The OpenBusiness Guide
From iCommons wiki
Contents |
Introduction
“The removal of the physical constraints on effective information production has made human creativity and the economics of information itself the core structuring facts in the new networked information economy.”
Yochai Benkler, The Wealth of Networks (2006)
The More You Give, The More You Get
Giving away things for free seems an unlikely business strategy. But the fastest growing business of the last decades offers its primary services for free. Google was created without a revenue model in mind, and when it started had no way of making money.
Web 2.0, peer to peer, social networking, crowd sourcing, open innovation, peer production, non-monetary incentives, free culture, Creative Commons, Free and Open Source Software are all terms which have gained prominence in the debate surrounding the present and future of culture, film, radio, tv, education, many other fields and last but not least 'business' in general.
Against this background OpenBusiness.cc, an international project with partners in Brazil, South Africa and the UK, supported by the Open Society Institute, International Development Research Centre, Ford Foundation and Arts Council England, has collected examples of new business models and processes that focus on:
- lowering the costs of market entry for individuals by providing tools or services, that ‘open’ up traditional business boundaries using the Internet
- sharing information for free using alternative ‘open copyright models’ while exploring new revenue models
- giving substantial parts of content away for free while creating derivative revenue streams
- operate organizationally like Open Source software production, but translate the model to services (finance, or film or music production)
‘Closed businesses’ rely on strong enforcement of Intellectual Property rights, tight contractual agreements between those who produce and those who distribute, hierarchical organizational forms, top down management closed production and innovation cycles to mention a few characteristics.
Recently we have seen a wave of innovation, mostly coming from individual entrepreneurs, which challenge those norms and provide actual alternatives. We have tried to capture the move away from ‘closed business models’ in the term OpenBusiness. OpenBusiness not only documents the different business models evolving in the Open Source spectrum, but also beyond.
Open Source was the first sector in which peer-based production led to quality products. However, innovative business models have started to appear in other economic sectors experimenting with open approaches. Now there are online record labels using Creative Commons licenses, Open Source film projects, peer funded music labels, p2p finance services and the list of innovations regarding information management in the widest sense almost endless.
OpenBusiness.cc has extensively documented how social activity has become a product in its own right. The old antagonistic categorisations of social vs business and financial profit vs societal gain have changed. Many of the most interesting and valuable internet services are networking shells which are enabled by lower transaction costs. It seems that being social has become a product in its own right.
These socially exciting services such as Fundable, which aggregates individuals’ financial power, are entirely based on creating communities. Likewise music communities and services are emerging, which decrease costs while increasing choice for consumers.
'OpenBusiness' is still an emergent trend, but the ‘opening up of boundaries’ organisationally, legally, culturally and socially seems to be accelerating and inexorable.
Documenting those innovations to share them with the world is the mission of OpenBusiness as we learn through the ideas of others to foster innovation benefiting small entrepreneurs. The aim of this paper is to combine a study of recent, successful practice with a summary of the key ideas of openness, remix, non-market production and attention now emerging around the networked information economy.
Learning from Open Source
The open source movement has revolutionised the creation and consumption of software. Open source business strategies, in which certain intellectual property rights are ceded to the commons, are central to such major companies as Sun, IBM and Novell. Many ‘web 2.0’ innovators have succeeded by adopting similar ‘open’ principles, recognising that only by embracing the freedoms made possible by the web can its powerful network effects be realised.
At the heart of OpenBusiness is a willingness to make intellectual property ‘free’, but this can take many forms. In English, the word ‘free’ can mean both zero-price (free as in beer) and freedom (free libre), a crucial distinction often made by the open source community.
The latter involves the freedom to tinker, adapt and build upon a work, not merely to use it gratis. It typically implies a business that uses GPL or Creative Commons licenses to distribute their digital works, or employs a comparable spirit in its dealings, particularly in its licensing practices. There are many conceptions of what it means to be ‘libre’.
Numerous aspects of a business may be ‘opened’ in some manner. The concept of ‘code’ now extends from its original software context to the materials and resources underlying a creative project. For example, in a musical context the code may include multi-track recordings, ‘parts’ and samples.
By giving something away for free, a business can develop extensive networks, communities and platforms which can then generate opportunities to create revenue. Precisely what a business has to share is a function of its particular business model. For example, record labels (e.g. Beatpick, Loca) can facilitate the sharing of their recordings under a Creative Commons licence whilst charging for higher quality versions, and web 2.0 services such as Flickr can offer zero-cost platforms for sharing of pictures.
Whilst it is fairly simple to designate outputs as open, it is also possible to pursue open notions to your production processes or inputs. For example, a business might focus on works resulting from collaboration or decentralised production, or it might encourage derivations from Creative Commons-licensed works.
More radically, it may be possible to share the ‘code’ underlying a business, including the intricacies of administering a sustainable business. This might involve writing and publishing a logistics guidebook, covering a range of simple and generic organisational practices, or perhaps even detailed examples on how to structure deals or agreements with media partners, suppliers and clients. Publishing and sharing this aspect of code is heretical in the culture of ‘industry secrets’, yet it is very appealing to those accustomed to the principles of free-software.
It is an intriguing thought experiment to consider what a truly open firm would look like and where this radical openness might lead. In his book Open Life, Henrik Ingo discusses the hypothetical case of a totally transparent company, which applies openness not only to inputs and outputs, but to the internal operations of the firm itself.
This ultra-open firm would give free access to its budgets and financial accounts, and would thus be unable to gain competitive advantages through trade secrets and non-disclosure agreements. The disadvantages to such extreme openness are immediately clear: ‘closed’ competitors would have access to information which will allow them to undercut the firm’s prices, bid more profitably for tenders and generally stay one step ahead of a company with little potential for surprise.
Nonetheless, the transparent firm does hold several advantages over its rivals. Opening its internal processes to the scrutiny of its partners, subcontractors and outsiders could lead to more efficient operations and fewer mistakes (applying the open-source dictum that ‘all bugs are shallow, given enough eyeballs’). And whilst certainly true that, by examining actual costs and scrutinizing boardroom minutes, competitors could easily undercut an ultra-open company’s tenders, the transparent tenders would possess the added value of honesty and verifiability. A secret bid calculated on the back of an envelope may not be preferable to a higher bid from an open company, which can be better trusted to carry out the work on time and to known standards.
This thought experiment highlights some key commercial advantages that can be gained by an open business. Users and commercial partners are more likely to trust and be invested in a business that treats them as co-creators and which is committed to an architecture of participation.
Openness Benefits Networks
Whilst running a business in a closed way might have benefits in an environment characterized by industrial age type businesses. By 'running a business in a closed way' we actually refer to tools such as patents, business secrets, and protected, insular production and innovation cycles.
But in the long run there is good reason to speculate that the more seriously a company takes the issue of openness, the better it will be placed to reap the full benefits of the budding information economy. Open business is in many ways a return to business fundamentals.
In pursuits as varied as reportage, critique, filmmaking, musicianship, stock broking, accountancy, scientific endeavour public relations, marketing, advertising and the ubiquitous culture of the brand, the flow of information is the key economic driver.
Be it through the distribution of print media, the partitioning of broadcasting spectrum, the privileged transfer of professional skills or the rigorous control and manipulation of images, economic gain has traditionally been a product of scarcity. This scarcity was a function of the flow of information – the mechanisms available to distribute it – and not of the nature of information itself.
