Wrong - Paul Krugman, Chris Anderson, Lawrence Lessig, Mike Arrington. Contents should not always be free.

(My first attempt at writing about the idea as the central element of the capitalism. Next time, I will write about the freedom of entrepreneurship as the defining freedom of the market economy.)

"Creative contents should be free, especially when they take a digital form." That seems to be the most popular thought these days.

I thought it was a fad that would go away. But now that Paul Krugman, a highly respected economist whom I never thought I would dare to argue against, has joined the group, it seems serious. See http://www.nytimes.com/2008/06/06/opinion/06krugman.html?_r=1&oref=slogin.

When I went to college, Marxism was very popular among Korean students. However, I was not attracted to it. I thought something was missing about the theory. The classical economics sounded reasonably, but it also lacked something. The text book did not convey the excitements and pains and discontinous and volatile changes. The theory depicted the market as smooth, misleadingly smooth. After years of pursuit for the nature of business and innovation, as a student, consultant, and an entrepreneur, I reached a conclusion.

So, here it is. To deliver my still rough thoughts clearly, I will say it in several different ways.

• Capital, as defined in classical economics, is not the defining element of the capitalist economy. Entrepreneurial idea is.
• Idea is the most essential source of profits, not the capital or labor.
• If idea is not compensated well, a free-market economy won't be much better off than a socialistic economy.
• Capital, material, and labor create value only when they are aligned with a good idea.
• Compensation for an entrepreneur is primarily compensation for his/her ideas.
• Profits from car sales are essentially the same as profits from Beatles album sales. They are margins attached to a unit of a product, which is an idea materialized and replicated.

Let me explain the last point. A car is nothing but an idea + materials. (And labor and capital. I am simplifying.) A Beatles CD is an idea + materials. So, a Beatles music file is essentially an idea only. So, idea = content.

(Again, I am simpifying. There are ideas that are not strictly the ideas that go into a song, a narrowly defined content. For example, the title of the album, the accompanying photos, the jacket design, etc. Similarly, there are "contents" that are more directly associated with a car, like design and engineering, and less direct ideas like marketing messages and management methods.)

As I said, the entreprenerial profits (which is the main source of economic profits) come from ideas. So, a car is nothing but ideas applied to materials (via work anc capital). The way an entrepreneur is compensated is by replicating the idea many many times. There is nothing different between a ford car in a dealer shop and a beatles CD sold at Amazon.com.

Now, what is different about a digital content? None. Well, there is some difference. It 'looks' different, because it does not have 'materials'. It is very deceiving to people. How can you charge some price to something that does not have any material? You would ask.

But, if you realize that the profit margin going to the entrepreneur was mainly for their creative ideas, i.e. contents, you know that there is nothing special here. Henry Ford is a content creator, as much as the Beatles is.

How would you erode their profit margin? The surest way is to allow other people replicate their ideas. In the car example, it would be like giving outsiders an exact recipe to make Ford cars. In the music, it would be let others copy Beatles songs freely. A song is much easier to copy, but you will be surprised how well some companies in certain countries can copy manufactured products.

In both cars and music, content creators have been making money by charging a small idea/content/creativity margin at each product and replicating the product many many times. That worked well. It was efficient and seemed pretty fair.

Is this the only way to make money from contents? Of course not. There are less straightforward ways. GM and Ford used to make more money from financing than from selling a car. Essentially, it is charging their idea margin indirectly. For music, a similar thing can be done. You give your music away for free, become popular and make money from concerts.

The thing is, no other business model is as efficient as the direct charge model. To use non-direct model, you should have other creative ideas. You need to create a new business model, and you need to make a good concert. With the direct charge model, you only need one good idea. What would give opportunities to broader people, having one good idea or two?

Also, there is a fairness issue. If your idea is loved by many people, you will sell many replicated units. If not, you won't. However, with the non-direct model, it may not be so. You created a great song, and it was downloaded millions of times for free. But you are a bad live performer, you don't look good, and your concerts does not attract many people. On the other hand, there is a sexy female singer. Her songs are popular, but not as much as yours. However, people love her concerts because she looks hot. As a musician, which world looks fairer to you?

I don't reject non-direct model. We use it ourselves. But we should make the direct charge model, which is the most accessible and the fairest, a viable option for the content creators.

If you argue digital content should be made free and musicians should make money performing, it is like you are arguing that anyone should be allowed copy Ford or Toyota cars freely and they should make money servicing. I don't see any logical difference.

I say, give the digital content the right to be protected from copying, when the creators want (not even always), like the Ford car is protected from copying. Idea is the life blood of the free market economy.

By the way, capitalism is not a very good name. We should call it marketism, or entrepreneurialism. Marx did a poor naming job.

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FirstPagr, your (growing) web sites on a page

Let me introduce our web app FirstPagr, a really simple tool to make a really simple website. It makes a static page that can contain lists. It does not do any automatic aggregation of your contents elsewhere or any interactive feature like commenting or RSS. You, no one or no machine else, enter everything you want on the page manually. Why such a primitive tool?

