Why Sharing Will Be Big Business

As you may have noticed, one of the central themes of this blog is the power of sharing. Mostly, I talk about non-rivalrous goods like software or music: here, sharing is a no-brainer, because copies can be made for almost zero cost, allowing everyone to share a digital resource. But what about the world of analogue *rivalrous* goods - the traditional kind of stuff we are most used to in everyday life?

Here, sharing is harder to arrange, since you need someone to lend something to another party, which requires organisation in the physical world. And where there is friction, there is a business opportunity in terms of making reducing that friction. Here's a perfect example of that:

Chegg may very well be the fastest-growing, most successful, second-generation e-commerce startup that you hardly ever hear about,except maybe for the fact that it’s raised more than $140 million. Chegg is the “Netflix for textbooks.” It lets students across 6,400 college campuses rent from a virtual bookstore containing 4.2 million books. Based on my analysis (which I get into more detail below), the company is on track to generate $130 million in revenues in 2010, up from $25 million in 2009, and $10 million in 2008. During the January, 2010 semester, I estimate the company made close to $1 million in revenue a day, up fivefold from $200,000/day the previous January, and it should double that this coming September. My analysis suggests Chegg will do close to $50 million in revenue this September alone. It is underappreciated, to say the least.

The article goes on to point out the larger implications of Chegg's success:

Chegg is disintermediating the $5B+ college textbook market by providing a low-cost, short-term, nationwide rental alternative to the high-priced university bookstore. This disruptive model will likely shrink industry revenues by half in the coming years, with Chegg in a leadership position to command 80%+ market share. The key questions, of course, are: 1) Is this a winner-take-all market, 2) What can Chegg do to fend off the likes of the major bookstore owners, Barnes & Noble and Follet, as well as Amazon and Apple, and 3) Is Chegg a harbinger of a new age of startup rental services?

In answer to that last question, no and yes: I don't think we should regard this as old-style rental over the Internet, but a new kind of sharing where people spread the cost of rivalrous goods. However you look at it, though, it is going to be big.

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WikiPremed: Making Money from Free

The virtues of free are pretty inarguable, but advocating the open release of stuff inevitably begs the question: but how do you make a living from it? So it's always great to come across a *thriving* business built on giving stuff away, like WikiPremed MCAT Prep Course, "an open access comprehensive course in the undergraduate level general sciences".

Here's some background:

WikiPremed was created to make it easier for an intelligent, motivated person anywhere in the world to become a doctor. For premedical students in the United States, there is no better learning program than the WikiPremed MCAT Course for securing the level of mastery that earns a superior MCAT score. In addition to improving the accessibility of science education, the WikiPremed MCAT Course is an important contribution to educational design. This learning program teaches the physical and biological sciences within a unified curriculum, an approach developed over many years working closely with college students in small group teaching. The WikiPremed MCAT Course consists of twenty modules. Each module contains fifteen to twenty hours of videos and assignments. The resources here can be utilized as a stand-alone MCAT course or in combination with another course. There are no restricted areas on this website. You can study at WikiPremed for as long as you want. It is often useful to begin WikiPremed several months prior to beginning a live course to establish the conditions for the full realization of the potential of the live course within a more ambitious program.

And here's the key thing:

The WikiPremed MCAT Course is open access. There are no restricted areas. Although registration is free, when you find yourself relying on this site in a significant way for MCAT preparation, please make a one-time $25 Tuition Payment.

But that's not enforced, so there's always the risk that people won't pay. Happily many do, but more importantly, the site generates money from products that are complementary to the online content.

Given that many remain sceptical about the viablity of this approach, I emailed the creator of the site, John Wetzel, who filled me in on how things work:

Basically, the development of the WikiPremed content has been going on since 1994, and at this point, it is a very large body of work. I think it helps to look at the content from an object oriented programming model and think of the various modes of presentation as methods of the content objects. Everything is licensed creative commons attribution, and we make the online methods freely available, so for example, you can find the entire set of Physics Flash Cards online. We offer the printed versions of the things for which print may be appropriate for sale for a very reasonable price, and students do buy them because print has its own advantages. We put the whole set of physics cards online (three years of work!) and the students still buy the printed cards any way. Even if they want to support the work, I think they like to have a commercial arrangement and a simple value proposition.

