HELP, THE PRICE OF INFORMATION HAS FALLEN AND IT CAN'T GET UP
Among people who publish what is rather deprecatingly called 'content'
on the Internet, there has been an oft repeated refrain which runs
'Users will eventually pay for content.'
or sometimes, more petulantly,
'Users will eventually have to pay for content.'
It seems worth noting that the people who think this are wrong.
The price of information has not only gone into free fall in the last
few years, it is still in free fall now, it will continue to fall long
before it hits bottom, and when it does whole categories of currently
lucrative businesses will be either transfigured unrecognizably or
completely wiped out, and there is nothing anyone can do about it.
The basic assumption behind the fond hope for direct user fees for
content is a simple theory of pricing, sometimes called 'cost plus',
where the price of any given thing is determined by figuring out its
cost to produce and distribute, and then adding some profit
margin. The profit margin for your groceries is in the 1-2% range,
while the margin for diamonds is often greater than the original cost,
i.e greater than 100%.
Using this theory, the value of information distributed online could
theoretically be derived by deducting the costs of production and
distribution of the physical objects (books, newspapers, CD-ROMs) from
the final cost and reapplying the profit margin. If paying writers and
editors for a book manuscript incurs 50% of the costs, and printing
and distributing it makes up the other 50%, then offering the book as
downloadable electronic text should theoretically cut 50% (but only
50%) of the cost.
If that book enjoys the same profit margins in its electronic version
as in its physical version, then the overall profits will also be cut
50%, but this should (again, theoretically) still be enough profit to
act as an incentive, since one could now produce two books for the
So what's wrong with that theory? Why isn't the price of the online
version of your hometown newspaper equal to the cover price of the
physical product minus the incremental costs of production and
distribution? Why can't you download the latest Tom Clancy novel for
Remember the law of supply and demand? While there are many economic
conditions which defy this old saw, its basic precepts are worth
remembering. Prices rise when demand outstrips supply, even if both
are falling. Prices fall when supply outstrips demand, even if both
are rising. This second state describes the network perfectly, since
the Web is growing even faster than the number of new users.
From the point of view of our hapless hopeful 'content provider',
waiting for the largesse of beneficent users, the primary benefits
from the network come in the form of cost savings from storage and
distribution, and in access to users worldwide. From their point of
view, using the network is (or ought to be) an enormous plus as a way
of cutting costs.
This desire on the part of publishers of various stripes to cut costs
by offering their wares over the network misconstrues what their
readers are paying for. Much of what people are rewarding businesses
for when they pay for 'content', even if they don't recognize it, is
not merely creating the content but producing and distributing
it. Transporting dictionaries or magazines or weekly shoppers is hard
work, and requires a significant investment. People are also paying
for proximity, since the willingness of the producer to move
newspapers 15 miles and books 1500 miles means that users only have to
travel 15 feet to get a paper on their doorstep and 15 miles to get a
book in the store.
Because of these difficulties in overcoming geography, there is some
small upper limit to the number of players who can sucessfully make a
business out of anything which requires such a distribution
network. This in turn means that this small group (magazine
publishers, bookstores, retail software outlets, etc.) can command
relatively high profit margins.
The network changes all of that, in way ill-understood by many
traditional publishers. Now that the cost of being a global publisher
has dropped to an up-front investment of $1000 and a monthly fee of
$19.95, (and those charges are half of what they were a year ago and
twice what they will be a year from now), being able to offer your
product more cheaply around the world offers no competitive edge,
given that everyone else in the world, even people and organizations
who were not formerly your competitors, can now effortlessly reach
people in your geographic locale as well.
To take newspapers as a test case, there is a delicate equilibrium
between profitibility and geography in the newspaper business. Most
newspapers determine what regions they cover by finding (whether
theoretically or experiemntally) the geographic perimeter where the
cost of trucking the newspaper outweighs the willingess of the
residents to pay for it. Over the decades, the US has settled into a
patchwork of abutting borders of local and regional newspapers.
The Internet destroys any cost associated with geographic
distribution, which means that even though each individual paper can
now reach a much wider theoretical audience, the competition also
increases for all papers by orders of magnitude. This much increased
competition means that anyone who can figure out how to deliver a
product to the consumer for free (usually by paying the writers and
producers from advertising revenues instead of direct user fees, as
network television does) will have a huge advantage over its
ITS HARD TO COMPETE WITH FREE.
