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Unintended Consequences: How Market Forces Outmanuever Big Groups For The Collective Good

Posted by Bob Warfield on January 11, 2008

If you’ve been reading my blog for very long you’ll know I’m a believer that evolutionary forces are at work all around us.  The web behaves very similarly to an evolutionary system, even experiencing punctuated equilibrium as memes propogate throughout.  Free markets are another example.  There are at least three interesting big stories in the blogosphere right now that provide interesting examples to watch as they unfold.  Let’s consider each.

First, there has been much ado about the idea that pirates come into markets due to inefficiencies.  This is a theme for the new book The Pirates Dilemma by Matt Mason.  What the owners of the assets in pirate-infested markets have done to prompt the pirates is they’ve created artificial scarcity.  It’s an interesting concept, but there are examples of it all around.  Music and video are the most obvious.  The music industry has all but given up on DRM because of the success of pirates, and their next salvo looks to be an attempt to tax us through ISP’s.  This is not unlike the taxes that were levied on videotape when it first came out.  You have to figure the music industry never imagined the pirates would get this far.  Their market and empires crumble almost continuously as time goes by.  Is it fair?  Perhaps not, but it is a natural consequence of market forces outmanuevering a group that had stalled in terms of innovation.  They were too focused on lawyers and control. 

Imagine what might have happened if one of the big labels had somehow adopted a radically different business model.  What if they’d made all the music free in exchange for accepting advertising, for example?  Wouldn’t the record companies love to be as successful as Google?  Ironically, I’ll bet a huge number of digital music playback devices and software could accomodate video ads that would be able to convey quite a lot of information.  One of the smartest things George Lucas did around Star Wars was to insist on retaining control of the merchandising.  Just consider all the ancillary merchandise that any entertainment brand has the ability to sell.  Perhaps the creative article itself should have been free and the merchandise charged for.

Software suffers from the same thing, which is another reason to convert to Software as a Service if you can.  The Service piece is harder to pirate, especially since some of the software stays in the cloud.  There are bound to be many other examples of artificial scarcity, but the owners of whatever is being made scarce don’t really want us thinking about it too hard.  Now we hear that AT&T is thinking of introducing the equivalent of DRM at the ISP level.  What a PR and sales disaster that would be.  What was AT&T thinking to have sent a lawyer to CES to talk about that?  It would simply be another case where Market Forces would outmanuever this big player.

The next story along these lines involves the Hollywood screen writers strike.  The BBC reports that according to Nielsen Online, YouTube usage has grown 18% and some sites have doubled since the writer’s strike.  The US-based Pew Internet Project has reported similar results.  Men slightly outnumber women in the switch, but it is the young who are most prominent, accounting for nearly 70% of that switch.  I feel younger just reading this–I stopped watching so much TV as soon as I had a broadband Internet connection despite also having an elaborate home entertainment system.

Mathew Ingram adds more color:

  • 15% of users visit video sharing sites daily, double what it was before the strike.
  • Ages 18-49 doubled their Internet video consumption.
  • Those 50-64 only increased 17% while those even older showed no increase.  Note that those older groups would have been in high school about 1975 or earlier–this is the first group for whom there were no video games or PC’s while they were growing up.
  • Comparitively less educated folks showed more growth as did slightly lower income households.

Artificial scarcity again?  Perhaps.  If so so, it was an artificial scarcity of the ability to create video entertainment.  Apparently people are finding its more interesting to watch amateur videos on the Internet than to watch reruns on TV.  Techcrunch was prescient in suggesting that this could happen, as Duncan Riley points out.  But perhaps there is another form of artificial scarcity at work.  The writers struck over a desire to get royalties when their work appears on DVD’s and the Internet.  The artificial scarcity was apparently the control the big media companies had on where that work was published.  Market forces will see to it that Big Media’s control is diminished first by switching attention to alternate channels and second by alerting the talent that they too can bypass Big Media for those channels.  From my perspective, the biggest risk is that once people have tried the alternate channels they likely won’t come back.

