Dating services, credit cards, game consoles, farmer’s markets, real estate agents all have something in common and thus the lover’s lament “he’s been too long at the fair.” Let me explain. Let me invite you to the fair.

The September ’03 issue of Review of Network Economics has an article by David S. Evans that I’m enjoying: “Some empirical Aspects of Multi-sided Platform Industries”. These “multi-sided platform industries” are a species of businesses that have particularly strong network effects.

I’ve heard it said that these business models have a butterfly shape. In an earlier paper Evans tells this story:

Dating clubs – typically bars or cafes – are an innovative way for men and women to meet each other in Japan. At one club, men and women sit on opposite sides of a glass divide. if a man sees a woman he likes, he can ask a waiter to carry a “love note” to here. Dating clubs sell patrons the prospect of making a match. Their business works only if they attract enough members of the opposite sex to their club to make a match likely. Enough men must participate to attract women, and enough women to attract the men. The club must figure out how much to charge men and women so that the club gets the right number and mix of patrons, while at the same time making money since most of these clubs are in business to turn a profit. One bar does this by charging men $100 for membership, plus $20 a visit, and letting women in for free. …

Pricing problems and startup problem make these businesses very unusual from a simple economic prospective. The paper talks about how various industries have tried to solve the problem of getting everybody to show up – what is commonly called the chicken and egg problem. The men won’t come if the women don’t, and visa-versa.

Another example is the commercial fair: flea markets, craft fairs, Comdex. IT people go to Comdex to see the vendors. The vendors go to Comdex to see the IT people. In the middle ages there were huge fairs for specific goods. For example to trade horses or clear letters of credit. Entire cities were taken over for weeks, much as Comdex used to take over Las Vagas. These fairs persisted until their industries had matured enough that other mechinisms replace them. Once a market matures the fair gets boring, vistigal. You don’t need to go to Comdex to find IBM or Microsoft.

Young industries have the fun fairs! Because then, only at the fair, can you see the newest coolest stuff Stuff you didn’t know was happening. Kick the tires. Find the interested buyers or the interesting sellers. At the fair you can start the fun collaborations.

With that in mind. Let me recomend ApacheCon. The conference of the Apache Software Foundation. Real people doing real work in new ways using really neat new stuff. Funky. No glass wall! No waiters. New opportunities!

You better register! Maybe you’ll bring home that “bunch of blue ribbon”.

Here’s a fine example of modern pricing practice. Notice how this forces the shopper to reveal (negotiate) exactly what price he’s willing to pay by setting up a cascade of barriers he must climb over to get the lowest price.

OfficeMax.com – Western Digital 120GB, 7200 RPM, 8MB Cache Hard Drive $69.98 After Rebates.

OfficeMax has the Western Digital 120GB Hard Drive Item# 20346127 selling for $139.98 with a $30 Mfg rebate (exp. 9/27/03 – original UPC) and a $20 OM rebate (#27 exp. 9/27/03 – copy of UPC). Start shopping with this $20 off $125coupon (exp. 10/05/03) and using the “Order by item number” link at the top of the OfficeMax homepage add the drive to your cart and check-out. Your cost just $139.98 – $20 coupon – $50 in rebates = $69.98 shipped to your door. You could add some free after rebate items to get over $150 and use the $30 off $150 coupon to get it for another $10 cheaper.

One aspect of this I find thought provoking is how the transaction is spread out over time. In a simplistic model the transaction is closed out once you have handed over you money, have your goods and you’ve left the cash register. No more.

What with return policies, rebates, warrenty, credit card warrenty extensions, firmware updates, etc. etc. transactions almost never manage to close out.

Some people in marketing call this a relationship.

There must be some way to introduce an intermediary into this. “Mr. Rebate: we do the work you get the money!” Maybe it could be a add on to the warrenty registration services some of the credit card companies provide. Maybe it could be one of those little mall cart based franchise businesses. Just once I managed to get the staff at a cell phone store to offer to do all the paperwork, including the envelope and stamp, as part of negotiating the purchase of a new cell phone.

Tim Oren turns his not inconsiderable pirate skills on the rich prize what is the dying music industry.

He makes a fascinating point that the Ticket Master monopoly might be the big winner in reshaping the industry. On the other hand the dollars may just go someplace else, never to return.

He points our that there will always be a top 40, the power-law curve is always there. I certainly agree, there will always be a top 40. But, three points temper that. One: The market share of that top 40 can decline substantially. Shifting the wealth out into the tail and lowering the slope (or exponent) of the curve. Two: The slope of the power-law curve depends on, at least, two things. The strength of the bottlenecks in the market, and the scarcity of information available to buyers. The net acts to undermine both these. This is true across the all the information industries. Third: durable are positions in the top 40? Saying there will always be a top 40 isn’t the same as saying there will be another Beatles.

Picking possibly winners, like Ticket Master, is a fun way to look at the problem. Maybe the winners are the equipment makers, maybe the platform vendors.

