Sunday, February 24, 2013

On Ownership: Game Objects Are Like Poison Mice Edition

Last week I read an article about the US Department of Agriculture's decision to parachute poison mice into treetops to kill tree snakes in Guam.  The tree snakes killed all of the birds on the island and the USDA is concerned the snakes may be able to migrate to Hawaii.   This reminiscent of all of the times a species was introduced to wipe out another, and it went terribly wrong.  The article moved through a series of curiously inappropriate connections in my mind and got me thinking about digital object sales. I cannot tell you why, but I a promise you it is much more of a curse than a blessing.   Our perception of digital objects and willingness to pay for them is evolving much more quickly than our understanding of the impact of the market and I am afraid they will get a foothold in our world before we know how to control them.   Oh yeah, don't worry about the poison, it is Tylenol which is just as useful for killing black tree snakes as it is for killing a headache.

Remember when it was really nutty to think someone would pay money to buy an game object?  If you don't have to remember and still think buying a digital t shirt to put on your avatar is kind of lame, keep reading, you are proving my point.   We are evolving, and it is a good thing.  DVD racks are ugly and building book shelves is surprisingly expensive.

In law school they taught me ownership is not a single right.  It is more like a bundle of sticks.  One stick represents possession, another the right to modify, another the right to collect revenue, and so on.   The aggregate is infinitely divisible and definable by contract.  We used to think the possession of a physical object was the paramount attribute of ownership.  No, even you don't think that way anymore. The digital era changed us.

If you think back in the dark recesses of your minds to the pre-kindle and pre-iPod days we devoted space in our house to collections of analog bits.   Records, CDs, DVDs and books were all displayed in the common areas.   We were buying the ability to access the content whenever we pleased, but also created and satisfied and secondary, and often primary need to display.  Your collection became an indicia of taste.   You may have even been driven to put books or DVDs out you never read or watched and hidden others to avoid the notion your taste may be odd or worse yet, mainstream.   You may think I am talking about porn, but I was thinking Grease - record and DVD, Bee Gees and Abba.  Digital access changed all that and is in the process of changing it more.

Devices like the iPod and the Kindle provided us with the access to the content we wanted and sharable playlists and friend notifications from applications like Spotify and Pandora allow us to display our good taste to people who would have had to come to our home or read our t shirts in the past.   Now we know the only sticks we really need from the bundle are access and display, not physical possession - and this is changing everything.  The evolution of a mindset based on holding physical embodiments of our media (or as George Carlin called it "stuff") to one of access to utility is driving growth of the digital object market at exponential rates.

The concept of physical possession separated from ownership is not new.   We applied it for years to the two most expensive purchases most people ever make in their lives, our homes and our cars.   I have possession of my home.  I can do whatever I want with it and invite whomever I please to access it.  I can also block anyone I please from access.  Feels a lot like ownership.  But my ownership is represented and dependent upon some analog bits in a file cabinet in a city called Norwalk, California.  I have never been to Norwalk, California.   But if anyone questions my ownership, or I want to sell my home, I need to put a new piece of paper, with my signature verified by an independent third party, in a different file in Norwalk, California.  I have possession and apparent ownership, but I do not have possession of the indicia of ownership.  The same can be said of my car.  I have the right to use and possess, but the actual indicia of ownership is on some analog bits somewhere in Sacramento, California.    Since the dawn of property ownership, we accepted possession as something separate from indicia of ownership.  The digital model is simply a reversal of the model.

If I am playing League of Legends, I am able to buy skins, champions and other objects that will appear to other players in the game.  The objects I buy have no impact on my power or abilities in the game.   In the early days this sounded strange to non players - ok maybe it still sounds strange today - but the migration to accept a digital champion in place of an action figure is no different than having music on an iPod instead of on my shelf.   Like my music collection, I have utility of my objects in the game, so I get to enjoy looking at objects that please me.  Also like my music collection, I receive a social benefit by the display of status associated with the object ownership.   Like a house or a car - in reverse - the object exists on a far away server, probably not in Norwalk or Sacramento, but indicia of ownership resides with me.  It actually makes more sense.

This evolution which started with music and is spreading like wildfire through the universe of games.  In 2002 The New York Times saw the ability tell digital objects as newsworthy.  Those wacky gamers were willing to pay money for a collection of words in a game called Gemstone.  But the practice was not limited to Gemstone and what started as an underground market quickly grew into an accepted practice and then even started to be woven into the fabric of certain games.   It is not stopping there.  Zynga took the people who unknowingly accepted the music "purchased" from the iTunes store as fungible with CDs and got to pay for digital objects in their games, thereby paving the way for broad acceptance of microtransactions.  So broad, the purchase of game objects, many persistent, is the not only acceptable, but the leading method for profiting from mobile and on line games.  This leads to a concern I raised in a post five years ago which remains unanswered.

