The Geodesic Marketspace

R. A. Hettinga rah at shipwright.com
Thu Aug 14 17:29:51 PDT 2003


You probably want to see the web-page, to look at the pictures. No. Not *those* pictures...

:-).

Cheers,
RAH
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This Issue: August 14, 2003 



INDUSTRY TRENDS 
by Jason from ImageAuction 

The Geodesic Marketspace 

Nineteen ninety four seems like forever ago in Internet years, but this was the year that John Perry Barlow published his seminal work, "The Economy of Ideas" in Wired 2.03 1.  That article has haunted me ever since I read it.  Still considered heresy by most people, Barlow believed you couldn't contain the torrent of digitized content unleashed on the Net, nor was it even appropriate to try. "How do you sell wine without bottles?" he posed.  The very nature of digital content demands a new approach. 

The problem lies in this limited span of time in the course of human civilization where we have contrived the concept of intellectual property and copyright 2.  At a time when it was relatively difficult to manufacture copies of works of art, the idea of granting copy monopolies to the creators seemed like a natural business model, and thus was created this legal concept of "copy"right.  This worked well when one could control the tangible manifestations of an idea (a book, a record, a movie) but as Thomas Jefferson eloquently stated, "an idea, once divulged cannot be exclusively possessed." 3

We are now at a crossroads where digital media, unlike its analog predecessors, exhibits more of the properties of ideas than items. "Music as a packaged-goods business is over", the chairman of Sony recently said. "What [do] you do now?", Jefferson, in his letter to Isaac McPherson Monticello, alludes indirectly to a possible solution. 4

One characteristic of an idea that Jefferson describes is "that no one possesses the less, because every other possesses the whole of it."  Translated to relate to modern digital media this means that when I make a copy of a digital file, you can have a completely unadulterated copy without detrimentally affecting my copy.  This essential and natural characteristic of digital media's existence is exactly what threatens the copyright model to which the entire information industry is so addicted. 

Jefferson continues, "an individual may exclusively possess [it] as long as he keeps it to himself."  The onus is therefore upon the original creator to extract the highest possible value before releasing it.  Once released, the market will continue to distribute the information in the most optimized and efficient manner. 

This manner was described by Peter Huber is his landmark 1987 Justice Department report on competition in the telephone industry entitled "The Geodesic Network" .5Huber was talking about the cost of phone switches and basically foretelling the packet switching architecture the Internet uses today as opposed to the hierarchical circuit switch network that phone networks operated under in the past.  But, as it turns out, the term geodesic network is also an apt description for an optimized information network.  Information will travel through that network with the path of least resistance.   Resistance, or network friction, can appear in many forms. One famous quote dating from early in the growth of the Internet goes, "The Internet sees censorship as damage and routes around it." 6Copyright is a legal grant to impose a form of censorship and adds friction to the information network. 

Clear examples of geodesic networks in action can be found by looking at peer-to-peer trading systems and email communications.  How many of you receive funny images or jokes from friends via email?  The point is these images aren't distributed on a website by some monolithic media giant but from person to person (node to node in network parlance) more like a spreading virus.  One only needs point to the success of computer viruses and the attraction of viral marketing to understand the efficiencies that a geodesic network possesses. 7

The business model that the media industry currently employs is based on an attempt to impose a false scarcity and thus make money on the friction in the network.  Many people equate this perceived scarcity with value, hence the desire to have exclusive or semi-exclusive ownership.  But if we look not at the value of the information passing over that network but rather the connections in that network, we get a different picture of how to generate revenue. 

The connections represent relationship, and the value of that relationship is based on the reputation of the nodes being connected.  That reputation, in turn, is based on the differential of the exchange (where one side might be in the form of money and on the other in the form of content: pictures, music, etc).  With each additional transaction the strength of that connection (relationship) increases or decreases.  In simplified terms, with each positive transaction the supplier can extract an ever-higher premium from the buyer, not based on the value of the information in the new transaction but rather the value of the established relationship.   This relationship can also be viewed as a form of brand identity. 

As an example, the New York Times is well known for its high journalistic standards.  Jason Blair not withstanding, people would be willing to pay a higher premium for a story coming from the NYT as compared to say Joe's Newsletter because of the value of the established trust.  The stories coming from these two news sources could be exactly the same, word for word, but the NYT can extract a premium not because of any intrinsic, underlying or scarcity value in the content but because they have brand equity and reputation. 





Under the most common model employed today (see diagram) in the adult entertainment industry, content generally passes from producer to broker who pays a royalty to the producer.  The content then passes from broker to paysite operator who usually pays a flat licensing fee.  At this point the paysite operators try to attract people (eyeballs) through affiliate programs or advertising to pay for the content usually under a subscription model. They hope that the exclusivity or semi-exclusivity of the content encourages would-be patrons to join. 

