Broken Symmetry

The History of the Internet: Netscape v. Microsoft

I can't recommend highly enough this Vanity Fair piece providing an oral history of the Internet. There are plenty of lessons for entrepreneurs and inventors in the piece, such as the description of AT&T's reaction to the suggestion of how packet-switched networked computers would be a huge market (they scoffed at the idea that there would ever be more than a handful of computers on such a network).  But the part that really jumped off the page for somebody interested in both IP and antitrust was the description of how Netscape and Microsoft ended up in an all-out war for the browser market.  Listen to what Thomas Reardon from Microsoft had to say:

"I was the first at Microsoft to know about Netscape. I remember calling down there and saying, Hey, I’m with Microsoft, and I’m looking around at all these people who started Web browsers because I think we’re going to do one inside of Windows and we want to know if we might look at your technology as a source for this, do a license deal, or we buy your technology. And they told me basically to go fuck off."

And here's how Netscape's outside counsel Gary Reback (an antitrust lawyer) described a later meeting between Microsoft and Netscape that took place at Netscape's offices:

"A group of Microsoft executives came down to Netscape and had a meeting, and the Microsoft people in effect said that if you’re going to make a browser that can serve as a platform for new applications it’s going to be all-out war with us. But if you want to do something smaller, that just hooks in with our stuff, we’ll give you the non-Microsoft part of the market to work with. And we’ll sort of draw a line, and you’ll have part of the market and we’ll have part of the market."

Reardon and his team were apparently caught off-guard by the attitude of Netscape's team at the meeting:

"The government’s argument that we went down there Mafia-style, telling Netscape that they have to do a deal with us or they were going to find a dead-horse head in their bed in the morning—it was kind of absurd. It turns out Marc was sitting in the meeting, taking notes on his laptop. They had contacted this famous anti-trust lawyer, Gary Reback. They had been working with him. They kept asking us these really loaded and weird questions. We thought we were down there for a business meeting, technology meeting, engineering meeting. And then they ended up taking all the minutes of that meeting, you know, and sending it out to this anti-trust attorney, who then turned it over to the D.O.J. that night. It was just a bunch of bullshit."

And their hostile reception apparently spurred some competitive juices at Microsoft.  Here's what Microsoft manager Hadi Partovi had to say about the competition between Netscape and Microsoft:

"Both Marc Andreessen and Jim Barksdale were trash-talking basically. I mean, there was a competition between the companies, but it got to the point where they felt they were far enough ahead that they might as well trash-talk to build up the perception that these guys are going to win. On the one hand, you know, they were the David and we were the Goliath. On the other hand, Internet Explorer only had 5 percent market share in the Web-browser world, and nobody had even heard of it when we started out. And it definitely got people’s competitive juices up. Marc Andreessen had said something along the lines of 'Windows will be reduced down to being a poorly debugged bag of device drivers.' And what that means is basically the relative value of Windows will be pretty much meaningless."

The result (if you happened to sleep through it) about five years later, was a ruling against Microsoft, which was later partially overturned.

The story is fascinating for antitrust and IP lawyers, because it demonstrates, quite vividly, the prisoners' dilemma faced by startup "Davids" and incumbent "Goliaths."  In particular, it's worth asking a few (related) questions about this episode:

• Could Microsoft and Netscape ever have found a contractual way to partner?
• If so, would that have been to the benefit of consumers?
• Regardless of any agreement could have been reached, could the costs of litigation been reduced?

On the first question, it's tempting to answer that had different people been involved on the Netscape side, or had the same people had a slightly less competitive attitude, then some partnership might have been possible.  From these descriptions of the meeting, Netscape executives seem to have taken the view that there was nothing substantial of value that Microsoft could offer Netscape.  This sort of begs of the question of why they even agreed to take the meeting with Microsoft.  But the way that Partova and Reardon tell the story, it was a trap, designed merely to generate fodder for Netscape's antitrust lawyer.