On the one hand we want the consumer to accept the purchase of the game object, as they do the purchase of a song from the iTunes store, or a coffee cup in the real world.  On the other, we are not ready to give them enough of the stick.  They are missing the access to relevant information pertaining to value stick.  The rights and remedies side of digital object ownership is lagging distantly behind the willingness to exchange value to own them.  In the original post I wrote:
My corporations professor, Hugh Friedman, taught us how difficult it is to actually spot a security, but he gave us the definition contained in the United States Code. "SECURITIES - An investment in an enterprise with the expectation of profit from the efforts of other people." Here is another definition I found on line: "Securities are documents that merely represent an interest or a right in something else; they are not consumed or used in the same way as traditional consumer goods. Government regulation of consumer goods attempts to protect consumers from dangerous articles, misleading advertising, or illegal pricing practices. Securities laws, on the other hand, attempt to ensure that investors have an informed, accurate idea of the type of interest they are purchasing and its value." The definition is intentionally broad and is meant to apply to a lot of things, to protect a lot of people. Interests in condominiums, farm animals, land and oil rights, have all been determined to be securities. The definition is the foundation of the Securities Act of 1933, sometimes called the "truth in securities law" and the Securities and Exchange Act of 1934, which established the Securities and Exchange Commission and sets out filing requirements and trading regulation. Both were established in response to the events leading to the stock market collapse of 1929. Prior to these acts, anyone could sell stock to anyone and there were no reporting obligations or restrictions on insider trading or proxy solicitations. In other words, it was a lot like buying and selling game objects today.
We know a share of General Motors is a security.  General Motors must comply with certain reporting requirements to maintain its right to allow ownership interests to be exchanged in the public market.  While I may not be buying my game object with the expectation of profit - although many do - the price I am willing to pay is based on the information available to me at the time of payment.  Factors like scarcity, utility, restrictions and duration of use are all material in my decision and willingness to pay.  Most significantly, whether the game be in existence tomorrow.

Last month Zynga shut down 12 apps.   One of them Petville, still had one million monthly active users, and before at one point had 43 million.  The value of every object purchased evaporated, without warning, overnight.  How many people were still purchasing digital objects after Zynga knew the game was going to be shut down?   I am not pointing my finger only at Zynga, Star Wars Galaxies sold objects right up until the game was shut down.  Shutting down a game is simply a fact of life.  Not letting consumers know it will happen is not.

These issues are very exciting . . . .  for lawyers.  It is kind of like a full employment act because very hard issues mean a lot of work to resolve which means funding for childrens' college educations.  This is the second post in a row that I leave without an answer.  I throw it out there because I want to raise the issue and let people know we may be getting ahead of ourselves - again.

Saturday, February 23, 2013

Sponsor Supported Online Content: Let's Stop Throwing Hundred Dollar Bills in the Bonfire Edition (Update)

SSH . . . . . . . . . . . . . . h ! ! ! "All ye, The People of the United States: his Excellency, the PRESIDENT!" This greeting may be heard all over the country, in the not-far-distant future, and not on a phonograph either, if Mr. Paul Calhoun's dream comes true. His idea is to link up all the larger cities and towns by radio with the powerful transcontinental government wireless station at Arlington, near Washington, so that when the President makes a speech before Congress or even his inaugural address, all the people can hear it, instead of a select few gathered within ordinary hearing distance of the speaker as has been the case in the past.

UPDATE 03/01/13

Two very important updates this week and I am too lazy to integrate them and rewrite.  I don't think anyone wants to see a redline version of my blog either.

First, it appears Google may be thinking the same way as I am.   Some coders found what looks some code to be used for a youtube pay service.   Even though some people from Google's domain hit my blog, I don't think I gave them the idea.  I hear there are some smart people over there.

The second one is this new TED video from Amanda Palmer.  It is hugely relevant, not just because she is good, but she talking about the consumers' willingness to pay for content when asked.


As I lie (lay?) here in my sick bed, mainlining Dayquil and trying to prevent the coughing from sharing a lung with the computer in my lap, I started to think about monetization of  on line video.    While I know this sounds cliché.  After all phenylephrine always causes the mind to wander into online business models, but just in case the sirens of genius are influencing the fingers dancing on the keys more than the cough medicine, I am writing it down.    If this is coherent to you, I am not speaking in tongues, and you may find something of interest below.

