The Long Tail

Atomic history on Google Earth

[As I race to finish the book by Monday (!), here's a random but fascinating thing that popped in my alternative universe of aerial robotics. It's a post from a brilliant but eccentric engineer who goes by the name of Jack Crossfire. What follows are his words and images (I haven't verified them) - ca] 

Everyone's seen the Nevada nuclear test site on Google Earth:

 

And everyone's seen the videos & photos of operation Desert Rock IV in 1951, where soldiers happily watched a 21 kiloton nuclear explosion from trenches 4 miles away & sitting positions 7 miles away:

 

 

But on Google Earth you can see remains of trenches 2 miles from an explosion. Google doesn't have any any photos or videos of this experiment, Desert Rock V, except for these haunting remains on satellite photos:

 

Soldiers were placed 1 & 2 miles from a 43 kiloton explosion. Needless to say, most of them are no longer with us, but through the magic of Google Earth, you can see the eery remains of their trenches:

Gilder at his prime

My least favorite question is "what's the next big thing in technology?" for a lot of reasons, from the excessive importance put on "big things" (whatever that means) to the small matter that I still can't predict the future, despite many years of fruitless practice.

What I usually say is that the industry I'm watching most closely these days is energy, not IT, and that not only do I not expect a new "big thing" in IT anytime soon, but we're still just figuring out how to absorb the genuinely revolutionary advances of the 1990s. It's hard to look around at the Web landscape today, from cloud computing to social networking, and see anything that wasn't at least sketched out a decade ago.

With that in mind, I happened to be reading a 15-year-old interview in Wired between Kevin Kelly and George Gilder, and it struck me as profound today as it was then. (Recall that this is before the Web!). Gilder has always been something of a hero to me, and it was delight to be reminded why. Choice quotes:

Gilder anticipating "Free" and, while he's at it, YouTube:

In every industrial revolution, some key factor of production is drastically reduced in cost. Relative to the previous cost to achieve that function, the new factor is virtually free. Physical force in the industrial revolution became virtually free compared to its expense when it derived from animal muscle power and human muscle power. Suddenly you could do things you could not afford to do before. You could make a factory work 24 hours a day churning out products in a way that was just incomprehensible before the industrial era. It really did mean that physical force became virtually free in a sense. The whole economy had to reorganize itself to exploit this physical force. You had to "waste" the power of the steam engine and its derivatives in order to prevail, whether in war or in peace.

Over the last 30 years, we've seen transistors (or switching power) move from being expensive, crafted vacuum tubes to being virtually free. So today, the prime rule of thrift in business is "waste transistors." We "waste" them to correct our spelling, to play solitaire, to do anything. As a matter of fact, you've got to waste transistors in order to succeed in business these days.

My thesis is that bandwidth is going to be virtually free in the next era in the same way that transistors are in this era. It doesn't mean there won't be expensive technologies associated with the exploitation of bandwidth - just as there are expensive computers employing transistors; but it does mean that people will have to use this bandwidth, they'll have to waste bandwidth rather than economize on bandwidth. The wasters of bandwidth will win rather than the people who are developing exquisite new compression tools and all these other devices designed to exploit some limited bandwidth.

Kelly asks "What is the fabric of the network?"

Photons. Electronics are not good for communications. Photons - optical computing - are. What makes photons so great for communication is they don't interfere with each other. They collide and pass on unaffected. You can send them two-way, and they are not subject to electromagnetic disruption. Many signals can flow through one fiber. But the fact that photons don't affect each other means they are cumbersome for computing, since you want interactions in computing. You need to have the charges affect one another - that's the heart of computing. The heart of the transistor function is that you can control a bigger force with a smaller force. But photons don't control each other. So for computing functions I still think that electronics will prevail; but for communications, photonics will prevail.

Best quotes from Lessig's "Remix"

Just flew to Barcelona (next stop Lisbon, then PopTech in Maine) and on the plane I had a chance to read Larry Lessig's terrific new book, Remix: Making Art and Commerce Thrive in the Hybrid Economy. I think of it as something of the closer to his Creative Commons trilogy, which started with Free Culture and the The Future of Ideas.  As such, it's a capper to his decade of thinking and experimenting with ways to liberate human creativity from the dead hand of one-size-fits-all intellectual property law. It's an important book, just like his famously entertaining speeches, and a quick read that can be finished in an evening.

Here are some of my favorite quotes from Remix:

On the two economies, "commercial" and "sharing", and why money changes everything:

It would be very odd if a friend apologized for missing lunch and offered you $50 to make it up. And it would very, very odd if your girlfriend, at the end of a great date, offered you $500 to spend the night. Or if Wal-Mart asked all customers to 'pitch in and help Wal-Mart by sweeping at least one aisle each time you shop'. Or if McDonalds asked you to 'help out' by promising to buy hamburgers at least once a month. Money in the sharing economy is not just inappropriate; it is poisonous. And 'helping out' is not just rare in the commercial economy. It is downright weird."