The rise of the internet heralds a gradual reduction of the distribution costs associated with information goods. Channels have widened, to the extent that content is no longer distributed according to a spectrum model but according to the network model of near infinite capacity. An author can now distribute his own work to an audience of millions, as can a musician and a filmmaker. The same goes for service businesses such as banks. Bringing people together, enabling them to collaborate, providing them with transparent information - in other words opening up business processes - seems to happen more often, and in many regards pushed forward by the internet.
Information that was confined within the walls of professional institutions is now detailed on the web and is free for all. Images associated with multi-million pound brands can be manipulated and subverted by any party through the simple mechanism of cut and paste. As such, space for new models of economic gain in the information economy has opened.
Crucially, the networked distribution environment allows audiences to talk back to businesess. We see this trend most clearly in the weblog, a publication tool which allows readers’ comments and reactions to appear alongside original content. Further, audience talk-backs can be aggregated to enrich content, displaying and promoting the most popular content automatically. This enriches the content experience dramatically by putting aspects of editorship in the hands of the audience.
As such, it has been predicted that the linear process of production-distribution-consumption will no longer apply to information goods. This process will instead become a virtuous circle of production-distribution-reproduction-distribution, performed in real time and reinforced by the growing power of the network to reduce spectrum constraints to zero.
Network Transaction Costs
In a pervasive network environment, information is abundant. This is the case not only because the distribution barriers of the industrial information economy have been removed for traditional actors, but also because new actors - creating content, a service, or a product in a non-market environment - flood the network with information.
Let’s turn our attention first to an almost pure informational good: media content in its many guises. Where once fans of, say, jazz music might have been expected to dedicate a Saturday afternoon to visiting various specialist dealers some distance from their homes to ascertain the availability of new releases or imports, now they can update their collection in an evening after work, from the comfort of their own front room.
However, the abundance of content in the network environment also increases search costs, since there are many more places to search. A fan of Andy McNab looking to purchase his latest novel will be confronted by dozens of suppliers offering to sell it to her. The fan will have to investigate, for example, price, payment terms, delivery time and delivery conditions of each of these in order to ensure she is receiving the best value for her money.
But this effect on search costs isn't the only way the network environment alters transaction costs associated with content. Slightly less obvious in the abstract, but painfully clear in practice, are the increases in policing and enforcement costs. If the contract between producer and consumer in a content exchange entails an understanding that said content is of a certain quality, then the networked environment obscures this understanding. So, for example, our jazz enthusiast might waste time downloading tracks of dubious sound quality.
This second, detrimental, effect on transaction costs has also reduced as the network has matured. And as search engines have tuned their algorithms in an effort to ensure that high quality content gets returned first, a further, and increasingly more significant mitigation tool has emerged. Peer recommendation mechanisms – increasingly common and increasingly sophisticated – now point consumers towards quality content online.
Thus, in as much as any endorsement by a large and hopefully diverse group of people can do, users determine and signpost quality. This approach doesn’t just work for a single site; it can be achieved across the Web. Social bookmarking sites like del.icio.us and Furl let users share their bookmarks – the websites they have marked especially for a revisit - classifying them using tags chosen by the user. Users can then search across the bookmarks for key terms, and filter for the most popular sites tagged with those terms, to determine what the greater proportion of people find the most useful site for a specific task.
Understanding how the network mitigates against the transaction costs of abundant content takes the content owner one step further to monetising content in the more competitive market of abundance. These mitigation measures yield a significantly different environment for content producers looking to make business online, by deprofessionalising the industries that content producers have traditionally relied upon to promote their work.
The Individual as an Organisation
Large parts of the infrastructure of a large organisation are now available to individuals. Users are equipped with two things that would previously have required the resources of a much larger company. The tools of production for much of the information economy – not just computers and DV cameras but knowledge tools like group collaboration software Basecamp – are now accessible on the web to hobbyists and non-professionals. At the same time, the process of distribution has been democratised by the process of peer-recommendation and the broad uptake of broadband internet, allowing experimental or socially-minded ventures to achieve truly organic growth at very little cost and on a small or local scale.
Likewise, now that a musician (read: individual) or band can record an album at home, then market and distribute it online with minimal outlay, the privileged position of record labels is increasingly under pressure. Individual musicians, like small business start-ups, can do for themselves what previously would have required access to an expensive infrastructure.
In an environment where individuals can compete with corporations, and start-ups can rival long-established giants, there’s an obvious need for mechanisms that can filter the good from the bad. Yet the processes responsible for the abundance of content are simultaneously transforming the filters themselves.
In the newspapers of old, next to reportage and comment, one finds cultural criticism – the review of artistic output for the consumption of the reader. Once the preserve of the few, this practice of recommendation is now the domain of the many, not only because of the ability to upload criticism onto the network, which has followed the pattern of citizen journalism described above, but crucially due to monitoring of consumption choices that can be aggregated and harvested for the benefit of further consumption.
Simply by recording the music taste of its million-plus members, Last FM need only expend the processing power involved in mining that data to recommend new music to its users. Further, because of the breadth and depth of that data, the recommendations are likely to have a far higher success rate than a music journalist reviewing new single and album releases in a weekly newspaper, or even a specialist magazine.
To sum up: What was previously segmented into specialized compartments of companies can be re-internalized through powerful software running on consumer grade PC's. Vice versa complex tasks such as writing code can easily be outsourced across the globe, without the need of a large and complex organisation.
The Architecture of Participation
Whereas there are many ‘participatory media models’ ranging from manipulating data to maps we have focussed for the purpose of this report on Last FM as it highlights several crucial characteristics of an ‘open service’.
Last FM’s business model is to make a small commission on music purchases from their site. As its network of users grows, Last FM can expect, not only to make more finely tuned recommendations, but also to make more money through commissions. Its business model will therefore become stronger and stronger as more and more people use it, as well as allowing increasing diversity in the products it promotes. This is the network effect.
Last FM acts as a portal, or interface, between users and content producers. Many other such portals exist on the network, the most prominent in recent times being the search engine Google.
As Tim O’Reilly notes in The Architecture of Participation:
…only a small percentage of users will go to the trouble of adding value to your application via explicit means. Therefore, Web 2.0 companies set inclusive defaults for aggregating user data and building value as a side-effect of ordinary use of the application… they build systems that get better the more people use them.
Databases like the ones created by Last FM and Google are produced as a side effect of large scale interaction being programmed in to the software architectures that make up their online presence. These differ from databases generated consciously by users, for example those databases maintained by social networking sites such as MySpace. Sites such as these could in fact be characterised as anti-portals.
Does Copyright Matter?
The traditional way of monetising content has been through copyright law. Compared to physical goods, it is difficult to ascertain the cost of producing information. Because, after these initial unknown costs have been expended, information can be reproduced at very low cost, the institution of copyright law – stated-granted, time-limited monopolies over the expression of ideas – has developed to help information generators exploit, exclusively, the information they generate.
In the networked information environment, it will become increasingly important for the success of any producer that content be available for the scrutiny of some network of users, be it through a portal such as Last FM or an antiportal such as MySpace. As we have seen, content is not only enriched by the network, it is also promoted by it. It is through user interaction that the most value will be derived from content in the networked information economy, and producers who persist in maintaining a one-to-many relationship with their audience will find themselves pushed out of an increasingly competitive space.
