2010. január 11., hétfő

Giving It Away, Making Money (2008)

The burgeoning "Internet Economy" is redefining operational assumptions and models for all organizations within the public and private sectors. This is particularly evident as free access to information increases and the clash between open source and proprietary development of software intensifies. But the transformation underway does not stop in the realm of bits and bytes; it is spilling into the traditional mainstays of agriculture and all types of industry and threatens to alter our most basic tenets of how to market, value, and receive compensation for our creativity, collaboration, and contribution. This posting explores some of the novel approaches underway in response to these changes and set the stage for viable business models in the near future.

The long tail of the Internet provides opportunities for individuals to post information, knowledge, experience, and insight from one location and reach potential audiences almost anywhere else in the world at any time. Countless millions of individuals, businesses, and organizations of all types use websites, wikis, blogs, etc. to do just that. Collectively, the number of intelligent insights and innovative ideas posted every minute is sufficient to change the world many times over.

Despite the countless, remarkable observations and viable solutions presented, it is difficult for all but a narrow slice of contributors to make a living from doing so via Internet media. Unless there is a subscription fee to the site, the content of postings is free to read. In many instances, incorporating or reproducing that content elsewhere only requires acknowledgement of the original contributor / author to do so.

Under these circumstances it is difficult to receive payment for the work itself.
Instead, payment is made based on what else readers do in and around the material they are reading: how many embedded links they check in the posting, how many advertisers around the periphery of the posting do they visit, how many RSS feeds and email notifications to they elect to receive, to name a few.

Such are the metrics and dynamics of the "Internet economy". In a October 2007 press release by ITWire entitled, "2007 Global Internet - Volume 1 - Web 2 Revives Internet Economy" states,

A key to success in this new era of digital media revolves around advertising and the ability to attract new revenues. We are now seeing the emergence of new business models as the industry gains confidence and begin to change their more traditional models. Driving this confidence is the phenomenal growth in online advertising revenues. It is estimated that over $25 billion dollars will be spent worldwide on online advertising this year.

Information is power for those who have it when others don’t. When information is free, it is a great equalizer. This equalizing feature is changing the business models of corporations that made their fortunes from a portfolio of proprietary offerings, as suggested in the article, "Facing Free Software, Microsoft Looks to Yahoo", by Matt Richtel in the 09 February 2008 edition of the NY Times:

Nearly a quarter-century ago, the mantra “information wants to be free” heralded an era in which news, entertainment and personal communications would flow at no charge over the Internet.
Now comes a new rallying cry: software wants to be free. Or, as the tech insiders say, it wants to be “zero dollar.”

A growing number of consumers are paying just that — nothing. This is the Internet’s latest phase: people using freely distributed applications, from e-mail and word processing programs to spreadsheets, games and financial management tools. They run on distant, massive and shared data centers, and users of the services pay with their attention to ads, not cash.

Such widespread distribution of free software--in many instances accompanied with open source code, as well (see the 15 September 2005 article by Dan Woods entitled, "What is Open Source" featured on Tim O'Reilly's website, ONLamp.com) --raises a basic question: where is money made in such an environment?

The sequence of diagrams that follow seeks to address this troublesome detail beginning with the first one below which plots options for ownership of software and availability of source code on axes of free versus paid and open versus closed.
Axes - Halfsize.JPG
The central dichotomy is from the bottom-left, where both the software and source code are given away, to the upper-right, where there is a charge for a software license and the source code is not available as depicted in the next diagram below:

Axes and Arrow - Halfsize.JPG

Public sector / non-profit institutions are represented in the lower-left quadrant where the deliverable and how to make it are given away. The private sector / for-profit businesses of all types dominate the upper-right quadrant where the deliverable is sold and the intellectual property (IP) that defines its design and production method is tightly held. Within the very different realities at either end of this diagonal dichotomy, traditional administrative and business models have enjoyed a distinct separation of function, role, and design. However, the advent of the Internet economy has facilitated a steady migration and blending between the ends, opening the two adjacent quadrants for development of new administrative and business models.