Online video is creating a larger audience than any other form of media or communication in the history of the world.  However, the leading lights of this industry are shoe horning the television sponsorship model into the business and does not seem to work. Despite the audience’s scale, revenue generated from sponsorship is not even high enough be considered a rounding error on a margin of error for a basic cable network.

In this video from DLD, Maker Studio’s chairman Ynon Kreiz pointed out that the,185 hours of London Olympic broadcast  on television US in primetime generated 67% of NBC’s total revenue and the 5300 hours via digital platform that generated only 7%  of the revenue (If you skip to the marker you can see the part I am talking about, but the whole thing is worthwhile)

These companies can argue the inequities of sponsors paying more the people “maybe” watching something like The Daily Show on television than the same broadcast on line where we know who and how many are watching, or the empty inventory in the on line Lance Armstrong interview relative to record ad rates on OWN, but while they do this – and logically and in a vacuum they may be right – they are merely singing in a Greek Chorus to shield themselves from reality.   Even though the television audience is shrinking, sponsors see it as growing in value. Morgan Stanley, as reported by Busines Insider noted as television viewership goes down, CPMs go up.   A 50% decline in viewership since 2002 led to only a 6 to 7% decline in revenue.  At the same time, Comscore indicated that despite the ability to target, on line suffered from perhaps a higher percentage of wasted ads.  In the “U.S. Digital Future in Focus report 2013”  Comscore pointed out that even though 6 trillion ads were served last year “research showed that an average of 3 in 10 ads are never rendered in-vie, leading to significant waste, weaker campaign performance and a glut of poor-performing inventory that imbalances the supply-and-demand equation and depresses CPMs. This should not be a surprise when you consider the very existence of sponsor supported television relies on the existence of friction and online video success only succeeds without it.  Rather than continuing to fight this uphill battle, on line should stop ignoring the unique attributes of the web, and look how it enables distributors and content creators to finally charge the right side of the equation – the viewers.

A little under five years ago I wrote why I thought on line video was going down the wrong road.  While I may have overdone it a bit on the ARG stuff Nikki Finke made me look smarter in hindsight because she cut it out when she ran it on Deadline. The point is made here:
Our agency friends further exacerbate their problems with a continued reliance on a dying model, ad supported television. The sites are sponsor supported. If cable fragmentation hurt network sales and cable is not worthwhile from a revenue standpoint, what do you think web fragmentation will do? Yet, even though none of these applications have shown a significant return, they still rely on sponsors. The widget guys show a myriad of additional revenue streams. They are able to sell digital objects, upgrades, added utility and a ton more things of value to the community. Oh yeah, and eventually, access to their channels to the Hollywood guys. 

If the agencies want to profit from the new opportunities, they have to stop thinking evolution and more revolution. Television is a solo experience. A show can build an audience, but it does not build a connected community, and with very few exceptions, the community has no impact on the show. The audience watches, and then shares around the water cooler the next day. The web is about community. Real time community. I can feel impotent in real life, I don't need my computer tell me I have to sit and listen to what someone else has to say. My computer empowers me and let's me join in, my entertainment should as well.
My post focused on the content, not the business structure.  Admittedly, I did not even think to write it at the time.  I just thought charging the customer followed logically.  I wish I could say I am the first person to disclose this concept to you, but sadly, I am not.  I am merely cribbing from other businesses that work.  Many executed before me – not the first time I talked about something while others actually did it – and I do not understand why more of it is not happening on the web.   Netflix, HBO and Sirius radio prove the model, but are not the only places consumers are showing a willingness to pay directly for content.   FreddieW  generated 800 million views on his youtube channel.  If his revenue looks anything like Psy’s from Gangham Style, this massive audience may have put him well into the “thousandaire” status.   But when he asked his viewers to pay for content directly, they gave him over $800,000 on kickstarter.  In ad sales terms, he got an $80 CPM for something that does not exist.  The HBO audience made it even more clear last year when a fan took it upon himself to create   Within 48 hours 163,673 people voiced their willingness to pay for a streaming service.  HBO did point out that Techcrunch’s assessement of why HBO should not do it makes sense,   but the evidence of consumer willingness shows it is not wrong for a non legacy content library to pursue the model – hello Netflix.  It’s time to remove the middleman and go direct to the audience who will pay more and drive better content.