Users are, as shown in the above chapters, adding value to and promoting content, through sharing and remix, then it seems that copyright law only gets in the way of this process.
It is this fact that has caused so much tension between artists, distributors and consumers during the maturation of the network. The rush to exploit copyright online has led to content being delivered in a way that has been so impoverished as to discourage user interaction and so forfeit the benefits of the networked environment.
If content is to succeed by clustering around portals and antiportals in the networked information economy, rather than by being bought, packaged and sold by incumbent, analogue, content distributors such as record companies and publishing houses, then a new way of protecting copyright must be used which keeps content usable. One new way is Creative Commons.
A flexible approach to copyright, Creative Commons allows artists to pick and choose which rights enshrined in copyright law they wish to maintain, and which rights to gift to the network. They might, for example, give up their exclusive right to distribute their work, or to sanction what derivative works are formed from the content, while maintaining their right to exclusively profit from the work, to be attributed as its author and to dictate how any derivative works are themselves to be distributed.
In short, owning the copyright in a piece of content is no longer enough to ensure its efficient monetisation. Attention and investment from a critical mass of users is far more likely to produce results.
Within this framework, content producers can take advantage of ways to monetise content, many of which, as we shall see in the next section, are not new to the networked information economy.
Open Business Strategies
If the networked information economy requires content producers to give up exclusive rights enshrined in copyright law, what other ways are there for producers to monetise their ownership of content?
This section outlines key rules of thumb for content producers to monetise content in the new networked environment. Some are adapted from strategies developed by Google consultant and professor Hal Varian at the UC Berkley School of Information. Though the focus of the 11 following recommendations is seemingly on content it applies in a limited way to services as well. If 'information' is at the heart of the business process similar revenue strategies can be used. In that sens the traditional narrow definition of what 'media' is applies in a networked environment to writing code, financial information and transactions, production of architectural plans etc..
Make the original cheaper than a copy
How can you make an original that is cheaper than a copy in an environment where content can be copied and distributed at practically zero cost? The answer lies in minimising transaction costs.
A good example of this is eMusic, which charges as little as 12p per song downloaded to mitigate against the risk of wasting time downloading poor quality music, as well as facing litigation from rights owners, by using illicit peer to peer filesharing clients. You might save money downloading music from such sites, but as Steve Jobs remarked at the launch of the iTunes store, “you’re working for under minimum wage.”
In the print industry, the print form of a novel is still much more convenient in many contexts than is the digital form. There are a range of environments, from the bath to the bus, where consumers would prefer their novel in book form, and will pay for the privilege.
Sell physical complements
Bands who develop a fan base by giving away their music online can rely on this fan base to consume physical compliments to their music, by attending gigs or purchasing products such as T-shirts, caps and badges.
Sell information complements
In open source software products, such as Red Hat Linux, are given away, and then support contracts are sold on the strength of the free product. A type of “support contract” for music might be specially packaged forms of the music, already generated by the artists during the production stages, where the different recording tracks have been separated out to allow users to remix the song.
In the same way, an academic, consultant or journalist distributing their writing free online could successfully charge for specific consultancy work based on the popularity or reach of their work. Developing ones reputation for free is a good strategy to create derivative revenue streams.
Subscriptions
The disadvantages of hiding content behind subscription barriers have already been discussed. However, this does not preclude the content producers from allowing access to special features associated with the content to paying subscribers. Slashdot, for example, gives subscribers access to their posts half an hour before they are posted to all readers, enabling subscribers to be first in line to comment on a particular post. Increasingly adaptations to old revenue models can be found where more is available for free, but revenue comes from parallel revenue streams, which are only available to paying customers. The difference being they increasingly are not paying for what used to be the main product, but for ancillary higher value services.
Offer a personalised version
Personalising content, using customer relations management software such as that employed at Amazon, can help users navigate your content by reminding them what they have and haven’t seen, as well as recommending they look at something based on what other users with similar profiles have enjoyed looking at.
Advertise yourself
As discussed, gaining exposure on the network is increased by giving away your content for free. This is a key strategy for artists seeking their audience.
Advertise other things
Though this seems to be the answer for nearly every web 2.0 entrepreneur it works for many. Once your content has enough attention focussed on it, you are in a position to sell advertising space. Advertising revenues are increasingly being diverted from print media towards the online sphere, and this trend can only continue. Plus, with Google Small Ads, there is a wider market for content producers to source advertising revenue. It will be interesting to watch what innovative forms 'selling attention' will take.
Monitoring
Collecting societies traditionally collect royalties for their members, and are moving into the online sphere. For example, Last FM, whilst offering recommendations and short previews of music, also offers personal radio stations, which play users music according to their music profile. Last FM pays the MCPS-PRS fees like any other radio station, and revenue from this is in turn distributed to rightsholders.
Selling content
If you are releasing your content online using a Creative Commons licence, then you still maintain the right to profit from your own work. And developing a fan base through freeing your content to a network of fans will make you a more attractive proposition to record labels and publishing houses.
Pure public provision
Public funding, either as seed funding or start-up funding might play a significant role in some online ventures, and funding from your own public, through mechanisms such as Paypal, could provide significant revenues.
Prizes, awards and commissions
Patronage in the form of prizes and awards as well as specific commissions, should also be considered as a source of revenue.
Where the first round of commercial web development focused on online services and e-commerce, the new Web focuses on sociality. People are at the core of the new Web -- contributing content, ordering it, and making connections amongst each other. Web 2.0 companies are merely 'containers' for their social activity: mediators, facilitators and meeting places. Such companies add value to users’ data by aggregating it, analysing it, funnelling the value of users’ collective intelligence back to the user.
This activity is driven by network effects, a fundamental dynamic in social networks. To get to these effects, some key lessons learned by early players and successes need to be remembered:
- It Won’t Work If It Feels Like Work
Getting people to participate and contribute is key to success of many, highly distributed services. But people won’t take part in co-content systems that make it hard work to do so. In fact, the best systems are crafted to let people enjoy the network effects of sharing their data with others with a minimum of hassle.
If you can find a way of harnessing the data that is thrown off a user’s everyday life (as, for example, Flickr stores people’s photos, del.icio.us their links, or Last.fm their playlists) this will improve your chances of hosting a successful co-content service. Demanding lots of work from users will not.
- Give Users Equity
Users see themselves with varying degrees of justification not as consumers of media (and services) but as its `co-creators'. Because of this they need some equity in what they produce, even if that equity is only or partially symbolic.
Tight feedback loops between co-creators and architects, in which suggestions and criticisms are acted upon quickly, are one way towards this.
- Free Your Content (and service), Lose Control
Not taking ownership of content is another. Because Web 2.0 is about autonomous, distributed services and remixability, it is fraught with ownership and boundary/control issues. These present particular challenges for all players, but they must be embraced.
It is crucial that content be as free as possible to traverse the Net. At the heart of Web 2.0 is the ability to use, re-use and remix materials from all over the Net, and to combine material or infrastructure from one service with that of others. Attracting more users causes organisational effects to emerge – the ‘network effects’ that everyone wants.
Personal Benefits
Often, contributions are motivated by a personal or selfish intentions on the individual user’s part. Services such as Digg and even the new iCommons site employ these strategies. Meritocratic elements should be considered to make users/customers feel good and to keep their engagement frequent.