There is one work, however, the Premedical Learning System, which sells for $32.95, where the advantages of the print version are so great, compared to the online presentations of the content, which are extensive, that we call the printed work 'essential' for the course, and it is definitely a good value. It's also a board game!

Students need printed study materials, and they get sick of the computer, so I definitely think there is room for creative commons educational content supported by print publications. I think there is an ethic to not holding content hostage to purchases, but I think there are commercial advantages to the open model as well. I don't doubt that the average customer at WikiPremed has 1000 page views before purchasing anything.

I am sure that if there were registration walls and missing chapters I would have fewer customers.

I'm not getting rich or anything, at this point, but it is working.

What's interesting here is that once again it's analogue goods that bring in the money, while the digital side does the marketing - a pattern that is emerging in many sectors.

But irrespective of the how, the simple fact of WikiPremed's success is good news: it means that Wetzel is likely to continue to offer his content for free, helping who knows how many impecunious students in the process; it also means that free content has another great case study showing how you can make money from giving stuff away.

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Hypocrisy, Thy Name is MPAA

I do love it when copyright maximalist organisations like the MPAA put out statements, because they invariably put their foot in it too. This "Testimony of Dan Glickman Chairman and CEO Motion Picture Association of America" is no exception. Here's a plum [.pdf]:

While not a Free Trade Agreement, the US motion picture industry – producers, studios and guilds -- has a keen interest in the Anti-Counterfeiting Trade Agreement (ACTA), in particular the provisions to address Internet piracy. We firmly believe that for the ACTA to address the enforcement challenges our industry confronts today, it MUST include robust protections for intellectual property online. Practical secondary liability regimes for online infringement are essential to motivate stakeholders to cooperate in implementing the reasonable practices that promote legitimate consumer options and make the online marketplace less hospitable for infringers. ACTA parties should refine their secondary liability regimes to reflect current realities and adopt modern, flexible systems where they do not exist.

What the MPAA wants is for ISPs, for example, to change their businesses "to reflect current realities and adopt modern, flexible systems where they do not exist": how strange, then, that the MPAA is not prepared to do the same by working according to the new digital rules instead of clinging to the old analogue ones...

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Analogue or Digital? - Both, Please

Recently, I bought the complete works of Brahms. Of course, I was faced with the by-now common problem of whether to buy nostalgic CDs, or evanescent MP3s. The price was about the same, so there was no guidance there. Of course, ecologically, I should have gone for the downloads, but in the end I choose the CDs - partly for the liner stuff you never get with an MP3, and partly because I have the option of degrading the CD bits to lossy MP3, which doesn't work so well the other way.

So imagine my surprise - and delight - when I discovered after paying for said CDs that the company - Deutsche Grammophon - had also given me access to most of the CDs as streams from its Web site, for no extra cost (I imagine the same would have been true of the MP3s). This was a shrewd move because (a) it made me feel good about the company, even though it cost them very little, and (b) I'm now telling people about this fact, which is great publicity for them.

But maybe my delight is actually a symptom of something deeper: that having access to both analogue and digital instantiations of information is getting the best of both worlds.

This struck me when I read the following story:

Google will make some 2 million out-of-copyright books that it has digitally scanned available for on-demand printing in a deal announced Thursday. The deal with On Demand Books, a private New York-based company, lets consumers print a book in about 10 minutes, and any title will cost around $8.

The books are part of a 10 million title corpus of texts that Google ( GOOG - news - people ) has scanned from libraries in the U.S. and Europe. The books were published before 1923, and therefore do not fall under the copyright dispute that pits Google against interests in technology, publishing and the public sector that oppose the company's plans to allow access to the full corpus.

That in itself, is intriguing: Google getting into analogue goods? But the real importance of this move is hinted at in the following:

On Demand already has 1.6 million titles available for print, but the Google books are likely to be more popular, as they can be searched for and examined through Google's popular engine.

