Open source, like digital media, doesn't suck money out of hitherto profitable industries. Instead, the opening up of software and information simply changes where the money gets made.
This is obvious to the Googles of the world. It's probably equally obvious to the Microsofts of the world. The difference is that the latter can see the train coming but is powerless to stop it, and the former is driving the train.
The evidence for this is increasingly clear and is driven by a shift in how content is sold and consumed. The problem is neatly summarized by Google CEO Eric Schmidt in a Wall Street Journal op-ed piece directed at the newspaper industry:
[T]he Internet has broken down the entire news package with articles read individually, reached from a blog or search engine, and abandoned if there is no good reason to hang around once the story is finished. It's what we have come to call internally the atomic unit of consumption.
That newspaper was "the package," but is increasingly too slow and out-of-sync with how people prefer to discover news content. New packaging is rising, including Google News, that will shift who makes money on news content.
Reporters will still get paid. They'll just have a new employer on their payroll check. Maybe it will be Google.
Think about what is happening in music. I could download New Order's "Regret" for free using LimeWire, but I bought it on iTunes because of the "packaging" which makes my experience easy, high-quality, and legal.
Still, the primary drivers are ease and quality.
Such packaging is worth a lot of money--and to an entirely new breed of vendor--as a quick look at Google's latest income statement suggests.
It's happening in software, too, particularly in open-source software. Red Hat is an example of a company that does a great job of turning software license into an ongoing service contract that enterprises buy. It does this by packaging the power of others' development in the form of a subscription, as Red Hat CEO Jim Whitehurst recently highlighted.
But Red Hat is just Open Source 1.5. Open Source 2.0 looks more like Google or IBM. For every dollar Red Hat makes selling subscriptions to use open-source software like Linux and JBoss, both Google and IBM make multiples of that dollar using open-source software to sell something else, something they've packaged in hardware or Web-based services.
The hardware is running open source. The services are based on open source. The money is made in the packaging of open source.
... Read moreContent may be free, but the format in which we buy it certainly is not. As Apple, Google, Red Hat, and others increasingly demonstrate, consumers and enterprises are happy to pay for "free" when packaged in convenient formats that add value to digital goods.
Over the years, I've paid Morrissey several times for his Bono Drag album: cassette, CD (twice), iTunes, concerts. I'm reading Moby Dick (again), and have bought it in hardback and paperback, not to mention Kindle, formats. The Economist? I pay for the right to read it in magazine format, because I hate the thought of trying to read it online.
All of these (re)purchases strike me that the media world may have problems, but they are mostly of discovering convenient formats in which to deliver content. Formats that suggest, and sometimes demand, payment.
Along came iTunes and it became easier to buy the song for 99 cents than to steal it.
Of course, iTunes wasn't the only "format" pioneered by Apple. Its iPod also made the music portable. The iPhone increased this advantage by meshing digital entertainment with work (phone).
Indeed, the iPhone introduced another winning "format": the App Store. Over 2 billion downloads and 85,000 available applications later, Apple has demonstrated significant value in aggregation of "content" (in this case, applications) in an easy to discover and consume format.
But it's not just Apple that benefits from such format shifts, as SourceForge's Paul Huff comments:
It seems like Red Hat, Apple, Google, and Microsoft...all win because of value added via aggregation/packaging/ease of use, which is why business models like Cloudera['s] and Lucid Imagination['s]...make a lot of sense to me: packaging can add immense value.
And maybe packaging is the wrong word...[It's really about] surrounding something free with something that facilitates the use of the free.
To me, too. Whether software or music, the key is finding the right format to make "abundance" manageable, as I've described before.
Importantly, such formats must facilitate and not inhibit the ease of distribution that digitization enables. This is why DRM worked fine for Apple's iTunes but why its rough equivalent--the pay-wall--may not work nearly as well for newspapers and magazines.
