Does the market need a free culture?

A couple of weeks ago at the Free Culture Research Conference in Berlin I organized a ‘freedom and sharecropping’ session that started with two questions: (a) when is ‘free’ necessary for the market? and (b) when is it ‘sharecropping’?

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Summary

A business should consider free/open licensing and/or free (as in gratis) access to its content or services when:

• A product, idea or business is in the early stages of development
• The business depends on very large numbers of transactions which would be too costly to negotiate individually
• The business wants to position itself as a middleman; a platform enabling large numbers of transactions as above
• There is a vision to build an open innovation ecosystem around the service or product that the business is offering
• There are strong network effects in the way the product or service operates; free/open licensing can be a boon in terms of promotion but businesses will also be concerned about monetization and possible lost revenue
• Free can be a complement or the icing on the cake on top of a commercial offering, i.e. a differentiating factor rather than an enabler of a very large number of ‘commodity-like’ transactions

Why should a business avoid implementing a  ’sharecropping’ scheme where it lets others upload share and remix their content but does not grant them rights to their creations?

• Because its users may be sensitized to the topic and perceive it as exploitation, which will inevitably backfire
• Because this will work against the open innovation argument above

Detailed comments after the jump…

Introduction

The idea to organize a session on this topic came up this June in Seoul, after Lawrence Lessig gave a presentation at a regional Creative Commons event, indicating that it is preferable to present someone with appealing options (imagine a kid in a candystore) rather than preach about what is right or wrong on some moral or other grounds.

One could argue that this has been the approach of Creative Commons all along, offering options rather than dictating a specific stance on licensing and sharing. But here specifically the question is about the market, more specifically about business, what Lessig calls the commercial economy (vis-a-vis the sharing economy).

This is by no means a full account of the session. It is my attempt to summarize what went on and what I think I learned from it personally. My apologies if there are ideas or people I forget to mention or credit. We first spent some time defining what it is that we really want to answer and  agreed to ask when and why business (and not generally ‘the market’) would want content to be free (in the sense of free/open licensing and ability to remix and/or just gratis access to the content itself; so both free as in speech and free as in beer ideas were entertained).

In other words, we wondered: when is it not necessary to explain (or, as some would have it, ‘preach’) the benefits of open licensing to businesses, because business itself sees a natural interest in it? When would business feel like the kid in the candystore when presented with open licensing options? And when that happens, how can it be avoided that the open licensing arrangements that a business would favor would be akin to ‘sharecropping’, i.e. sharing a resource so that others may build on it, but more with the exploitation of other people’s cheap ‘labor’ in mind; extracting most of the value and not granting them any rights to their product?

See Lessig’s discussion of sharecropping in the context of licensing in his Remix book; Wikipedia has a quite informative article on the traditional practice of sharecropping in farming if you are not familiar with it.

Michelle Thorne from Creative Commons recommended reading Cory Doctorow’s article in the Guardian titled “The real cost of free”, which was written in response to Helienne Lindval’s article “The cost of free”. We didn’t discuss this further in the session, but it is an exchange worth reading.

Early adoption

John Hendrik Weitzmann from CC Germany (yes, there were several CC-affiliated academics and many non-academics present and they were very active in this session) reminded us of how our discussion of the relationship between business and free access is similar to the older arguments for how Microsoft allegedly became a dominant player in software in part by silently consenting to their OS being pirated by some key segments of the population, e.g., students, and in developing markets where growth is the main concern rather than worrying about maximizing earnings through the immediate monetization of every single copy in use.In some stages, usually the early stages of a product’s lifespan or the early stages of the development of a market or business, it may make sense to let users have things for free, i.e. free as in beer. But there is no reason why this shouldn’t also include free as in speech. Relevant here is clearly the literature on innovation, lead users, first-mover advantage, and so on, to determine when a business would benefit from following more open and free practices (in the sense discussed here) at the early stages of its life.

Scale

Mike Linksvayer from CC argued that the market needs free because a more free and open ecosystem of content lowers baseline costs, like Joi Ito likes to point out in his presentations to investors and internet entrepreneurs. The market does need free in that sense. But how can an individual business exploit freedom? What does an individual business in that sense gain from free/open licensing?

