Better than Free

Here are his eight ways of making something worth charging for:
Immediacy -- Sooner or later you can find a free copy of whatever you want, but getting a copy delivered to your inbox the moment it is released -- or even better, produced -- by its creators is a generative asset. Many people go to movie theaters to see films on the opening night, where they will pay a hefty price to see a film that later will be available for free, or almost free, via rental or download. Hardcover books command a premium for their immediacy, disguised as a harder cover. First in line often commands an extra price for the same good. As a sellable quality, immediacy has many levels, including access to beta versions. Fans are brought into the generative process itself. Beta versions are often de-valued because they are incomplete, but they also possess generative qualities that can be sold. Immediacy is a relative term, which is why it is generative. It has to fit with the product and the audience. A blog has a different sense of time than a movie, or a car. But immediacy can be found in any media.
Personalization -- A generic version of a concert recording may be free, but if you want a copy that has been tweaked to sound perfect in your particular living room -- as if it were preformed in your room -- you may be willing to pay a lot. The free copy of a book can be custom edited by the publishers to reflect your own previous reading background. A free movie you buy may be cut to reflect the rating you desire (no violence, dirty language okay). Aspirin is free, but aspirin tailored to your DNA is very expensive. As many have noted, personalization requires an ongoing conversation between the creator and consumer, artist and fan, producer and user. It is deeply generative because it is iterative and time consuming. You can't copy the personalization that a relationship represents. Marketers call that "stickiness" because it means both sides of the relationship are stuck (invested) in this generative asset, and will be reluctant to switch and start over.
Interpretation -- As the old joke goes: software, free. The manual, $10,000. But it's no joke. A couple of high profile companies, like Red Hat, Apache, and others make their living doing exactly that. They provide paid support for free software. The copy of code, being mere bits, is free -- and becomes valuable to you only through the support and guidance. I suspect a lot of genetic information will go this route. Right now getting your copy of your DNA is very expensive, but soon it won't be. In fact, soon pharmaceutical companies will PAY you to get your genes sequence. So the copy of your sequence will be free, but the interpretation of what it means, what you can do about it, and how to use it -- the manual for your genes so to speak -- will be expensive.
Authenticity -- You might be able to grab a key software application for free, but even if you don't need a manual, you might like to be sure it is bug free, reliable, and warranted. You'll pay for authenticity. There are nearly an infinite number of variations of the Grateful Dead jams around; buying an authentic version from the band itself will ensure you get the one you wanted. Or that it was indeed actually performed by the Dead. Artists have dealt with this problem for a long time. Graphic reproductions such as photographs and lithographs often come with the artist's stamp of authenticity -- a signature -- to raise the price of the copy. Digital watermarks and other signature technology will not work as copy-protection schemes (copies are super-conducting liquids, remember?) but they can serve up the generative quality of authenticity for those who care.
Accessibility -- Ownership often sucks. You have to keep your things tidy, up-to-date, and in the case of digital material, backed up. And in this mobile world, you have to carry it along with you. Many people, me included, will be happy to have others tend our "possessions" by subscribing to them. We'll pay Acme Digital Warehouse to serve us any musical tune in the world, when and where we want it, as well as any movie, photo (ours or other photographers). Ditto for books and blogs. Acme backs everything up, pays the creators, and delivers us our desires. We can sip it from our phones, PDAs, laptops, big screens from where-ever. The fact that most of this material will be available free, if we want to tend it, back it up, keep adding to it, and organize it, will be less and less appealing as time goes on.
Embodiment -- At its core the digital copy is without a body. You can take a free copy of a work and throw it on a screen. But perhaps you'd like to see it in hi-res on a huge screen? Maybe in 3D? PDFs are fine, but sometimes it is delicious to have the same words printed on bright white cottony paper, bound in leather. Feels so good. What about dwelling in your favorite (free) game with 35 others in the same room? There is no end to greater embodiment. Sure, the hi-res of today -- which may draw ticket holders to a big theater -- may migrate to your home theater tomorrow, but there will always be new insanely great display technology that consumers won't have. Laser projection, holographic display, the holodeck itself! And nothing gets embodied as much as music in a live performance, with real bodies. The music is free; the bodily performance expensive. This formula is quickly becoming a common one for not only musicians, but even authors. The book is free; the bodily talk is expensive.
Patronage -- It is my belief that audiences WANT to pay creators. Fans like to reward artists, musicians, authors and the like with the tokens of their appreciation, because it allows them to connect. But they will only pay if it is very easy to do, a reasonable amount, and they feel certain the money will directly benefit the creators. Radiohead's recent high-profile experiment in letting fans pay them whatever they wished for a free copy is an excellent illustration of the power of patronage. The elusive, intangible connection that flows between appreciative fans and the artist is worth something. In Radiohead's case it was about $5 per download. There are many other examples of the audience paying simply because it feels good.
Findability -- Where as the previous generative qualities reside within creative digital works, findability is an asset that occurs at a higher level in the aggregate of many works. A zero price does not help direct attention to a work, and in fact may sometimes hinder it. But no matter what its price, a work has no value unless it is seen; unfound masterpieces are worthless. When there are millions of books, millions of songs, millions of films, millions of applications, millions of everything requesting our attention -- and most of it free -- being found is valuable.
The giant aggregators such as Amazon and Netflix make their living in part by helping the audience find works they love. They bring out the good news of the "long tail" phenomenon, which we all know, connects niche audiences with niche productions. But sadly, the long tail is only good news for the giant aggregators, and larger mid-level aggregators such as publishers, studios, and labels. The "long tail" is only lukewarm news to creators themselves. But since findability can really only happen at the systems level, creators need aggregators. This is why publishers, studios, and labels (PSL)will never disappear. They are not needed for distribution of the copies (the internet machine does that). Rather the PSL are needed for the distribution of the users' attention back to the works. From an ocean of possibilities the PSL find, nurture and refine the work of creators that they believe fans will connect with. Other intermediates such as critics and reviewers also channel attention. Fans rely on this multi-level apparatus of findability to discover the works of worth out of the zillions produced. There is money to be made (indirectly for the creatives) by finding talent. For many years the paper publication TV Guide made more money than all of the 3 major TV networks it "guided" combined. The magazine guided and pointed viewers to the good stuff on the tube that week. Stuff, it is worth noting, that was free to the viewers. There is little doubt that besides the mega-aggregators, in the world of the free many PDLs will make money selling findability -- in addition to the other generative qualities.

