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Chris Anderson might have been criticized for being a pop-scientist and I regret not having a list of cited works of his recent book FREE¹ within my paper back edition. Still, after a short presentation I did in middle of June, asking how publishers can cope with content devaluation, now in Anderson’s book I stumbled upon the term “demonetization” which in fact comes closer to what I was talking about in my presentation. In this article I will shortly rework my thinking, summarize some essential ideas Anderson came up with and I will give additional thoughts on hardware markets as a driver of demonetization of content as well as an opportunity for publishers.

The idea behind devaluation of content is simple. There is just much more content available because it is much easier to produce and distribute content and the technology to do this is becoming ever cheaper. As the prices of bandwidth, storage and computer processing power decline (Anderson describes the cubic decay even topping Moore’s Law) the growth in amount of content is staggering – it might be even exponential. With this explosion there is also a new business logic becoming prevalent which Jeff Jarvis describes as “link economy” in contrast to “content economy”. These two logics clash because one measures the value of content by its links (it is like currency) while the other one requires a “pay-wall” to keep up pay-per-unit revenues but which obviously imposes barriers for links and opportunities to reap other revenue sources. Because free content handled within the link economy exceeds paid content in amount and often is an acceptable alternative regarding quality (or the paid content is copied bypassing the pay-wall), the willingness to pay for content is shrinking and traditional business models don’t work anymore unless your content is an extremely light buoy of continuous exclusiveness.

To make the clash tangible I showcased in my presentation two prominent players in the news industry who embrace the rules of internet and the link economy. I introduced the New York Time’s bold move to provide an API offering third-party company developers access to the Times’ entire online article archive going back to 1981 which has “triggered a whole host of mash-ups, increasing the reach and value of its content”. Secondly, the Guardian Open Platform “which will allow users to build their own applications in return for carrying Guardian advertising”. In opposition to this idea I illustrated the A.P.’s stance and the hassle it has with aggregators which has been refreshed by its recent announcements to crack down on unpaid use of articles on the web by licensing even small snippets. Also I mentioned the push of some German publishers to find a collecting society to encounter revenue losses and to enforce legislation to give them ancillary copyright which would bring them in a better position to sue people using content they publish. Ambitions like this culminated recently in the Hamburg Declaration signed by 166 European publishers. Nevertheless, these ambitions and Rupert Murdoch with his latest decision to charge for online content might be wrong.

Chris Anderson’s book, Free – The Future of a Radical Price, comprises what I was talking about in my presentation and examines a variety of aspects circling around the idea that something is available for free. He stresses the fact that there is a difference between twentieth-century Free and twenty-first-century Free, the second rather based on economics of bits, not atoms. “The near-zero marginal costs of digital distribution allow us to be indiscriminate in what we use it for – no gatekeepers are required to decide if something deserves global reach or not.” While proclaiming an abundance of information Anderson refers to the Law of Conversion of Attractive Profits introduced by Clayton Christenson a couple of years ago: “Products that can become commoditized and cheap tend to do so, and companies seeking profits move upstream in search of new scarcities. Where abundance drives the cost of something to the floor, value shifts to adjacent levels”.

He outlines four categories – or rather characteristics – of free-based business models which are all variations of four kinds of cross-subsidy, “shifting money around from product to product, person to person, between now and later or into non-monetary markets and back out again.” The first model is based on direct (within one company) cross-subsidies where one product or service is given away for free to promote something else for what money is charged for. The fact that sometimes the giveaway has to be purchased from another company doesn’t make it a case of the second model which is called Three-Party Market. This model is “the extension of the media business model to industries of all sorts”. It’s not just about advertising but attention based revenues from a second market or customer class. The third model, called Freemium, is actually a case of the first model but the product or service given away is a limited version of something and it is charged for the advanced version. For digital products this model becomes much more attractive because the “ration of free to paid is reversed” as the cost of serving 95 percent of users is close enough to zero to be subsidized by the fee charged from the five percent premium users. The distinctive credential of the fourth “model” is that the subsidy crosses the blurry border between markets measured in money and markets rather based on attention and reputation. Anderson’s systematization helps to demystify the term Free although he doesn’t go very far at this point to explore the adjacent value levels or, as Kevin Kelly coined it, the “stuff which can’t be copied”, which becomes scarce and valuable instead of what now becomes abundant and which is better than free.