On the natural coexistence of monetary and non-monetary economies:

No one is called a communist because he plays in a Thursday-evening softball league (competing with professional baseball) or helps clean up the local church (competing with the janitor of the church).

On how free things can sometimes be seen as superior:

For all of Wikipedia's flaws, the one thing people don't say is, 'Well, I don't trust Wikipedia because it's basically all advertising fluff.' Forgoing ads is a way to buy credibility, just as a judge forgoing bribes is a way to buy credibility.

Does the Long Tail work for mobile music?

Apparently not, at least not with the current generation of phones that make music discovery difficult. From our Listening Post blog:

Frank Taubert, CEO of 24/7 Entertainment, which provides 4.5 million songs to a wide variety of digital music services including the unlimited mobile music services Omnifone, toldPopkomm attendees on Monday  that a full 66 percent of those songs had never been purchased or downloaded -- not even once.

So does that say something about the limitations of devices or does it reflect consumer demand? It appears it's more the former. Online, with all the tools of the web (search, sample, recommend, and other social tools), the Long Tail is alive and well, according to eMusic, who responded to Taubert's data to say that their own experience was very different.

Three quarters of eMusic's entire four million track catalog sells at least once every year, or to put it another way, we sell more than 50% of our catalog at least once every quarter," according to Madeleine Milne, Managing Director of eMusic Europe. "Music discovery on mobile devices may not be supporting long tail sales but the new digital music consumer is web savvy, and turns to social networks, blogs and the web to find out about new music. This is further evidenced by Entertainment Media Research's Digital Music Report 2008.

The lesson? More evidence that a Long Tail without good filters is just noise.

The vanishing point theory of bad economic news

The closer something is to you, the more you care about it and the more you know about it. I've called this the "Vanishing Point Theory of News" before, and for the last year or so I've been testing it on the economy.  Everywhere I go, I ask the CEOs I meet the same two questions: 1) What do you think is going to happen to the economy over the next year? 2) What do you think is going to happen to your own company?

The answers to the first usually range from dark to darker: 1970s recession, Japan's lost decade, 1929, etc.

The answers to the second are invariably brighter, ranging from the private equity guys ("we're sitting on billions of dollars of  'dry powder', and the valuations are now incredibly attractive") to non-financial industries from electric cable to, yes, real estate, where without exception everyone I've talked to thinks their own company is going to outperform the economy.

Now you could say this says more about the people I'm talking to than it does about the country at large. But what if this is actually a widespread phenomena, where most CEOs think they're going to do better than the economy as a whole? (AKA the Lake Woebegone effect?)

(Note: this is not the same as the question the Conference Board asks in its CEO Confidence Survey, which is about absolute rise or fall in profits, not performance relative to the overall economy)

I think you can only draw two conclusions:

1. CEOs are very good at misleading themselves
2. At the micro level, the economy looks better than it does at the macro level.

Either way, it seems clear the closer people are to the facts, the better they tend to feel about the market (with the possible exception of those in the financial sector itself, where what's become clear is that even the experts didn't have a grasp on the facts).

What's most scary about financial markets is how much we don't know about risks and consequences. But as we map the turmoil back to our own industries, we get better at calculating those risks, and this looks less like the Great Depression and more like a cycle, albeit a nasty one, and we actually know how to steer through those.

Thus, the "Vanishing Point Theory of Economic Predictions": in a downturn, the further away an object is, the worse it looks.

What recession means for free

I get asked this all the time these days, so before I crash after a speaking tour of Latin America (eight cities in four days!), here are my thoughts on what a recession will mean for free-based business models.

First, let's confine this to online, which is where the most interesting free models are. There are three main forms of "real" free: Ad-supported, "Freemium", and the Gift Economy. Here how I think each will be affected:

• Ad-supported: In the offline world, advertising is going to go down. Online, where it's easier to make the case for clear ROIs, I suspect advertising growth will continue to be positive, but will slow considerably. That means that many of the companies that were counting on a rising tide lifting their boats will be disappointed, and more than usual will go bust. Result: Negative
• Freemium: This should become the favored model, since it's connected to direct revenues. But companies that have only worked out the free part but not the premium part are going to have to figure out what they can add to their products to make them compelling enough to pay for. If they don't, they will find their investors' patience with them is very limited, and many will fold. Those that get the freemium balance right should be fine: free is a good price to have when people don't want to spend, and freemium models can work well when just 5% of users convert to premium, thanks to the near-zero marginal costs of serving the other 95%. Result: Modest positive
• Gift economy: This is driven primarily by people's "spare cycles" (AKA cognitive surplus) and rising unemployment means more spare cycles, sadly. Obviously people still need to pay the rent, so many of these shared contributions are really just advertisements for the contributor's skills. But other contributions will be idle hands finding work while they look for their next job. As a result I think you'll see a boom in creativity and sharing online as people take matters into their own hands. Today, if you're in-between jobs you can still be productive, and the reputational currency you earn may pay dividends in the form of a better job when the economy recovers. Result: Positive

Agree? Disagree? The comments are open.