If I'm following a link off Twitter the last thing I want is to have my interest bogged down by a pay-wall. I might, however, be happy to subscribe to a Twitter service that automatically lowers the pay-wall. In other words, a walled garden around The Economist may annoy me, but a metered garden accessed through Twitter, similar to iTunes and music, would not.
It's all about getting the format right.
In software, I've described current business models for open source as a transitory period, the "awkward teenage years" before models mature. I suspect we'll come to see cloud computing as a convenient new format to distribute otherwise free software. Or, as The 451 Group's Matt Aslett suggests, perhaps cloud computing is a natural evolution from open source.
Good content is a necessary precondition to getting paid, but it's not going to be reason we pay anymore. That reason for payment is the format in which the content is delivered.
Perhaps it's always been that way, but the physicality of the delivery mechanisms confused us: we were buying the paper but thought we were buying the news.
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Open source hasn't traditionally been thought of as an innovative force, but based on suggestions that the media industry is borrowing its leading business model, perhaps open source is at least the sexiest nun in the convent.
Whether you're selling software or newspapers, it's tough to get paid in the digital age. This is due, in part, to shifting value.
As Arnon Mishkin, a media consultant with Mitchell Madison Group, suggests, "The vast majority of the value [in news media] gets captured by aggregators linking and scraping rather than by the news organizations that get linked and scraped." According to Mishkin, this sets up an untenable situation where the Googles of the world get rich on the work of organizations like The New York Times...which ultimately can't afford to be "scraped" anymore.
Rather than rage against the digital machine, however, some organizations are fighting back, and doing so with one of the open-source industry's preferred tools: open core.
The Financial Times, for example, is looking for ways to balance free use of its news assets while charging for premium content through micropayments (for individual articles) and subscriptions. The idea is to give away the core of its product to casual readers and charge for more "professional" interest.
It's Zimbra's business model, but for newspapers.
This is the right approach to digital commoditization, rather than the sue-them-until-they-pay approach that the music industry has taken (and which the U.S. Department of Justice appears to condone). Users of digital goods, as Linus Torvalds will tell you, are not parasites or thieves: they're customers waiting to be converted.
The Open Core approach is working very well for the companies that employ it (Disclosure: Alfresco, my employer, increasingly uses this model), and sees various permutations even outside digital goods. The airline industry, for example, is being turned on its head by the discount carriers, which have discovered all sorts of innovative ways to make big business on low prices.
If there's sufficient value, users can be converted to customers. The question is 'how?' Open Core, with its emphasis on both adoption and monetization, seems to offer a compelling answer, whether you're an open-source project or a global media brand.
Follow me on Twitter @mjasay.
As the Internet dismantles one business after another, it's surprising how fungible the responses to the Web have become.
Reading a recent Economist description of the changing newspaper business, for example, I was surprised by how much its transformation mirrors the software business. The Economist suggests a change to the economics of news businesses:
(T)he plight of the news business does not presage the end of news. As large branches of the industry wither, new shoots are rising. The result is a business that is smaller and less profitable, but also more efficient and innovative.
This is almost certainly what open-source software is doing to the traditional develop-a-product-and-license-a-million-copies proprietary software business. Open source is not a monastic pledge to poverty; instead, it's an alternative way to wring profits from a bloated industry that has gotten away with monopoly rents for far too long.
Intriguingly, though, even the business models that appear to be working for News 2.0 are the very same models being deployed by budding open-source software companies. The Wall Street Journal's bifurcated content model sounds suspiciously like open-source software's Open Core model and our attempts to create hybrid-source business models:
The Wall Street Journal takes a shrewd route to a similar destination. Rather than charging certain types of user, it charges for certain types of news. Earlier this week, it offered for nothing a story about swine flu, a review of the new "Star Trek" film and a report on looming cuts at car dealerships. It charged for pieces on Cigna Corporation's pension plan, Lockheed Martin's quarterly lobbying expenditures and a lawsuit against a bottling company which alleges that a board meeting was held improperly. In short, the fun articles are free. The dry, obscure stuff costs money.