Mike brought up the example of Flickr – leveraging other people’s creativity without having to negotiate individual deals with all of them. By utilizing Flickr’s API and CC-licensed content, other sites have added value on top of what Flickr itself provides, and it’s all based on users voluntarily sharing their content and maintaining the rights to it, i.e. without sharecropping. Generalizing this, we could argue that in cases where there is a business model depends on large numbers of relationships which one doesn’t want to negotiate separately, ‘free’, as in speech or beer, is beneficial. Flickr offers a service for free and lets uers retain their rights to their creativity because that is not only ‘fair’ (or whatever other adjective we may want to use), but also because it is easier than anything else and it makes Flickr’s service that much more attractive. Essentially this sounds like a transaction costs argument as some participants noted: ‘free’ scales well by lowering transaction costs, though clearly monetization will sooner or later be a concern for business as was also noted. During the session we didn’t go deep into business models actually, although the words were on the lips of many attendees.

This last point also brings up the issue of license standardization, so that large numbers of licenses can be easily interpreted by people and by software that will enable additional services, a point that Creative Commons CEO Joi Ito also likes to make in his talks, when arguing for the use of CC as the standard. In my talk at the Berlin event I took a critical look at this way of pitching CC as the standard, but for the purposes of this session and my summary, it is a fitting analogy, or at least one to be considered because it has some merit.

Promotion

An additional reason why business might go into free/open licensing is for promotional purposes. This is the old ‘giving stuff for free to promote a commercial product or service’ argument, similar to the concept of a loss leaader. It was not discussed at length and personally I sometimes feel that this type of argument rubs some people the wrong way, including perhaps myself, because it positions free as a cheap marketing trick of sorts, an aid to the commercial economy rather than a complement or (if one would be keen to go that far), a correction of that economy.

Still, in the context of what a business might want, this is a valid and perhaps even a major reason why a business might want for some of what it does to be free (again as in free speech or beer), in order to promote something that is not. This is anyway also the argument behind CCPlus, one of the ways in which Creative Commons has tried to facilitiate the marriage of the sharing and the commercial economy, to use again Lessig’s terms.

Critical mass

Max Valentin (Crowdculture) mentioned how Mozilla is making money out of the search window on the top right corner of Firefox and argued that this is an interesting example of how a product, i.e. Firefox in this case, is shifting revenue flows to the part where people feel they’re doing something for free. Although I admit I do not know the details of how this works, the argument in itself seemed compelling for business. How can one maintain a user exeprience that is free as in beer and where possible also free as in speech, while also monetizing this experience in a way that may be completely hidden from the user? If it works for Mozilla in this case, where else could this be applied? I do not know yet, but Max also added how critical mass is essential here (and in may of our other examples). Someone argued that thinking like this means turning user actions into commodities, but apart from one’s possible distaste for the word and besides the urge that some may feel to build a Marxist or other critique on this, commodifying and monetizing user actions should sound attractive to a business – and indeed now that I think of it, a lot of current Web 2.0 business is based on exactly that.

Natural monopolies

A critique that is harder perhaps to ignore or argue one’s way around is that the need for scale means not everyone can do it; in fact maybe only very few can do it. How many successful Flickrs, Wikipedias, Firefoxes can the world afford if every service, whether purely commercial or not, depends on the use and contributions of very large numbers of people? I notice that often when I talk to young entrepreneurs who dream of building the next web 2.0 or social media success story. They all talk about scale and they are all after it. Clearly only very few will reach a scale that will make this a successful business, when the average business value of every ‘transaction’ on the platform is close to zero. The sharing economy doesn’t necessarily care about this, but the commercial economy clearly does.

Still, I suspect that for every super-successful story, there are many others that may be sustainable at the local or regional level, supported by smaller communities of people, without ever reaching the critical mass that we (and, since we’re talking about startups, venture capitalists) have come to expect before we call something a success. How much is ‘enough’? Thousands of users? Millions?

Free as differentiator

Another participant reminded us that although many Web 2.0 business models seem to rely on the commodification of very large numbers of free (gratis) user actions, providing something for free could be the icing on the cake, i.e. what differentiates a product or service. An insteresting thought, if you think for example of how some cafes choose to offer free WiFi while others do not.

User sensitization to sharecropping

One more interesting take-away for me with respect to the issue of sharecropping was that one would perhaps not notice it until one becomes aware of it, and then it can become a problem for the user and for the platform. Mike noted that sharecropping is a moraly loaded term anyway and although we didn’t discuss so much whether it is a valid term to use after all (something that is thoughtfully explored in Ruth Suehle’s blog post), Mike pointed out that in any case businesses will be naturally incentivized to avoid any practice that may reek of sharecropping when users are sensitized to that. So, taking this a step further, using a free license would then become a need because it would communicate to users that they are on an equal footing so to say with the business. So, the message to business seems to be: if your audience is sensitized to this, you need to make sure you follow a more free (as in speech) approach to how you manage intellectual property, especially for user-generated content.

