agricultural economy, 3 industrialisation). When the bubble burst, the public felt devceived by the prophets and turned to those whose opinion had been largely ignored just a little bit earlier, those who now sensed that bashing all about “new economy” was the right thing to do (now here you realise why stock market analysts are a high risk group for schizophrenia, being obliged to do bash now and justify their earlier recommendations). I’d say, we’re still in the latter phase of dealing with the recent economic past, as, eg, this article in this week’s Economist demonstrates.

The article reviews a book written by by Stan Liebowitz, a professor of economics at the University of Texas at Dallas, “and a long-time sceptic of the view that the Internet changes all the rules…“. And it seems to cover a broad range of issues –

“the exaggerated advantages of Internet retailing over conventional retailing; the false claim that the Internet’s lower costs would give Internet firms bigger profits; the inadequacies of the broadcast-television model of advertising revenues; the poorly understood questions of copyright and digital-rights management. But the crux of the book is two chapters devoted to attacking the theory of lock-in. This was the notion that caused the biggest mistakes – and the area where many economists were most at fault.

The Economist’s author clearly believes in the last notion as the rest of the article is devoted to an explanation thereof. But I don’t. Quite to the contrary, I’d argue that the argument was (and thus is) right and that all the other problems (of business judgement) have been far more serious.

It’s not that economists have been wrong to point out that network effects are crucial for a lot of information based business models and being first to market is thus a crucial element in a business strategy. Likewise, if that is case, there is a possibilty for customer lock-in because of high switching costs which will offset the losses incurred during the roll-out phase when getting to a critical mass of customers was the most important thing. There is nothing wrong with this argument.

Liebowitz’ argument is based on a distinction between weak lock-in and strong lock-in. In the Economist’s words:

As the story was told, Internet lock-in happens largely because of network effects. When the value of a product to consumers increases with the popularity of the product, that is a network effect. (A telephone is worthless if you own the only one; the wider the network, the more useful a phone becomes.) Given strong network effects, a company that gains a big share of the market will be protected from competition from late-movers. Even a plainly better product may fail, because people, much as they may prefer it in itself, will wait for others to buy it first. The implication for business is that moving first is all-important. In refuting this, Mr Liebowitz emphasises the distinction between two kinds of lock-in. The question of compatibility is central to both. One kind of lock-in arises simply because switching to a new product involves a cost beyond the purchase price: costs of learning how to use it, for instance, or the difficulty of using it alongside products you already own. Mr Liebowitz calls this self-incompatibility, or weak lock-in. But there is also strong lock-in. This arises if a new product is incompatible with the choices of other consumers – and if, because of network effects, this external incompatibility reduces the value of the product.

The point is that weak lock-in is very common, indeed pervasive. Many new products have to overcome self-incompatibility. People do not buy a new computer every three months even though the product is improving all the time. Learning to use a new word processor is a bore; for most users, a rival has to be much better, not merely a bit better, to be worth the trouble. Note that if slightly better products are rejected because of self-incompatibility, this is not inefficient: it would be inefficient to buy such a product, incurring all the costs, unless the improvement was big enough to justify it. To repeat, weak lock-in is nothing new.

Strong lock-in is different, because of the network aspect. Strong lock-in means that consumers won’t move to a new and much better product unless a lot of others jump first. If they could somehow agree to move together, they would all be better off. But they cannot. Strong lock-in reflects a failure of co-ordination, it causes economic losses, and in theory it does create opportunities for decisive first-mover advantage. But how common is it, even in the new economy? Mr Liebowitz is forthright on this. Strong lock-in is not merely uncommon, he says, there is actually no known instance.

The lock-in literature leans heavily on just two examples: the persistence of the supposedly inferior QWERTY keyboard (see article) and the triumph of the VHS video standard over the supposedly superior Betamax. Both examples, Mr Liebowitz shows, turn out to be bogus. The QWERTY keyboard is about as fast to use as the most plausible alternatives, and VHS had important non-network advantages over Betamax – notably, longer tapes. Neither case shows strong lock-in.

OK, now let’s see – there’s about a hundred different stories out there concerning the alleged efficiency or non-efficiency of the QWERTY keyboard (which was allegedly designed to reduce typing speed because of technical issues in mechanical typewriters). Pick and choose your preferred one. And VHS? longer tapes than Betamax? From a band-length perspective Siemens’ Video 2000 was clearly the best product. I still have an eight-hour-tape somewhere. VHS is a clear example of network effects, but the explanation is not technical superiority. It was content.

Don’t ask me why but there were much more films available on VHS than on Beta or any other system. So more and more people picked VHS to be able to benefit from that choice. The more people chose it, the more attractive it became to even more late adopters. VHS is a clear example of lock-in. Strong or weak? I don’t think that dichotomic distinction is useful. There are weaker and stronger lock-ins. VHS is an example for a stronger one. Microsoft is an example for a stronger one – one could say, one with a interperson compatibility issue, as opposed to an “intra-person” compatibility issue, as the word processor example used above.

And these aren’t common effects? Think of’s recommendations, a service I have often used. They are based on a system called collaboritve filtering, which relies heavily on a critical mass of consumers. Think of p2p applications – you need a lot of people in such a service to be able to find the stuff you want. The more people find the stuff they want, the more will use the service.

Now switching file sharing applications is not particularly difficult for most users. But there’s a reason only a handful of useful filesharing applications exist at a time, some in niche markets, like Edonkey, where a lot of (pirated) movies are swapped.

You get my point. It’s not the wrong principle. It has been the wrong application which has caused financial desaster in so many cases. Network effects/rising returns and lock-in (in whichever way) are a lot more important for information based businesses than for car manufacturers. They have very limited problems of collective action, most of which have been dealt with in a legal way.

But it is important to emphasise that neither network effects nor customer lock-in are the only conditions for success in the cyber space. For some businesses they may be sufficient, but a useful product or service is still what people pay money for. As long as it is free, a lot of people will consume a lot of stuff. If they have to pay for it, things are different.

But let me say it again. The failures are not about wrong economics. But about their misapplication.