The open-source analog is Zimbra giving away its standard e-mail software but charging for the "boring" (but necessary to enterprise roll-outs) bits like multi-domain support and Outlook/MAPI sync.
This is why I often talk about the entertainment industry, newspapers, etc. in the midst of an open-source software column.
The solution to the music industry's P2P woes should provide significant insight into the business models that will fuel open-source software for the decades to come. The best models for open-source software will almost certainly suggest clues for monetizing Twitter, online video, and more.
Indeed, Twitter's founders on Tuesday told CNET that they're focused on building a great product first, and fixating on profits second, which sounds a lot like Red Hat's model over the past few years of growing revenue slowly, but customer value quickly.
We're all in this Internet thing together.
Follow me on Twitter @mjasay.
Even as open source seeks new models for funding its explosive adoption, open-source business executives can take heart: the newspaper and, indeed, the Web 2.0 world, are undergoing the same soul-searching.
It is therefore instructive to hear what Google CEO Eric Schmidt has to say on the matter, since Google is one of the few Web companies that has learned how to make serious coin on the free Web. TechFlash has excerpted his comments Tuesday to the Newspaper Association of America, some of which are highly pertinent to anyone trying to make money in freely distributed goods:
I think you're going to end up with all three [advertising, micropayments and online subscriptions]. An analogy I would offer is television. There's free television, over-the-air television, there's cable television and there's pay television. And they have smaller markets as you go from free to more highly paid. And that structure looks to us like roughly the structure of all of these businesses....
[Y]ou should assume that your information -- that there's a category of information you all produce that you'll want to distribute free -- freely -- there's a category that you'll want to have a per-click basis, and then there's some that you'll want subscription for.
The reality is that in this new model, the vast majority of people will only deal with the free model. So you'll be forced, whether we like it or not, to have a significant advertising component, as well as a micropayment and an additional payment system.
Hmm....This sounds eerily similar to the business-model somersaults that the open-source world is also going through, and which the Web 2.0 world must soon explore in earnest.
Free adoption is the hallmark of the Web, whether expressed in an open-source download or an online service. But real businesses need to find ways to charge for value beyond that initial taste of "free," or they will discover that there is no such thing as a free bankruptcy. (Lawyers tend to charge for that sort of thing.)
Schmidt's counsel is wise: find different ways to charge different types of users. Marten Mickos, former CEO of MySQL, suggested that a good open-source model segments users into those willing to trade money to save time, and those willing to trade time to save money. One pays in cash, the other in code. It's a nice approximation of the principle Schmidt outlines.
We're still in the early days of the Web. It's nice to see that even the big vendors like Google are still experimenting with the right business models to monetize the Web's tremendous growth.
Follow me on Twitter @mjasay.
In a recent series entitled "The Future of Newspapers," Wall Street Journal managing editor Robert Thomson made some provocative (but insightful) comments about the Web's effect on journalism and the newspaper business.
One comment in particular stands out:
Google devalues everything it touches. Google is great for Google, but it's terrible for content providers, because it divides that content quantitatively rather than qualitatively. And if you are going to get people to pay for content, you have to encourage them to make qualitative decisions about that content.
Google Page Rank supposedly makes qualitative distinctions between content by measuring quantitative links to content, but in reality it doesn't work that way--not enough of the time, anyway.
I can see this from my own posts: sometimes I want to find a previous post of mine among the thousands that I've previously written. So I start digging through Google using keywords that I think will unearth the post. What I end up finding much of the time are my most popular posts related to those keywords, and often not the actual content I'm seeking. Given that some of my best content hasn't necessarily been the most linked-to content, I struggle to find it.
Even so, Thomson points out one area in which the Web actually has the potential to accelerate revenue potential for content, reminding his audience that the "beauty of the Web is that you can repurpose (content) many times" and therefore "generate revenue several times over." The key is figuring out how to monetize that content, repurposed or otherwise.
