Why Platforms Leak: The Impact of Artificial Scarcity

[Note: This is a follow-up post to one I wrote earlier this month]

For nearly a decade, I have espoused the view that every artificial scarcity shall be met, and ultimately overcome, by an appropriate abundance. I think it’s time to view this statement in the context of platforms and “leakage”. Let me explain what I mean.

By now many of you should have heard of Karen Murphy, the pub landlady from the Red, White and Blue pub down in Portsmouth. She did something very simple: she installed a decoder that let her pub regulars watch English Premier League soccer matches beamed over from Greece, paying a lot less for the service than she would have had to pay Sky for the privilege.

I quote from the article: “Juliane Kokott, one of the eight advocate generals of the European court of justice, advised that selling on a territory-by-territory basis represented a “serious impairment of freedom to provide services”, adding that the “economic exploitation of the [TV] rights is not is not undermined by the use of foreign decoder cards as the corresponding charges have been paid for those cards”.”

Selling on a territory-by-territory basis represented a serious impairment of freedom to provide services.

Hmmm. This is a serious point, and all that this post is about.

When you make something digital and connect it to the web, it becomes available everywhere, it becomes available immediately. That is the essence of the abundance that the web represents. Instant. Everywhere. An extreme nonrival good.

This was not the way business was done in the past: for analog goods, territorial rights and licences were normal and natural; exclusive rights were less common, but nevertheless could be found, acquired, exercised.

As we’ve moved from the physical world to the digital world, incumbents in many industries have sought to preserve the historical structures and ways of doing business. Which, in effect, were attempts to create and exploit artificial scarcities.  When it comes to digital assets, there are four primary ways to try and create artificial scarcity:

1. Sell the rights to digital things on a territorial basis, and then sue those who seek to overcome those territorial barriers. The Karen Murphy case is just the example of the day…. the Bosman ruling in football was a similar case in point; every attempt to enforce gardening leave may also be seen as an attempt to restrict the freedom of the individual.

2. Encrypt the assets regionally, as done with DVDs and some classes of video games. [As I’ve stated so many times before, region coding on a DVD is the best example I know of a technological invention adding zero value to the customer or her experience].

3. Slice releases of digital assets not just over geographies but over time as well, drip-feed the releases into the world, again to protect a historical business model. I reviewed a Hugh Macleod book a couple of days ago, and a UK reader pointed out that the book will not be available here for a few months.  Hugh, the author, saw the comment and confessed that the publishing world seemed to insist on working that way.

4. “Lock” the assets to a particular device, provider, connection type. If you want to watch Premiership football, you must buy from Sky Sports. Or for that matter iTunes and iPod. That kind of thing. Walled gardens.

All these have been attempted. All these have failed, and will continue to fail. You cannot make something that is essentially abundant artificially scarce.

Where the law is called upon to intervene, as in Karen Murphy’s case, the law may decide to fight back against the artificial scarcity. Even if Ms Murphy loses her case, there will be another. And another. The artificial scarcity cannot hold. Where new monopolies are created, as in Sky’s exclusive rights to Premiership coverage, there will be Ofcom-like rulings to wholesale the content.

Where encryption or walled gardens are used, the fearful power of the web will be unleashed; encryption algorithms will be cracked and made available to all, as happened with iTunes or iPhone. DVD players will be “chipped” to support multi-region play. Ways will be found to unlock walled gardens.

Where time-slicing is used, and releases are artificially suppressed from specific territories, outbreaks of piracy will be more common, pushing back against the “second-class citizen” implications of being made to wait in the queue.

All this becomes very interesting when it comes to the cloud. Some months ago I wrote about cloud principles; at a level of abstraction, many of the comments can be viewed as requesting abundance where the scarcity is artificial. Portability of data, metadata, code is a classic example.