Is Yahoo Worth $44.6 billion?

Microsoft is paying a premium to catch up to Google.
By Jennifer Ordoñez and Brian Braiker

After what may have been a two-year flirtation, Microsoft is trying again to tie the knot. On Friday morning, CEO Steve Ballmer announced that the company initiated a $44.6 billion takeover bidfor Yahoo! It's the second time Microsoft has made a play for the online service. But its current bid is the firm's boldest move yet and is clearly designed to close the gap created by Google, which increasingly dominates the paid search and online advertising business. But in its attempt to catch up, is Microsoft paying too much?
Microsoft's announcement injected some drama into the online ad environment that in recent weeks has left both investors and advertisers worried about the effects a weakening global economy may have on the industry. Still, Microsoft's $31 per share offer amounts to a 62 percent premium over Yahoo's Thursday closing price of $19.18. Never mind that according to recent report by eMarketer, Google's share of the paid search advertising market was 75 percent last year, up from 60 percent from 2006. Yahoo's share in 2007: a meager 9 percent.
For Ballmer, Yahoo clearly seems like a relative bargain considering what he hopes to gain from the deal. "Microsoft and Yahoo should be aligned in some way to create a more effective competitor in the online marketplace," wrote Ballmer in a letter to Yahoo's board of directors. He added that "the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers and publishers." In response to the offer, Yahoo, which earlier this week reported a 23 percent drop in fourth-quarter profit and announced it would layoff 1,000 employees, said its board "will evaluate this proposal carefully and promptly."
Investors applauded Microsoft's bid, sending shares of Yahoo up nearly 50 percent during early-Friday trading. But the backdrop of the news is an Internet advertising market that has significant potential for growth but still faces some uncertainty. Google this Thursday reported fourth-quarter earnings that failed to meet Wall Street expectations.
Still, Google owns the lion's share of online-ad revenues. Last year, U.S. advertisers spent a total of $20 billion on the Web, a relatively small chunk of the $250 billion ad market overall. Global online advertising is estimated to reach $49.5 billion, a 22 percent increase. "Even though the Internet will likely be more resistant to a downturn than other places, it's far from immune," said David Hallerman, senior analyst at eMarketer.com, which tracks Internet ad spending. "Unless people click on the ad, there's no money. If there is a recession, and consumers pull back, people will be searching less for things to buy."
One potential bright spot in Yahoo's arsenal is a relatively strong display-ad business--those costlier banner or drop-down ads that companies use to heighten consumer awareness of a brand, considered the holy grail of advertising efficacy. "Yahoo is not an insignificant player in display advertising. Neither is Microsoft. We shouldn't bow to Google too early," said Tim Beyers, a senior analyst for Motley Fool. "You have to look at this as an arms race for most properties … to be the dominant provider of advertising in the digital world and advertising, period." Google, however, has been increasingly aggressive in broadening its reach beyond search. Last year it struck a $3 billion deal to acquire DoubleClick, a display- and banner-advertising giant. The Federal Trade Commission has approved the deal, but it will only be finalized if European regulators decide to sign-off in April. Meanwhile, on Friday, the U.S. Department of Justice said it is "interested" in reviewing any potential merger between Microsoft and Yahoo.
Complicating things, of course, is the fact that reliable ways of measuring Web traffic--and, hence, any company's ad revenue potential--is still as much art as science. As for Microsoft's valuation of Yahoo, it's about right for a high roller, some analysts say. "If you're Steve Balmer and want to be the Donald Trump of the Web, you want the most-viewed properties on the Web. Well, Yahoo's got 'em," says Beyers, adding, however, that investors might want to keep their own passion in check and think back to the last tech bubble. "I'm not a bear, but I'm careful when it comes to tech investments right now."

