Dec 2

Tim O'Reilly

Tim O'Reilly

The Economics of Disaggregation

Peter Brantley pointed on a private email list to "a nice article in slate on the disaggregation of content in newspapers, with several nice insights, including a remark on the lack of novelty of some of the problems facing the industry." He quoted:

"Fresh thinking about what ails newspapers arrived in yesterday's Wall Street Journal, where staffer William M. Bulkeley contributed a column titled "The Internet Allows Consumers to Trim Wasteful Purchases." Bulkeley explains how the photographic film industry, encyclopedia publishers, the music industry, and the advertising industry feasted on buyers by forcing them to purchase things they didn't want - prints of all 24 shots from their camera or a whole album to secure one favorite song, for example. "The business models required customers to pay for detritus to get the good stuff," Bulkeley writes. But digital cameras, the Web, iTunes, and search-related advertising have stripped those industries of their power to charge for detritus.

" ...[G]iven a choice, and the economic means to make a choice, many buyers prefer to make an unbundled purchase. Unbundling the news they want from the news they don't want is what the Web allows readers to do now."

This is a very good point, and one whose benefits many of us enjoy. But thought-provokingly, Joe Esposito riposted:

I have been studying this for some time in the context of academic research journals. A journal might cost $1,000 and publish 100 articles a year. Someone might want to buy one article for $10. Of course the price of one article is $1,000, unless you re-create the business model from the ground up. What those new business models will look like is anyone's guest, but they won't provide a free ride to the customer. Indeed, quite the opposite: businesses exist precisely to make sure no one gets a free ride. Apple and iTunes is instructive: the disaggregated $1 song requires you to purchase a $300 iPod every couple years.

This comment is related to the idea that long tail businesses disproportionately benefit the aggregator. While they create new opportunities for content providers "down the tail" who might not otherwise have been noticed, they create even greater collective benefits for the Amazon, the Google, the Netflix, who hosts the entire collection, the dog who wags the tail.

It's always easy to look at business changes in isolation. But there is, as Clayton Christensen notes, a "law of conservation of attractive profits," and when outsized profits disappear from one place in an economic system, they usually reappear somewhere else.

This isn't to say that there isn't benefit to the end user, but that benefit isn't necessarily the primary goal of the aggregator (or in this case, the disaggregator.) Joe concluded:

The fundamental error in most discussions of disaggregation is that they assume that the goal is to provide more value to the end-user. It's exactly the opposite: the goal is to provide a greater return to the producer. How could it be otherwise? If that greater return also provides a superior experience to the end-user, all the better; but that is epiphenomenal, not essential.

I'm not quite sure I agree with the sentiment "How could it be otherwise?" but Joe makes a strong point. Idealism does exist even among economic actors. But for the most part, businesses introduce new consumer benefits not just for the benefit of the consumer, but because they expect that benefit to redound to themselves as well. So Deep Throat's now classic injunction to "Follow the money!" is always instructive. When one party loses, some other party typically wins, and it's not always who you think.

In addition to getting you to buy a new iPod every few years, Apple also now has a huge force for market lock-in, with 1.5 billion songs in their proprietary format.

tags: web 2.0  | comments: 10   | Sphere It

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Comments: 10

  Sam [12.02.06 06:23 PM]

> Apple and iTunes is instructive: the disaggregated > $1 song requires you to purchase a $300 iPod every > couple years.

There's no need to buy an ipod in order to use itunes.

While most people may buy a $100 ipod, I'm far from certain that there's a wide range of people who do that because they already use the iTMS. The reverse is almost certainly true however.

  Daniele Beccari [12.02.06 10:46 PM]

The main benefit for the aggregator of as-large-as-possible content is not the actual revenues of long-tail purchases, but the ability to capture a potential huge hit that otherwise would be captured by someone else. You can see this as a sort of portfolio management strategy. You invest in all possible content and you deliver users the benefit to find everything on your aggregation platform. When a new trend kicks in (or a new unknown band) you're already there.

  Rich [12.03.06 11:00 AM]

The opposite of "aggregation" is "segregation" - literally, to add to (ad-) and separate from (s?-) a flock (grex, greg-, flock). The prefix "dis-" has several meanings, none of which can be applied with any meaning to the word "aggregation". For example, if discomfort means "the lack of comfort", then I suppose disaggregation (if the word existed) would mean "the lack of aggregation". From the article you quote, I think the sense is "separation of previously aggregated things" i.e. segregation.

Hey ho.

  Tim O'Reilly [12.03.06 12:33 PM]

Rich, I'm afraid that segregation and disaggregation are not equivalent. Merriam-Webster defines "disaggregate" as "to separate into component parts" vs. "segregate" as "to separate from the general mass," or "to force such separation."

And even if it weren't in the dictionary, with 1.6 million Google hits for the word disaggregation, I suggest it would soon be. That's how language progresses. As Shakespeare said, "the hot blood leaps over the cold decree."

  ariel [12.03.06 09:33 PM]

there are few issues with joe espisto's point regarding iPod "Apple and iTunes is instructive: the disaggregated $1 song requires you to purchase a $300 iPod every couple years."

*what itunes did was take out the high recurring cost of the content itself. while one clearly does not go out and buy a new ipod every month or so, most music fans do buy music once every few months and these costs quickly begin to accrue. in fact, back when one was forced to buy cd's/tapes the total cost of the musuc itself would become far more expensive then the actual devices itself.

*furthermore, paying premiums for cool gadgets is not new. even before ipod starting charging $300/ipod (hopefully the launch of zune and others will start to change this) people were buying expensive walkman and other 'cool' music devices.

  Seamus McCauley [12.04.06 04:57 AM]

Apple also now has a huge force for market lock-in, with 1.5 billion songs in their proprietary format -

That's the theory, sure, but as Umair has demonstrated in his Edge Competencies ppt (slide 30) only between 1.25% and 3% of the space on iPods is actually taken up with iTunes songs. What Apple could have done with its position in the market isn't what Apple has actually done.

  Leo Klein [12.04.06 04:17 PM]

Booboo on the 'Joe Esposito' link?

  Rich [02.06.07 06:23 AM]

Thanks, Tim. I imagine that both Merriam-Webster and you might regard that as the the truthiness, the whole truthiness, and nothing but the truthiness on the subject. Meanwhile, I look forward to your thoughts on the Economics of Things That Are Not Aggregated (the one that cold decree - i.e. my school education - led me to believe I was going to read).

  Tim O'Reilly [02.06.07 07:57 AM]

Rich -- the economics of "things that are not aggregated" is indeed an interesting question. I'm not an economist, and I don't have any deep thoughts on the subject. But off the cuff, it seems to me that all markets are about aggregation, and more aggregation equals more market power. Get four families together for the super garage sale, and it's theoretically better than one. Get millions of families together and you have ebay.

It does seem to me, though, that much is lost in aggregation as well. I find it more satisfying to buy at the farmer's market (less aggregated) than at Whole Foods. I find it even more satisfying to buy vegetables at the local farm stand, where they put stuff out in a little shed, with prices marked and an "honesty box" for you to leave your money.

Another thought: Ultimately, the economics of disaggregation is the economics of everyday life, the economics experienced by the solitary consumer whose un-aggregated market power is taken advantage of by all the aggregators. The reason why small scale commerce is more satisfying is that it is commerce between equals, while most of our commercial experiences are on terms set exclusively by the vendor.

Following this thought, it seems to me that there is huge opportunity in aggregating consumers in ways that give them market power over vendors. Hmmm...that's what wesabe is doing :-)

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