Anderson appoints six drivers of content devaluation. One is the growth of supply of content coupled with the obvious limit of demand (and attention). Secondly, with the loss of physical form content can be replicated without actually depriving the originator, although this is objected in often awkward court cases against so called piracy. The third is the ease of access and thereby decline of search costs resulting in a decline of “willingness to pay for having content made available”. Fourth, the advance of the ad-supported free content model results in consumers expecting content to be free anywhere. Another reason for content devaluation is that a new generation has grown up in the digital economy being habituated to free content and “either indifferent or hostile to copyright”. As there is a constant interdependency between recipients, technologies and business models I don’t see a specific point here. Finally, the computer and hardware industry wants content to be free, because the more content is available the more valuable the devices through which content is consumed. I’m going to examine this point in more detail below. Furthermore the fact that software companies such as search engines have a vested interest in cheap and free content too should be addressed in this collection of drivers.

These drivers might be analyzed using the term demonetization rather than the term devaluation because value shifts and is scattered. Anderson explains: Although something is free doesn’t mean that there isn’t someone making lots of money or lots of people make little money. Regarding the demonetization of the classified ad market enabled by sites such as Craigslist the value “is distributed among the site’s hundreds of thousands of users”. Similarly in the case of Wikipedia, part of the demonetization process of a billion dollar encyclopaedia market. Anderson continues: “…because an incomparable information source is now available to all at no cost, our own ability to make money armed with more knowledge is improved (…) In other words, it’s shrinking the value we can measure (direct revenues), even as it’s hugely increasing the value we can’t (our collective knowledge)”. On the other hand tiny amounts of money go back to Wikipedia via corporate donors who pass on the donation costs to their paying consumers.

Anderson’s model of cross-subsidy between monetary and non-monetary markets challenges economics as a science all together: “What can not be directly measured in economic systems is handwaved away into a category called “externalities” and another way to “handle things which don’t fit into basic models” are opportunity costs. Anderson seems to criticise the “basic models” and “standard theories”. On the other hand he builds on standard theories such as the conservation law: “wealth doesn’t vaporize”. So, what is it all about? Would it be a good idea to include more of these externalities into an economic theory? At least they become more measureable as people move their communication and relations online – of course with some questionable equations like: amount of links is equal to reputation. Additionally I was wondering why the cross-subsidies “back out” of nonmonetary markets, the provision of value into monetary markets by crowds of people allegedly keen mainly on reputation, isn’t elaborated that explicitly by Anderson. The crowd from which something is sourced might not lose knowledge or money but these people expend time and attention – also on things again which are monetized by others.

As emphasized by Google’s announcement to offer a free operating system, software markets are demonetized as are the travel agent and the stockbroker businesses and, of course, content markets. One major impact on content value, other than the effect of search engines, derives from hardware markets. As content becomes digital it requires appliances and new infrastructure to be received. Content distributed via Apple Stores for example can be seen rather as a means for Apple to sell iPods and iPhones. If necessary, the content is subsidized in order to keep prices down to keep up demand for these highly profitable devices². In content markets Apple competes with Amazon which drives content prices even further down. Apple doesn’t need to be actually in the content market though. It just collects the market-makers fee for letting the trading happen in the iPhone arena and will take a 30% commission. “Since Amazon have a track record of obtaining 55-65% discounts from book publishers, and since Google’s terms trade for the Settlement have been announced at 38% (plus a bit more), the Apple share does not look too greedy. But for the daily expense in running the Store it is a fat margin.” Apple’s infrastructure definitely attracts publishers as CourseSmart LCC just indicated. Founded by Pearson, John Wiley & Sons Inc. and others it’s offering 7,000 titles of its e-textbooks for iPhone.