Subsidies vs. markets

I was expecting that sooner or later someone would point out that this conference was taking place in Europe, with most participants being Europeans, and we were essentially assuming a mostly free-market-based system of cultural production that is not very representative of the European tradition. It was Paul Stepan from the Austrian Society for Cultural Economics and Cultural Studies that argued that we were discussing a very American problem – in Europe one is much more used to subsidies. From a European perspective, is the issue we are discussing then a non-issue? There were some objections to this latter point, including John Weitzmann’s argument that if say a movie makes money, it has to pay back the subsidy and therefore making money is still relevant, and so is licensing. If a movie is subsidized with taxpayer money, shouldn’t an NC license or similar be the natural choice and wouldn’t this be a more European case where free is needed? This topic deserves a lot more attention in my view, but is also diverging from the main question here.

Network effects

In the later part of the session, Paul and others engaged in an interesting discussion around network effects, critical mass, fixed and variable costs. Austrian Paul argued that for free/gratis to be sustainable in the economic sense we must have zero variable costs, but fixed costs need not be zero. Old pricing models have been predominantly unit-based, whereas now we are moving to models which try to exploit network effects while not expecting to monetize every unit. The way I understood  this is that it is easier to argue for non-unit-based pricing when variable costs are zero. But it was also noted that network effects can be a double-edged sword, i.e. can mean that “the more you sell, the more you sell”, or that “the more they share, the less you sell”. This is I believe why we see for example movie makers or distribution outlets experimenting with different models, e.g. makin something available under an open license early or a bit later in a product’s lifecycle. The concern for a business is to find the right balance between using free for promotional purposes and making a profit from commercial distribution. Network effects will help you in the former and may bite you in the latter.

Again here we were reminded by several participants that there is a relationship between ‘free’, network effects, the need for critical mass and natural monopolies. Similarly to the way I talked about Flickr earlier, if business models that rely on some form of free access and free/open licensing require very large numbers of users and transactions to reach critical mass and depend heavily on network effects, does this mean that they will naturally tend to lead to monopolies?

The new middlemen

Mike Linksvayer and others pointed out that many of the examples that were bring brought up were middlemen of some kind (as is CC itself in a way). Middlemen who enable transactions on some ‘free’ basis and these transactions add up to the point that the platform becomes a natural monopoly. If middlemen need free in that sense, should we be worried if this model leads to (natural) monopolies? We did not discuss this and I have not thought about it well enough to have a qualified opinion – yet. It reminds me again of the argument that Ito and others make that we must converge to one set of licenses, making CC essentially a natural ‘monopoly’ of sorts, to exploit the nerwork effects and reduced transaction costs that come with that. Perhaps it is true that Web 2.0, to put it more broadly, although empowering the average user to have a more active role in shaping his/her experience and influencing those around him/her, at the same time leads to super-sized natural monopolies with immense power over user data, transactions and content.

Thinking outside the Web

Last, but not least, Anne Marie Schleiner from the University of Amsterdam (and a colleague of mine in Singapore – how she manages both I do not know!) asked how these issues would manifest themselves in games and virtual worlds. I definitely see interactions between IP freedom and creative freedom  in virtual worlds – e.g., can you take your creations out of a givenplatform to use and develop them further outside that platform? Second Life is often brought up in this context as an example of a more free platform. Still, in most if not all commercial games, as far as I know, users do not maintain the rights to their creations, and online games that one can play for free sometimes do reek of virtual sharecropping. That is of course, if one sees play as labor, and that’s another long discusssion.

In similar spirit, someone commented on the difference between digital and physical markets. This relates again to the point above on variable costs being zero in the former and non-zero in the latter. So, is ‘free’ needed by the market when it comes to physical goods? Another point worth further exploration. I believe it is needed in situations where efficient and effective production capacity is not centrally available or when international trade doesn’t work to one’s favor as is the case in some developing countries. Something I hadn’t thought about before is that inventory costs can be drastically reduced when physical can be produced according to need, based on inputs from possibly freely available digital content, as one participant noted. In this case, even if ‘free’ wouldn’t make sense for a market in physical goods, a market for a complementary digital good might aid in increading the efficiency of the market for the physical good. Not sure what would be a good example of this though.

Well, that is all for now, this summary became longer than I anticipated. To me at least this is a good sign that the session was productive. But then again, I proposed and moderated it, so I may be biased.

For more information on the FCRC event in Berlin visit the official wiki. My apologies again to any participants whose names I didn’t mention here. And my thanks to the Berlin team for helping make this an awesome and educational event.