To see how this would work, consider these three thought experiments
showing how the cost to users of formerly expensive products can fall
to zero, permanently.
Greeting card companies have a nominal product, a piece of folded
paper with some combination of words and pictures on it. In reality,
however, the greeting card business is mostly a service industry,
where the service being sold is convenience. If greeting card
companies kept all the cards in a central warehouse, and people
needing to send a card had to order it days in advance, sales would
plummet. The real selling point of greeting cards is immediate
availability - they're on every street corner and in every mall.
Considered in this light, it is easy to see how the network destroys
any issue of convenience, since all Web sites are equally convenient
(or inconvenient, depending on bandwidth) to get to. This ubiquity is
a product of the network, so the value of an online 'card' is a
fraction of its offline value. Likewise, since the costs of linking
words and images has left the world of paper and ink for the
altogether cheaper arena of HTML, all the greeting card sites on the
Web offer their product for free, whether as a community service, as
with the original MIT greeting card site, or as a free service to
their users to encourage loyalty and get attention, as many magazine
publishers now do.
Once a product has entered the world of the freebies used to sell
boxes of cereal, it will never become a direct source of user fees
Newspapers make an enormous proportion of their revenues on classified
ads, for everything from baby clothes to used cars to rare coins. This
is partly because the lack of serious competition in their geographic
area allows them to charge relatively high prices. However, this
arrangement is something of a kludge, since the things being sold have
a much more intricate relationship to geography than newspapers do.
You might drive three miles to buy used baby clothes, thirty for a
used car and sixty for rare coins. Thus, in the economically ideal
classified ad scheme, all sellers would use one single classified
database nationwide, and then buyers would simply limit their searches
by area. This would maximize the choice available to the buyers and
the cost able to be commanded by the sellers. It would also destroy a
huge source of newspapers revenue.
This is happening now. The search engines like Yahoo and Lycos, the
agora of the Web, are now offering classified ads as a service to get
people to use their sites more. Unlike offline classified ads,
however, the service is free to both buyer and seller, since the sites
are both competing with one another for differentiators in their
battle to survive, and they are extracting advertising revenue (on the
order of one-half of one cent) every time a page on their site is
When a product can be profitable on gross revenues of one-half of one
cent per use, anyone deriving income from traditional classifieds is
doomed in the long run.
Real-time stock quotes
Real time stock quotes, like the 'ticker' you often see running at the
bottom of financial TV shows, used to cost a few hundred dollars a
month, when sold directly. However, much of that money went to
maintaining the infrastructure necessary to get the data from point A,
the stock exchange, to point B, you. When that data is sent over the
Internet, the costs of that same trip fall to very near zero for both
producer and consumer.
As with classified ads, once this cost is reduced, it is comparatively
easy for online financial services to offer this formerly expensive
service as a freebie, in the hopes that it will help them either
acquire or retain customers. In less than two years, the price to the
consumer has fallen from thousands of dollars annually to all but
free, never to rise again.
There is an added twist with stock quotes, however. In the market,
information is only valuable as a delta between what you know and what
other people know - a piece of financial information which everyone
knows is worthless, since the market has already accounted for it in
the current prices. Thus, in addition to making real time financial
data cost less to deliver, the Internet also makes it _worth_ less
TIME AIN'T MONEY IF ALL YOU'VE GOT IS TIME
This last transformation is something of a conundrum - one of the
principal effects of the much-touted 'Information Economy' is actually
to devalue information more swiftly and more fully. Information is
only power if it is hard to find and easy to hold, but in an arena
where it is as fluid as water, value now has to come from elsewhere.
The Internet wipes out of both the difficulty and the expense of
geographic barriers to distribution, and it does it for individuals
and multi-national corporations alike. "Content as product" is giving
way to "content as service", where users won't pay for the object but
will pay for its manipulation (editorial imprimatur, instant delivery,
custom editing, filtering by relevance, and so on.) In my next
column, I will talk about what the rising fluidity and falling cost of
pure information means for the networked economy, and how value can be
derived from content when traditional pricing models have collapsed.