For those coming late to the party, this is a long post in response to Zara posting a Wired article ( http://www.wired.com/techb
OK, the main problem with this article is that it insists on treating every transaction within the world as a stand-alone unit, when in fact the whole point of economics is to look at the world as a single complex interacting system. It presents no real conclusions and discourses at length on things that are fairly apparent but refuses to actually substantiate its arm-waving literary and historical leanings with thought-out examples. Does the author really believe that Yahoo’s storage is unlimited? If so I believe he is quite deluded. Yahoo have come to the conclusion that their “average” storage allocation was at a level that most people would find more than adequate, and the spare from the average user could accommodate the power users. I’ve heard no bad things about Yahoo, but if we look at the use of the term “unlimited” in other areas, lets say ISPs, I think we can all acknowledge that there is nothing unlimited about them despite their claims, and the same is true in any situation where there ultimately have to be limits imposed at the provider level. Unlimited is increasingly code for “unlimited provided you don’t exceed secret limits we wont publish”, making its use in the tech sector typically more of a marketing con than an economic turning point, and for an analyst to use it unqualified is bordering on criminal. I don’t think anyone would suggest that if every Yahoo user suddenly decided to send each other 100TB of data, Yahoo would have a problem and unlimited email storage would quickly stop being. Thus the author’s proposition that “that’s ‘unlimited’ as in ‘infinite’” is a complete fallacy, making conclusions drawn using this as a prime example misleading.
Again, staying with the Yahoo section on the second page, and to a lesser extent the myspace artists mentioned on the first page, although cross-subsidisation is mentioned, it isn’t made explicitly clear that all of the examples used are examples of cross-subsidisation. Increasingly artists have found that the principal source of their revenue was concert tickets and merchandising, not least because in order to produce a mainstream product they invariably had to sign to a major record label thus making a pitifully small profit per album sold. By making their albums available freely or cheaply, they do not lose much in the way of revenue, but they do still encourage customers to attend concerts and purchase merchandise – the prime example of cross-subsidisation. In the case of Yahoo, the more people who use the service, the more users Yahoo has for their ad server, and the wider the potential user-base for other Yahoo products. Yahoo itself as a company is reasonably uninteresting, having lost the search engine war a long time ago, and not doing anything else especially unique; and yet Microsoft valued it at $42,000,000,000 just last month in a take-over offer. Obviously a range of factors are at work here, but since MS has alternatives to most, if not all, Yahoo services, there is something more fundamental at work behind Yahoo’s strategy than this article implies. Ultimately businesses need to make money. If they do not, they might as well not be in business. Therefore a company that offers its products for free has to be making money elsewhere, a point that is largely glossed over before being introduced brusquely in the business model overview.
Finally, to return to the most important point that this article glosses over – that every economic exchange happens within, and affects, an economic system. In the final page, the author suggests a world in which electricity would be free. What he fails to take account of is the ramifications this would have on the remainder of the system – how prices elsewhere would be affected, how the market would change and how ultimately, balance would be restored. Again and again, treating each example as a micro-system you can prove your point, but each example has a wider context to be placed in which brings in more factors – to come back to Yahoo, services such a GMail and Hotmail were also competing for users, and the decision to make Yahoo Mail an “unlimited” service needs to be put in that context to fully understand the rationale behind such a decision, rather than to portray it as one motivated purely by the falling costs of storage.
Incidentally, on the fourth page the author suddenly announces that micropayments have failed, without substantiation. Interestingly enough, many companies currently turn a tidy profit from the whole area of micropayments. Cell phone ringtones are paid as micropayments. Itunes songs are sold as micropayments. To a lesser extent, every major console manufacturer offers micropayments for their downloadable content. Linden Labs, the creators of Second Life, have based a whole interface between their virtual economy and the real one via micropayments. It would appear that in no way is the concept of the micropayment dead except in this article where it suits the author’s purposes to declare it such.
Finally, and most telling of all, we come to the constant naive belief that this concept of cross-subsidisation and freely available products online is somehow a new invention. As with most things in this latest technology bubble, the rediscovery of a system has led to it being abducted wholesale and claimed as a child of the current age. The concept of freely available services, even in the tech sector, is an old one. When id Software released Quake in 1996 they did so using the “Shareware” model, in which the user got a demonstration version of the product and could for a fee unlock the full version, which was included in the package being distributed. Countless others were released as “Freeware” or “Donationware”, costing absolutely nothing for the full version, a trend which continues to this day. Typically though, this was because the developers needed a task accomplished and released the application in case someone else needed the same task doing, or as often wanted to be associated with the project to build a user-base or reputation for future endeavours, again highlighting the constant return to the concept of cross-subsidisation.
Overall this article is long winded, littered with literary and historical references that serve little purpose but to inflate the author’s ego and restates obvious and established business models as though somehow unique to the current climate in the tech sector. The examples chosen are poor and poorly explained, and skewed in such a way as to prove the author’s point regardless of actual relevance. But what do you expect from the clown who wrote an entire book explaining the long tail phenomenon like he had just cracked world peace.
P.S. You don’t want me on your peer review board – thats all I’m saying.