All this has reminded me of a story I find useful to revisit whenever I’m thinking about the role of DRM in these markets. It’s the story of what happen to the Font Foundries. They were almost innocent civilians, collateral damage, in the platform wars back in the 1980s.

A huge demand emerged for high quality fonts in the 1980s as the price of high quality printing fell. On the one hand olde font foundries wanted DRM on their IP. On the other hand there was an explosion in demand for high quality fonts due to the arrival of laser printer and it’s complements.

Adobe stepped in between these two and offered a DRM solution coupled with a bundle of other stuff. This solved the problem faced by the font foundries. Adobe needed access to source of quality fonts. But the bundle that Adobe offered threatened the platform vendors. The bundle that Adobe pulled together solved two problems. The print driver problem. Adobe really irritated the platform vendors with Display Postscript which offered to solve the display driver problem.

Technically, operating systems are not much more than bundle of device drivers – i.e. they solve the rondevous problem between hardware and application software. You can’t compete in markets like this without huge flexibility in pricing. When bootstrapping the network effect you desperately need to be able to match the price of the competing solutions. In software, where marginal costs are close to zero, that often means zero.

It’s hard to sell something at zero price if you have to pay a unit cost to some other vendor buy some random component part. In this story Adobe threatened both Apple and Microsoft in just this way.

This is one of the problems you can solve with industrial standards. Industrial standards allow components to be comoditized. So Apple and Microsoft got together and put forth an reasonably open standard for font encoding, and for the display. The display standard never took fire. But OpenType(r) did.

The platform vendors weren’t targeting the font industry. They were targeting Adobe. Adobe had somewhat incidentally solved the DRM problems of the font foundries. Adobe cared about high quality fonts. High quality fonts were pretty low on the agenda of the platform vendors.

I find this story fascinating because what happened next. Billions of fonts appeared in the market.

Good fonts had been scarce. The font industry saw to that. Suprise, good font designers were not scarce. Lots of talented font designers were hiding out in the art schools all over the planet. Their motivations to create new fonts? Well it wasn’t fame and fortune.

Out of the long tail of the power-law curve we saw billions of horrible fonts appear, thousands of good fonts, and occationally really really great fonts It was a font bubble!

That forced Adobe to back off on the DRM. Adobe couldn’t afford to lose the attention of the font designing community. They had to move fast to assure that font designers built fonts for their platform at least as often as they built them for the new OpenType(r) font platform.

To this day it’s still the case that the traditional font foundries horde the IP rights to some wonderful and beautiful fonts. That means that those fonts are rarely seen.

I see a very similar future in the cards for the music industry. I suspect we will see a bloom of new music from the long tail of the curve. We will see some moves by various players to try to keep up with the new more open distribution channels. Other players will cling to the old model. Much of 20th century music will become rare (loose market share, become more rarely played, etc.) just as many beautiful fonts are now rarely seen.

Locked up in the old business models.

This kind of displacement – margarine for butter – is a common downside of shifting technology and business models. You seem to have to just lump it. Those aspects maximized by the olde winners are rarely the same aspects maximized by the new winners.

Tim notes this and other things in assorted posting about how the movie industry seems more clueful, how there is some sign that alternate kinds of entertainment (video games?) maybe grabbing consumer dollars from the music industry, and how on some days it looks like content is just the necessary evil of a rising tide of communications.

This blog entry points to a paper on patents and draws out a few paragraphs. One of them I strongly disagree with:

Second, the number of citations received by the average patent has increased over the last couple of decades, suggesting that the social value of the average patent has increased.

I have no doubt that the increasing number of citations is due to two causes. The patent bar’s empowerment by technology. It’s just a lot easier for the patent lawyer to find related work and by citing that work he demonstrates he’s doing his job.

The second reason is the way that the patent bar has sold a bill of goods to universities. The patent bar has convinced the universities that there be gold in them thar proffessors and all you gotta due Mr. Adminstrator is get your self a half dozen members of the patent bar and pretty soon you’d be rich just like Yoyodyne University with their DNA transcription pattent.

Meanwhile no practicing engineer, in my experiance, reads patents as a source of ideas. Why? Because he’s afraid he will be tainted by the experiance. I have, multiple times, sat in meetings where members of the audience have strongly objected to one participant’s offer to explain some patent in the area where they are working.

Generally there are so many ways to skin a cat. Mr Engineer is confident he can just figure it out. But once he’s read the patents in an area he’s at risk that he will skin the cat using a patented method and then his product’s margins will be taken hostage by the patent holder.

The only people who would be tempted to read pattents for ideas would be those that believe that ideas are scarce and that the patents are of high quality. Those people haven’t done much engineering, and they certainly haven’t read any patents.

Very nice essay on why the music industry’s lashing out is just a further manifestation of the death of their current business model; in this case the key point being made is that you can’t run a business on that’s based on destroying value for your customers.

Then we have humor: RIAA Files Suit Against Share Bear.

The RIAA sue your customers and make examples of them strategy requires that people see it as rightous, rather than as a sign of weakness.