While I think advertising is one way to manage monetization of content, I think there's something more profound and more closely linked to the abundance of Web content. I don't know what that is, but I suspect someone smart will unearth it soon. It needs to take into account the short shelf-life of content--even good content--but also the critical importance of original source material, as Nick Carr recently wrote.
Perhaps we can figure out ways to put a premium on original content--journalism--and then pay lower rates for add-on commentary like this blog?
Follow me on Twitter at mjasay.
As someone who dearly loves reading The Wall Street Journal every day, it was gratifying to see Nick Carr blast a hole in the "everything will be free" utopian arguments from Clay Shirky and others that suggest newspapers are dead.
While the newspaper industry is certainly reeling, Carr's suggestion that a lower supply of news will translate into a greater ability to monetize it rings true:
Shirky claims we're "in a media environment with low barriers to entry for competition." But that's an illusion born of the current supply-demand imbalance.
The capital requirements for an online news operation are certainly lower than for a print one, but the labor costs remain high...It's a fantasy to believe that the production of all the kinds of news that people value, particularly hard news, can be shifted over to amateurs or journeymen working for peanuts or some newfangled journo-syndicalist communes...Whatever the Internet dreamers might tell you, [newspapers] ain't going to a purely social production model...Once you radically reduce supply in the industry, the demand picture changes radically as well. Ad inventory goes down, and ad rates go up.
And things that seem unthinkable now--online subscription fees--suddenly become feasible. We also, at that point, get disabused of the fantasy that there's no such thing as news consumers. We see that providing fodder for "conversations" is not the primary value of the news; it's an important value, but it's a secondary value.
Amen. I do believe that how newspapers structure their operations, including how they charge for their services, will change, but it seems like a gullible fantasy to believe that the Web will magically create quality content via a ready pool of amateurs.
I'm one of those amateurs. I think I'm capable of writing great commentary, but I'm not the one out there doing real journalism. That's what CNET and other news organizations create.
I'm confident that the Web will reset the way in which media gets created and consumed. It already has. But the idea that content will get created in the absence of effective payment models for that content is absurd. While the creative destruction of the newspaper industry continues apace, let's be sure to focus on the "creative" and not revel in the "destruction."
Follow me on Twitter at mjasay.
I read an intriguing article in The Atlantic over the weekend, discussing the probable implosion to The New York Times and what its future may be. One paragraph, in particular, struck me:
At some point soon--sooner than most of us think--the print edition, and with it, the Times as we know it, will no longer exist...What would a post-print Times look like?
Forced to make a Web-based strategy profitable, a reconstructed Web site could start mixing original reportage with Times-endorsed reporting from other outlets with straight-up aggregation. This would allow the Times to continue to impose its live-from-the-Upper-West-Side brand on the world without having to literally cover every inch of it.
In an optimistic scenario, the remaining reporters--now reporters-cum-bloggers, in many cases--could use their considerable savvy to mix their own reporting in with that of others, giving us a more integrative, real-time view of the world, unencumbered by the inefficiencies of the traditional journalistic form. Times readers might actually end up getting more exposure than they currently do to reporting resources scattered around the globe, and to areas and issues that are difficult to cover in a general-interest publication.
This is a similar prognostication to what I offered up recently, one that I find increasingly compelling.
Ironically, my very presence here on CNET may confirm it. CNET's Blog Network is filled with non-CNET employees, like me. We offer CNET breadth, allowing CNET's staff reporters to offer depth in particular areas of interest (e.g., Stephen Shankland focuses on Google and Yahoo, as well as search, online advertising, portals, and digital photography). That depth will then be picked up by other publications to feed its breadth, while they choose to go deep in other areas.
Symbiotic, interesting, and effective. So long as the depth is strong, people will pay for access to that content, be it through subscriptions (I am and hope to always be a paid subscriber to The Wall Street Journal, as there's little more comforting than reading it on my couch at the end of a day), advertisements, or some other means.
