Perspective: How to lose friends and alienate people

William Smith, the chief technology officer of BellSouth, recently said Internet service providers should be allowed to charge companies that want their sites to load faster than those of a rival.

Meanwhile, Sony distributed millions of CDs bundled with a dangerous copy-protection rootkit that made consumers' computers vulnerable to attack.

It is commonplace to say these companies have lost touch with their customers. That may be true, but there is something deeper going on here. Too many companies, with too little thought, have subscribed to a flawed product model.

The "control" or "value added" approach neglects the market values of neutrality and consumer choice. Companies sometimes are acting out of fear or are operating with a poor understanding of economics. Yet avoiding the kinds of errors BellSouth and Sony are making will make a key difference in companies' comparative fates.

Let's start with a basic proposition. The value of a product to a consumer (and its price) is directly related to what the consumer can do with it. This is a point Sony and the Bells once knew very well. The Sony Betamax sold because it enabled people to watch television when they wanted. In its golden age, AT&T became a common carrier; its customers could reach whomever they wanted and for whatever purposes--which is one reason people bought phone service.

Too many companies, with too little thought, have subscribed to a flawed product model.

Yet while this seems obvious, why did Sony want to sell crippled CDs that endangered its customers? Why does BellSouth want to make it comparatively harder for people to reach the sites they like best?

The answer is that these companies have fallen prey to seductive economic fallacy. The culprit goes by many names, but we can call it the "value added" business model.

The logic works fine on a PowerPoint slide. Today we sell an Internet connection for $50 a month. To make even more money, we should add a service (say, e-mail), give it preferential or exclusive rights, and charge customers an extra $10 per month. That means more money, right?

Wrong.

In the process of favoring your own services, you often cripple the underlying product--or at least make it less useful for the consumer than it might otherwise be. In the e-mail example, you need to block or disadvantage the e-mails of other providers like Yahoo. Immediately, the product as a whole--the Internet connection--is less valuable. The same logic works for search engines, operating systems and even toasters. Neutral products and neutral networks are usually more valuable to customers--a point too easily forgotten.

The e-mail example is an obvious case, and in the real world, things aren't usually so simple. Take Sony's case. By adding copy protection, Sony presumably thought that the incremental decline in piracy would add up to greater total CD revenue. But in the process, it was unthinkingly destroying an important value proposition--that the value of a CD today lies partially in its ability to be copied. A completely copy-protected CD is worth less, and a CD that infects your computer with spyware is worth less than nothing.

While I want to stress the value of neutral products, that's not to say it never makes sense for a firm to offer add-on services. Companies, for example, do very well competitively offering their own services, such as when Canon sells you great lenses for its cameras. And sometimes, though quite rarely, a service requires a kind of coordination that can only be offered by a single company(laptop repair, perhaps, being a good example.) The problem is that companies like BellSouth aren't acting carefully at all. They err by thinking that their customers want their services, as opposed to better access to an open market.

BellSouth's Smith made these logical errors abundantly clear. Surely, part of what makes Google successful, Smith said, is that it gives better search results to those who pay. But he was wrong. Google and Yahoo strive for neutral results, and that is why people find them useful.

Biography
Tim Wu is a visiting professor at Stanford University law school. He teaches trade, telecommunications and copyright and is co-author of the forthcoming book, "Who Controls the Internet?"

More Perspectives

[kwilco]

Alienating Users

Mr. Wu is so very on the money with his notion that users want neutrality from the products we buy. This is probably the main reason I have come to disdain all things Microsoft. Every time I buy a computer, I have to spend hours removing all the links, products and other "preferences" before I can use the damned thing for my purposes. Long live Linux! Long live open source!

[Harfeld Bilgewing]

Don't blame Microsoft for that...

If you buy an OEM'd version of Microsoft, that's where all the extra links and stuff come from. Get a clean machine, buy a copy of Windows from Microsoft and you'll get a nice clean install without all the extra garbage.

It's HP, Dell, Sony, etc., that burdens you with all that annoying, additional, useless crap.

[jazzrich9]

frightening time to be a provider.

This is a fascinating article. The "value added" business model is pretty standard in telecom providers and elsewhere. Ultimately, I think part of it is a scrambling to find sustainable sources of revenue.

In Bell South's case, if the question is should a company be able to charge more for more bandwidth, of course they should, and the size of the pipeline a corporation would like their customers to have in order to get to their site, is an internal business decision, I don't really see that so much as value added as much as tiered pricing, and I think that's alright on the hosting end as long as it's alright on the consumer end (think dial up vs. cable at 3mbps vs. 8mbps)

But that does partially miss the point, and there is a difference between crippling what you're selling and offering additional services for additional money.

I think the Sony example is much more persuasive, as they weren't really trying to offer a value added service, although their pitch to the public was that these new CDs made it easy to put digital content on your computer, it had the look of an acquiescence to people's broad desire to rip their CDs and put them on Ipods, but in truth was a thinly masked attempt to further protect their IP.