Feedback, Rewards, and Recognition
Rewards and positive feedback are another strong motivation for users/customers. When users/custmoers feel appreciated as a result of contributing to a system, they tend to stay active in anticipation of future rewards. Flickr’s early success in building its strong community stems at least in part from a well-designed feedback system that not only makes it very easy to leave positive comments(one-click favorites and in-line comments) but also makes sure to highlight this feedback to the user each time they visit.
Give and Take
Users will agree to contribute data if they feel they receive an equal‚ if not greater value in return. BitTorrent enforces this principle by correlating the download rate of users with the willingness to upload data. Last.fm makes it clear that users benefit the most from its system if they agree to share their music play lists. Since the required effort is minimal (installing a plug-in), many will say ‘Why not?’.
Meaningful Connections
As people spend more and time online where most interactions are mediated by text, email, IM or SMS, they increasingly seek meaningful environments in which they can connect with others based on shared interests and intentions. Flickr built a strong international community of passionate photographers; Digg has aggregated a large tech-savvy community in which people start making connections and watching each other’s stories.
Create Platforms For Attention
For many of today’s successful Web 2.0 systems, making money has been secondary to attracting attention, a term now used to describe the amount of time and personal investment that a user is willing to spend on a given site. In terms of 2.0 business models, attention has become a new currency, although the means for converting it into revenue have not yet been proven universally.
Attention is the cornerstone of building trust, loyalty, and brand recognition. For established media companies, it reinforces authority and can have cross-channel ‘halo’ effects: time spent on an online property will lead to more attention for the same company’s offline media, especially if the two are increasingly linked.
Design For Community
People are at the heart of what is called `Web 2.0’. Conversation and social activity, mediated by a Web platform or software, is the core Web 2.0 proposition. Design and architecture should reflect this, focussing on usability, clarity, and user experience.
Plan For And Enjoy Unintended Uses
Start from the beginning with the assumption that others will find your service or information valuable. Then don’t preclude them from using it in their own service because of limiting design decisions, particularly by making things complex. This means identifying and using remix-friendly techniques and technologies. Document how your services work and make the pieces and documentation easy to find.
Conclusions
The main thrust of [Wikipedia’s] evolution has been to become more open, because we have found time and time again that increased openness, increased dialogue and debate, leads to higher quality. I think it is a misunderstanding to think of "openness" as antithetical to quality. "Openness" is going to be necessary in order to reach the highest levels of quality.
Jimmy Wales, quoted in Wall Street Journal, September 12, 2006.
Surveying the business landscape in the networked information economy, what can we see? With barriers to production and distribution lowered dramatically, and sophisticated mechanisms for peer endorsement processing content in ways which require no industry middlemen, three (educated) guesses are: abundance, diversity and quality.
Whilst these changes were present in the early 90's and different industries started feeling pressure to change - such as music and now increasingly film and tv - only now other sectors such as banking start employing design and process paradigms coming from Open Source and p2p filesharing. Whilst moving the capabilities for monetary transactions was an innovation in the 90's it was unthinkable to largely (or completely) remove the banks from processes such as lending. Likewise only in the last two or three years have entrepreneurs started to employ the web for such complex processes as distributed product development.
What we can see is multi-faceted shift in perception of how to run a business, what a business is and how we define 'work'.
For example: It seems more and more clear that the human impulse to create is not driven by economic reward, indeed it is the preoccupation with economic reward that can often stifle creativity (think of the proverbial “difficult second album” or the slew of identikit boybands that plagued the early 1990s). Traditional economics has great difficulty understanding non-monetary motivation, but very few artists, at least in the beginning of their careers, chose art for the financial rewards.
This is not to say that human creativity can be nurtured in a cash-free environment - creators must live, eat, provide for their children and their future. Rather, this is to say that as amateur production enjoys the same potential exposure as professional production there will be a diverse range of content and services available for peers to endorse, reward and promote.
Further, because of the wrong-footed reliance on copyright law and ownership of content as described earlier by many incumbent producers, amateur producers have had a head start in injecting their content into the new networked environment.
The traditional entry barriers to creative practices such as journalism, music and video production are evaporating in the new networked environment. The web is now closer to what its inventor Tim Berners-Lee envisioned – a ‘read-write’ web in which content is not consumed passively, but is dynamic, fluid and editable by users.
The traditional ways of selecting for quality are not scaleable to the abundance and diversity of such an environment. Rather, quality must be maintained by a process of natural selection. The collective intelligence of a large base of users linking to and recommending sites, or creating and editing content, can be harnessed to focus attention on the highest-quality content, and then to improve upon it.
Wikipedia’s dominance demonstrates how opening up content to the community can, perhaps counter-intuitively, increase its quality. Contributors to Wikipedia are not working for money, but for something else. Undeniably human motivations – to share, gossip, endorse, criticise, boast, debate, fiddle, hack – are what add value to information goods in the networked information economy. Allowing users to manipulate content and produce derivative works will therefore broaden further the range of content available for the endorsement of the network.
There are different types and levels of user participation. Recently, the producers of the Colbert Report, a popular show on Comedy Central, became aware that many fans were distributing clips from the programme on YouTube. Rather than requesting the clips be taken down, presenter Stephen Colbert urged viewers to download and remix clips. These have become a popular running segment on the show itself, demonstrating how opening up content to the community and allowing derivatives to be made can directly benefit the producer.
A more common form of user involvement entails the enrichment of content by means of metadata such as tags, recommendations and ratings. Flickr is a good example of a service that has harnessed both types of user involvement to great success. The content itself is provided by individual users, but its structure and quality is a result of the ‘drive-by data’ contributed by the entire network. Features such as one-click favourites and in-line tag creation make the process of contributing quick and effortless; when this data is aggregated, it provides a powerful filter that adds significant value to the raw content.
For example, the ability to add location data to photographs via Yahoo Maps was recently added to Flickr, and within twenty-four hours users had geotagged over 1.2 million photos. This data significantly enriches the experience of using Yahoo Maps itself, as users can not only see satellite and cartographic images of a location, but also view photographs of that place taken by members of the Flickr community.
In a world of minimal network transaction costs, in which content is abundant and user metadata plentiful, new forms of social and commercial interaction suddenly become possible. The sophisticated algorithms under the hood of sites like Last FM, Flickr and Amazon provide relevance and individuation for users, guiding them on the basis of their own listening, tagging or purchasing behaviour towards recommendations which, in a world of infinite shelf space and diverse content, can be as niche and eclectic as the individuals themselves.
And individuals are extremely individual, as the companies that fully embraced the potential of the networked information economy have discovered. In a traditional retail venture governed by the economics of scarcity, such as a bookstore, it is a business-school saw that 80% of the sales should result from just 20% of titles. In the networked economy a different rule applies: whereas a typical Borders store might stock around 130,000 books, over half of Amazon’s sales come from books outside of its top 130,000 titles.
This phenomenon was noted in 2004 by Chris Anderson, editor of Wired, who wrote an influential article christening the effect the ‘Long Tail’. Such results are to be expected online, he argued, since low-frequency sales, whilst not amounting to very much individually, can have a greater cumulative value than all the high-frequency sales put together. The long tail of the demand curve is where low-demand, niche products go to die. But collectively, they can have a greater value than the handful of bestsellers at the top of the demand curve.
