Chatalas Shrugged

The Internet is having a profound impact on society and culture. We are communicating in a more open and efficient manner thanks to this technology. And as a result we are on the precipice of revolutionizing the world’s economic and political systems.

This is the premise of Yochai Benkler’s classic and influential book, “The Wealth of Networks.” His tome, published in 2006, touts the emergence of a “networked information economy” that is shaping the way in which we create and share, and its far-reaching consequences.

Benkler explains that the world has moved to an economy based on the production of information (software, science, financial, services) and culture (music, writing, film). And it is our use of the Internet (which Benkler describes as a “communications environment built on cheap processors with high computation capabilities”) that allows us to produce information in an interconnected and decentralized manner.

These changes have fueled what Benkler describes as “commons-based peer production,” which features collaboration and creativity that is easily disseminated. Benkler claims this will replace the industrial production methods that dominated the 19th and 20th centuries. No longer will we rely upon monopolies to supply us information goods; instead we will do it ourselves. Printing presses, cable and satellite systems, and proprietary rights will give way to non-market social production, practiced and shared by millions worldwide via the power of the Internet.

Where all this is leading, Benkler posits, is toward making “the 21st century one that offers individuals greater autonomy, political communities greater democracy, and societies greater opportunities for cultural self-reflection and human connection.”

It’s quite an ambitious blueprint.

Certainly much of what Benkler writes rings true. The economic traits of information apply seamlessly to peer production, including low marginal costs, large-scale consumption, and widespread availability. Benkler is also correct about our transformation from an industrial economy that is centralized and mass-market-based to a networked version that is interconnected and distributed. This sea-change is threatening entrenched business models and corporations.

Media companies, in particular, are suffering. We no longer just consume media, but now we also create and share it, and that has caught the old-guard off-guard. For decades these companies relied upon wealth, political influence, consolidation, and copyright law to stave off competition and solidify profits. But these techniques aren’t as effective any more due to the sheer scale and democratizing power of the Internet.

Examples of how social production is altering the media landscape are in abundance: the CraigsList marketplace has obliterated newspaper classified advertising revenues; blogs have given everyone the opportunity to have a voice; cheap video cameras and platforms let everybody be a film-maker or talking head; and collaborative efforts have led to open-source software creation and a community-based encyclopedia.

Subsequently we’ve seen media companies buying up tech firms and products, supporting Benkler’s inference that monopolies will typically act in self-serving fashion rather than for the common good. As their business models are failing, newspaper giants such as Gannett, Hearst and others have purchased or invested in digital properties like E-Ink, Adify and CareerBuilder.com hoping to alter their dire prognosis.

Benkler champions an open marketplace that isn’t driven by monetary considerations, but he also acknowledges that the infrastructure can be costly. Social production may be free, but not the cables, switches, and microprocessors that are necessary to a networked economy.

For all of Benkler’s forceful and enlightening insights, though, his over-arching view is utopian. And herein lies a problem: idealism is admirable, but usually unattainable.

Benkler envisions a world where the masses come together and create for free in a new economy based on decentralization and distribution. In turn, he believes this will revolutionize the way business is conducted, how society communicates, and how government works. While some of this may seem plausible, societal and economic realities would seem to make the dream elusive.

Specifically, his assumptions about non-monetary rewards give pause. Benkler feels that community members will be guided by altruism. But it is ingrained in society that we will be paid for our work and expertise. I don’t see desire for money disappearing in a networked economy. That which we produce will eventually be driven by a profit motive.

Benkler contends that a decentralized approach to production will succeed outside a price system. However, this is more likely because the market has yet to fully evolve. YouTube, Facebook and other social production sites are wildly popular, but they are still desperately seeking ways to make money. Creators seem to be biding their time until monetization occurs.

Going further, amateur production will gradually lead to specialization and commercialization. Radio played this song before; it began as an amateur endeavor, but eventually gave way to a set of radio stations that could better serve a growing audience. Similarly in this era we’ve already seen bloggers create successful business ventures and networks.

Even in Benkler’s writings we see examples of monetary motivation. Among his strategies for the production of information, Benkler describes the Scholarly Lawyer who gives speeches or writes articles for free, but mainly to enhance reputation and thus opportunity for financial gain.

Another of Benkler’s claims, that production will proliferate without managerial structure, invites scrutiny, too. As entities grow, structure will necessarily become part of the equation. Look no farther than some of the darlings of social production: Wikipedia has implemented some hierarchy to improve its quality, and open-source software production utilizes a management framework. Autonomy may be a hallmark of social production, but there’s nothing wrong with being well organized.

At times Benkler’s overly pedantic prose can obscure his message. But his 515-page treatise nonetheless provides tremendous observation and analysis.

“The Wealth of Networks” is a groundbreaking book covering the repercussions of the Internet on society at large. While Benkler may overestimate the influence that social production will have in transforming the world, he still builds a convincing case by connecting current trends to larger ideals. In that regard, the book remains required reading for understanding the relevant issues of today’s networked economy.

