Chris and Malcolm are both wrong

Many of you are familiar with dust up between Chris Anderson and Malcolm Gladwell that was touched off by Malcolm’s review of Chris’s new book, Free: The Future of Radical Price. [UPDATE: Free is no longer free. The link to Chris’s book has been retired. You can find Chris’s book on Amazon.]

Anderson’s book points out that the cost of providing web services is declining as a result of open source software, commodity hardware, and cheap bandwidth. Gladwell agrees with the trend but notes that it is very expensive for YouTube to host video. Gladwell and Anderson also traded visions of the future of the media business, with Anderson arguing that content was becoming commoditized and Gladwell holding up the Wall Street Journal’s paid web subscription as an example of paid for premium content. Ultimately the debate veered into a discussion of the economics of abundance, pitting overly enthusiastic cyber utopians against cynical and perhaps self interested, defenders of current media business models.

The debate was entertaining but not very satisfying. Malcolm’s examples were too narrow and not compelling. The WSJ gets away with a subscription, for the moment, because their users bill it to their corporate credit card. YouTube has real costs because of its enormous scale, and the structure of the pharmaceutical industry has little to do with purely digital products on the web. Chris, on the other hand, drifts too easily into an imagined world of abundance where economics (for lack of scarcity) will no longer be able to describe human behavior. I agree with Chris that the economics of the web are fundamentally different, but I agree with Malcolm that the basic laws of economics still apply. I understand why Chris and others are attracted to a “new” economics of abundance. Material abundance does change what we value, but it does not eliminate scarcity. Malcolm, Chris, Seth, and Fred all made good points in this debate. Many others weighed in. Much of this conversation is captured here in the Squidoo lense devoted to the topic.

My frustration with the debate about Free is that it seems like a last ditch effort to fit the internet economy into the familiar framework of the industrial economy. That isn’t going to work. Free is not a pricing strategy, a marketing strategy, or the inevitable consequence of a market with low variable costs. It’s a symptom of a much more fundamental economic shift. Until we agree on what resources are scarce and have a framework for how they will be allocated in the future we are not just talking past each other, we are talking about the wrong things.

Fortunately, a bunch of smart people have been thinking about scarcity in an information economy for a long time. Herbert Simon, the Nobel winning economist and psychologist, first wrote about it in 1971.

…in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients.

Since then Michael Goldhaber and Rishab Gosh have debated the nature of the attention economy. John Hagel summarized the arguments here. These insights into the economy of attention offer a powerfully explanatory perspective in the debate about Free and explain why Free will be the dominant media model of the near future.

In a world where facts are readily available, from multiple sources, basic information will be commoditized. But the explosion of sources will create a real burden for the consumers of information. Raw information will become not just a commodity, it will be a nuisance. In that world, consumers will value scarce, relevant insight over abundant facts. Computer scientists have been working for years on algorithmic ways of mining text for insight with only modest success. It turns out that people still out perform computers at this task. Web services like Google, LastFM, and Facebook, succeed because they do a good job of harnessing the explicit or implicit input of users to sift through an overwhelming supply of information to deliver relevant insight. Google uses in-bound links to filter search results. LastFM uses other people with similar tastes to recommend music. Facebook filters information by the strength of relationships. So the users of these services are not just consumers, they are a necessary participant in the creation of the service. Since all these services require a large base of users for their filtering techniques work, you could just as easily ask why the services are not paying their producers. Debating whether to charge these same producers make little sense.

Both sides of the debate about Free do not seem to acknowledge how fundamentally different the relationship between suppliers and consumers is on the web. Services are not offered for free at all. There is an exchange of value between users, the creators of the raw material – data, content, and meta-data, and the network where that data is converted into insight. This exchange is still governed by the basic laws of economics but the currency is not dollars, it’s attention. The network that takes attention and converts it into insight is also quite different than a traditional firm. The services they provide are more like those we expect from a government than a company. Craigslist, Facebook, and Twitter all provide (or try to provide) a robust stable reliable infrastructure (hosting, bandwidth), security, safety, and dispute resolution. In all three cases, the product users create and consume emerges organically from this environment.

In a world where the scarce resource is some combination of time, attention, relevance and insight, those commodities become the medium of exchange in a parallel economy alongside traditional currencies, debating what a traditional firm charges for something they produce and distribute to customers who have no role in the product’s creation sheds very little light on what is going on today.

The much more interesting conversation is about the appropriate economic model for a social network that depends on the contributions of its participants and increases in value as more people use it. One possibility is that the economic models of these networks will look more like Craigslist than Yahoo. Recent estimates peg Craigslist’s revenue at more than $100,000,000. Not much compared to Yahoo’s billions, but Craigslist still employs only 28 people. Even allowing for substantial bandwidth, and server costs, it is still hard to imagine how their costs are more than $5,000,000. Since Craigslist collapsed a multibillion dollar classified advertising business into a fabulously profitable $100,000,000 business, perhaps we should be talking about the potential deflationary impact of more “zero billion dollar” businesses. As the radical efficiencies of the web seep into more sectors of the economy, and participants in social networks exchange attention instead of dollars, will governments at all levels need to make do with less tax revenue? That’s a scary thought in an era of high deficits unless traditional governments can learn from the efficent governance systems of social networks and provide more for less.