TCS Daily

Edge Power

By Arnold Kling - December 12, 2002 12:00 AM

The Internet lowers the cost of the tools of communication and creativity, making them affordable to individuals and small businesses. This phenomenon might be called Edge Power, because it increases power around the "edges" of the network, in contrast with broadcast media, where power is centralized.

There is a striking generation gap between media empires that were built before the Internet and those that grew up as Web businesses. Companies that were formed on the Internet treat Edge Power as a feature. Traditional media companies treat Edge Power as a bug.

Edge Power as a Feature

An example of a company that treats Edge Power as a feature is Amazon. Amazon encourages consumers to participate by providing reviews, ratings, and recommendation lists.

Amazon has a large, well-established affiliate-marketing program. Anyone can set up a web site that offers to sell books through Amazon. The affiliate receives a share of revenues. Affiliates can even install one-click ordering from Amazon.

Recently, Amazon made its affiliate program even more flexible, by giving affiliates programming interfaces to its database. That way, anyone can set up a storefront using Amazon as the "back end" for fulfillment. One early adopter set up a camera shop using Amazon's interface.

The latest Internet buzzword is loosely coupled web services, of which Amazon's interface is an example. CNET reports that other companies experimenting with web services include Google, Yahoo, and eBay. These companies will be offering access to their data to developers on the edge who can come up with new applications and businesses. One example is Googlism, which was developed using Google's web services interface as an amusing way of looking up opinions about famous people or products.

Loosely coupled web services would work really well for the music publishing industry. A recording company could put its catalogue on the Web and publish programming interfaces. Using those interfaces, someone on the edge could set up a radio station, a music recommendation service, a facility for mixing custom CD's, music gift-giving systems, or other services. The original music publisher could give each affiliate an access code, and it could charge fees based on the monthly access through each code. It would be up to the affiliates to come up with revenue models. If I were a publisher, I would only start charging affiliates for accesses above a certain threshold, so that they could experiment at little or no cost.

If each of the major music publishers set up interfaces, a developer on the edge could connect with all of them. That would enable the affiliates to offer music from all of the major publishers, just as a record store today can offer music from all major publishers. This would not require that the publishers get together and offer music through a single joint site, with the resulting bureaucratic and anti-competitive problems.

Edge Power as a Bug

Even though it would make sense for music publishers to set up web services, I do not expect them to do so. The entertainment industry is determined to treat edge power as a bug, not a feature. The industry has its lawyers engaged in a full-court press against song-swapping, Internet radio, and other edge-based innovations. The industry is determined to criminalize every effort to enable the Internet to achieve its potential of providing consumers with greater convenience and lower cost.

Actually, I am not sure that this is a case of the industry giving directions to its lawyers and lobbyists. It almost seems as if it is the other way around. If the leaders of the entertainment industry had real business acumen, they would be trying to have Edge Power working for them rather than against them. They would be trying to maximize profits instead of throwing resources at courts and political campaigns.

The entertainment industry's approach to the Internet is illustrated by Movielink. This is a monopoly service, with many restrictions. Consumers report problems with long download times, interruptions, and limited viewing windows. I used Googlism to find opinions of Movielink. These included "movielink is committed to providing the premier online movie rental experience to consumers," but also "movielink is also turning its back on apple computer," "movielink is a huge disappointment," and "movielink is either a premature idea or an effort at creating a preemptive failure."

The entertainment industry does not recognize that its content could be used as a platform for innovations developed on the edge. It is missing out on a tremendous opportunity.

Innovation on the Edge

Many studies show that innovation tends to originate on the edge, rather than in large incumbent companies. Amar Bhide points out that large incumbents have low tolerance for ambiguity. Joel Barker gives many examples of innovations that were rejected by incumbent industries, including digital watches rejected by Swiss watchmakers and photo-copying rejected by large photography firms. Eric von Hippel documents the importance of customer-driven innovation.

Based on von Hippel's findings, Hal Varian expressed a concern over technologies that can be used to track and restrict the use of products. He wrote, "Too much control can be a bad thing, particularly when innovation is a critical source of competitive advantage."

Many companies instinctively want to control as much of their business as possible. They strive for vertical integration and stifle creativity on the edge. This was the downfall of Apple Computer, according to Steven den Beste, among others.

The Internet will reward companies that take advantage of innovation on the edge. Forward-thinking business leaders seek to create platforms that encourage such innovation, rather than retain total control. If the entertainment industry were aligned with the future, it would be designing web services to make its content accessible to third-party developers. Instead, it is trying to take the edge off of innovation.



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