But that answer is too easy for a few reasons.  Having worked with plenty of entrepreneurs (and now being one myself), I understand and have seen how a kind of persecution mentality develops within startups.  Especially very ambitious startups, that launch well before most people have any idea of what market they're after.  It would be terrifying to have a huge incumbent casually call up and ask to talk nitty-gritty about what you're doing.  It'd be like the rebel headquarters all of a sudden getting a friendly call from Darth Vader.  And that's without getting into the reputation that Microsoft had accrued by 1995 for being a bit -- shall we say -- casual with others' IP rights.  I don't know enough of the details of the earlier episodes (involving their acquisition of DOS, for example) to know how well-deserved that reputation is.  But until recently at least, Bill Gates never struck me as a particularly soft-hearted guy.

So I'm thinking Microsoft was too late in approaching Netscape.  By 1995, Netscape had already gained enough momentum that Microsoft was merely reacting to the new market that had developed.  If somebody at Microsoft had been paying attention in 1993 or 1994, the whole story might have been different.

But the second and third questions seem easier.

I do not believe that consumers did benefit from the war between Netscape and Microsoft.  I'm sure that the new versions of each browser rolled out quicker as a result.  And consumers (and other dot coms) benefited greatly from the iterations.  But by far the biggest driver of growth in the browser market was not any innovation by Netscape or Microsoft engineers; it was simply the network effect of having more and more people on the web.  And I'm pretty sure that the largest part of the increase in new web users arose from PC and OS buyers who would never have figured out how to download a browser on their own suddenly finding one installed with their operating system.  Obviously, this was going to happen no matter what Netscape agreed to.  To wit, over a decade of litigation and hundreds of millions of dollars in taxpayer money didn't stop it from happening!

Which brings me to the third question of how could those litigaiton costs beeen reduced.  The answer is stronger IP rights for the "Davids" like Netscape.  Admittedly, in this case it's hypothetical since differences in culture and business plans basically made an agreement between Netscape and Microsoft impossible.  But I suggest that in a less emotionally charged atmosphere, strong IP rights would have made it easier for Netscape to take a meeting with Microsoft, and eventually reach some partnership agreement whereby Netscape would have received a royalty share on every copy of Internet Explorer installed.

With stronger IP rights a company like Netscape in 1995 might have looked at the negotiation with a company like Microsoft a little differently.  Some startups might see that there was no good reason to try to reinvent the marketing, distribution, and manufacturing facilities that a larger company already had setup to sell its product or service worldwide.  Some startup executives and investors might be open to licensing technology, especially if it came with a strong guarantee of non-interference with whatever core market that the startup was after.

Before you send me an angry email, understand that I'm NOT saying that that's what Netscape should have (or even could have) done in this situation.  Netscape in 1995 really had no good reason to take a meeting with Microsoft.  They had a huge head start in the market.  Microsoft had no engineers and no already developed technology that Netscape needed to continue to execute on its business plan.  Sharing ideas with Microsoft seemed far more likely to hurt than to help Netscape in executing its business plan, which no doubt ultimately involved knocking Microsoft off its position as the largest software company in the world.

What I am saying is that if we had a stronger patent system, then more startups and established companies would be considering the possibility of IP-driven partnership.  There is no way that a company like Microsoft could have executed on a new idea the way that Marc Andreessen did in the early 1990s.  And there is no way that any startup could have built a network of manufacturers, distributors, and marketing agents fast enough to have competed directly with Microsft in the operating system market -- no matter how killer the app.

Wouldn't it save everyone money, especially consumers, if startups and large corporations had more incentives to form IP-oriented partnerships?

Cultural Norms within the Blogosphere

Cass Sunstein and Eugene Volokh discuss (really not much of a debate) the blogosphere.  Sunstein is worried about the echochamber effect, and what cultural norms would promote better group deliberation and hence functional democracy.

Sunstein is worried that people are going to polarize along ideological lines because so many blogs pander to particular ideological views.  Sunstein's work on incompletely theorized agreements in the past has emphasized how ideological debates can be counterproductive to democracy.  He points to Madison as somebody who was the institutional architect behind the idea of substituting election contests for ideological debates.

Volokh, who has more on the ground experience with the blogosphere, points out that we shouldn't be too worried about ideological polarization so long as we can get lots of people with lots of different views onto the Internet.  The problems would be worse if there were particular ideological groups that did not have access to the Internet.  But that doesn't seem to be the case right now.