My cursory research revealed the range for the highest CPM content on line is video at $11 to $25 (I know incentive video can be much higher, but it is also very limited). Just for the fun of it, let’s look at revenue from Netflix on the basis of their revenue generated per thousand.   Measured in clumps, they have a CPM of $8,000.  This means a Google channel must serve 2,650,000 video ads in a month to equal the revenue generated by 1 thousand Netflix viewers.  This may not sound soooo bad until you realize this means over 10,000,000 videos when you factor in Comscore’s recent data indicating only 23% of on line videos carried video ads.  That’s not all.  Again, looking to the most favorable data, the highest percentage of audience indicating they watch video ads often or all the time, at 47%, is on youtube.  Factor this in and 20,000,000 videos must be served in a month to equal the revenue prepaid each month by each thousand Netflix customers. Even as the market grows, the scale needed requires content to be diluted to the lowest common denominator, the antithesis of the web’s promise.   I chose Netflix because it is easy, but we can look at any number of pure subscription, or pay as you go – iTunes- content companies on and off line as examples of consumers’ willingness to pay for content.   
Instead of accepting these facts, both content and the medium are bending to the force of over USD188.5 billion spent annually on video broadcast on television.  The mistake is made in the assumption the dollars are being spent on content, they are not, they spent on viewers.

Let’s walk through this logically.   Television networks love friction.   The industry’s midwive was the need to stand up to change the channel.   Ad agencies thought their business was over when the remote control came into play.   And time shifting with VCR’s, forget about it.  Friction serves the business model.  This because NBC, CBS and ABC’s  “product” is viewer and the customer is the sponsor.  The content is the capital expenditure used to build the product.   Friction helps to build the product and create inventory for the customer. The web is about a lack of friction.  The friction equivalent of an eyelash on an asphalt road can be the difference between success and failure.  The web carries no need to set a recording, start an appointed time, or change a channel.  The content is always there.   Advertising pre roll, registration, pay walls are all friction that drive traffic lower.   The consumer is no longer captive.   The new reduced friction empowers the consumers and allows us to shift from being a product into being the purchasers of a product.   Content and curation are the product and the customer is the viewer- ust like Netflix, HBO and Showtime.  So why are continuing to treat the audience as the product rather than the customer?

When we look at the value chain for content on television, it is kind of a wonder it lasts.   The sponsors are funding, and thereby selecting the content.  Networks act as arbiters between consumer taste and sponsor willingness to pay.  Networks commission the most audience appealing, least offensive to a sponsor content and sell the audience to sponsors.   Consumers choose what they like, but they select from the lowest common denominator pabulum supported by sponsors (DIGRESSION ALERT: For something really interesting, take a look at episode 1 of Black Mirror to see a dramatization of a television news service which was not able to broadcast a newsworthy video readily available on the web).   We see no better evidence of the disconnect than the quality shift when content itself is the product.   On networks like HBO, or cable channels covering deficits on foreign sales, we see shows capturing the country’s attention in meaningful ways.  Breaking Bad, The Sopranos, Mad Men and Downton Abbey all came from a model where the show is the product.  The show has to be good enough to appeal to foreign markets, rather than good enough to appeal to sponsors at an up front and a large audience each week.

The current model did not “evolve” to the web, it was bolted on without significant change from television.   This is more than strange when we consider the web is a model of efficiency because it removed friction from both sides of the equation, and the television model gained its power from inefficiency and friction. The advertising unit model grew from radio in the 1920’s, into television in the 1950’s – with government help – and was twisted and crammed on to the web.   In reality, if just a few attributes of the web were around in the 1920’s, we would never be here.   Ad units exist because radio’s pioneers could not figure out how to charge the customer directly.  By the time television arrived and was able to do it, the horse was out of the barn. In the early ‘20s the user base was growing like a weed and no one knew how to pay for content. The first sponsored show happened years earlier in 1916, when a Westinghouse assistant chief engineer started playing phonograph records over the radio.   He ran out of records and called Hamilton Music Store to get more.  They agreed to supply him with records if he would tell the audience where he got the records.  Despite a willingness of advertisers to buy the audience most of the content was funded by hardware manufacturers.  They knew people buy the hardware for what it does, not what it is.  Steve Jobs did knew this when he commoditized content to sell enough hardware to build the most valuable company in the history of the world.  Then Commerce Secretary, Herbert Hoover said “It is inconceivable that we should allow so great a possibility for service to be drowned in advertising chatter" The problem was troubling enough for Radio Broadcast, the most prominent trade magazine of the day, ran a contest to figure out who would pay for radio.  The winner was to be selected by a prestigious panel of industry luminaries.  The request rings strikingly relevant t some 90 years later:
WHO  IS  TO  PAY  FORBROADCASTING  AND  HOW?A Contest Opened by RADIO  BROADCASTin which a prize of $500 is offered 
What We Want 
    A workable plan which shall take into account the problems in present radio broadcasting and propose a practical solution. How, for example, are the restrictions now imposed by the music copyright law to be adjusted to the peculiar conditions of broadcasting? How is the complex radio patent situation to be unsnarled so that broadcasting may develop? Should broadcasting stations be allowed to advertise? 
 These are some of the questions involved and subjects which must receive careful attention in an intelligent answer to the problem which is the title of this contest.

