The Future of Business in the Internet Economy
Part 1: Scarcity - the Great Motivator
We are in the throes of a transformation in the global economy. Rules that govern the traditional economy, such as distribution and use of physical objects, do not apply well in the information age. 1Industries that have existed for decades are disintegrating. 2Companies that did not exist ten years ago now dominate our economies, lead the news, and form the infrastructure of our lives.3
Two key relationships frame the power and success of organizations in the Inter-net economy: abundance vs. scarcity; free vs. paid. If misapplied, misunderstood or ignored these concepts can frame organizational failure. Taking advantage of them can increase revenue and recognition of your brand with a huge audience. This is a hard opportunity to take. Organizational leaders need to integrate new ways of thinking into daily decisions and long range plans, but the rules that govern the new economy appear to be diametrically opposed to the traditional economy. Many existing processes and standards break down when applied in this new paradigm. For example, traditional business cases—and all the related organizational processes—are based on scarcity, and must be adapted to account for abundance and free.
In this article we explore the nature of these ideas and their implications to the ways businesses work. In part one, we explore the equivalence of scarcity and value, as well as the equivalence of abundance and worthlessness. We also explore ways these factors are used today. In part two, we survey four business models based on abundance and free—where most revenue is driven by giving core products away. Part three contains recommendations for action. Through-out, we use examples from organizations like Amazon, Google, Facebook, and the International Institute of Business Analysis (IIBA®).
These words are intended to cause discussion, and are not canonical. Use them to shine new light on your success and challenges, and to understand your organizational development.
We will discuss five key concepts and their consequences in part one of this article; the business models that take advantage of these ideas are in part two.
1. Humans treat scarcity and value as if they are identical. (Money is a way to exchange value, but is not valuable itself.) Four consequences arise:
- If it is abundant, it must be valueless.
- If it is valueless, it must be abundant.
- If it is rare, it must be valuable.
- If it is valuable, it must be rare.
2. Consumers treat natural and imposed scarcity differently (e.g. time vs. [digital rights management a.k.a. copy protection4]).
3. The Internet is a giant copy machine that makes information abundant.
4. Free is profoundly different than any other price: 0¢ ≠ 1¢ – 1¢. This drives odd behaviours.
5. Content creation costs are irrelevant to consumers.
Scarcity—The Great Motivator
Scarcity is a potent motivator. It is simple, subtle and profound: value and scarcity are the same thing. This is not to say that one can be translated into the other: humans treat these concepts as being identical. Reading this one way, it seems reasonable and obvious that anything rare is valuable. This is a quirk of cognition, and is not actually a reasonable assertion. The same quirk makes us treat anything valuable as if it is rare. 5Human nature equates scarcity to value and value to scarcity, no matter how value is measured6. Unfortunately, there is a complementary equivalence built into humans: anything abundant is, by definition, worthless. 7Kevin Kelly proposed a theory of generatives largely based on this idea, though limited primarily to the digital world. 8Here, we consider several kinds of scarcity as they apply to physical and information products.
What is Scarcity?
There are two types of scarcity: natural and imposed. Natural scarcity is a conse-quence of the nature of the universe (air or time) or the nature of humans (experience or innocence). Natural scarcity is outside human control.
Humans create imposed scarcity by restricting access to a product. We do this because people don't dedicate attention, let alone money, to things with no value—and value = scarcity. In the age of the Internet this includes practices like DRM, walled-garden websites, and pay-for-subscription services. It also covers more traditional imposed scarcity, such as restricted OPEC production, strikes, diamond supplies and sales "FOR A LIMITED TIME ONLY!"
In his influential paper Better Than Free9, Kelly argues that the Internet is, at its core, a giant copy machine: it makes copies for free. This is a serious threat to any business based on intellectual property (emphasis his):
If reproductions of our best efforts are free, how can we keep going? To put it simply, how does one make money selling free copies?
I have an answer. The simplest way I can put it is thus:
When copies are super abundant, they become worthless.
When copies are super abundant, stuff which can't be copied becomes scarce and valuable.
When copies are free, you need to sell things which can not be copied.
In his essay he calls these saleable, valuable extensions of a product generatives. The categories used in this article are related to the next section on the price free.
Contractual generatives are relatively impersonal measures of value, based pri-marily on an exchange of goods, services and money. In most cases these are not directly tied to a particular feature of a product, or even the product as a whole. Often, they are associated with an experience a person can have through the product, or a characteristic that a person gains through the product.
Authenticity—the real deal; provenance; authority
Embodiment—physical representations of an information product
Findability—relevant information as needed
Immediacy—first access; time limited
Interpretation—teaching; expertise; understanding
Personalization—mass customization; made for me
Usability—simplicity; ease of use; Mac vs. PC vs. Linux10
Familial generatives are relatively personal measures of value, based primarily on an exchange of an intangible such as reputation, love, trust or respect.