Such a strategy enables the media to be many things to many people without having to undergo the burden of failing to be all things to all people. I think it's a winner.
Browsing through Dan Farber's review of a recent Pew Research Center survey on news readership, I was reminded of one of the central tenets of blogging: blogging helps to destroy the business models powering its original source material:
While the Internet is growing as the place where people go for news, the revenue simply isn't catching up fast enough. The less obvious part of the Internet overtaking newspapers as the main source for national and international news is that much of the seed content--the original reporting that breaks national and international news and is subsequently refactored by legions of bloggers--comes from the reporters and editors working at the financially strapped newspapers and national and local television outlets.
I've long recognized this, and have taken my share of swipes at a new web mentality that celebrates aggregating largely amateur content, without providing the financial incentives to replace such content with professional content. But what to do about it?
Looking at my own readership patterns, I tend to read the front and back of magazines and newspapers. That is, I read the headlines (much of which derive from original research and authorship on the part of that publication) and the op-ed page. Everything else tends to be minor filler, "Associated Press" content that doesn't motivate me to purchase.
Is the new model for media to discard the AP and focus on original content?
I don't mean the model that The New York Times has taken, focusing on a publication that is almost entirely of its own making, nor the experiments that The Wall Street Journal is making.
Rather, I mean making media heavier in two core areas: the big stories that no one else can do better than a given publication, and the commentary on the big stories and everything else, because the commentary on the little stories arguably makes them much more interesting.
And so, TechCrunch thrives because its founder, Michael Arrington, is an industry player that has conversations with technology's movers and shakers that others get less often, if at all. I'd wager that people read The New York Times as much for its columnists as for its slant on the news. Ditto for The Wall Street Journal. I read Businessweek starting at the back, plowing through commentary and then usually giving up once I get to the "news."
Less filler, more killer: is this the new model?
If I'm not alone in how and what I read, then the answer to media's woes is to stop pretending to be all things to all people, and instead to significantly up investment in a limited but potent brew of original news reporting, focused in areas in which one's staff has competitive differentiation, as well as the best commentary for this and everything else.
Imitation may be the sincerest form of flattery, but movie fans like to show their love for a great movie by stealing it, as data from TorrentFreak on The Dark Knight downloads suggests. With over one million downloads in just a week, The Dark Knight is quickly on its way to earning the dubious honor of being the most pirated movie of 2008.
(Credit:
Warner Brothers)
What a perverse message to send to the movie studios: we love your product so much that we refuse to pay for it. How do we expect the industry to invest in more movies like The Dark Knight if we aren't willing to fund that investment?
Microsoft's Thomas Rubin, chief counsel for Intellectual Property Strategy, recently told the UK Association of Online Publishers that "the 'information wants to be free' approach not only does not work, actually it has been a disaster for almost all newspapers." While Rubin's words were somewhat self-serving, designed as they were to position Microsoft as the "safe" technology partner to the industry, to Google's detriment, he still has a point, and one that correlates to online video.
Yes, many people steal online music and video because they simply want a more convenient way to consume it. Rubin suggests that "It turn(s) out that most people do not want to steal music--they just want convenient online access to it," and I agree with that. Back when Fellowship of the Ring came out, I downloaded the movie from an IRC network and watched it for months before it hit retail. However, I also bought both the standard and extended versions, plus I saw the movie three times in the theaters. New Line Cinema made its money from me, and I got to conveniently watch the movie well before its retail release.
Yet my desire for convenience shouldn't have trumped New Line Cinema's desire for control and profit. I had no right--legal or moral--to pirate the movie to satisfy my own whims. I was wrong, and that wrong could well end up ensuring that fewer "Dark Knights" and "Fellowships" get created.
As consumers, whether of movies, software, or other digital goods, we do ourselves a disservice when we steal. I hate to rely on a Microsoft executive to teach this lesson, but Rubin's comments on the newspaper industry are instructive here:
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