That fact is disguised in bricks-and-mortar stores, where books take up valuable shelf real estate. Those which sell only one or two copies a year are unlikely to cover this ‘rent’. In the networked digital economy, however, abundance and diversity are the norm. By analysing the rich metadata provided by users, online businesses can fine-tune recommendations and drive users down the long tail, towards pockets and niches of demand that previously were inaccessible.
Socially, culturally and commercially, the opening up of the long tail has enormous implications. The phenomenon encompasses not only online shopping malls but also the niche activities of geographically scattered groups and communities.
There is now a market, however small, for every blogger, video artist, activist and musician who has access to the internet. For every interest or hobby you may have, there is a del.icio.us user with a list of useful bookmarks you can share.
In such an environment, the key to success is the attention of and engagement with users. As Tim O’Reilly has noted: “the lever of power in the previous era is irrelevant, because software need never be distributed, only performed … the value of the software is proportional to the scale and dynamism of the data it helps to manage.” An algorithm on its own does not make a web service; network effects can only be realised when a sizeable, engaged user base interacts with and itself produces such data.
The most successful web services give something back to the user when they contribute or manipulate content. The reason so many users geotag their photos in Flickr, and provide listening data to last.fm, is to add value to their ‘own’ content and improve the personalisation of their service. There are similarities here to Adam Smith’s conception of an ‘invisible hand’ in the marketplace – a network mechanism in which individuals acting for their own benefit can tend to promote the good of the wider community. An open question is whether users will ultimately require remuneration for this added value, once its importance to the wider network is recognised.
Innovations such as Amazon’s Mechanical Turk (an ingenious service where for a small fee users carry out ‘human-centric’ tasks, such as identifying pictures and writing code snippets) and the new Netscape.com (similar to Digg, except that the top contributors are financially remunerated) are the first gestures at financially compensating users for their contributions to the network. It is likely that this issue will loom larger in coming years, as users question the equity of a system which amply rewards site owners whilst paying contributors nothing.
The current era of the web repositions users as co-creators, but the next stage in its evolution may well involve them to some degree as co-owners. This is particularly true of those businesses founded with a social or civic motivation. The same processes that allow corporations to benefit from the ‘collective wisdom’ of their users are capable of empowering local communities and activists. It may be appropriate for such projects to be funded by small, local investment from their communities.
Case Studies
Social Lending Experiments
Zopa – the Zone Of Possible Agreement – puts lenders and borrowers directly in touch and promises better rates for both by cutting out the middleman. The site acts as a facilitator for transactions and makes sure debts are repaid.
Who: Zopa was set up by many of the team who launched Egg, and is backed by Benchmark Capital, (who backed eBay), Wellington Partners, Bessemer Venture Partners (the VC firm which backed Skype), Tim Draper and The Rowland Family.
Borrowers: People can borrow from £1000 to £15000 under contracts of £10 each, in multiples of £100. Borrowers must submit to being credit-checked by Equifax, and to having the results made publicly available on their profile. On the basis of this and other information collected during registration, they are assigned to one of four different markets (A*, A, B and C). In the less ‘credit-worthy’ markets, borrowers will pay significantly higher interest rates, to account for the statistically greater ‘bad debt’ rate. The ‘market rate’ for each of the four classes of borrower is determined globally and not on an individual basis. The funds are then reserved and after more checks with credit reference agencies the loan is approved by Zopa. The money is then paid directly into the borrowers bank account, often within a few days. Any defaults or late payments will affect a borrowers credit rating, as with a standard bank loan.
Lenders: Zopa lenders first transfer the amount they wish to lend into their Zopa holding account. This is a segregated account which is operated by Zopa and specified as containing money owned by Zopa members. Zopa lenders can lend any amount from £10 to upwards of £25,000. Offers are made in amounts of £10 to each borrower, although the highest number of contracts any one borrower can have with a single lender as a result of his or her successful bids is 20. To lend more than £25,000 lenders need to first hold a Consumer Credit Licence. Lenders can choose their rates and loan lengths, and whether they want to lend in the A*, A, B or C markets. Zopa provide information - including market data and expected levels of bad debt - to help lenders choose their terms. Lenders will also earn 4.5% interest while they're waiting for their money to be lent out. Zopa estimate that lenders should make a 6-7% return per year if all the money repaid is lent out again (an average bad debt of 4% is already taken into account). This is 1% to 2% higher than the current best savings account. Returns are approaching the level of long term stock market returns (which are around 8%) but are more predictable.
Community: Members who have not lent or borrowed with each other are only identified on the site by their nicknames. If you have lent money, you will find out the real names (but not any of their contact details) of your borrowers on the quarterly statement. If you have borrowed money, you will see the real names (but not any of the contact details) of your lenders on your loan contract note. There is not a great deal of engagement within Zopa on a community or social level, as the primary aim is to save lenders and borrowers money by 'cutting out the middleman', not to create a community of lenders and borrowers. Typical transaction: Zopa is the most classical 'financial instrument' of the emergent P2P finance services, and the typical transactions reflect that: relatively anonymous, diversified holdings in widely ranging amounts.
Business model: Zopa makes money by charging lenders and borrowers a fee. It charges borrowers 0.5% of their loan amount and lenders a 0.5% annual service fee.It also earns money through selling payment protection insurance to borrowers who want it (they have a commission based deal with Pinnacle Insurance), and through introducing people who can’t pass Zopa's credit checking regime to other loan providers (again on commission through 'preferred' suppliers). Zopa has received credit licenses from the Office of Fair Trading. It is authorised and regulated by the Financial Services Authority only in respect of its insurance mediation activities, although it must also comply with the “Higher Level Standards” that apply to all firms authorised and regulated by the FSA.
Establishing trust: Everyone looking to borrow is credit-checked and risk-assessed by Equifax, and people judged not credit-worthy will be prevented from borrowing at Zopa. The rest are put into either the A*, A, B or C market. This allows borrowers to "get a rate that's right for them", and means lenders can manage their risk level. Lenders are encouraged to diversify risk by spreading money across a range of borrowers. When a person lends £500 or more, his or her money is spread across at least 50 borrowers. A collections agency chases any missed payments on each lender's behalf. Zopa's model is close to that used by banks and other financial institutions. In the event of a total business failure, the loan agreements still stand because Zopa is not a party to any loan contracts; it only provides the mechanism for agreeing them. The repayments will continue to be collected by a collections agency that is appointed by Zopa lenders to collect missed payments. The costs of collections activity will not vary if Zopa has failed. Zopa also have a number of online and offline procedures to catch unusual or suspicious behaviour on the site and can immediately suspend the membership of anyone whose intentions do not look completely honourable. These procedures are not elaborated.
Performance: Zopa has been relatively successful, and has recently secured an additional $12.9m of investment to expand its business in the UK and to launch in the US.
Problems or limitations: The forced diversification and lack of meaningful contact between lender and borrower may mean that users could feel somewhat estranged from one another. Lenders know the 'class' of borrower (e.g. A*, B) but they cannot lend more than £200 to any one borrower. The bond is ultimately legal and not social -- the devices for reclaiming money are drawn from the banking industry, such as risk evaluation and collection agencies. The potential social aspects of the service are not exploited to the same extent as they are in competing services (such as Prosper) since personal interaction is not of great importance to the model.