14 thoughts on “Why Platforms Leak: The Impact of Artificial Scarcity”

  1. In general DRM have failed due to the trade off between usability vs security. When users are being restricted beyond what the utility it gives, one of the two things would happen, users would leave the platform or someone would break it. Good casing point is that of PS3, until Sony ( well known of various DRM tricks) locked it down preventing PS3 being booted into Linux. It wasnt hacked, but when that was done, it was cracked within the normal duration ( an interesting talk on Chaos 27 on this topic).
    Case of cloud is reverese, data would have to be free. But some data would have to have some binding with context and policies. How this could be achieved is an interesting question, or else there is a small chance that we could end up having cloud computing with no privacy and security ;)

  2. Artificial scarcity seems to encourage platform leaks. FT.com raised subscription rates about 100 pct over the last two years, seemingly making the quality content more scare, I unsubscribed because of price. Yet I find the really worthy content I care about leaks out the paywall.

  3. You don’t have to be a pirate to get around territory locks. You just have to virtually visit another country, which has the benefit of being much quicker and cheaper than flying – http://wp.me/palij-9L

    That might still constitute a terms of service violation, but I can’t see service providers playing too tough against people when they have their money.

  4. Is about scarcity or is it about arbitrage?
    The network effect is exposing more and more the artificial differences:
    Geographical pricing (eg: dvd regions…), pseudo complex supply chain (eg: intermediaries in music, coffe trading…), legacy pricing (sms bandwidth versus raw bandwidth) etc..
    And more and more end users or new companies are defining arbitrage mechanisms to eliminate these differences. The coffee grower in Africa dealing directly with the retail stores is an arbitrage mechanism to reduce price differences between the raw product and the retail items. Viber, Skype, Facebook, Twitter all appear are arbitrage mechanisms that minimise the pricing difference between raw data pricing and sms, voice etc.. pricing. Will these initiatives generate as much value than the incumbents doubtful but hopefully the end user will win.
    The ubiquitousness of the network makes the creation of these arbitrage mechanisms more and more possible by a very limited group of people and this means that for the incumbent organizations it will be more and more difficult to react…

  5. The main anecdote of your article relates to sport.

    Sport is different to all other Rights sales because Sport is far more valuable live than any other subject. Sky pay a huge amount of money for domestic rights, and that’s why they guard these rights so tightly.

    If millions of viewers stopped their Sky Sports subscription to get a Greek decoder, or watch football on an illegal web site, there would be a huge knock on effect to the sport as a whole.

    Again, Sport is a completely different beast – because with films, dramas, documentaries and so forth, it doesn’t usually matter if you watch the broadcast an hour, day or even a month later, hence Sky protect your third “way” above as tightly as possible.

  6. Isn’t there a fifth? That is, hosted access / subscription services, where specific capabilities / data are locked to premium subscribers. You can think of paid virtual worlds or paid streaming subscription services to follow that model, perhaps even SaaS (as Anish points out, and you seem to allude to). If the artificially scarce resource is freed, is the result a resource-consumption-based business model for cloud-based services, with the cloud provider that can provide the resources most efficiently or effectively winning out? Very intriguing – content development would then become a way for the resource delivery to be more useful, similar to Cisco increasing the utility of network services through Webex.

  7. There’s also something – and I can’t quite put my finger on it – which attracts us to scarcity. I was recently at a conference in Las Vegas – inside the hotel there were nightclubs – and they kept us waiting to get in them. People who could get into the nightclubs with the longest queues felt happy. I don’t think the booze was any better, it certainly wasn’t cheaper – and the air was equally rancid with perfume.

    On the one hand we knock down the walls of DVD regions and film release dates, and on the other we voluntarily define ourselves by inherently valueless baubles whose only virtue is that we have it while others do not….

  8. @kumar that isn’t really a fifth, unless I’ve misinterpreted you. A level playing field, multiple cloud service providers, commoditised infrastructure, there is no artificial lock.

  9. @leon some people set store by having scarce things, by not being part of the herd, by being setters rather than followers of fashion. but bragging rights strictly related to owning scarce things are, I think, a generation thing. I have never queued for something from Apple. But I do buy things from Apple. But maybe we all have first-day fetishes somewhere.

Let me know what you think