I think that the value added model is often code for other things, and too often encourages companies to offer crippled products and then to charge for uncrippling them (verizon wireless's bluetooth/wifi crippling comes to mind). Instead, value added should be just that, additional services or features that build off of already neutral and capable products and actually add value to the initial sale.

But, with bandwidth getting broader, municipalities starting to make noise about free city wide wifi, and telecomm moving into the realm of free world wide communications (with the humblest of broadband connections) I can understand why these companies are scrambling to figure out how to remain vital.

[gerhard_schroeder]

More examples : cable companies

Time Warner Cable - is afraid to list the channels being sold in its cable packages. Browse the site, I dare you to find specific channels and link them to specific packages. Even if you create a profile it won't tell you.

Comcast Cable - Bundles advertisements with its monthly bills. They inject advertisements into their on-screen TV guide. Get a bill from IBM sometime. I bet it doesn't contain an order form for the Pasta of the Month or Whinnie the Pooh bank checks.

[aabcdefghij987654321]

More cable examples

When I first signed up for cable internet access there was no cap on the bandwidth. After about a year the company suddenly capped the bandwidth and then another year later started selling higher bandwidth as a "value added" service. Then they decided their original caps were too low (DSL started encroaching) and upped the bandwidth for both the "base" and "premium" users.

The only reason I didn't kick the service out was the fact that there's no viable competition though it's also true that my "base" connection is usually faster than the servers providing data anyway so the "premium" bandwidth doesn't offer that much to start with.

[pjianwei]

The only thing that is free and successful

is air, even clean air needs resources so how can anything be free, successful and longlasting?

[Antij]

Sounds like Verizon

I recently found out that Verizon totally cripples their phones so that you have to buy their apps, games, news services, etc. from their Get It Now service instead of getting files from Bluetooth or the net. Too bad they stop non-profitable wireless function by doing so. http://www.eweek.com/article2/0,1759,1751567,00.asp

So excellent job, you morons at Verizon. You can offer me my new-every-two and all the coupons you want, but you lost me as a customer, forever. I'm going to another company that will give me a free, fully functional Razr, GSM, 1500 minutes (vs. your stingy and expensive 400), and only a 1-yr committment for THE SAME PRICE.

I can't wait for everyone else to catch on and the exodus of Verizon's customer base to begin. Remember people, avoid Verizon at all costs! They're greedy and stupid and clearly don't mind screwing over their entire customer base for a few bucks...a few extra bucks is all you will ever be to them.

Need more proof? They sold me a low-end Motorola when I signed up. The charging port broke no fewer than 4 times in one year. They kept replacing with the same model until the warranty on the original phone ran out, and then they nailed me full price for a phone to replace my Motorola that was only 3 weeks old and already broken. Even after they admitted to my face it was a bad, problematic phone. The new LG has been flawless for 1.5 years...so it's obviously 'not just me.' They refused to give me my money back for their mistake, and that's just one more reason I'll never do business with them again. Good job, Verizon. If you don't "Get It" Now, kiss your dominance and your $$$ good-bye.

[aabcdefghij987654321]

Premiums don't fade away well either

Just examine your phone bill, see where you're still getting charged extra for having a "Touch Tone Phone"?

Now why should that still cost extra when nearly every phone in the country is touch tone? Why shouldn't those who still have only rotary dialing be paying extra for maintaining compatability with their antique phones? Why haven't the regulatory agencies told the phone companies that charging a premium for that service is no longer acceptable?

Why are the phone companies allowed to charge extra for caller ID and other "features" that are actually standard parts of their systems and they actually have to block them from going to people who don't pay extra?

[pierredv]

A good argument, not quite persuasive

This is an admirable attempt at extending the case for network neutrality beyond arguing that discrimination is either illegal or immoral.

The case is not quite persuasive yet. While it?s true that companies sometimes do things their customers hate, it?s typically by accident and not on purpose. No business can afford to alienate its customers over the long run; companies will do things that irritate some of their customers some of the time, but usually as part of a conscious trade-off.

I?m not persuaded that the likes of BellSouth ?err by thinking that their customers want their services, as opposed to better access to an open market.? Only policy wonks worry about ?access to open markets?. Most consumers just want products at the lowest price for the highest quality. Open markets often provide this, but are a means to an end for consumers, not an end in itself. If they can get a better product for no additional cost ? if, say, Real Networks paid BellSouth a premium to ensure that a Rhapsody media stream gets Platinum Tier treatment even though a customer has only paid for Silver Tier network performance ? the consumer will take it.

Wu argues that neutral products and neutral networks are usually more valuable to customers, but neglects to explain how a company should balance this with the fact that such neutral systems are usually less valuable to sellers. As Isenberg and Weinberger said: ?The best network is the hardest one to make money running.? Amazon.com?s home page isn?t a blank Google-esque page with only a search box; it uses the customer?s profile to lead off with recommendations that are not neutral. Any web search result, including on Google, is headlined by paid-for ad links that aren?t ?neutral?. In many cases customers even find such bias useful, or at least sufficiently un-intrusive that they don?t go to another supplier.

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