The US-based Prosper bills itself as the ‘eBay of personal finance’. The service is similar in many ways to Zopa, but with somewhat more emphasis placed on personal interactions and community lending. People who need money request it, and other people bid for the privilege of lending it to them. Prosper aims to make sure everything is safe, fair and easy.
Who: Prosper's CEO and co-founder, Chris Larsen, was formerly the CEO, Chairman and Founder of E-LOAN, an online consumer lender "dedicated to providing consumers with a fast, transparent, and low cost way to obtain mortgage, auto and home equity loans."
Borrowers: Prospective borrowers register with the site and allow the company to review their credit history. Then they post a loan request of up to $25,000, along with an upper limit for the amount of interest they are willing to pay. Loans are not secured by collateral and are paid off over three years at a fixed rate, with no prepayment penalty. Once the bidding is complete, and if enough lenders bid enough money to finance the loan at a single rate acceptable to the borrower, Prosper transfers the money to the borrower's account and establishes a monthly repayment system that withdraws money from the borrower's checking account. (Should a borrower default, Prosper hires a collection company on the lender's behalf and alerts credit bureaus.)
Lenders: People who want to lend set the minimum interest rate they are willing to earn and bid in increments of $50 to $25,000 on loan listings they select. People who lend can easily diversify using "standing orders", which automatically make many small loans to different borrowers. Lenders essentially deposit their money with Prosper — which holds it in an interest-bearing account with Wells Fargo— and either review the loan requests individually or fill out a form permitting Prosper to allocate money to borrowers who meet certain criteria. Chief among those criteria is the borrower's rating from the credit reporting bureau Experian, but borrowers can also join or create groups with defined interests or characteristics that, they hope, will make them more attractive to some lenders.
Community: Unlike Zopa, there is a greater emphasis on personally selecting and lending to particular borrowers. Loans can be fully funded by one person, so it is possible to lend someone up to $25,000 (in Zopa the limit is just £200.) As a result there is much more interaction between lenders and borrowers. The 'groups' are an important part of this process, and make the service seem less like just another financial instrument.
Among the groups on Prosper are aficionados of the Porsche 914 model, associates and employees of a Berkeley cafe and Vietnamese-American students. Prosper's group leaders receive a commission on the group's lending and borrowing activities, which they sometimes share among the group. When you join a responsible group with a good payment history, you get a good reputation by association, and lenders are more likely to offer good interest rates. But, belonging to a good group puts some pressure on you, too. If you stop making your loan payments, you not only tarnish your own reputation, but the group's as well. If you're part of a group, the theory is that you'll perform better as a borrower than if it was an impersonal bank or credit card company.
Typical transaction: Loans requested range widely between about $2000 and $25000. The average loan amount as of March 2007 is just shy of $5000. Most lenders lend between $50-200 to any one borrower.
Business model: Prosper generates revenue by collecting a one-time 1% or 2% fee on funded loans from borrowers, and assessing a 0.5% or 1.0% annual loan servicing fee to lenders.
Establishing trust: Prosper obtains the borrower's Experian credit score, and assigns one of seven credit grades, from AA to HR. Borrower credit grades are posted with their listing to help lenders plan their bidding. Further information is also provided, such as delinquencies, number of credit lines, debt-to-income ratio and debit or credit card utilisation. Additional data, which is self-reported by most borrowers when registering, includes occupation and income. This information combines with the personal and group interactions that Prosper enables, to give lenders and borrowers a credible sense of risk and trust in other people.
Performance: Prosper has 270,000 members and $61 million in loans to date. Their open API has spawned dozens of websites focused on Prosper users, and these communities and Prosper groups are very active. Prosper has raised approximately $20 million in investment for further expansion.
Loan performance seems to be good. Although Prosper has not existed long enough to make definitive claims about this, the default rate for loans is lower than Experian’s for all but the top credit grade, while interest rates are consistently lower than elsewhere.
Problems or limitations: Like Zopa, Prosper’s contractual and enforcement structure is founded on specific territorial laws. Growing the network transnationally is impracticable due to regulatory considerations. Given the size of the US banking market this is not a fundamental problem, but it is necessarily a brake on growth, especially given the geographically dispersed nature of many online communities and affinity groups.
Sellaband.com is a music business based on profit sharing and bringing together artists and music lovers directly. Fans can become ‘believers’ in bands by paying $10 for a ‘part’ in an artist they like. Once an artist has reached the goal of $50,000 (5,000 parts), Sellaband uses this money to record a CD, providing the artist with a studio, an A&R manager and a producer. ‘Believers’ receive a copy of the CD and share in some of the profit of the band.
Who: Sellaband is the idea of the Dutch entrepreneur Pim Betist, and has been managed by Johan Vosmeijer, a former Sony BMG executive.
Musicians: The money reaches bands indirectly: once $50,000 is raised, the funds are held in a Sellaband account, as a budget for the band to spend 'as they like'. Sellaband has a stable of A&R reps, recording studios and CD pressing plants, which the musicians are encouraged to utilise.
Believers: Investing in bands allows fans the chance to 'be in business' with bands they like. The more tangible return is a special edition of the CD that is sent to all believers once produced. Additionally, believers share in a one-thirds split of the advertising revenues from the website. The amount received depends on the market share their band has on Sellaband's download portal. In addition, believers will share 50% of the net profits from so-called 'regular versions' of CDs that are sold at gigs. Once a year the totals are added up and any returns are deposited in the believers’ Sellaband account. Users can withdraw money from this account or use the funds to buy parts in other musicians.
Community: Believers can maintain a blog, upload photos and videos and post messages to network with other believers and artists. These community aspects are limited to users who have bought at least one part. Musicians have similar options, and it seems to be a prerequisite of success for bands to engage heavily with the Sellaband community.
Typical transaction: Each part costs $10, with additional transaction costs that are proportionately reduced the more parts a 'believer' purchases. Many believers just buy one part in various artists, but some invest heavily, with some believers buying over $5,000 in parts in artists like Nemesea and Clemence (two artists who have succeeded in raising $50,000). Business model: The advertising revenues generated are split evenly between the artist, the believers and Sellaband. The publishing income of the songs that artists record with Sellaband are divided between the artist, Sellaband, producer and A&R manager, in the following way: Artist 60%, Sellaband 30%, Producer 5%, A&R manager 5%. Sellaband doesn't touch any of the $50,000 that is given. Sellaband is for-profit, and registered in Germany as a company. Due to the structure of the returns, it is not subject to financial regulations.
Establishing trust: Sellaband retains controls of the funds pledged by believers and provides these as a 'budget' for bands to use as they see fit, within certain parameters. A sense of participation that is more than purely financial is provided, as bands are expected to blog and engage with their believers. However, believers have no input into the recording of artists’ music, and have no say over the end result.
Performance: Four bands (as of March 2007) have succeeded in raising $50,000 and recording a CD since the site's launch in August 2006. There are also over 15 bands that have raised over $10,000.
Problems or limitations: The mechanism for splitting profits from CD sales is somewhat ill-defined. This is probably because of the need to avoid legal regulations, but could create problems as the service scales. Another criticism is that the structure of the site tends -- at this point at least -- to favour bands with a mainstream sound. This might change as Sellaband grows and is able to connect niche musicians with enough believers of like-minded tastes. But the constraints that Sellaband puts on bands, by offering rather generic industry tools, studios and producers, might not appeal to more experimental or innovative artists who want to do their own production or who are purely electronic musicians.
