Thursday, February 11, 2010

Electronic goods markets: end-to-end wins?

Hypothesis: As industries of cultural production adapt to digital distribution, content publishers in each industry will follow, with minor variations, the four-phase pattern set by the music industry:

  1. Denial: Publishers pretend that digital distribution does not exist, attempting to salvage business models based on distribution of physical media. In some cases, publishers use the legal system to try to make this fantasy a reality. Regardless of the legal outcomes, this proves unsustainable in the long run. During this phase, publishers may make halfhearted forays into digital publishing, which invariably fail because they are deeply and deliberately user-hostile.
  2. Faustian Bargain: A technology company designs a system which disguises computers' fundamentally general nature with a fig leaf of DRM. The disguise allows this company to strike a deal with major content publishing cartels to distribute content. Because a technology company has taken control of the technology, the system finally works in a way that doesn't make customers want to tear their hair out. The DRM system fails to prevent widespread copyright infringement, but it provides a hook for the technology company to build a vertically integrated stack which is somewhat inconvenient for customers to exit.
  3. Clash of the Titans: Publishers realize that they are in a weakening bargaining position with respect to the technology company, which has acquired considerable monopsony power due to its control of the platform. Publishers butt heads with the technology company over prices and other contractual terms. This, too, proves unsustainable.
  4. End-to-End Wins: Publishers realize that architectures which embed control in the distribution mechanism put more power in the hands of middlemen than endpoints. Conversely, end-to-end architectures, wherein the endpoints negotiate the transaction and any number of interchangeable mechanisms carry data between them on a best-effort basis, place power in the hands of endpoints rather than middlemen. Publishers furthermore realize that publishers and customers are the endpoints; that in the long run both are best served when the customer can purchase a bundle of data which is not bound (even weakly) to the sales channel, the software stack, or the physical device, all of which are intermediaries between the content and the customer. Publishers finally offer their content in a portable format via multiple sales channels.

This is just a hypothesis. I'm not sure I believe it. However, as evidence that expecting the final stage is not laughably utopian, I offer Sony and Warner's deals with eMusic and the introduction of MP3s on iTunes as evidence that stage 4 is already happening for music.

Detailed application of the above model to current hoopla in the e-book market left as an exercise to the reader. However, I will note that one reason I bought a Kindle is that I thought book publishers were so ornery, retrograde, and technophobic that they'd never progress to stage 4 unless they had an obnoxious would-be monopsonist (viz., Amazon) to frighten them through stage 3.

(A counterpoint to the above argument would be to observe that certain goods, like streaming video and computer games, appear to be evolving in the direction of fairly strong architectures of control. Neither Netflix streaming nor Steam give you much freedom w.r.t. your "purchase". It's unclear whether this means their respective markets haven't progressed far enough yet, or there's something fundamentally different about these media.)


  1. I have no idea what you're talking about above, sadly. (I'm a novelist and science is Greek to me. (Actually Greek is Greek but you get my drift.) Just stumbled on an earlier post of yours about online dating and wanted to say thanks for the coherent breakdown of the OKcupid study. At least now I know I'm not crazy. (John Mayer anyone?)

  2. Neither Netflix streaming nor Steam give you much freedom w.r.t. your "purchase".

    My experience with Steam contradicts the usual (dominant?) "Steam is restrictive" narrative. There are at least some cases were it offers more freedom than the disc-in-a-box experience. (Indie developers tend to agree, but your comment was about the customer side of things so I'll not veer too far off topic.)

    I play games almost exclusively on my PC. I got a hankering for some Tropico 3 while on an extended visit out of state. I was able to boot into Windows on my Macbook Pro, install Steam, login, download and install the game, and play to my dictatorial heart's content. I didn't have to remember to bring any games with me beforehand. I didn't have to call up Valve and give them my Social Security number before installing the game on a second machine. I was able to summon my purchase out of the ether and install it on a new system on a whim. (Download times notwithstanding.)

    I don't think this somehow excuses the terrible experiences some people have had with Steam. I just think that Steam gets more hate than it deserves.

  3. Funny your mention of Netflix. I work for an ebook site (Teleread) and the editor, founder and most of the contributor are violently opposed to DRM. At the same time, all three of us own a Roku, which lets us stream encrypted video onto our televisions. We enthusiastically love Roku and Netflix's solution, but we recognize the contradiction in our positions. I think it has to do with the fact that films are more expensive to produce and we only need to watch them once (unlike mp3s for example). Also streaming seems more practical for video anyway. Ppeople are more conservative in their film tastes than in any music or books.I.e., we prefer to watch recognizable titles. Another reason is that there's not a decent supply of full length public domain/creative commons films to sustain an alternative DRM free channel. Although the quality of the writing and creativity of CC films might compare favorably to Hollywood films, the production values just don't come anywhere close.

    The question become could a video streaming solution have come about without DRM? my guess is no.