When you created a blog, you thought it would be your 'homepage'. You may have even bought a domain (yourname.com) and associated it with the blog. But things changed. Now, you may spend more time at Facebook or with Twitter. Even worse(?) you may create another blog, or a tumblog. So, what is your 'home' page? You wonder or you don't care, if you were like me.

A side effect of this is that you stop caring about giving your own domain name to your sites. Either you have no choice of putting a custom domain name (e.g. Facebook) or, even if you did, you are tired of coming up with and buying new domains.

You may have linked sites with each other. Your blog lists all your other sites, and your facebook profile lists all your other sites, and your friendfeed lists... Some people seem to think that(linking) is natural on the web. But in my eyes, that seems like 'over-linking'. (In fact, a recent fashion seems to be copying and pasting contents everywhere. That's ... over-loading.) I don't enjoy looking at all those small icons at a sidebar. It only gives me the impression that this person is another contributor/victim of information overload.

So we created FirstPagr to let us make the simplest site that can link to other sites of yours. You can only have one page. You type in the site name and create lists of your sites (with some descriptions, if you want). That's it.

So far, I am personally very happy as a user. I used to associate www.hyokon.com with my blog, but now with my FirstPagr. Have a look and try yourself.

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Insuring high-risk customers.How?

Fred Wilson's 'Making My Personal Health Record Public' is inspirational, though I am not completely agreeing (or disagreeing). Privacy matters aside, I think the insurance issue is a very interesting one. The biggest project I did as a strategy consultant was about insurance, making the first online insurance in Korea (and one of the first globally, as we could not give the clients any success case when they strongly demanded one) and strengthening the existing agent-based insurance business. The project involved auto and life insurances.

This is same in the auto insurance. No one wants to insure a truck or a motorcycle in Korea. So a lot of them go uninsured, or get alloted to insurance companies by some rules (part government, part self regulation).

I have discussed with an exec that there may be a business opportunity to create an insurer who specializes in high-risk vehicles. Fundamentally, insurance exists because there are risks. Unless the risk is systematic (meaning accidents tend to happen together), they are insurable. The problem is, then the price may be quite high.

The other solution is to make an insurance company that says 'we have one price for everyone regardless of the risk profile'. The key will be to pool risks widely and to forego the costly underwriting process (which means they don't investigate your track records). The goal is hassle-free, simple, reasonably-priced insurance. The problem here is there might be adverse-selection. Because they give lower price for high-risk cars, you may attract only high-risk cars. The problem will be especially real when the competing insurer says "you are paying for high-risk motorcycles at that insurance company. Come to us and we will offer lower price." So the key is whether the saved underwriting-process costs of the 'one-price insurer' can be as large as saved claims of the 'discriminating insurer'.

The last solution is the government regulation. The government could create one big monopoly insurance company, or ban private insurance companies to discriminate the insured. I don't think this is a great idea. It will became politics, not business.

My example was about auto insurance, but the same is true for health insurance. And my personal opinion? The first one. The second one is attractive, but I am not very positive the cost saving can justify the claims difference.

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In response to Will Prices's "Lost My Voice"

(This is a comment that I made on Will Price's recent blog post http://willprice.blogspot.com/2008/04/lost-my-voice.html)

I would rather think that you should feel free to promote your company in your blog. What needs more caution is when you write about other topics, including what you learned from your management experiences.

In this age of personal broadcasting tools, people broadcast even what needs to be communicated silently between individuals. The world will eventually find new ethics, but right now people seem overshooting. It's not different here in Korea. A politician recently said, "Stop talking to a microphone. Let's meet."

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Crash of the longtail and the attention economy, and the solutions

I have about 20 rss feed subscriptions. That's how I get information about what's going on around the world. But it's hard to keep up with the pace of information coming out of them. In terms of writing, I have this blog, which I don't regularly write posts.

Amazingly, there are people who actively manage, in addition to reading and writing blogs much more than I do, all sorts of other web app accounts (Facebook, Twitter, Friendfeed, and so on). The result is that they produce and consume more and more information. And it seems that they are beginning to feel the pain to keep up.

I expected this crash of the longtail and the attention economy was coming. In plain words, it is a conflict of increasing variety and the scarcity of our mental capacity. I have a slide that I have been using for 2 years, which you can see here (note that the chapter itself is a mess and to be written and organized).

The long tail itself is a good thing. We'll have more choices. However, like all changes in human life, it brings some negatives as well. When you have more choices, you have to use your brain more to process the information and you have to make more decisions on what to consume and what to discard. And that can be very very painful.

The pain of decision making is so severe that the human society created a full-time job for decision making, the CEO (and other leadership positions at organizations). So, how should we deal with this growing pain? How should we handle variety overload (information overload being the most immediate for the Internet community)?

There are three solutions, as you see in my slide.

The first is to fractionize the consumption unit. That is, make the unit of consumption smaller. It happened in music (from CD albums to MP3 singles) and in video (from 2-hour movies to 2-minute YouTube videos). Though less apparent, it seems happening around the book (from 300-page books to 1-page blog posts to 1-line twitter messages). The purpose is for you to consume more variety, just like a buffet restaurant. We will see this happening in much more categories.

