“Open” vs. “Closed” Distribution: Part III

In the last post I discussed the ascendance of “open” networks and why these networks will eventually dominate at the expense of closed networks. While I believe that the benefits of such networks are clear to consumers, the benefits to producers are less clear (at least today). In this post I intend to describe how these content owners will specifically benefit from an open distribution model and how the economic foundations of this market will likely operate (again, IMHO).

Part III: Time and Attention Economics in Open Networks

Without a solid economic foundation, any new content distribution framework (no matter how beneficial to consumers) is ultimately crippled. The reason for this is that content ecosystems require both producers and consumers in order to work (I know, crazy, right?). If producers cannot be compensated for their efforts in some fashion, the network will have a hard time expanding beyond an initial volunteer community. Now, this is not to say volunteer communities cannot be vibrant and successful, this is only to say that financial compensation will drive participation by a much larger group of producers and provide for a richer content pool than could be achieved by unpaid benefactors alone. In other words, you want both groups to participate to achieve the richest possible experience.

Why Producers Don’t Like Open Networks

Currently, closed distribution networks can help copyright holders shield content from unauthorized redistribution while also ensuring broad reach. Essentially, closed networks today promise large paying audiences. Open networks, on the other hard, are beginning to promise equally large audiences, but no promise of payment (at least directly).

The problem with open networks is not really that anyone can “write” to the network (or redistribute copyrighted media files), the problem lies in the other criteria I mentioned in Part I. An open network P2P site like eDonkey has a very loose regulatory framework (anyone can publish anything, without restriction), no rights management (no defense against redistribution), and no standard file format (can be ‘read’ by any device). On eDonkey, enforcing copyright within the network is essentially impossible without substantially modifying one or more of these characteristics.

But, even if you could protect individual files within the network through some combination of these criteria, you still haven’t solved your problem. Clay Shirkey captures the essence of the problem in his ‘Fame vs. Fortune’ post when he discusses “substitutability and deflection of use.” Shirkey uses the example of blogs:

“If InstaPundit and Samizdata are both equally easy to get to, the relative traffic to the sites will always match audience preference. But were InstaPundit to become less easy to get to, Samizdata would become a more palatable substitute. Any barrier erodes the user's preferences, and raises their willingness to substitute one thing for another….Though each piece of written material is unique, the universe of possible choices for any given reader is so vast that uniqueness is not a rare quality. Thus any barrier to a particular piece of content (even, as the usability people will tell you, making it one click further away) will deflect at least some potential readers… Charging, of course, creates just such a barrier.”

So the problem is not just one of enforceability, but also the natural behavior of individuals within the network. In a relatively mature open network, consumers won’t pay you for your content (at least in cash).

And, to add insult to injury, open networks have a habit of leeching content from closed networks regardless of myriad counter measures. Whatever DRM is conceived, whatever regulations established, people get around them. And once there is one digital copy in an open network, well, there may as well be a million. As a result, open networks not only prevent producers from charging for content, they simultaneously erode the value of the producer’s content within existing closed networks.

Ouch.

Why Producers Should Learn to Love Open Networks

The trouble is, producers are going to be stuck with open networks whether they like them or not. Open networks can’t be sued into submission, they’re organic and adaptable. Some networks may die, but others will rise to fill the void and evolve in ways to defeat regulation and restriction. And, when given the choice, consumers will continue to select open networks over closed. The fact is, open networks provide greater selection, neutrality in how or where the content is consumed, and incredibly low cost. As more content owners accept the inevitable and adapt their business models in an effort to reach millions of open network consumers, any residual motivation for remaining on a closed network will rapidly evaporate. The collapse of remaining closed networks will subsequently accelerate.

But this doesn’t have to be a shotgun wedding.  However bad open networks seem to producers, they have some significant advantages over closed networks. These advantages can drive new business models that, while different from existing models, can be equally profitable. Two primary advantages are:

1. Open networks offer bi-directional communication: communication between producer and consumer is direct, simple, and immediate.
2. Open networks encourage diversity and specialization: low cost publishing encourages consumer participation and enables focus on niche subject matter.

If utilized effectively, these advantages can help producers derive maximum benefit from open network distribution through an alternate form of currency.