The winner, H.D. Kellogg, Jr. of Haverford Pennsylvania received $500 for his suggestion that consumers should pay a tax based on the power of the hardware purchased and a newly formed arm of the government would administer the fund.  Even though this remains the model for the BBC, this is America and we did not want the government involved.  Instead, for lack of a better idea the ad unit took over.  

By the 1950’s when television started to take off, the ad sales market was accepted by the public, and more importantly, very large.   Zenith found out the hard way in 1951.   The company started tests of its “Phonevision” subscription based television service.  Sure it was cumbersome, but the system failed under government lobbying from movie theater owners and advertising interests, not the friction in the system.   If the model was viable, it would not have needed government intervention to survive.

Maybe I am completely wrong.  It would not be the first time,  I did tell Steve Jobs the iMac would not work.  But even assuming I am wrong, The Makers, Machinimas and Google channels of the world are still bringing knives to the gun fight.   Jeff Bewkes made the point painfullyobvious at last year’s ignition conference. He said the investments from the new companies are cute and welcomed them to the kiddie table.   Google is doubling down this year and will spend USD 200 million on content this year.   A huge amount of capital to spend in a non-leveragable high-risk business, but it gains perspective only when we consider Time Warner spent USD 5 billion on content last year.   They had to because content creation is expensive.  The money goes not only into the content you see, but content you do not see.  Development is more expensive than production and it takes a lot of it to deliver the cream to the audience.   

The online club may not be scared by the size of the investment, but they should realize that Time Warner’s investment is not only justified by the other release channels, but comprises the lion’s share of content sponsors and consumers are willing to pay for on line. When we consider the ownership of Hulu, Cinemanow, HBO and even the 60 Minutes mobile app, when they want to distribute their content, they go direct.  Even giving the new guys the benefit of the doubt, the old guard wins.   They speak with the hubris of a disruptive actor, but the model is not disruptive, it simply a new distribution channel.  

People seem to love lists, so I am going to put in a list of a handful of truisms we should all accept. Since they do not change, let’s call them immutable rules.
1)            Television is one direction (passive)
2)            Online is bi directional  (interactive)
3)            Sponsors pay distribution channels for large collections of captive demographics who will watch an ad
4)            Online thrives on specialized content to small sociographics of viewers who hate ads and will do anything, including spending money, to skip them when possible
5)            Every successful online venture is based on adapting quickly to audience analytics
6)            Linear content is not tunable.
For those of you wondering when I am going to get to games, or as some would say, the only thing I know anything about, let me do it now.   For those of you not interested in games, let me just take a moment to blow your mind.  This year Telltale Games created a game with appeal to a television audience.  The Walking Dead game is somewhat limited when it comes to interactivity, but there is a strong story line and its accessibility does not dissuade traditional game players from getting involved or from validating it with more than its fair share of awards.   More importantly, by leveraging the unique attributes of the web with high quality content, consumers paid to play the game.  According to Forbes 8.5 million of them paid an aggregate of USD 40 million or in ad talk, a USD 4,705 CPM.   This is even more stunning when we consider 11 million people watch the show in US when it runs on television.  That is a higher tie ratio than NASCAR.

I wish I could conclude this piece with a disclosure of the perfect on line business model.  I can’t. If I could I would do it and not spend all this time writing.  However, I hope I can get smarter people than me to start exploring proven alternative business models away from traditional ad unit sales.  The game industry uses events, subscription, velvet rope, previews, in app purchasing and freemium models, among others to generate scalable businesses from content in an interactive environment.   Deep down in my heart I know one or more of these is the answer.  We just have to focus on the medium. 

In a culture like ours, long accustomed to splitting and dividing all things as a means of control, it is sometimes a bit of a shock to be reminded that, in operational and practical fact, the medium is the message. This is merely to say that the personal and social consequences of any medium- that is, of any extensions of ourselves - result from the new scale that is introduced into our affairs by each extension of ourselves, or by a new technology. . .  The electric light escapes attention as a communication medium just because it has no “content.” And this makes it an invaluable instance of how people fail to study media at all.  For it is not till the electric light is used to spell out some brand name that it is I noticed as a medium.  Than it is not the light, but the “content” . . . that is noticed.
 Marshall McLuhan