Unable to fend for itself

TOKYO From The Economist print editionJapan's export-led economy still relies heavily on America

IN TOKYO'S financial markets a long-held sense of injustice is turning to rising alarm. The injustice is that the shares of Japanese companies were the first to be punished, long before other stockmarkets, when credit troubles in America broke out last summer. The alarm is partly over the effects that an American recession might have on the Japanese economy. But, equally, it is over a dysfunctional political establishment at home that is incapable of facing up to a weakening economy.
Pessimism is growing about the damage an American recession might do. Last year growth in exports to Europe and China more than offset an export slowdown to America. But the United States is still the end-market for many Japanese goods that go to China. A recent slackening of shipments of semiconductors and steel to China does not bode well.
If Japan's six-year recovery were broad-based, that would not be such a concern. Yet it has been pulled along by exports, and despite repeated predictions, household spending has failed to take off. The reason is clear: though employment has steadily increased, wages are stagnant or falling, since cash-rich companies insist on hoarding their profits—and will presumably continue to do so now that dearer oil is eating into margins.
Perhaps that hoarding is an insurance against unpredictable government. A year ago, in an attempt to crack down on predatory lending, the government all but destroyed the consumer-finance industry. Far more damaging has been a system for vetting new buildings that was hurriedly introduced last summer in reaction to architects faking data for earthquake-proofing. The housing ministry was unable to get new software up and running in time, so new-building approvals collapsed. The jaw-dropping effect has been to knock 0.6 percentage points off growth, according to Takatoshi Ito of Tokyo University, who sits on the government's advisory Council on Economic and Fiscal Policy (CEFP).
Partly as a result, the government has lowered its forecast for growth in the fiscal year to the end of March, from 2.1% to 1.3%. Some economists think Japan is already tipping into recession. But the longer-term picture is more worrying. Mr Ito argues that if Japan pursued the kind of supply-side and tax reforms that the CEFP has long proposed, the country could grow at a respectable 2% a year. Without those reforms, growth will crawl along at 1-1.4%. Hopes of sensible policy have vanished since the opposition seized control of the upper house of the Diet (parliament) last July and Yasuo Fakuda's ruling coalition appears to lack the courage for reform.
Now, the Bank of Japan (BoJ) is adding to the uncertainty. At its policy-board meeting this week, the central bank was reluctant to admit that reality was at odds with its bullish view, though it acknowledged that momentum had slowed since its last outlook in October. Insisting, once again, that monetary policy should be “forward-looking”, its governor, Toshihiko Fukui, seemed to affirm that, far from cutting rates as other central banks are doing, the BoJ still hoped to raise them from unnaturally low levels.
Mr Fukui's term ends on March 19th, and somehow Japan's warring political parties must settle on a successor. With a slowing economy, the BoJ's conduct of monetary policy is about to become intensely politicised.