Phoenix Rising

The infrastructure of the information economy rests in IP law, filtered through our broader policy decisions and public investments. But the primary importance of public infrastructure lies in the opportunities that it creates and in the ways that private parties avail themselves of those opportunities.

The New Channel paradigm defines industries by the goods and/or services that vendors provide to customers, by the geographic reach of those vendors, and at times by the demographics of the customer base. In other words, it changes nothing.¹⁵ Only New World advocates thought that they could define an industry around its preferred mode of com­munication. New Channel inquiries into the viability of an Internet busi­ness plan must identify the relevant industry and then consider the Internet’s likely impact on the transactions that govern that industry. Which information costs will it reduce, and how great an impact will these reduced costs have on the overall transaction? Those Internet­specific questions are where we begin evaluating whether a pure play has a prayer. Because the vast majority of cases will generate negative answers, we’ll have to continue our analyses using the tools that people usually use when evaluating business plans in the industry in question. That can be tough work—and it serves as a subtle reminder that most new businesses fail.

But pure plays will continue to arise, and some even will succeed. They may not be as plentiful as we once expected, and they’ll certainly need a better business plan than: “trust me, I’m online,” but they will develop and thrive. People need information, and under the right circumstances they’re willing to pay for it.

In the single-use side of the information sector, news providers, sites answering frequently asked questions (FAQ sites), and “infomediaries” providing detailed information about a narrow topic, all have become popular—if not always lucrative. The basic challenge in running such a site is convincing users to pay for the information—or finding some other way to convert your popular site into a source of revenues. Because few if any entry barriers appear to protect such sites, some infomediaries or FAQs try to generate revenues by varying their fees according to “fresh­ness,” in an Internet-based application of “versioning.”¹⁶ It’s not clear, however, that this sort of approach will prove workable—at least as a general rule. In fact, good general ways to drive standalone FAQs or info- mediaries to reliable profits may not exist. As a result, while it’s easy to believe someone who claims that his radical, new Web site will become popular, it’s best to remain a bit skeptical when he insists that popular­ity will make it lucrative. Even true devotees are unlikely to pay much to use it, and few or no barriers to competitive entry exist. The best bet for the future of infomediaries or FAQs seems to rest with groups not interested in running them for a profit: “educators,” including universi­ties, governments, advocacy groups, nonprofits, etc.; and companies seeking to “attract attention” to their real businesses. In either case, direct revenues from the site are unlikely to be the provider’s primary goal. That challenge makes them a dubious choice for pure plays.

Advertising revenues—set, at least in part, by the amount of traffic driven through a site—remain central to many Internet business models,¹⁷ though it’s hard to see a revenue model based on banner ads working for more than a small number of very popular sites.

Heavy reliance on advertising revenues is likely to work only in select places. But another category of single-use information goods, rights and permissions, appears almost ideal for e-commerce. A ticket is little more than a very simple contract backed up by both a collection of default legal rules and specific rules enumerated on the ticket. Tickets may be the ideal item for Internet distribution—particularly when they provide entry into a commoditized, well-understood, or easily describable event, such as a specific flight, a game between two named sports teams, or a concert by a known band.

The role of the Internet in simple ticket sales is a straightforward con­vergence of technological and legal interests—with a commission struc­ture providing a well-defined business plan: A ticket sale is an exchange of rights—a purely informational transaction. Internet transactions, by reducing the cost of information exchange, reduce the costs of ticket sales. Internet ticket sales should thus help consumers pay smaller service charges, help service providers sell more tickets, and still leave enough of a commission for the agent. While the shift to the Internet has undoubtedly put many traditional travel agencies—particularly small ones—out of business, their lobby is neither particularly large nor par­ticularly well funded, and therefore unlikely to be able to reimpose too many of the reduced information costs. The general weakness of tradi­tional intermediaries²⁰ makes tickets an ideal product for e-commerce, though Ticketmaster’s continuing stranglehold on various categories of ticket sales demonstrates once again how monopolists can exploit consumers.

Less well-understood sales provide yet another potential venue for pure plays. Hybrid infomediary/ticket sites may be able to sell both the infor­mation needed to understand complex products and the products them- selves.²¹ But entrepreneurs launching such sites must exercise constant vigilance. Their business models must ultimately lie in their ability to charge enough to cover their data acquisition and coordination costs— plus a profit. As always, price differentials create possibilities for both free-ridership and arbitrage; users may obtain information from the info- mediary and then take their purchases to a discounter. Furthermore, from a legal perspective, sites providing dated or inaccurate information may discover unanticipated areas of liability. Such sites show a good deal of promise, but a good business plan still must explain how to lock in con­sumers—as well as to demonstrate attention to more standard consider­ations like product quality, personnel, managerial acumen, and timing.

Beyond the land of “infomediaries,” ticket vendors, dating services, and hybrids, though, lies an entire realm of reusable information prod­ucts that we’ve been buying for ages—long before we came to think of them as information products. In traditional off-line business models, vendors of reusable information goods charge customers either for every use (e.g., by selling admission to a movie) or for every copy (e.g., by selling music CDs). The ease of producing and redistributing multiple copies of digital goods has strained those models. That complication makes reusable information goods among the most interesting battle­grounds not only of the Internet, but of the entire tech sector—far beyond what we’ve seen in the worlds of software and music.