That's true, but not really the key point, which is that as well as being able to search *for* books, you can search *through* them. That is, Google is giving you an online search capability for the physical books you buy from them.

This is a huge breakthrough. At the moment, you have to choose between the pleasure of reading an analogue artefact, and the convenience of its digital equivalent. With this new scheme, Google will let you find a particular phrase - or even word - in the book you have in your hands, because the latter is a physical embodiment of the one you use on the screen to search through its text.

The trouble is, of course, that this amazing facility is only available for those books out of copyright that Google has scanned. Which gives us yet another reason for repealing the extraordinarily stupid copyright laws that stop this kind of powerful service being offered for *all* text.

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Copyright Industries Very Nearly Get It

They're getting there:

Copyright holders on Wednesday acknowledged they have done a poor job of countering the “anti-copyright” lobby and demonstrating the creative community’s value to the world.

During the second day of the 9-10 June International Confederation of Societies of Authors and Composers’ (CISAC) World Copyright Summit here, some content creators also lamented that instead of fighting for compensation with the advent of new technologies, they fought the technology - like the VCR - itself.

But then they spoil it with stuff like this:

”The enemies of copyright have really done a good job at creating the false premise that the interest of copyright holders and the interest of society as a whole are antagonistic, and they always talk about the need for balance,” said Fritz Attaway, executive vice president and senior policy adviser for the Motion Picture Association of America. “We have got to do a better job” at attempting approaches at copyright protection “in a way that we get paid but also that consumers can access our works,” he added.

So...balance is bad, eh? And still looking for copyright *protection*, instead of working on the business models.

And then there's this:

Although Israelite made the comparison that if people were stealing computers from stores en masse, the technology industry would be up in arms, Shapiro argued that it is not the same, and that copyright and intellectual property rights are different than “real” property - a statement that received groans from the rights holder-friendly audience. “That’s hurting your case because you’re being rejected by anyone under 25 who is saying, ‘these guys are full of it,’” Shapiro continued.

OK, I was wrong: they *still* don't get it.

More Analyst Cluelessness

Yesterday in "the other place" I was berating Gartner for its inability to understand the reality of open source, and now here's someone else from that strange world of "research" that simply doesn't understand the basics - in this case, digital music:

Music cannot just be 'for free' anymore than cars or houses can 'just be for free'. If people aren't paid, they don't make the product.

Sigh. Once more, then, children - and do pay attention at the back: music is digital, cars and houses are analogue. You can make copies of digital music for effectively zero cost (it exists, but it's too small to measure); you cannot easily make copies of cars or houses, and certainly not for vanishingly small cost.

As for the second part, ever heard of something called free software? Variously estimated as worth tens of billions of pounds, most of it is created by people who aren't paid. And even if they are, that's not a necessary pre-condition for its creation, simply a reflection of the health of the business ecosystem that has grown up around it. If there weren't people who got paid, free software would stil exist - as it did originally.

Similarly for Wikipedia: nobody gets paid, but look at the results. In just a few years it has succeeded in creating an unmatched respository of human knowledge, to the point where it is pretty widely regarded as the first place to look stuff up, despite its undeniable imperfections.

As with Gartner, this seems to be a case of analysts simply telling their clients what they want to hear, rather than what they need to know. Hence my general contempt for the breed, with a few honourable exceptions - RedMonk and the 451 Group spring to mind - that both know what they are talking about, and tell it as it is.

Signs of the (Digital) Times

Readers of this blog will know that I am fascinated by the analogue/digital divide, and how the passage from one to the other causes all sorts of interesting problems:

Question: Why is eBay requiring sellers of digitally downloaded goods to list their items in the Classified Ads format?

Answer: Most items that require digital delivery, once created, can be very easily replicated. This ease of replication creates the opportunity for sellers to list thousands of the same item in an attempt to manipulate the Feedback system. It also creates a perception that even legitimate sellers of Digital Goods are manipulating the Feedback system. This dynamic -- real and perceived -- undermines trust across the entire marketplace.