My perspective is that the link structure of the web is going to permit more ideological keiretsus.  Polarization is a function of both inability to commit (which might be the result of differences in ideology) and ability to communicate.  The Internet makes communication easier.  It doesn't distort ideological differences, although it does encourage people to express them, which psychologists know will make the person who expresses the ideology to feel more strongly committed to it.

In other words, Sunstein has a valid concern, and it should addressed by focussing on how and when people choose to begin expressing their ideological beliefs to one-another online.  If people start expressing strong ideological beliefs before they've explored a variety of theories, then they may end up stuck in a belief-pattern that doesn't fully represent themselves.

Perhaps government and private entities should work harder to ensure that each person expressing herself online has both enough accountability to avoid the temptation to do the ideological equivalent of a driveby and enough control over her content to ensure that she can take it down or edit it if and when she later changes her mind about any or all of it.  And social norms that permit for people to change their minds should be encouraged.

What the PTO will look like in a few years?

The NYT on Sunday carried this article on the USA National Innovation Marketplace, founded by inventor Doug Hall.

First, this is more evidence of how the shortage of patent lawyers is forcing inventors in many technical fields to find new ways to attract private funding.  I discussed other consequences of the shortage in an earlier post on Stranded R&D.

Second, I wonder: How much more effective would the National Innovation Marketplace be if we had patent lawyers draft a set of claims, and put that up with the other materials offered on the website?

Isn't that what the PTO should look like in an era in which the costs of offering multimedia and social networking services through a website have dropped so low that even teenagers can launch new companies?

UPDATE: On a conference call today (5/13/8) I hear from Patent Commissioner John Doll (a fellow former p-chem grad student!) that the PTO is working on a social network for Examiners.  Why not offer a social network for both inventors and Examiners?  Why not work with Planet Eureka, which has already built one?  The idea of software engineers hired by the PTO reinventing this particular wheel is particularly troubling to me.

How Abraham Lincoln was wrong about one thing, but right about almost everything else

On February 11, 1859, Abraham Lincoln gave a lecture to the inhabitants of Jacksonville, Illinois on the topic of discoveries and inventions.  His most famous words from this lecture are the last few that were recorded:

"Next came the Patent laws.  These began in England in 1624;* and, in this country, with the adoption of our constitution.  Before then, any man might instantly use what another had invented; so that the inventor had no special advantage from his own invention.  The patent system changed this; secured to the inventor, for a limited time, the exclusive use of his invention; and thereby added the fuel of interest to the fire of genius, in the discovery and production of new and useful things."

It's hard to overstate the importance these words have had for patent law.  They have been a motto for patent lawyers for generations.  But not many people, even patent lawyers, have read the whole speech.  Everyone in America should be required to read this speech in high school or college.  I will come back to it again and again in the future.  There are many, many posts I could write about this speech.  Practically every sentence in it sparkles with insight into human nature and invention.  The speech is as beautiful a piece of American prose as we are ever likely to get from a patent lawyer.

In this speech, Lincoln anthropomorphizes the United States into "Young America," the "most current youth of the age," which some people "think conceited, and arrogant; but has he not reason to entertain a rather extensive opinion of himself?"  Lincoln is funny, but also honest.  For example, he observes how Young America "is always very anxious to fight for the liberation of enslaved nations and colonies, provided, always, they have land, and have not any liking for his interference."  Have we changed much?  Read the whole thing to get all of his insights into questions about the relationship between "Old Fogy" and "Young America" (i.e., international trade and politics), natural resource use,  the process of invention, joint invention, and more.

But my point in this post is that he miscalculated one important thing.  It's a miscalculation that he can hardly be faulted for.  Nobody can see into the future.  But it's important to revisit the past, and reconsider Lincoln's words now as we consider and reconsider how we as a nation are going to grow in the future.

In this speech, Lincoln delineates four stages of human progress in making inventions and discoveries. 

First, Lincoln points to human speech.  "If I be in pain I wish to let you know it, and to ask your sympathy and assistance; and my pleasurable emotions also, I wish to communicate to, and share with you.  But to carry on such communication, some instrumentality is indispensable."  Second, is writing -- "the art of communicating thoughts to the mind, through the eye."  Third, printing, "a great gain; and history shows a great change corresponding to it, in point of time."