The era of the print encyclopedia, for example, is over; just ask the folks at Britannica.com.²² Publishers of reference books have had to redo both their products and their business models to enter the information sector. They’ve developed full hypertext versions of their works to include links that make it easy to surf their own little corners of the Web. In many ways, our formerly linear encyclopedias are coming to resem­ble the complex exegetic structure that Jonathan Rosen found in the Talmud. Conversion to the information sector imposed real costs on reference publishers—even as it caused the prices of their products to plummet. Meanwhile, the rest of the book-publishing industry has encountered its own set of technological challengers. Books on tape came first. Electronic books (or e-books) have followed.²³ As the technology for delivering them improves, publishers will have to adapt. New busi­ness models will have to follow.

Advertising long has been the primary source of revenue for newspa­per and magazine publishers. To a large extent, the same is true with Internet periodicals. But Internet and print publications lend themselves to different variants of competition. Playboy and Penthouse, for example, long have been the two most popular gentlemen’s magazines, in part because they cater to a broad audience.

The publishers of archival periodicals like the New York Times faced their own set of challenges when they entered the information sector. They discovered early on that sales to database publishers could gener­ate additional revenues. But their freelance writers also discovered a potential new revenue source. When a newspaper buys an article from a freelancer, what it actually buys are the rights to publish that article in its newspaper. Under general principles of copyright law, it also pur­chases the auxiliary right to include that same article in some specific sorts of anthologies, such as a special “best stories of the year” issue. With the advent of commercial databases like Lexis/Nexis, however, the newspapers began selling the rights to republish these articles in a dif­ferent format—as parts of an archival database. The Supreme Court ruled that the freelance authors hadn’t relinquished their rights to this sort of republication—and that the publications had thus infringed the authors’ copyrights.²⁵

This ruling exemplifies an important aspect of our transition to an information economy. The length of modern copyrights suggests that a new valuable technology always could be just around the corner. If no one’s thinking about these developments when they sign contracts, who gets the windfall revenues? The courts have reminded us that this ques­tion has no general answer. Copyrights are what copyright law says they are, and contracts say what they say. If a question arises as to who retains a right, we look to the statute and to the contract—never, mind you, to a policy objective. And if one party or the other feels ripped off for having “relinquished” rights that it never contemplated, that’s just too damn bad. While it may affect the transition to the information sector, it’s unlikely to have major consequences on the success or failure of various business models going forward. Yet again, IP rights dictate the transition’s shape.

The entire category of reusable information goods is thus a veritable legal minefield replete with potentially lucrative business opportunities and few proven business models to exploit them. Many of the valuable and desirable goods that Internet vendors can sell easily are reusable information goods, but the legal challenges surrounding this transition are likely to be fierce. In fact, any attempted entry is almost certain to raise a legal issue, because distributing reusable information goods is so easy and so cheap that consumers may balk at the thought of paying for them—and even more at the thought of letting some “owner” control their flow.

It’s an arena in which law, economics, and technology eye each other warily, each poised to jump as the other two develop new ways of either invading its turf or constraining its reach. Technology sets information goods free. Law tends to constrain them. Economics hovers around the edges insisting that there must be some way to convert desirable goods into profitable ventures. This tension highlights the relationship between the two economic pillars of the information age: public infrastructure and private investment. It demonstrates quite clearly how our allocation of IP rights will constrain business planning—and thereby determine which plans will succeed and which will fail.

IP rights will play a lesser—though hardly insignificant—role in delim­iting the Internet’s impact on the electronic sales of physical goods. There, industry-specific analyses will dominate future business models. Nevertheless, the empirical data of the bubble already have taught us some powerful general lessons. First, buyers who know what to expect upon delivery are likely to be particularly amenable to Internet pur­chases. Items that are essentially commodities or branded may be easier Internet sales than those that are experiential, tactile, or sensual. Second, collectibles will continue to sell well on the Web despite the general rule that consumers like to know what they’re getting. Though collectibles do tend to be one of a kind, the Internet has reduced the search cost— an important information cost—inherent in collecting. Third, fulfillment will pose a perpetual challenge. Perishable goods (like groceries) that require timely delivery and careful handling will continue to challenge Internet vendors. Fourth, the Internet provides an easy mechanism for taking customizable orders. In the past, the expense inherent in deter­mining the preferences of a specific customer has generally restricted cus­tomization to a relatively small number of expensive goods, such as homes or automobiles. Fifth, Internet vendors are well poised to cus­tomize prices as well as products. Customized pricing derived from low­cost information about consumers’ individual tastes, preferences, and budgets promises to help make goods more widely available while simul­taneously increasing corporate profits. Nevertheless, it has some draw­backs. Various types of “price discrimination” are illegal,²⁶ and even the legal types can hurt a vendor’s reputation.²⁷

In short, the future of commercial development on the Internet is likely to look a lot like the history of commercial development before the Inter­net. Entrepreneurs will need to struggle to succeed, incumbents will need to fight to stay ahead, investors will need to exercise due diligence in selecting their investments, and the government will need to experiment gingerly to determine the appropriate amount of guidance and regula­tion needed to foster development on different parts of the Internet. But savvy Internet entrepreneurs will understand how a reduced information cost can restructure an industry—and then make it happen.

We need both economic pillars of the information age to succeed. If we invest in developing a suitable public-information infrastructure, and if our private information entrepreneurs stay grounded in New Channel thinking, we can look forward to a bright future. And all that we’ll have to worry about are those pesky distributors who decide to fight back rather than to let their profit streams evaporate as we drift closer to a world sans transaction costs. That—and our still tentative levels of hope and trust.