As the Internet economy becomes more established, it is affecting all types of organizations. This is illustrated in the diagram below by the addition of a "Portfolio (What) - Practices (How) - Assets (With What)" triangle circumscribing the diagonal arrow. This triangle is positioned to emphasize that the WHAT and HOW of an organization are fluid on price and openness, but the investment in what it takes to do the WHAT and HOW must be exceeded by sales revenue, if a for-profit business, or matched by gifts and volunteer efforts if a non-profit entity. The consequence of not doing so is cessation of operation.
Axes, Arrow, and Triangle - Halfsize.JPG
Looking specifically at a business that goes beyond software and source code to the design and manufacturing of tools, machines, and equipment systems, let's consider something simple like a machine to mold compressed earth blocks (CEB). Advanced Earthen Construction Technologies, Inc. (AECT) offers several CEB machine models; the "Impact 2001" can be towed, is hydraulically operated, powered by a 7 HP diesel engine, has the capacity to make 230-240 blocks / hr . It is protected by U.S. patent, manufactured in Texas, represented by the Leading Edge Group, Inc. who has exclusive distribution rights, and can be shipped anywhere, The base price is $26,000. They are working on a model for the home owner / small-scale contractor that is under $10,000 (see Freesteader Libertarian Forum discussion ). This is clearly in the upper-right quadrant. AECT's goal is to set the price and control the IP such that their investment in assets (people, facilities, equipment, and operations) is covered and they are profitable over the long run.

An alternative is going to Marcin Jakubowski's Factor E Farm project (see weblog) "the most important social experiment in the world" to emerge out of the Internet economy in the opinion of Michel Bauwens in this P2P Foundation posting. Marcin is working in parallel on a multitude of collaborative projects that when complete will provide a portfolio of products and services useful for those who are committed to building a "basic and robust infrastructure for a Global Village economy". One of these projects is a CEB machine code-named, "The Liberator". Marcin estimates,

Parts for The Liberator as detailed below are approximately $1000. The machine will cost an estimated $3-5K, depending on manufacturing abilities.

Open source design is one of the main reasons why Marcin's CEB machine is less expensive. As he states,

Here are the capitalization requirements for fabrication capacity. The Cost column reflects the price structure if off-the-shelf tools and materials - and proprietary development procedures - are utilized. This cost is conservative, as intellectual property costs are probably higher than the $10k that was specified. The alternative route, or the Open Source Cost, is that which utilizes open source know-how and is built on a land-based facility. The open source option means that certain equipment may be fabricated readily from available components when a design and bill of materials is available.

Obviously, Marcin has and continues to invest considerable personal resources into his "Factor E Farm". What is the business model through which he makes money, or does he give it all away and ask for contributions?

In a Global Villages Yahoo! Group posting, Marcin explains it as follows:

...how do we get the work funded? The collaborative microfunding is perhaps the right idea. The Core Teams develop technical details. Then we fund prototypes, optimization, and the building of optimal production facilities. Why should low product cost be feasible? Because we have a lean operation with little overhead, and if funded, we have low-cost production capacity that can match even slave goods and mass production. The new economic age is here. We are not talking of many hundreds of thousands of capitalization requirements for similar enterprise. We are talking of open-source-fed production facilities that will cost on the order of $10k to build. There is cascading cost reduction, for example as we use our CEB to build the facility, or the solar turbine to power it.

As such, 'capitalization costs' are 'zero'- fundraising covers the cost. So far, we've operated 100% on voluntary contributions. R&D costs are zero - they are distributed collaboratively. All the costs are zero zero zero, outside of materials and labor. We capture the value of labor - but even if we charge $100/hour for the CEB - with optimized fabrication time predicted to be 20 hours per machine - that is still $3500 for a machine - factor 8 lower than the competition, as you can check for yourself. That $100/hour is very well worth it - if it's not being dissipated in wasteful production ergonomics and wasteful product design. Moreover, all proceeds are used to fund further open product development.

And that brings us to the diagram below which adds a boundary of "common value" in the foreground and another boundary for "differentiated value" in the background.
Axes, Arrow, Triangle, and Ends - Halfsize.JPG

Marcin's model illustrates how to strike the critical balance between giving it away and making money. As he mentions, the R&D costs for the CEB machine are zero because they are distributed collaboratively and the results are open source and freely accessible for all. This is anchoring against the "common value" boundary. Setting the price for the machine at $3700 covers the cost of materials and fabrication and if set at $5000 it generates a reasonable profit that can be reinvested or used as further compensation. When compared to $25000 for a competitive model from AECT, this clearly bumps up into the "differentiated value" boundary.

Marcin envisions using the Internet to widely disseminate information about the CEB machine, take orders, expand operations, offer training, initiate "open franchises", distribute manufacturing capacity, and prompt further "localization". These represent ways to play in the space between the boundaries where some activities are done for nothing and others garner compensation. It is that agility to remain pliable in the intervening space that IS the sound business model to stay on track. This is a lesson suitable for any business to consider.

Source: Steve Bosserman
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