And finally came the fourth, and the passage from this speech that everyone is familiar with.  Lincoln picked patent law as the fourth stage of human progress in promoting inventions and discoveries.

Even Lincoln couldn't have predicted the Internet.  None of us did.  It just happened, much like the printing press did in the 15th century.  We're still experiencing the aftershocks, and will be for some time. There are some Catholic churches in the world that are not ready for the democratisation of knowledge made possible by the Internet.

So Lincoln was wrong about one thing: patent laws are not the fourth stage in human progress.  They're the fifth.

* As an aside, regular readers will note that Lincoln was also mistaken in attributing the origination of patent laws to the English Statute of Monopolies.  The Venetians had a patent system in place in the late 15th century.  And English and other European monarchs were granting exclusive rights to inventions by letters patent well before the Statute of Monopolies anyway.

A tabloid for every profession? The democratisation of gossip.

It is commonplace for us to observe that the Internet is changing the face of modern mass media.  One interesting consequence of the granularization of media coverage made possible by declining costs of distribution and marketing is the emergence of tabloid-style gossip rags for relatively small markets.

In the past, newspapers or magazines serving niche markets couldn't afford to be too risque in their news coverage because of the need to appeal to everyone in the niche market in order to maximize circulation and hence advertising revenue.  For example, it would have been unwise for a venture capital newspaper to run stories on the sex trade.  Similarly, it would have been unheard of for a newspaper on events relevant to practicing lawyers to report on the affairs of prominent legal academics.  But we have seen both over the past few months on Valleywag and AboveTheLaw.

In the future, we might expect to see similar developments in nearly every professional or non-professional field in which writers can pander to the prurient interests of readers educated well-enough to know and care about the gossip in a given field or industry.  A gossip page for dentists?  Why not, we already have too many straight-laced dental blogs: see here, here, and here.  What about a gossip blog for pharmacists?  We've already got The Angry Pharmacist,  The Angriest Pharmacist, and  Drugs 'R' Phun!  Even postal workers have their own blog.

Here's another prediction: the common law of defamation, libel, and slander isn't setup for this world.  How are courts going to handle defamation claims that arise from posts on the Internet?

There is no diversity-participation tradeoff.

Prof. Sunstein and Glenn Reynolds (a/k/a Instapundit) are discussing the way the Internet is changing social and political discourse in our society at the uchiblawgo this week.

Sunstein worries that the Internet is enabling "polarization entrepreneurs" to exacerbate ideological differences by reinforcing ideological precommitments through repetitive, one-sided analyses of news and gossip.  The good news is that people tend to be more active once they've identified their ideological precommitments.  The bad news is they tend to be less patient with those who do not share them.

Reynolds isn't too worried first, because he figures the obnoxious rhetoric isn't representative of the largest part of people who get their news on the Internet, and second, because the obnoxious rhetoric may be a purely online phenomenon.

I'm mostly with Reynolds here, and mostly because of my personal experience with blogs and blogging.  I started reading blogs about the time I started law school in the fall of 2003.  For about three years I was checking about a half-dozen to a dozen blogs a day for new posts.  I probably spent more time on the group blogs like Slashdot or Volokh Conspiracy because they were updated more frequently.

Sometime in the middle of this period -- maybe about a year after I started reading blogs earnestly -- I tried commenting on a blog.  Commenting for the first time is kind of scary, right?  I had seen many people get into nasty arguments in the comments section, and many bloggers "outed," and I hesitated strongly, like any risk averse lawyer would.  But I got used to it because it was fun to chat with people who were interested in a particular topic.  And I don't have a lot of personal friends who share my same nerdy interests in patent law, for example.

Then about eighteen months ago, I got a feed reader, and since then have been reading more then two dozen blogs.  It's gotten to the point where I have to be really selective about what goes on the list.  I'm trying to be more and more careful about what I include and exclude.

And two months ago I took the leap and started blogging.  And if you're interested in having an audience, starting a blog naturally forces you to think carefully about narrowing your posts down to a particular set of topics.  The people who are interested in patent law don't want to wade through your posts on social networks, and vice versa.