Fundable allows groups of people pool funds to make purchases or raise money. Similar to online auctions, Fundable's pages, called "group actions," are created by people who use the service. Each group action gives a description of how much money needs to be collected and what it will do. Once enough pledges (not payments) have been collected, Fundable turns them into real payments and sends the total to the group action's organizer.
Who: Louis Helm and John Pratt co-founded Fundable in 2005.
Group leaders: Group leaders may receive money they have collected either through their paypal account or (for a $10 flat fee) by cheque. Community: Social transactions are at the heart of Fundable, and many users will be dealing exclusively from people drawn from their own social network. Typical transaction: The majority of the group actions tend to be fundraisers, such as sponsored walks or pleas for charity. There are also people doing things like recording albums, and promising a CD to investors in the style of Sellaband. Fundable sets no limits on how many people a group leader expects to recruit, and if the group leader permits, people can pledge more than the contribution amount. The value of the average pledge has risen since the service launched. The first completed pledges were for amounts between $50 and $1000 -- with most in the range of $200-500. Recently completed group actions have been for greater amounts: rarely less than $500, the typical action raises around $1000. The smallest pledges are typically $10 or $20.
Business model: Fundable acts as an escrow between groups of people and the person who collects their money. It is for-profit, and makes money by charging an 8.9 percent fee for its services. No fee is charged if a pledge expires without reaching its goal, and it is free to register and to set up a group action.
Establishing trust: Fundable allows group leaders with an established online auction reputation to display a link to their eBay rating on their group actions. In most cases, the weight of 20 or 25 waiting contributors creates considerable pressure for organisers to deliver on what they promise. However, as in eBay, people are expected to ask questions and verify the trustworthiness of the organizer before making a pledge. Fundable holds pledges until the group action reaches its collection goal, and then collects payment. If a group action's collection falls short of its target pledge amount on deadline, Fundable deletes the pledge and no money is collected. This lets users participate in a group purchase or fundraiser without worrying about what other people will do. No one pays until and unless everyone else makes a pledge. As a further measure to ensure trust in the system, Fundable reviews most group actions that seek over 40 contributors. Performance: Fundable is still in its infancy, but there have been hundreds of successfully completed group actions, and the engagement and enthusiasm of users suggests great potential for growth.
Problems or limitations: If you are recruiting from your immediate social network, it is very hard to get more than 20-25 people involved in a group action. Collecting pledges from more people than this involves planning and effort, and if a group action seeks more than 40 participants, the organiser must have access to a large audience. This is a reflection of the difficulty of raising money within real-world social networks, an objective for which Fundable is nonetheless very helpful. Where Fundable falls short is in providing series of feedback mechanisms between group actions and funders, and degrees of involvement between group leaders and contributors. One important aim of DIN is to enable such structures.
Kiva lets individuals connect with and loan money to unique small businesses in the developing world. By choosing a business on Kiva.org, lenders can "sponsor a business and help the world's working poor make great strides towards economic independence.” Throughout the course of the loan (usually 6-12 months), lenders receive email journal updates from the business they've sponsored. As loans are repaid, they get their loan money back.
Who: The team behind Kiva worked at TiVo, PayPay and Google before developing the service in late 2004. Kiva partners with many existing microfinance institutions (MFIs), who work on the ground in developing countries.
Borrowers: Before an entrepreneur appears on Kiva they have first been vetted by a Field Partner for loan application approval. Each of Kiva's Field Partners use their own application procedure which Kiva has reviewed and approved. This ensures that loan funds are actually going to genuine entrepreneurs who will use the loan for the purpose they specified. Kiva does not send loan funds directly to the entrepreneurs; instead, each loan is managed by a microfinance institution. The full value of the loan goes to the entrepreneur, but the Field Partners do charge interest. However, Kiva requires Field Partners to fully disclose their interest rates, and doesn’t partner with organisations that charge exorbitant rates. Kiva claims that allowing MFIs to charge interest enables them to bear transaction costs and currency risk, and achieve self-sustainability.Kiva is also the first organization PayPal is supporting by providing free payment processing, reducing the transaction costs significantly.
Lenders: Kiva’s loans do not provide a financial return on investment, but lenders do get the investment sum back at the end of the loan term of investment -- which ranges from 6-12 months. There are no tax implications because there is no possibility of earning interest. For lenders, it's a sustainable, high impact, high engagement way to get involved with just a little amount of money, and carries minimal financial risk. Unless you're extremely rich, an accredited investor, or a big institution, you can't really invest in microfinance institutions, so lenders and charitable donors are limited to giving to organizations that already have a lot of money. The smaller organizations that are working hard to serve their communities and to loan money to people are typically capital-poor. Kiva allows individuals to access a long tail of organisations and individuals, which can potentially be more rewarding and efficient for lenders.
Community: Sponsorship has always been a high overhead business. Kiva creates a similar interpersonal connection at much lower costs due to the instant, inexpensive nature of internet delivery. The individual nature of Kiva’s loans and the feedback that lenders receive all the way through the course of their loan makes for more personal and social transactions.
Typical transaction: $200-300 all the way up to $1200. The majority of loans are for between $800 and £1000.
Business model: Kiva is a non-profit social venture, that currently has financial support from a number of angel investors, including Silicon Valley donors, and corporate sponsors including Microsoft Research. However, "self-sustainability is critical to Kiva.org and we intend to be fully self-sustainable by 2008. This will be achieved through the implementation of a number of income streams which may include optional transaction charges to lenders and low debt capital fees to Field Partners." Kiva’s loans are personal agreements between lender and borrower. There is no note or security involved.
Establishing trust: Kiva partners with existing microfinance institutions. In this way, they gain access to outstanding entrepreneurs from impoverished communities world-wide. The partners are experts in choosing qualified borrowers, and usually have many more promising projects than funds. Through Kiva, the partners upload their borrower profiles directly to the site so that users can lend to them. Users receive emails throughout the loan term updating them on the progress of the business, and letting them know each time a repayment is made. Each project also has a business page on the website, with a journal which can be commented upon. Loans are not guaranteed, but are statistically low-risk. Microfinance loans worldwide are generating repayment rates of 97%. To date, Kiva’s repayment rate is 100%.
Performance: Kiva has processed over $6 million in loans, distributed to more than 60,000 people. It is growing fast -- in March alone over $1 million was loaned. Impressively, the repayment rate is 100% (although of course many loans have not come to term yet).
Problems or limitations: Kiva doesn't fully cut out the middleman -- it does bring investors and recipients closer together but there is another layer of interest-collecting MFIs on the ground. However this is not necessarily a drawback. Part of the aim of Kiva is to help not only borrowers but MFIs as well.
The founder describes: “A lot of them out there are great organizations, but their barrier to growth is capital. There are many things that are in the way, but that is a really significant one, and lenders, by providing zero interest, flexible, debt capital, really empower a lot of the smaller MFIs to grow, and to more quickly reach a level where eventually they'll be able to get commercial capital, and access commercial markets.”
OpenBusiness Models
For further examples of open business models visit www.openbusiness.cc/category/models.
For analysis, interviews and discussion of these models please go to www.openbusiness.cc/category/discussion.