There are many problematic issues with this model: 
1) It may take the producer months or even years of licensing fees to recuperate its investment and earn a desired profit; 
2)  The broker may not offer enough licensing options or the appropriate options for all cases; some websites may only want it for one site, some for 20, some for banners and some may want to give the content to affiliates; 
3) The subscription model, employed by paysites, has a fundamental flaw.  One month's subscription fee does not usually cover the cost the subscriber imposes on the website in terms of customer acquisition, content and bandwidth.  Unlike a health spa, for instance, which can rely on a binding long-term contract, a website is at the whim of the consumer (and credit cards) to cancel their subscriptions.  As anyone who has been in this business long enough knows, the average subscription length per customer has been getting steadily shorter; 
4)  Finally, the subscription model also fails to exact payment when users share content either through download and retransmission or through direct sharing of usernames and passwords. 





The geodesic distribution model that I'm proposing here relies on extracting value at each transaction as content gets pulled out by the consumer rather than trying to pull the eyeballs of the consumer to the content.  Any value in the content that is not extracted at the time of purchase builds up as reputation capital and brand equity. 

The original producer sells his content to a group of value added resellers (VARs) for a price that the market dictates.  These VARs then repackage, re-purpose, merge, sort and manipulate the content in various ways to add unique value that other VARs of the content don't.  Some examples include retouching photos and removing blemishes, taking raw video footage and editing it with sound for a more professional look, or using the content in a compilation such as an e-zine.  Those VARs then sell to other VARs who then take their content and use it further, creating localized versions, compiling groups of similar content, etc. Imagine, instead of just a director's cut to a movie, you had hundreds of different viewpoints each providing a slightly different take on the movie based on the particular market served. 8

At each transaction, the seller tries to maximize the value of the sale.  Buyers reward quality sellers with a higher reputation, again brand equity, and tend to buy from those sellers over and over again.  At some point the content is sold to consumers by an aggregator/distributor who sells it on a cost plus basis, namely the cost of acquisition, storage and transmission plus a surcharge based on their reputation or brand.  This may be a subscription model but more likely is a system priced on downloads (since the costs, such as storage and transmission, are measured in bits). 

I'm not advocating a pay per picture system per se.  Try to think outside the website box and imagine a Kazaa/Napster type network where you could search for free and get unreliable low quality results or search only reputable dealers where you are willing to pay a slight premium.  The reputation may be individualized and based on your personal experience or could be community based like Ebay's feedback system. The higher price you're willing to pay per MB downloaded the higher quality results you would expect. In turn, the Aggregators you are purchasing from, wanting to keep you paying a premium, must constantly find new content to keep you returning to them.  They will continue to purchase from trusted VARs with each positive transaction strengthening that trusted relationship and increasing the premium that VAR can expect to earn on the next sale.  This strengthening of the reputation works its way back through the network to the original producer.  Value is no longer in the content but in the ability to continually and consistently produce content. 


1 Wired 2.03 Mar 1994 "The Economy of Ideas" - The article has been republished in other forums as "Selling Wine Without Bottles: The Economy of Mind on the Global Net" 
2 The first copyright act was the British Statute of Anne 1710 
3 "If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation. Inventions then cannot, in nature, be a subject of property." - Letter to Isaac McPherson Monticello , August 13, 1813 
4 Business 2.0 July 2003 "Can Sir Howard Save the Music Biz" 
5http://www.phuber.com/huber/geo1/geo1.html 
6 Attributed to John Gilmore 
7Geodesic n. "The shortest line between two points on any mathematically defined surface." The term geodesic network is not meant to describe the shortest physical path of data over physical wires but a description of the topological properties of the information flow.  In other words, I may not have physical network connections to the people in my email address book or the contacts on my ICQ list but I act like a network node when sending information to them. See also Bob Hettinga "What's a Geodesic Economy?" 
8ClearPlay is a company trying to do this within the confines of the current copyright laws.  It offers filters for popular Hollywood movies removing objectionable material.  They do this slyly without actually making a copy of the original movie but relying on a player that skips, pauses and bleeps out objectionable material.  Obviously Clearpay's definition of objectionable may be different than someone else's but then someone else could capitalize on that and create a new product to serve a slightly different market. 



Jason is President of EOE Inc, which has been in the adult Internet industry since 1997 creating several award winning sites such as boobscan.com and puritytest.com.  EOE Inc now runs www.imageauction.com , which employs a revolutionary patent pending auction system allowing content producers and value add resellers to maximize their revenue in the new geodesic marketspace.  Current projects in the works include a service for 2257.com to help custodians keep offsite backups of their records required under Title 18 Sec. 2257.  Jason can be reached at support at imageauction.com .



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R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
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