So with my personal experience as a guide (and I think most blog readers/bloggers have a pretty similar trajectory), I have to (mostly) agree with Sunstein that there has been a trend toward (1) more specialization (i.e., less diversification) and (2) more participation.

Why then am I mostly with Reynolds?  Because unlike Sunstein, I don't see any link between my increasing specialization and my increasing participation -- i.e., I don't think that I'm participating more because I've identified (and more finely distinguished) my ideological precommitments; I'm participating more because I've gotten more comfortable being subject to the scrutiny of the incredibly large number of people on the Internet.  Just like in the non-virtual world, the people who feel the most strongly are the ones who participate the most.  But that participation is only a partial reflection of the larger group of people who are taking things in, learning, and deciding how and when to participate, if at all, in the future.

How hiearchies develop in social networks

Hundreds of years ago in England, when real property changed hands, it changed hands through a ceremony called the livery of seisin.  The ceremony was necessary for its evidentiary value.  Before the existence of written title and recording offices, disputes over ownership were settled by eyewitness testimony.  Incidentally, this is probably also why you hear the minister ask the crowd whether there is anyone present who has reason to the object to a marriage -- there were no marriage certificates until relatively recently.  Similarly, until the resume came into common use (probably within the last 100 years), work experience was based almost entirely on eyewitness testimony (i.e., references).  In general, one had to talk to the people who had known a person to learn even basic information about that person's status (property ownership, marital status, employment).  Even after the paper recording systems had been established, the non-trivial costs of the system were born by the searchers, so most searchers were businesses that could estimate in dollars and cents how much that information was worth.  Socially, it is still the case (except in extreme circumstances) that nobody is going to do a marriage certificate search to determine whether someone is married, much less if someone owns property.

The way in which status information is stored and made available within a community has social consequences.  One such consequence is the relative flatness of hierarchies in large (offline) social communities.  Think of the difference between how you pick your friends and how you hire people.  In choosing who to hang out with, decisions are made almost entirely through references within your network.  The balance of information comes through the external status signals that someone sends (the first impressions).  But external signals are often unreliable ("don't judge a book by its cover").  There simply isn't enough information for strangers to be placed within any hierarchy.  As a result, social hierarchies are flatter in large (e.g., urban) communities in which people move around often and are constantly being exposed to new people.

Social hierarchies do exist, however, in smaller (e.g., rural or church) communities.  And they exist also in corporations and government institutions.  What these groups have in common is improved storage and availability of status information.  Rural communities have no storage or availability advantages over urban communities (i.e., still memory and word of mouth).  But they have the advantage of time.  Corporations and government institutions have resumes and titles.

Until recently, the Internet has been more like a large urban community than a small town or a corporation.  Social hierarchies, to the extent they exist, have developed organically from public-facing value.  For example, active bloggers from relatively less well-known academic institutions have developed some of the largest followings.

But the Internet is changing in this regard.  More and more offline status information is going online. The result is a de facto audit of personal status information.  Already, some professional status information is available free.  Eventually, title searching, birth, death, and marriage certificates will also be free.

The development of social hierarchies on the Internet looks, unfortunately, to be an inevitable result.

What does the Facebook News Feed have to do with the Price System?

In The Road to Serfdom, F.A. Hayek observes that the price system:

enables entrepreneurs, by watching the movement of comparatively few prices, as an engineer watches the hands of a few dials, to adjust their activities to those of their fellows

Hayek probably has the train engineer in mind, trains seeming a favorite source of examples for mid-20th century economists.  The point is that divisions of labor, which permit more fine-grained and complicated activities within an institution (or the economy at large), require quicker feedback, which the price system permits.  This key strength of the price system is achieved through its compact representation of aggregated information about value.

But the compactness of price information also creates a key weakeness:  price collapses the measurement of value, which in general might have as many independent dimensions as the number of market participants, into a single dimension.  The price system thus tends to work best in markets where the measurements of value have lower dimensionality -- i.e., where different market participants are more likely to measure value using similar input data, with similar means for processing that input.