Amazon meanwhile by acquiring Lexcycle, the owner of the leading e-book reader application used on the iPhone, and by launching its iPhone-optimized Kindle store, has shown that it is heading to a further integrated e-book strategy going beyond the Kindle e-reader. This strategy also deprives publishers of direct costumer relation, ownership of costumer data and control of pricing. “In selling e-books at $9.99, Amazon effectively takes a loss on each sale because publishers generally charge booksellers about half the list price of a hardcover ­ typically, around $13 or $14.” By bundling e-books with the Kindle it assigns the costs improperly and subsidizes the e-books which are undercosted to push Kindle sales and further network effects. The content eventually will be demonetized while Amazon moves upstream to leverage the e-reader market as well as data regarding sales, products and customers which is essential for personalization of content, advertisement and e-commerce.

Google is going to offer a cloud-based alternative to Amazon while simply selling access to e-books via mobile phones as well as the Sony Reader, the Kindle’s largest competitor. As Google is making money from advertisement and benefits hugely from the link-economy it obviously enforces open standards, makes millions of public domain books available for free and reserves the right to set prices as well.

Because of the loss of control and dumping prices for e-books, publishers such as Hearst, the New York Times and Newscorp. announced the introduction of their own e-readers. The bookseller Barnes & Noble will be the exclusive provider for content on the Plastic Logic reading device. There are several new e-readers and e-reader-like appliances announced for the coming season and publishers already compete in this fast paced market with powerful technology companies. Some of these companies bet on open standards, some have their own online stores and some are bargaining with publishers about pricing conditions to bundle content subscriptions with their hardware. Either way, there wouldn’t be much reason not to behave like Amazon and to try to undercut even the $9,99 to get a share of retail, hardware and data related markets. There would be only slightly more reason for publishers not to do so, but by entering the appliances and mobile platform space they are more likely to manage the transition and to carry over their competencies to make them work for them.

Apple has set the paradigm and established a completely new market with its App Store and many other phone companies like RIM and even network operators follow. A recent Forrester report claims that the next wave of e-book reader use devices they already own and some argue that the Kindle market is insignificant compared to the mass of people reading e-books on their phone or laptop. The advantages for phone companies against e-reader companies are evident. The price for an extra device is still too high. With mostly voice service available and better browsing features (some e-readers don’t even have wireless connection yet to purchase and link content) it’s more probable to cooperate with network providers to subsidize their fancy devices as it’s speculated for the upcoming Apple, Nokia and HTC tablets. The Dell 5-inch touchscreen tablet, expected to hit the market in around six months, will be provided free of charge to users who sign up to digital content subscriptions and it will directly compete with Amazon’s Kindle e-reader. If such devices are becoming cheaper and if they would have additional features like telephony capability, this would create more revenue and more flexibility in pricing. Hence, subscription models, where not only the hardware but the content is cross-subsidized and feels like free are becoming realistic not just for music but for all digital content, including e-books.

Markets for mobile digital content as well as for mobile appliances and platforms are becoming bigger and more fragmented. Publishers have to find the right mix of subscription, pay-per-unit, ad-supported and free-based models. They have to further explore the potential of price differentiation, content customization and bundling of different content formats and services and they need to be aware of the sometimes counterintuitive new conditions. Beyond this they need a sustainable mobile strategy and have to find appropriate partners to diversify into adjacent value levels. To gear into hardware segments of content related value chains is one of these new sources of value, as well as a precondition for leveraging adjacent sources of income by engaging with audiences in the direction media consumption is heading – the mobile internet.

[1] Chris Anderson, Free : the future of a radical price (London: Random House Business, 2009).

[1] Michel Clement, Ökonomie der Buchindustrie Herausforderungen in der Buchbranche erfolgreich managen (Wiesbaden: Gabler Verlag / GWV Fachverlage GmbH, Wiesbaden, 2009).

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