Hindawi Publishing is a profitable, for-profit publisher of scholarly journals based in Cairo. They use the CC-Attribution license and make their money on page charges and other publishing services, including reference checking. They are the first profitable users of the CC-Attribution license in scientific publishing.
BioMed Central is a for-profit publisher of almost 200 biomedical peer-reviewed journals based in London. They implement the CC-Attribution license and make their money on article fees and other publishing services. Revenues are reportedly more than $10,000,000 USD per year.
HSRC Press primarily publishes the output of the Human Sciences Research Council. It has adopted an open access publishing model. HSRC adopted the model because the primary goal in publishing the research materials as opposed to seeking financial reward through the turnover from book sales.
Instead, the goal of HSRC to attract further research funding and contracts, and crucial avenues of dissemination, which can increase the overall size and influence of the HSRC organisation.
Printed books are offered via the website, and can be read on-screen, downloaded for printing or ordered on the website as a POD publication through an e-commerce engine (and supplied on a cost-recovery basis). Having adopted this model revenue has increased by 300%!
Mute is an example of participatory publishing and a networked economic model. It has a number of interesting new services, including print on demand (POD) and Networked Distribution, developed on top of the Open Source web tools Drupal CMS and CiviCRM (constituent relationship management). The Mute site has been designed to address the difficulties facing a small publishing cultural group, the most persistent of which remain reaching your audience and covering your production costs; a problem which Mute addresses using POD. POD is a high quality, low cost form of digital book printing, through which one or 1000s of copies can be printed. In conjunction with a network of self-selecting agents, the NGO web campaigning tool CiviCRM will be used to manage all aspects of distribution (including orders, deliveries and payments) over the net.
Linup Front uses POD to ensure that only the most recent training materials reach their audience. Once purchased in POD form or as a PDF the files are free for distribution. This free distribution is used as advertising for Linup Front, who users can turn to when their copy becomes out of date.
Magnatune has significantly helped in the sale and distribution of hundreds of artists, whose music would otherwise be heard and purchased with far less frequency, by providing free sampling methods and genre specificity options. Added music consumption in this fashion, in conjunction with low distribution costs, allows for found sales and an effective revenue sharing regime between Magnatune and artists.
Magnatune’s revenue sources are music (both for personal and commercial uses), music licencing, and artist merchandise. Magnatune employs a Creative Commons licencing regime that allows for online distribution of music. It bypasses traditional distribution chains, avoiding expensive costs. This allows for music revenues to be shared evenly by Magnatune and artists.
Jamendo is "a new model for artists to promote, publish, and be paid for their music. On Jamendo, the artists distribute their music under Creative Commons licences. In a nutshell, they allow you to download, remix and share their music freely. It’s a “Some rights reserved” agreement, perfectly suited for the new century. These new rules make jamendo able to use the new powerful means of digital distribution like Peer-to-Peer networks such as BitTorrent or eMule to legally distribute albums at near-zero cost."
Jamendo users can discover and share albums, but also review them or start a discussion on the forums. Albums are rated based on the visitors’ reviews. If they like an artist they can support him by making a donation.
Neuros Technology applies an Open Source approach to hardware and software development. “As engineers, most of us spent our academic careers in an environment where open peer review was just taken for granted as the most sensible way to advance science and technology. Once we transitioned to the business world, we were conditioned to accept that secrecy was a necessary evil,” says Neuros CEO Joe Born. “In fact, experience is showing us that peer review works great in the business world as well. The more information we release to the public, the more our community helps provide us with the ultimate strategic business advantage: better products”.
By releasing proposed specs and involving users in development of a product, Neuros gets feedback from the community’s most involved users and in exchange those users get visibility and an opportunity to influence the product’s development from the very beginning.
Steven Soderbergh has been an astonishing film director for years. Now he is innovating the way movies are made and distributed. His new movie ‘Bubble’ will be in the theatres, on DVD and going to the networks at the same time. And it has been produced entirely with unknown actors and entirely digital. The coolest idea is that he does not mind filesharing since production costs are so much lower - just 1.6 million US $ - and people will still bug the DVDs and go to movies as it is still, as he says, the No1 dating location. So making a profit is much easier, if you haven’t invested hundreds of millions. Well done. Seems like that the movie business is finally starting to change the way the do business - at least some of them.
While it is true that Cory Doctorow himself is not a business, he does have an innovative approach to selling hardcopies of his books and creating revenue for himself as an artist, so I think he is certainly worth mentioning here.
Doctorow releases his novels on a Creative Commons Licence on the internet for free download, sharing, and even remixing. This open approach has produced a whirlpool of activity around his name, making him a renowned science fiction writer with a huge following. His revenue comes from selling hardcopies of his books (nobody wants to read an entire novel from a computer screen) and speaking at conferences, debates and other events.
Resources
Further Reading
Interview with Tim O’Reilly about the evolution of the Web and its most current trends, which are commonly labeled as Web 2.0. In September 2005, Tim wrote a seminal piece that presented many of the aspects of Web 2.0 and now surrounds much of the buzz around a new generation of internet applications. In the interview, he re-emphasizes the most important points of this development, talks about the evolutionary relationship between open & free
Eric von Hippel on Democratizing Innovation
Eric von Hippel, a professor at the Massachusetts Institute of Technology (MIT), focuses his research on developing strategies to identify new ideas and innovations systematically and quickly. His book Democratizing Innovation has documented how the internet and improvements in computing have changed the innovation process. Now users have much more power. To understand the effects of his ideas OpenBusiness spoke to von Hippel.
In the spirit of Time magazine, Crowdspirit's strategy is "to tap the world-shaping potential of “You” for higher value tasks than just sharing videos! Our business model is simply to design innovative electronic products by “you” for “you” and to reward the best “you” based on the products sales revenues and in practice “you” will be made by a community." CrowdSpirit will provide the means for this community to design, invest, produce, market, distribute and support the products that make business sense.
A Film Business Without Copyright
A look at the Nigerian film industry and their more decentralized and "open" distribution practices.
Freebase aims to be the Wikipedia for data. So naturally OpenBusiness was interested. Also their business model seems cool. They say they will make money through an through an API program. Depending on the commercial vs. non-commercial nature, and extent of services required by a developer, they will charge fees.
Big Business Supporting OpenBusiness
Amazon might turn out to be the real OpenBusiness provider. That’s at least how their new business strategy sounds like: from user generated content, to user generated jeans, cars and what have you. Though I would think ebay, google and some others will want to compete as well.
Embryonic New Music Business Models
MusicLessons, an European Commission funded project has investigated some and published a report. They list a number of rather conventional online business models - nothing new -, but also look into some p2p related business models.
OpenBusiness Tools
Funding for OpenBusiness ideas -- Digital Pioneers and Open Business partner to create new funding opportunties for internet initiatives that promote social innovation.
Business Model Template Hacking
DIY Business Models in a slideshow friendly format.
The Business Plan Archive is an extensive website that was formed in the wake of dot-com failures to document and analyze the business models of the infamous Internet bubble
Has anyone out there heard about WideCircles.com. It seems like a way better service then wasting money on PPC. Apparently they are using referring websites ( forums, blogs, wiki, etc. ) and have a viral word of mouth distributed approach to it. My friend told me he got around 100 visits from single post which cost him $0.40c. I am going to give them a try today .