The Underlying Currency of Open Networks

Even as producers focus on the virtues of open network distribution, in many cases money still needs to be spent to produce content. As I stated before, without economic incentive, content richness and diversity ultimately suffers.  But in an open network, charging consumers cash for content erects barriers to consumption that will dramatically reduce demand and limit reach. As open networks become more mature the problem only gets worse. So how can financial incentive reinsert itself in this equation?

Call it the 'The Economy of Bartered Time and Attention.' In this economy, you might not be able to charge the consumer directly for access to your content, but you are nonetheless receiving something from the consumer that is very valuable (albeit less liquid than cash). Time and attention are the only variables which remain scarce in an open network, and they’re about the most valuable things you can request of a consumer.

Consumers’ time and attention are an open network’s primary currency.

How Producers Monetize Content Assets in an Open Network

While time and attention is not itself liquid, there is already a group of people who specialize in converting time and attention into real dollars. They’re called advertisers. While many advertisers have struggled recently (many still focus on traditional push marketing), open networks provide the tools necessary to increase advertising efficiency by orders of magnitude.

1. Bi-directional communication provides advertisers with the potential to communicate directly with consumers.
2. Niche audiences enable advertisers to focus messaging on very tight demographic communities (even individuals).
3. Inexpensive production and distribution ensures equal reach, even if audiences are fragmented.

Contextual advertising is still in its infancy (witness the imperfections of AdWords), however, improved software algorithms and direct consumer interaction will continue to drive greater efficiencies in the conversion of time and attention into cash. Ultimately, advertising and sponsorship receipts should meet the funding requirements of almost any production. 

But while advertising and sponsorships will generate a bulk of the revenue, producers will still have other ways in which they can monetize content assets in an open network.

1. Charge money on a per-use or subscription basis. Until open networks reach the scale necessary to realize ubiquitous substitutability, some content will retain its uniqueness. During this transition, such content will still attract customers willing to part with cash for access.
2. Charge for opting-out of advertising. While imbedded advertising can prove difficult (or impossible) to extract from content cost effectively and without reducing the value of the duplicate, producers can provide simple mechanisms to remove advertising in exchange for direct cash compensation.
3. Solicit voluntary payments for access (donations). Consumers realize content costs money to create. If given the choice, many will elect to support producers who consistently deliver quality product.
4. Identify ancillary sources of income. Bi-direction communication reveals a plethora of profit opportunities outside content sales alone. Paid events, merchandise sales, content filtering, device integration, and production services represent a small collection potential revenue sources.

The Evolution of the Profitable Open Network Business Model

Mark Pesce does a nice job explaining the difference in approach between open and closed media production in his essay “Piracy is Good?” As open networks begin to dominate and closed network revenue streams begin to evaporate, producers will have to make changes, not just to the way they distribute their content, but also to the way in which they create it.

“The future belongs to the fast, cheap and out-of-control. Cheap productions will more easily find the advertising partners they need for hyperdistribution; costly productions will find themselves competing against so many cheap productions that they'll find it progressively harder to justify their costs in the face of ever-smaller ratings. The audiences of the future will only very rarely number in the millions. The "microaudiences" of hyperdistribution will range from hundreds to hundreds of thousands, but in that "long tail" of television productions there is a vast appetite for an incredible variety of programs. This is no longer an era of mass media and mass audiences: the dinosaurs of media are about to give way to the mammals.”

Once producers learn how to combine the inherent advantages of open networks with low-cost content development, the result can actually be greater profitability with less risk on smaller capital investments. But in order to realize these benefits, producers must learn to master the economics of time and attention. They must focus less effort on building walls and more on building community; less focus on the lecture and more focus on the conversation.

Most will fail. But some old media dinosaurs will make the leap from closed to open. In doing so, they will join an emerging global community of millions of producers, advertisers, and consumers, each striving to contribute something valuable to the conversation. The result will be a network defined by a staggering degree of diversity, but also rich in the possibility of profit.

Tags: opennetwork , citizensmedia , shirky , pesce , hyperdistribution

Comments

[Rob]

Good stuff Alex! So there's a future with DRM and RFIDs controlling our lives, and another one where brain-numbing soap ads will be replaced by enjoyable, and for the producers, profitable discourse.

I know which one I want but fear the evil forces - dinosaurs had very small brains, and no lawyers!