Community—participating in something bigger than me11
Patronage—sponsorship of something bigger than me
Most organizations have a mixed bag of natural and imposed scarcity in their portfolios, with both commercial and familial perspectives. To understand the implications of these generatives, we will use one of the core products from IIBA®: the BABOK® Guide.
Scarcity and the BABOK® Guide
This compendium of commonly accepted practice represents many generatives that deliver benefits to business analysts. We will consider five, roughly in order from least to most significant: findability, interpretation, embodiment, usability and authenticity. Some notable changes were implemented as IIBA moved from version 1.6 to version 2.0.
All quotes are from the original article by Kelly or the responses.
This generative of the BABOK® Guide isn't a property of the guide itself, but "an asset that occurs at a higher level in the aggregate of many works." The BABOK® Guide took information found in several hundred books and put the essence together in one place. When there are a plethora of movies to see, reviewers are important middlemen: they provide guidance that directs viewers to content they are likely to value. Now, with version 2 of the BABOK® Guide available on Google Books, the text itself can be easily searched.
Related to findability, the BABOK® Guide is an interpretation of vast swaths of in-formation, bound into a compendium of expert knowledge. Hundreds of man-years of business analysis experience are wrapped up in the book, with substantial peer review and standardization as part of the compilation process. This provides structure and order where there was once relative chaos.
Making the BABOK® Guide available to buy in print took substantial effort from IIBA, and that effort was questioned: why would anyone buy a print copy of something they can print out? Kelly answers this way: "PDFs are fine, but some-times it is delicious to have the same words printed on bright white cottony paper, bound in leather." Having access to information is important, but disembodied information has advantages and limitations distinct from physical copies of that information. Sales of the printed BABOK were a significant step in delivering value to the community of practice, and remain a significant revenue generator for IIBA – for a product that they give away for free.
While version 1.6 of the guide was an impressive effort, it had many usability problems. In version 2, IIBA made significant advancements in this generative. The result is more information, better organized, with consistent formatting, and improved readability—all in a shorter document. Having online, PDF and print versions of this content expands the use cases for the material.
"You might be able to grab a key software application for free, but … you might like to be sure it is bug free, reliable, and warranted. You'll pay for authenticity." As a professional association in the social sector (not-for-profit), IIBA has a clear agenda: promote and develop the business analysis profession and the business analyst professional. These activities need to be profitable, in order to invest any profits back into the goals.
The credibility of any body of knowledge depends on the transparency and credibility of the authors. IIBA claims to provide an independent seal of approval on the information it has found and consolidated, and has presented evidence that the content of the BABOK reflects the reality of business analysis as it is practiced today. More than any other generative, authenticity is the core benefit that makes the BABOK® Guide valuable.
Scarcity, value, abundance and worthlessness are so deeply connected that they are inseparable. Most products deliver value as a combination of utility and generatives. Utility delivers value through features, with the expectation that consumers will pay for products that enhance something they do. Features are usually easy to copy and distribute, which makes them abundant—and worthless from a consumer perspective. Generatives deliver value through characteristics and experiences, with the expectation that people are willing to pay for products that enhance something they are. Generatives are difficult or impossible to copy, so they remain rare and valuable. In other words:
A. Consumers pay for the benefits of utility and generatives, not products or content.
a. Generatives deliver value in terms of ‘something you are’. They are characteristics and experiences that are inherently difficult to copy.
b. Utility delivers value in terms of ‘something you can do’. These fea-tures are often easy to copy.
B. Free content is often perceived as common and low value (YouTube).
1Information can be copied and distributed for free (essentially no cost to the consumer), without any physical instantiation. Google gives you news without paper. iTunes provides recordings without records. And proving that some goods are really information, Zappos gives shoes without stores. You still can't hammer a nail through the internet – yet.
2Newpapers. Music distribution. Movie theatres.
3Google. Facebook. LinkedIn. Twitter
4This illustrates a danger of imposed scarcity: other humans have always found a way to circumvent artificial restrictions. The ‘honest’ people who play by the rules are punished by DRM (e.g. can only listen to purchased music on one device) while people who break the rules are unaffected.
5See A sense of scarcity: Why it seems like all the good ones are taken (Physorg.com, http://bit.ly/4O88qM) for a summary of original research.
6ibid A sense of scarcity.
7One way to assess the value of a thing is to consider its absence. Air is a physical example of a ubiquitous resource that is considered worthless in most decision-making. The fact that air is the most valuable resources we have—death in seconds without it!—is trumped by the ubiquity of the substance. Love is another: your experience of love feels rare because it is so valuable to you. That it is the same experience that billions of other humans have experienced is not a significant factor in decisions you make.
8Kelly limited his discussion to information, touching on the physical world only when information is instantiated – turned into something tangible.
9See http://bit.ly/4FBade for the original post.
10From the comments to the Kevin Kelly Better Than Free article.