Bypassing the Toll Booth

The business model I find most facinating is the two sided network effect; where the business acts as a middleman or a distribution channel between two distinct groups. eBay is my standard example bridging between buyers and sellers. Single’s bars where men and women rondevous are another fun example.

I often use the example of a bridge with a toll booth as a way to help visualize this model. I often emphasis the role of the two cities that grow up on either side of the bridge; the complementary industries. Other times I emphasis the role of discrimitory or value pricing as a means for the bridge owner to encourage a larger network. For example bridge owners will agree to lower prices for travelers with an alternative, i.e. those who aren’t locked in. Bridge owners will cheerfully lower prices for travelers who, like the poor, who don’t derive significant value from their travels.

The media business is member of this class of business models; bridging between entertainment producers and consumers. Technology has been lower the cost to create substitute bridges and they have been desperately striving to avoid displacement.

In their thrashing around one technique they have been trying is digital rights managment. This tactic has lots of problems; in particular it misses the point entirely: their bridge is now irrelevant. DRM is a strange attempt to use technology to create chasm which the industry can then offer to bridge; it’s all backwards.

But, there is another problem with DRM. It doesn’t play well with pricing. Nobody in the bridge business wants to charge his entire universe of users the exact same price. Such a strategy would be fatal, at least in the presence of competition.

Pricing in network businesses is a balance between extracting taxes from the network while assuring that your bridge is carrying the most and best traffic. When two fo these bridge businesses compete the one that strikes the balance best wins. Most niave approaches to DRM ties one arm behind your back.

So this story is no suprise Musicians tell how to beat system (Bruce Schneier).

First off it’s obvious that Musicians would be happy to tell their listeners how to get around the bridge; because any information about alternative routes over the river has two positive effects for them. It helps them reach more of their customers and grow their own networks. More interestingly it improves their ability to negotate with the bridge owner – lowering his tolls and increasing their cut.

The second part is more interesting though.

Sony BMG says it is not trying to prevent consumers from getting music onto iPods. Fans who complain to Sony BMG about iPod incompatibility are directed to a Web site (http://cp.sonybmg.com/xcp) that provides information on how to work around the technology.

So Sony cuts the iPod owners a break because it would be very bad for Sony’s network.

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