It’s been said that the best things in life are free. Chris Anderson sings this tune in his book “Free: The Future of a Radical Price,” saying that not only is “free” great for consumers, but a necessity for business in the digital era.

As the editor of Wired magazine, Anderson has had a front-row seat for the technological revolution of the last couple decades. His 2006 book, “The Long Tail,” surmised that digital technology was toppling standard business convention. Specifically, because of high costs of marketing and distribution, brick and mortar companies have relied on selling massive quantities of a few hot products. But thanks to digital tools, these marginal costs are significantly lowered, allowing companies to sell smaller amounts of many different items and still make money.

“Free” is a continuation of Anderson’s general themes of “Long Tail”: the positive economic effects of digital technology on society and business. Here he argues that offering stuff for free is a savvy and inevitable move.

Anderson understands that his thesis runs counter to traditional economic theories. “It doesn’t take a PhD to understand why Free works so well online,” he writes. “You just have to ignore the first ten chapters or so of your economics textbook.” He seems to relish his role as a rabble-rouser, and heaps praise on successful practitioners of “free,” from Gillette to Google.

The economics of production have indeed been turned upside down by digital media. At the heart of this transformation is the sharply decreasing price of technology: processing power, storage and bandwidth. As a result, the marginal costs of copying, sharing and distributing are next to nothing.

Thus, he reasons, these low marginal costs, combined with the psychological appeal of a zero price point, make “free” a winning proposition. In turn, Anderson argues, businesses that learn to accept and maximize “free” are going to find success. The book goes on to lay out the ways this is being practiced, and cites cases where companies are using “free” as part of their business models.

So far advertising is the most prominent method of monetization. There’s a lot of free information on the Internet these days, content that attracts viewers with specific interests and needs. And advertisers are paying to reach these coveted audiences. Besides the standard display ads to which we’re accustomed, many creative approaches to online advertising have taken hold: pay-per-click text ads, affiliate ads, site sponsorships, paid listings in search results, and more. Google is the leader in translating its page views to cash; its services and products are offered gratis, and the money comes from advertising.

“Freemium” is another popular model, in which some content is free, but there are charges to access enhanced information and services. Several online publications, including The Wall Street Journal, Congressional Quarterly and Consumer Reports, and niche sports sites such as Rivals.com, are successful with this hybrid approach; free content generates interest, but if you want the really good stuff you’ll need to pay. Flickr and Craigslist give away services, but charge fees for what they deem premium services.

Anderson doesn’t limit himself to information products in explaining why Free is so dynamic. He points out that Zappo’s and Amazon use the power of free shipping to encourage purchases, and studies have shown it works.

What becomes obvious while reading the book, though, is that these common approaches to monetization aren’t really all that unique. Advertising revenue subsidizing free content has long been the strategy of publications, radio and network television; bring in as many people as possible, and charge high ad rates. Freemium, too, is merely a derivative of subscription publications and cable television. And using “free” as an enticement to buy a product is a time-worn strategy.

And while the book celebrates “free,” others curse it. In particular established media companies have struggled in the online era. They’ve offered their content for free, but the ad dollars haven’t proven to be particularly lucrative. Classified advertising, a cash cow for newspapers for decades, has become a skinny source of revenue as those dollars have fled to free online classifieds sites. Meanwhile, the one product you would think the media should be able to convert to cash, content, instead is being poached and monetized by Google and other aggregators. Media companies are actually failing, in part, because of their embrace of “free,” and the book doesn’t reconcile that conflict.

So as the book claims that there’s a lot of money to be made by charging nothing, this isn’t necessarily proving to be the case. And “Free,” while making its points, doesn’t really address where the money is going to come from over the long haul either. When it comes down to it, Facebook, YouTube and others mentioned in the book aren’t yet making a whole lot of money on their free offerings. Anderson concedes as much in the pages of “Free,” noting that while anybody can incorporate it, “typically only the number one company can get really rich with it.” Google is proving to be that exception, a company that is raking in big bucks in the era of free. But Google’s CEO Eric Schmidt is also quoted in the book, expressing concerns about the free model on the larger marketplace; free does work fine for his company, “and not well enough for everyone else.” That said, considering Google’s remarkable innovation and products, one might even question whether free is the reason Google is succeeding.

The book is at its best in providing historical context to “free,” and tying it gracefully to the present. And it does an excellent job explaining the basics of “free,” and demonstrating how prevalent it truly is today. However, unlike its cover claims, it doesn’t really examine the future of “free.” Free offerings may still be an interwoven element of our digital economy going forward; but without insight into its future I’m not convinced “free” will be the backbone Anderson believes.

Anderson, Chris.  Free:  The Future Price of a Radical Price.  New York:  Hyperion, 2009.