shirky.com Clay Shirky's Writings About the Internet
Economics and Culture, Media and Community, Open Source

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 thusly:

'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.

ECONOMICS 101

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 same cost.

ECONOMICS 201

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 $8.97?

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.

ECONOMICS 100101101

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 competitors.

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 Cards

    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 again.

  • Classified Ads

    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 viewed.

    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 to have.

    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.



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