The price system and its single dimension is at one end of a spectrum with the bartering system at the other.  In the bartering system, there is no aggregation of information about value, and hence no information is lost in the collapse of the real multi-dimensional phenomenon of value into the artificial, single dimension of price.  The bartering system works poorly, however, when the goods are "lower-dimensional" in how their value is measured by market participants.  The extra transactions costs (of time) associated with the bartering system are hardly worth the information preserved.  For example, every holder of wheat does not have a unique perspective on how much wheat (much less that particular grain of wheat) is worth.  Yet something like the opposite is true of transactions involving human capital, such as the market for a potential spouse.

What if there were a more multi-dimensional means for aggregating information about value?  What would that look like?  My suggestion is that it would look something like the Facebook News Feed.

For non-Facebook users, the Facebook News Feed provides status updates and links to multimedia that provide new information about your friends on Facebook.  New information about myself that I add to my profile is automatically pushed out to all my friends, usually showing up as a single line on their News Feed.  Now the value of a friendship with me must be among the most difficult things to measure in a single-dimension.  Yet the value of my friendship, like the value of wheat, is going to depend in part on how many others are offering you the chance to know someone like me.  If all of your friends love to go kite surfing, you may be indifferent to whether I too enjoy kite surfing.  On the other hand, if it turns out that I'm your only friend who shares your taste in medieval English legal history, we may be spending more time together soon.

Notice how the Facebook News Feed falls somewhere in between a pure barter system and a pure price system.  Unlike a pure barter system, I don't have to transact bilaterally with everyone who might be interested in what I have to offer.  Unlike a pure price system, I don't have to submit to my value being collapsed into an almost inarticulate number.

Notice also how the News Feed system requires market participants to internalize the positive and negative effects of their status updates.  For example, by posting photos of yourself at a party, you may get more party invitations, but fewer job offers.  This is how the News Feed is distinct in an important from other social networks, such as Wikipedia.  Professor Sunstein had an insightful post related to this about six months ago.

Now what if instead of collecting information about the relative value of various friends, the news feed collected information about the relative value of various projects within a large organization, or the relative value of different programs within government?

Reducing administrative costs, federal adminstrative agencies, and globalisation

Rees-Mogg and Davidson point out in The Sovereign Individual that the Internet is producing declining returns to violence.  What they mean is that it is harder for governments to control undesirable citizens in a world with the Internet.  Putting aside the problems that the possibility of nuclear holocaust present for their argument (which I may address in a later post), I find this argument believable.  At the margins, some rich or talented people will opt out of citizenship in large nation-states in favor of smaller jurisdictions that demand less in taxes.  A direct consequence is that nation-states will more often be in competition for the "best" (i.e., richest or most productive) citizens.  An indirect consequence is that more economically efficient governments will have a competitive advantage with respect to less economically efficent governments that offer a comparable package of "public goods" in exchange for the same taxes.

As a patriotic American it's natural then to wonder, what aspects of American government could be made more efficient?  Note that the question is not how could we spend less.  For purposes of this analysis, we should assume that we'll come to the same substantive decisions regarding what services (or disservices) the governmment will offer, regardless of how efficent or inefficient the process of decisionmaking and administration of these services.  For example, ending the war in Iraq would save trillions.  But the substantive decision of whether to stay or leave turns on substantive political questions (e.g., "Will Iraq collapse into anarchy?" "Would it collapse into anarchy anyway?") rather than the efficiency of the process that results in the decision, or the efficiency of the process within the institution that oversees the war.

The largest cluster of procedural inefficiencies that I see in the federal government right now are the administrative costs associated with the executive branch.  Looking at the United States constitution, one might imagine the executive branch to be the most efficient arm of federal government.  Even without the idiosyncrasies of the current Bush administration, administrative agencies are the most responsible for something like the exact opposite being true.  Although the legislative and judicial branches are slow and often deadlocked in controversy, they are so by design.  Moreover, they remain transparent throughout their long, drawn-out process.  By contrast, administrative agencies, many of which hold as much substantive power over the public as the legislative and judicial branches, are inaccessible to the public, and run by agents relatively well-insulated from political pressures.

As the United States loses its political market share because of the globalisation of the world economy, there is a relatively easy strategy that we might consider deploying in order to stem the outflow of money and talent: bring federal administrative agencies onto the Internet.  We still have the chance to be a first-mover in this regard, although other countries (such as South Korea) have been quicker to get people Internet access.  Pioneering web-enabled government would gives us an edge in maintaining our position within the global economy.