Best advice I've heard all week

What should you do amidst financial turmoil?

"Put wax in your ears. People are more afraid of flying than driving because the press does not report car accidents. I never watch the news. Only listen to news you get in a social setting, the things people talk about. Our brains cannot deal with the overload of information. Having a lot of data is not good for anyone trying to make a decision."

Nassim Taleb, quoted in an interesting article (sub required) about why we're so bad at putting bad news in context. Found in an old (Aug 30) issue of New Scientist that I was reading on the plane back from Brazil today.

A tour of free, Safeway version

Sent to get a gallon of milk at Safeway, I decided to take a picture of every example of "free" that I encountered as I walked through the aisles and into the parking lot. There were lots of repetitions of things like "buy one, get one free", but here's one example of each kind I saw. This being a supermarket, the canonical "atoms economy" example, almost all fall under the Free 1 category.

(Note: the Ultra II Free detergent is actually a different use of free: it's "perfume free")

 

The biggest fortunes built on free

From the Forbes 400 list, the following are the billionaires who made their money on businesses whose products are primarily free to consumers:

(Note: I didn't include diversified media tycoons, such as Rupert Murdoch and Barry Diller, even though much of their business is free-to-air broadcast and web media. That's because it's too hard to separate the free bits from their pay-media businesses, or to say which is bigger.)

#13 Sergey Brin $15.9 billion, Google

#14 Larry Page $15.8 billion, Google

#54 Pierre Omidyar $6.3 billion, eBay

#59 Eric Schmidt, $5.9 billion, Google

#155 Oprah Winfrey, $2.7 billion, free-to-air TV

#161 Mark Cuban, $2.6 billion, Broadcast.com

#246 Omid Kordestani, $1.9 billion, Google

#246 Joseph Mansueto, $1.9 billion, Morningstar (freemium investing services)

#281 David Filo, $1.7 billion, Yahoo

#281 Jerry Yang, $1.7 billion, Yahoo

#281 Kavitark Ram Shriram, $1.7 billion, Google

#321 Todd Wagner, $1.5 billion, Broadcast.com

#321 Mark Zuckerberg, $1.5 billion, Facebook

#377 Peter Thiel, $1.3 billion, Facebook, Paypal

Add it up and that's more than $62 billion of net worth built on free. And that's just within the top 400 Americans.

FREE: the cocktail party version

When you're writing a book you need to have your elevator pitch down or "What's the book about?" will become the most dreaded four words you can hear (followed closely by "how's it going?").

Obviously the one-sentence version of the answer should be something close to the book's subtitle. But I haven't nailed that one down yet, so these days I just say "The economics of zero dollars and zero cents" and hope for the best. Some people glaze over and move on at that point, but for those who stop, intrigued, and ask me to explain, here's what I say:

We all know free--it's a trick that marketers use. But free is changing. When you think about it, there are two economies, one of atoms and one of bits. In the atoms economy, which is to say most of the stuff around us, things tend to get more expensive over time. But in the bits economy, which is the online world, things get cheaper. The atoms economy is inflationary, while the bits economy is deflationary.

The 20th Century was primarily an atoms economy. The 21st Century will be equally a bits economy. This book is about the differences between 20th Century free and 21st Century free--free moving from a marketing trick to a new economic model.

Anything free in the atoms economy must be paid for by something else, which is why so much traditional free feels like bait and switch--it's you paying, one way or another. But free in the bits economy can be really free, with money often taken out of the equation altogether. People are rightly suspicious of free in the atoms economy, and rightly trusting of free in the bits economy. Intuitively, they understand the difference between the two, and why free works so well online.

Today the online world is a country-sized economy built of free. The most interesting business models are in finding ways to make money around free. Sooner or later every company is going to have to figure out how to use free or compete with free, one way or another. My book is about how to do that.

A revizualization of the four kinds of free

When I posted on my taxonomy of free, I asked for help in designing it better. David Armano, VP of Experience Design with Critical Mass, responded with the below, which is a clear improvement over my original. Thanks, David!

 

 

(My only modification would be to reflect that the non-monetary rewards in the Free 4, the Gift Economy, can be more than just reputation. There's attention, expression, etc.)