We understand that digital goods, by themselves, are not the cause of Feedback Manipulation, but clarity of policy and ease of enforcement require all digitally downloaded items to be offered via the Classified Ads format.

Tricky stuff this business in the absence of scarcity.... (Via Techdirt.)

Has EMI Finally Heard the Music?

I'm not the biggest fan of private equity companies, but they do have the virtue of being ruthlessly logical: they are not enslaved by history, just by greed. That means they are not frightened of radical thinking or radical solutions if it brings them more of the foldable stuff. Thinking like this:

The record business - in which 85 per cent of artists are lossmaking and EMI pays £25m a year to scrap unsold CDs - "is stuck with a model designed for a world that has changed and gone forever", he says.

His solution is to switch from pushing CDs to pulling consumers towards music in different forms. One element will be focus groups. "People say the music industry is more creative and the customer doesn't know, only the creatives do.

"When you look at which car companies are succeeding it's the ones which work with their customers. Are clothes not creative? Is fashion not creative? Is food not creative? The only real difference is these industries have learnt to work with the customer and not force-feed them," he argues.

So, he seems to get the idea of listening to customers, which is good.

Surprisingly, he says that Radiohead, the band that ditched EMI last year to launch their latest album online, made the right choice. "Radiohead had the right idea. They understand their fans. They realise some of them want the premium box set. I'm one who bought one, and paid the full price. What Radiohead showed the industry was that it isn't one answer for all artists or indeed for every customer."

Which indicates that he also realises what the record business is really about: selling scarce commodities like analogue objects and unique relationships.

A Three-Dimensional Approach to Content Sales

One of the recurrent themes on this blog is the transition from a world of analogue content to one that is purely digital - and hence trivially copiable. The refusal of the media producers to recognise this shift is at the root of most of the problems they face in terms of declining sales and increasing unauthorised copying. Another recurrent idea has been the solution to this problem: to give away the digital but make money from the analogue.

Here's someone else with a nice observation that meshes with this perfectly:

Last Friday I was at a movie preview for a concert movie called U23D, which, as you will correctly surmise, was a U2 concert filmed in digital 3D.

A few weeks ago I saw the new film Beowulf, also in 3D.

As I look out the office window to the AMC Loews on 84th St, I see that the marquee is already pitching Hannah Montana 3d, not due out until February.

And outside that same theater is a 3d movie poster for the upcoming Speed Racer movie.

Suddenly everything is floating in space, after decades of flatness. What gives?

The answer?

Could it have something to do with the fact that a 3d movie cannot be pirated?

According to IMDB, the LA premier of Beowulf was on November 3, 2007 and the film was officially released in the US on November 16. On the other hand, according to vcdquality (a news site that announces the “releases” of films into various darknets) it was already available for file sharing by November 15.

Isn’t it just possible that the studios were thinking: Hey guys, I know you could just download this fantasy flick and see it on your widescreen monitor. But unless you give us $11 and sit in a dark theater with the polarized glasses, you won’t be seeing the half-naked Angelina Jolie literally popping off the screen!

Kids Today - The People Tomorrow

Nice story here:

I just could not find a spot on the spectrum that would trigger these kids' morality alarm. They listened to each example, looking at me like I was nuts.

Finally, with mock exasperation, I said, "O.K., let's try one that's a little less complicated: You want a movie or an album. You don't want to pay for it. So you download it."

There it was: the bald-faced, worst-case example, without any nuance or mitigating factors whatsoever.

"Who thinks that might be wrong?"

Two hands out of 500.

Now, maybe there was some peer pressure involved; nobody wants to look like a goody-goody.

Maybe all this is obvious to you, and maybe you could have predicted it. But to see this vivid demonstration of the generational divide, in person, blew me away.

I don't pretend to know what the solution to the file-sharing issue is. (Although I'm increasingly convinced that copy protection isn't it.)

Er, David, it's called changing the business model. It is just not sustainable to try to enforce analogue-type laws on digital content, and ultimately it's counterproductive - as the music industry is finding to its cost.