The last story concerns Apple’s iPhone.  Wired Magazine kicked this meme off with, The Untold Story: How the iPhone Blew Up the Wireless Industry.  In exchange for a 5-year exclusive, Jobs talked AT&T into radically changing the cellphone experience.  Visual voicemail and no need to visit a store to sign up would be just two revolutionary aspects of the new device.  And I have to say, I was blown away with my own new iPhone to learn I didn’t have to go to a store to activate it.  The whole thing took about 3 minutes over the Internet using iTunes.  Vive la Self-Service!  I’ve written before about the virtues of self-service, but the iPhone has to be my personal best experience with it.  It has been a huge success for Apple, for whom it is probably their most profitable device, as well as AT&T, where about 40 percent of iPhone buyers are new to AT&T’s rolls, and the iPhone has tripled the carrier’s volume of data traffic in cities like New York and San Francisco.

But the real impact is yet to be felt.  There is an $11 billion a year mobile phone business in the US alone that is still feeling the shockwaves from the iPhone.  Why?  Because the iPhone shifted the emphasis from the infrastructure to the experience.  As Steve Jobs and others like to say, the user experience is everything.  It may be the only thing that matters, and the iPhone delivers in spades.  Ironically, this all started from humbler beginnings.  Jobs set out to create a three way partnership with Apple, Motorola, and Cingular to combine the iPod with a phone.  The initial result, called ROKR, was a dud.  As Wired put it, the ROKR failed because it came to “represent everything that was wrong with the US wireless industry, the spawn of a mess of conflicting interests for whom the consumer was an afterthought.” 

Artificial Scarcity at work again.  The wireless carriers were trying to control the consumer by limiting the infrastructure and the handsets, and it was a mistake.  The iPhone blew the lid clear off because AT&T was willing to gamble and follow Jobs, and what a brilliant move it has turned out to be in hindsight.  Motorola was the biggest loser because Jobs cut them out first and insisted on almost total control over the concept with Cingular (later acquired by AT&T).  Ed Zander is no longer with Motorola, though we can only speculate how much failure to participate in the iPhone’s incandescent success may have contributed to that.

For Cingular, now AT&T, the marriage was a beautiful thing.  It has given them a way out of the increasingly commoditized infrastructure wars with the other carriers.  Commoditization had led to price wars, and soon, loss of profit margins.  The answer was to create a new focus, and who better to lead that revolution than Steve Jobs?  Of course they would follow him. 

Does this mean Apple has taken over the wireless industry now as Scott Carp suggested?  There’s just one little problem with that theory:  now Jobs himself faces the spectre of dealing with artificial scarcity.  In order to get AT&T/Cingular to sign up, he had to promise a 5-year exclusive.  What could be more artificially scarce than that?  At the same time, his iPhone formula seems not to be especially well protected.  Every handset manufacturer on the planet is rushing to copy it.  Even Microsoft seems to have some iPhone like technologies up their sleeve.  And Apple has another artificial scarcity problem at hand since the iPhone is a closed ecosystem that Apple has yet to open up.  Meanwhile, the carriers have ceded the power to manufacturers, software developers, and consumers while they continue to deliver pipes.  Every boy and his dog is gearing up to deliver iPhone clones, and Jobs will need to think about the next move to retain his dominance.  He has time.  The iPhone has more web browser share already than all the Windows CE devices combined.

What’s next in the ending-artificial-scarcity game?  How about Zillow, which ends the artificial scarcity of MLS listings and evaluating what the value of real estate ought to be?  Fascinating stuff, this business of artificial scarcity.  It represents opportunity and risk.  It tends to be a dead end strategy in the long run.  Look for opportunities to exploit it, rip the cover off scarcity, and change the paradigm.  But be careful not to enter into your own artificial scarcity dead end while you’re doing that!

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