July 19, 2006
Earlier today I described the concept of network effects and analogized it to gains from trade. I suggested that public policy should encourage open systems in order to maximize the gains to interoperability.
But there’s an obvious objection to this line of argument, which is hinted at in the IEEE article I referenced yesterday:
Surely it would require a singularly obtuse management, to say nothing of stunningly inefficient financial markets, to fail to seize this obvious opportunity to double total network value by simply combining the two. In other words, if there are gains to interoperability, it’s in the interests of the firms themselves to make their platforms interoperable in order to increase their value. Firms, therefore, have the necessary incentive to maximize the value of their platforms with or without a platform monopoly.
The problem with this response is that it ignores the question of who captures the gains to interoperability. In a closed platform controlled by a single firm, most of the surplus flows to the platform owner, who is able to raise prices to capture the increased value. Apple is currently reaping the financial rewards from sitting atop a closed platform as it grows to dominate its market. On the other hand, in an open platform, competition pushes down prices. As a result, most of the surplus flows to the consumer. Given that price-fixing agreements are difficult to enforce (not to mention illegal), companies may rationally opt to keep their platforms separate.
The free trade analogy applies perfectly here: from an economic perspective, the companies choosing not to interoperate are behaving like protectionist firms. Free trade simultaneously increases total wealth and reduces the profits of the formerly-protected industry. Likewise, interoperability increases societal wealth but it reduces the profits of the firm that previously had exclusive control over its platform.
Of course, this analysis ignores the possibility of inter-platform competition. If switching between platforms is inexpensive, then inter-platform competition will drive down prices the same way intra-platform competition does. Unfortunately, a lot of technological platforms have high switching costs. Moreover, switching costs tend to grow over time, as users make more and more platform-specific investments. Once one has spent $500 on iTunes music, one is unlikely to purchase a music player that will not play iTunes songs, no matter how superior it might otherwise be to the Apple-branded alternatives. So once a market has matured, so that most users have made large platform-specific investments, the owners of the respective platforms are likely to enjoy considerable market power.
Of course, my argument here doesn’t fully answer the argument I laid out on Sunday, because any discussion of how to divide the profits from a platform is academic if the platform is never created in the first place. It’s possible that the only way we’ll get certain types of platforms is if we give the firm that creates them a monopoly on platform access. I’ll explore that question next.
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unmediated.av:
The Weekly Show
drawing from extrastruggle.
We've been having a back channel conversation amongst the trackers at unmediated about how/whether to update the way in which we aggregate, present, and make useable the content on the site, in light of all the various aggregators, digg and its clones, and role model group blog sites that we all consume/use/hate/love. Since we all primarily support open media movements and the freedom of bits and so forth, and with all of us being busy with our primary projects, we are looking for ways to make getting content on the site easier and more streamlined, while making it obvious that we are presenting other sources content. With the availability of open API's for just about any type of media aggegration literally getting past the saturation point, and mashups taking every possible form, we are wondering, is it time to take a step back, or a step forward with how/what we do at umediated? In the course of my surfing today, i found this new site, Boxxet Which just might be the straw that breaks the camel's back in how we all perceive the current mix and match nature of the web as it now stands. What's different about Boxxet from other aggregators and mashups like the newest entry popurls, (which aggregates digg, slashdot, reddit, newsvine, tailrank, and flickr) is that Boxxet is a Website generator. Thats right, just pop in all the urls u want to aggregate (and WHAT from them) choose how u want to format it, plug in the url that u want it to be accessed at... and whammo: Your own site with everyone elses content, and all thats left to do is decide whether googleplex or yahooza is going to be the source of your linklove revenue. And if u have on older domain that u plug this into...well, we all know how the pageranking with search engines work by now. It used to be that u had to have a bit of code knowledge to make all this stuff work. Eyebeam's Re-blog engine which powers this site was not a simple undertaking at the time that Michael Frumin and Michael Migurski put it all together... a half a year before Marc Broadband-mechanicked the term Reblog as his latest buzzword before casting his attention on the ourmedia-meme. (kudo's, kudo's) But now, with the cut and paste mentality of webculture that we at unmediated have helped create, the pace at which people are remixing and repurposing code is accelerating at a rate similar to the curve that we saw with pro-sumer desktop video... almost anyone can do it. I have this sinking feeling in my gut that we will arrive sooner than later at the same existential threshold that the film studios and record labels are squirming under to our joyful cries of "die, dinosaurs, die!". What i am wondering, is how long until my hero of the open-information movement, Cory Doctorow, and the rest of our pals at BB will tolerate re-aggregation and repurposing of his content, (now that he is investing so much more time at the site) before he (or any of one us) screams, "FOUL!" Stewart Butterfield over at Flickr is dealing with this beast at the moment...and i have to admire the dryness with which he states, "I loaded the FlickrCentral pool and firefox got up to using 240mb of ram before dying. So that's not a great user experience, but it's really terrible for Flickr. If it catches on and you don't limit it, we'll have to cut you off :\" Sure, Stewart, blame it on the user experience and firefox. ;) I admire your candor, and personal attention/approach to what has become one of the hottest new BRANDS in Web 2.0 ...that u still have time to be personal and all flickr-fuzzy even after being acquired, but I am sure that your jeans feel like they're fitting a bit tighter all of a sudden. Pretty soon, I expect, a lot of us bell-bottomed infornistas are going to wake up in a similar pair of Jordaches. I'm curious which of us will cut the inseams and sew in another totally different material to keep our style,and which of us will claim that now that we're wearing skintight jeans ("they're really really comfortable...REALLY! You think i should get a pair of Reeboks to go with 'em?"), that the manufacture of bell-bottoms should be forbidden. I point this all out in good humour only to illustrate a point: The times, they are('nt) a changin'>, and Cory just might wake up one day soon in his magic kingdom, and say "Hey, man, where'd all my whuffie go? And he's going to have no choice but to join Walt's pinstripesuits in pushing for copyright extension. It's a pill i hope he (and we) never have to swallow. So i pose the question to our community readers: How do you see unmediated-Are we crossing the boundaries in how we repurpose content? Would you like to see more editorializing? Narrower/Broader scope? Are we a repository of information that you come back to use, or just part of your daily information addiction? Let us know... I, for one, would like to have an idea about what pair of jeans to wear this year ;) michael
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Berkeley Conference: Online Video and the Future of Television - Friday, September 30, 2005
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