Wednesday, February 10, 2010

The Economics of Information

The theme of a few recent stories in the New York Times can perhaps be termed "The Economics of Information".

David Carr writes about Demand Media
's hyper-efficient web content generating process. Demand Media has five times the youtube content than the next largest single source and over a million articles, we are told. It works like this:
Demand uses a three-part formula of search terms, potential ad results and what competitors are doing to feed an algorithm that, with a human assist, comes up with headlines that are full of clickable, salient language that serves as bait for readers and search ads. (News is expensive to produce and not really a part of the formula because the company is looking for durable content, so “How to avoid a tiger attack” will have more value than, say, “Tiger’s not out of the woods, yet.”)

The topic is then fed into a central database where freelance writers sign up for the assignment. The articles they write are run through an automated plagiarism checker, an actual copy editor and posted on one of the company’s sites like eHow or LiveStrong.
David Carr writes that the twenty hours he spent on his NYT article would have earned him the equivalent of a dollar an hour at Demand Media. But with the shrinking print media, there are plenty of writers who have used Demand Media as a lifeline. What is to be seen is whether Demand's business model can last in the long-term, and whether people at some point tune out a dollar an hour content.

The Fight Over Who Sets Prices at the Online Mall, by Brad Stone, is about raising a barrier to online retail price information. Manufacturers are trying to control price advertising. Retailers can sell, but not advertise, at a price lower than a manufacturer-set minimum. Product pages on online stores count as advertisements. That is why you might see messages like “To see our price, add this item to your cart.”

The manufacturers fear a race to the bottom if price information is readily available, and comparison shopping is automated and easy. They also don't want their brick-and-mortar retail partners to stop carrying their products because they cannot match online prices. Previously such tactics would have earned anti-trust scrutiny we are told, but the Supreme Court immunized businesses from this in the 2007 Leegin Creative Leather Products v. PSKS decision. Of course, ecommerce sites are trying to fight back, seeking legislation in Congress.

What this article illustrates is how raising the cost of information makes the market less price-efficient. It is also of considerable interest to all of us consumers how this fight is resolved.

In "Kindle Books in Snack Sizes", Motoko Rich tells us about FT Press' venture of selling highly condensed 1000- to 2000- word versions of already published books (The Elements) and new 5000-word essays (The Shorts) at prices of 2 to 3 dollars. The idea is that people don't want to or can't read longer books. It is reported that authors are not paid advances, and are offered a 20% royalty on the publisher's net proceeds. I suppose this is the niche between full books and Demand Media output that is free-for-the-reader-except-for-advertisements.

Apple's iPad has had an immediate effect on the economics of information. Motoko Rich writes that the pricing power that publishers had ceded to on the Kindle may be restored. The situation is somewhat unclear to me, but this is another front in the battle over the information economy.

I would not dare predict where things will go, except that in the end, we will end up with an economic model that is sustainable. Whether that model is fair to producers, distributors and consumers is to be seen.