I will post more on how administrative agencies and corporations might use the Internet to improve institutional efficiency over the next few weeks.

Signal-to-Noise Ratios in Content

In my last post, I pointed out how blogs have a technological advantage over social networks (and Facebook, in turn, has an advantage over other social networks) in solving collective action problems associated with bad content.

This got me thinking about the differences between books and magazines.  Magazines and newspapers have a different signal to noise ratio in content than do books -- i.e., magazines and newspapers take part of their revenue from advertisers who are interested in the demographic groups within their distribution, and the advertisements in turn add some "noise" to the content of the publication.  Revenue from books, by contrast, comes almost exclusively from readers.  (Almost because a few authors or publishers are accepting money for product placement.)  Actually, the relationship of books to magazines is similar to the relationship of film to television in this respect.  The revenue model shifts from exclusively consumer-based to consumer/advertiser-based as the signal to noise ratio approaches 0 from 1.  Near the zero end of the range we have "free" (i.e., free to the reader/watcher) content in the form of real estate listings or paid infomercials.  Near the one end of the range, we have novels and films.

There are several interesting ideas that are suggested by comparing these traditional media to the new media of blogs and social networks.

First, somewhere along this signal-to-noise segment the benefits of vertical integration breakdown.  Magazines and television are likely to own their own printing presses or studios, respectively.  By contrast, book publishers and movie producers tend to contract with presses or studios.  Ronald Coase explained why such breakdowns occur.  Magazines and television studios can keep costs down by coordinating production and distribution because both are happening continuously and in parallel.  Best-selling books and movies are produced (or at least identified) on a more irregular schedule, and the costs saved by coordinating production with distribution are much smaller than the benefit of having a competition among studios for distribution rights.

The Internet has (in effect) eliminated the cost of distributing media.  One corollary to this is that there can be no cost advantage to vertigal integration of production and distribution -- there can be no cost advantage when there are no costs!  One effect should be that magazine and television producers/distributors are now at a disadvantage relative to book and film producers on the Internet.  I think we're observing this right now -- newspapers and magazines do appear to be getting hit harder than book publishers and movie studios.

Second, by analogy to the revenue models associated with traditional media, it seems possible that a few websites with "hit" content may draw enough eyeballs to generate revenue by charging for access without advertising support.  These might be, for example, the top blogs.  Social networks will charge for access rather than accept advertising so long as content is exclusive (i.e., cannot easily be copied by competitors).  Social networks with such characteristics will be far more valuable in terms of profits than their advertising-supported competitors because, in effect, all of the value associated with the content is internalized by the social network rather than shared with advertisers.

Collective Action Problems on the Web

Marc Andreesen, whose own foray into blogging has more or less inspired me to follow suit, remembers Dave Sifry explaining how blogs would help solve the collective action problems of spam and comment trolls.  In response, Tyler Cowen predicts the future of blogging to look pretty much like the status quo.

Blogs do help solve collective action problems by centralizing decisionmaking into the hands of one or one group of bloggers, who have an incentive to keep their webpage as hospital an environment for readers as possible.  The Chicago school answer to collective action problems is to centralize decisionmaking by assinging exclusive rights (i.e, "property rights") to the highest value user.  Because most blog software permits non-anonymous bloggers to internalize the positive social benefits of mindshare from blogging, bloggers will tend to remove value-destroying comments and advertising on blogs.  The negative costs of spam are spread over the entire Internet.

But there's nothing particularly special about blogs in this regard.  Any software platform that bundles exclusive rights to content and assigns it to a particular person or group would achieve this same benefit.  A while back I saw that the number of new blogs had leveled off as social networks such as MySpace and Facebook took off.  This is most likely because for some people social networks are an economic substitute to blogging.  (For others, such as Tyler Cowen, who recently setup a Facebook profile they may be economic complements).

As a competitive matter, I believe this cuts in favor of Facebook, which has maintained far more control over the content presented on its pages than has its competitors.  Indeed, Facebook privacy settings could be viewed as a means for fine-tunining the risk-reward tradeoffs between the benefits of more widespread dissemination of personal information on the Internet and the costs.