Sell the Analogue

This is what the film industry *really* makes its money from:

new research suggests that the presence of other people may enhance our movie-watching experiences. Over the course of the film, movie-watchers influence one another and gradually synchronize their emotional responses. This mutual mimicry also affects each participant's evaluation of the overall experience -- the more in sync we are with the people around us, the more we like the movie.

Note, too, that this is not something you can download and copy....

Kindling a Conflagration

There's one of Steven Levy's finer big pieces in Newsweek about Amazon's new Kindle e-book device. It all sounds pretty cool, but for me the real showstopper is the following:

Publishers are resisting the idea of charging less for e-books. "I'm not going along with it," says Penguin's Peter Shanks of Amazon's low price for best sellers. (He seemed startled when I told him that the Alan Greenspan book he publishes is for sale at that price, since he offered no special discount.) Amazon is clearly taking a loss on such books. But Bezos says that he can sustain this scheme indefinitely. "We have a lot of experience in low-margin and high-volume sale—you just have to make sure the mix [between discounted and higher-priced items] works." Nonetheless the major publishers (all of whom are on the Kindle bandwagon) should loosen up. If you're about to get on a plane, you may buy the new Eric Clapton biography on a whim for $10—certainly for $5!—but if it costs more than $20, you may wind up scanning the magazine racks.

What planet are these people on? Amazon is shipping electrons - well known for being rather cheap (here, take a few trillion for free). When you buy a book, you're buying mashed-up trees that cost something (which in fact cost rather more than you pay). E-books will never take off until publishers are prepared to throw their analogue business models on the fire.

Update: Almost needless to say, Kindle is powered by GNU/Linux.

In the Digital Age, Analogue Makes the Money

Further hints that the way to make money with digital content is to go analogue:

Why do so many people still love vinyl, even though its bulky, analog nature is anathema to everything music is supposed to be these days? Records, the vinyl evangelists will tell you, provide more of a connection between fans and artists. And many of today's music fans buy 180-gram vinyl LPs for home listening and MP3s for their portable devices.

"For many of us, and certainly for many of our artists, the vinyl is the true version of the release," said Matador's Patrick Amory. "The size and presence of the artwork, the division into sides, the better sound quality, above all the involvement and work the listener has to put in, all make it the format of choice for people who really care about music."

Yup, yup and yup.

A Taste(Book) of the Future of Publishing

Publishers continue to fret over their precious texts appearing online, worrying that there's no business model for them if the content is already "out there". Well, take a look at this for an alternative vision of publishing in the future:

TasteBook is a service that lets users take their favorite recipes from partner sites (starting with Epicurious) and create printed cookbooks that are delivered to them and/or friends. Users can add their own recipes as well, and customize the book with their name and other information. Blurb, which was recently in the news, is somewhat similar but does not focus on recipes.

I predict this will happen more and more, and publishers realise their job is about, well, publishing - producing objects with words in them. In other words, the money is in the analogue stuff - the digital you give away as promotion.

Out of the Mouth of Babes and Sucklings

Look, this content stuff is quite easy. It costs money to make a CD because it's a physical object, and if you take a CD from a shop, the shop no longer has it: that's stealing. It costs (virtually) nothing to make a digital file (electrons are cheap), and if you make a copy of a file, the original owner of that file still has a copy: that's not stealing (it may be copyright infringement, but that's another matter).

See, even nine-year-olds understand the difference:

TF. Do you think you should be paying for stuff off LimeWire? You have to buy CD’s from the shop…

- You have to pay for CD’s because they’re actually on a disc not on the computer. My cousin, right, she uses LimeWire when she doesn’t have any money for CDs.

Simple.

It's Up to Us

Radiohead has a new album that you can download - and choose how much you pay. Alternatively, it has a CD version, two vinyl records, an enhanced CD, artwork, photos and lyrics, all supplied in a hardback book and slipcase for £40. Oh, and you get the download thrown in for free.

In other words, as I've said many times before, the digital is the marketing for the analogue, which is where you make your money (since it's currently hard to make perfect copies of analogue goods).

This is the future - it's just unevenly distributed. Let's hope people support this move and that the future spreads.