Free Markets 2.0

Cyberspace has enabled the development of entirely new information resources that were unimaginable only a few years ago. However, the transformation of existing information industries from real-space to cyberspace has produced far fewer transforming innovations.

Consider the numerous resources that the were first developed on the net, from Wikipedia and blogs, to Google, Flickr, and reddit. An interesting question to ask is why none of these resources existed prior to the web. This may seem like a silly question, but it demonstrates an important point. The reason why these resources did not exist 20 years ago is that their existence is only possible in cyberspace. The architecture of cyberspace, not limited by the physical constraints of real-space, makes them possible.

Now, let’s consider those information industries that were originally developed in real-space. Here I am talking about books, magazines, music, movies, software, newspapers, etc… What is interesting is that while most of these resources can be found online, they are rarely substantially different from their real-space counterparts. P2P file sharing has changed the way people share movies and music, but record companies and movie studios haven’t changed their underlying business models. Online newspapers and magazines have various electronic bells and whistles, but their fundamental structure is the same as their printed counterparts. E-books have not only failed to revolutionize the book publishing industry, they have barely been able to get off the ground. Even software vendors, arguably the most high-tech of the real-space industries, largely rely on product-based business models that were developed before the days of the web.

One might ask why record companies, software vendors, movie studios, and book publishers would be so resistant to embracing the potential of the internet, when doing so almost certainly means that they will be left behind. A common, but naive, answer is that these real-space companies just don’t get cyberspace. Now it is quite possible that some of these companies just don’t get it, but it’s hard to believe that everyone in these industries is that irrational or ill-informed.

A more likely explanation is offered in Lawrence Lessig’s The Future of Ideas. Lessig examines the notion of the Inventor’s Dilemma and explains that “leading companies within a particular market will outperform others in perfecting the technology that defines their existing market,” but “what these companies can’t do is identify and develop disruptive technologies.” Established companies “see real revenue from existing customers who need marginally better technology,” but they “don’t see the revenue from radically new technologies that depend upon unidentified or undeveloped markets.”

In order to transform these pre-existing industries, companies with new business models must compete with the established players in their market, since change will not come from the industry leaders themselves. In contrast, startups that create entirely new markets do not face competition from established companies. They have the advantage of existing in virgin territory, without the baggage that comes from an established market. Moreover, they do not have to deal with the legal barriers that reinforce the existing information industries.

Innovative production and distribution models will shape the future of cyberspace far more than any technological advances. Only by harnessing the potential of the internet to address the real needs of a market can new business models hope to succeed. In the following entries I will examine new means of creating, managing, and distributing information that build on the unique architecture of cyberspace in order to redefine the information industry.