The second is to improve filtering. Google and Amazon use algorithms for filtering, and there are attempts to make even better algorithms. However, as we have more and more variety, people will look for more human filtering. Digg and Delicious are more human filters, and, more narrowly, crowd filters. Yet, another form of filtering will be also needed, which is the expert filtering. I often read only Techcrunch among web2.0 blogs and news, when I don't have much time. When I do so, I am trusting that TC must have done a good job of selecting the right news.

This is a bit strange. The information is increasing exponentially so that any individual expert could never compete with algorithms or crowds. But the reality is that overwhemled by information overload, people seem looking for experts more. Though they can always find the best books about innovation, I am very often asked to recommend books about innovation.

The two solutions above help people be more productive. They make you enjoy more variety and filter out less important things. Wouldn't these two be enough, especially now that contents are getting smaller and smaller and there are many new approaches in filtering? No, I don't think so.

The ultimate solution will be simply to slow down. As a human being, your brain have certain limits no matter what tools you use. You will realize this sooner or later, and then have to rethink what your focus area should be.

I think the reason why many people try to keep up with a lot of information is that we have not adjusted to the variety economy yet. Our economic life in 20th century was governed by the Mass Production model. We did not have much variety in products and information. In this age, an educated person was supposed to know 'all that's important'. If you were a college-educated professional, you were expected to know the headline news of the day, to have read the best-selling book that other professionals all seem to have read, and to have watched the movies of the year.

A lot of tech leaders, as Alexander van Elsas wrote, may be the best examples of this symptom. They seem to think they should know whatever is being said in the tech world. They are living the web2.0 longtail world with the mentality of 20th century professionals. I don't mean they are doing wrong things. Their paranoid makes them good human expert filters right now. I just mean that they represent stressed 20th century info worker adopting to 21st century variety economy. I feel that, too. I try to calm myself down saying that I am normal. But inside of me, I often feel I am not doing the homework.

But sooner or later, all these busy bloggers will have to redefine their coverage if information increases at this pace. You just cannot keep up. To help people to define coverage narrowly, I predict that there will be more niche aggregators. At the moment, we have a lot of general aggregators, equipped with powerful filters. You start at Google or Yahoo, and try to read all the important news there, and search and browse to your areas of interests. But if you already know that you are interested in Japanese Manga, why not start at an aggregator specialized in Manga?

There is another (and the last) reason why we should slow down. By slowing down, we will recover depth. At the moment, information is like disposable cameras. They are consumed once and forgotten (by the writer as well as readers). This is too much waste and in a way non-sensical. You write everyday, because people won't read your post a day ago. You produce more, just because you will throw away more. By following that trend, we lose depth. We become shallow and trendy. It is true that the world is changing faster so that the shelf life of information is decreasing. But does it apply to all information? Of course not. But because of this trend, because there are more innovation for fast-pace tools, we seem to treat information that are worth staying longer just like daily news.

This is partly why we started paragraphr and rankrz. They are tools for revision and updates. They are tools for slow writing and reading. We don't know whether and how these will be used, but I am very confident that the world needs to do something for slow and deep writing, reading, and thinking.

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Internet is not free

An AT&T excecutive said that due to surge in online content, expecially video, the Internet will hit full capacity by 2010. According to him, $130 billion is needed to improve the global Internet infrastructure.

http://www.news.com/2100-1034_3-6237715.html

Certainly, the Internet is not free. The marginal cost argument ("as the marginal cost approaches zero, the product will naturally become free") misses a basic truth in business and economics.

Let's assume the marginal cost of operation is zero, as pro-free people seem to argue (which can never be true by the way). Even at the zero marginal cost, you cannot price the product zero, because then you cannot recover your investment.

A roller coster in a theme park requires a large investment to build, but once it is built the marginal cost of running it another round is almost zero. So, the theme park should take customers for free? Of course not. (If you can make money elsewhere, you might do this. This is another area where pro-freers are misleading, which I want to talk about some time.)

The Internet economics cannot be understood correctly if you only look at the marginal cost during the operation stage. Whether you are an ISP, a web service, or a content provider, your cost is concentrated in the investment and fixed costs as opposed to the marginal costs. And when you were deciding to invest in it or not, you certainly assumed some revenue. Don't forget that.

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The Tipping Point vs. The Wisdom of Crowds

(A comment on a ReadWriteWeb post titled "Study: There is No Tipping Point, Blog Readers Are Skeptical". I think I just found out what was wrong with my cocomment setting. Hopefully it will work from now.)

"Gladwell's arguments in the 2000 book The Tipping Point had reached levels of cliche approaching The Wisdom of Crowds, in large part because of its seductiveness to marketers."

I find the statement very misleading. It should be the other way around. The Wisdom of Crowds was published a few years later than The Tipping Point. And it has not made people think and debate as much as The Tipping Point has.

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