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Viral Spiral - the New Open Business Models

on Fri, 09/10/2010 - 16:22


The commons and the market can be great partners if each shows respect for the other and ingenuity in working together. Entrepreneur John Buckman concedes that his Internet record label, Magnatune, amounts to “building a business model on top of chaos.”1 That is to say,he makes money by honoring open networks and people’s natural social inclinations. The company rejects the proprietary muscle games used by its mainstream rivals, and instead holds itself to an ethical standard that verges on the sanctimonious: “We are not evil.”In the music industry these days, a straight shooter apparently has to be that blunt.

Magnatune is a four-person enterprise based in Berkeley, California, that since 2003 has been pioneering a new open business model for identifying and distributing high-quality new music. It does not lock up the music with anticopying technology or digital rights management. It does not exploit its artists with coercive, unfair contracts. It does not harass its customers for making unauthorized copies. Internet users can in fact listen to all of Magnatune’s music for free (not just music snippets) via online streaming.2 Buckman, a former software programmer turned entrepreneur in his thirties, previously founded and ran Lyris Technologies, an e-mail list management company that he sold in 2005. In deciding to start Magnatune, he took note of the obvious realities that the music industry has tried to ignore: radio is boring, CDs cost too much, record labels exploit their artists, file sharing is not going to go away, people love to share music, and listening to music on the Internet is too much work. “I thought,why not make a record label that has a clue?” said Buckman.

Well before the band Radiohead released its In Rainbows album with a “pay what you want”experiment,Magnatune was inviting its customers to choose the amount they would be willing to pay, from $5 to $18, for any of Magnatune’s 547 albums. Buckman explains that the arrangement signals a respect for customers who, after all, have lots of free music choices. It also gives them a chance to express their appreciation for artists, who receive 50 percent of the sales price. “It turns out that people are quite generous and they pay on average about $8.40, and they really don’t get anything more for paying more other than feeling like they’re doing the right thing,” said Buckman.4 About 20 percent pay more than $12.5 “The reality is today nobody really needs to pay for music at all,” he acknowledges. “If you choose to hit the ‘buy’ button at Magnatune then you’re one of the people who has decided to actually pay for music. Shouldn’t we reflect that honest behavior back and say,well, if you’re one of the honest people how much do you want to pay?”6 The set-your-own-price approach is part of Magnatune’s larger strategy of building the business by cultivating open, interactive relationships with its customers and artists. “If you set up a trusting world,” explains Buckman, “you can be rewarded.” Magnatune’s business model embraces the openness of the Internet and makes it a virtue, rather than treating it as a bothersome liability that must be elaborately suppressed. All of Magnatune’s music is released as MP3 files, with no digital rights management, under a CC Attribution-NonCommercial-ShareAlike license.This means that customers can legally make their own remixes and covers of songs, and take samples, so long as the uses are noncommercial and carry the same CC license. Magnatune also invites customers to give free downloads of purchased music to three friends. Podcasters have free access to the entire Magnatune catalog.

By using a CC license,Magnatune saves a bundle by not having to oversee complex terms and conditions for usage of music. Nor does it have to maintain a DRM system and police the behavior of its customers, both of which squander a key marketing asset: consumer goodwill. Instead, the music circulates freely and, in so doing, expands public awareness of Magnatune’s 244 artists. Two-thirds of Magnatune’s revenues comes from licensing its music to films, ads, television, and shops.Like so many open business models, it has carved out a mid-tier niche between “expensive and proprietary” and “cheap and crummy.” Most mainstream music licensing involves either expensive,highly lawyered deals with record labels or insipid stock music from royalty-free CDs. Magnatune’s innovation is to offer high-quality music in multiple genres at flatrate licenses for sixteen different usage scenarios. The deals can be easily consummated via the Web; artists share in half the proceeds. No accounting flimflam.To date, Magnatune has licensed its music to more than one thousand indie films and many commercials. Magnatune is a small, fledgling enterprise in the $4 billion music industry. It does not have all the answers, and it may be sideswiped by bigger players at some point. But Magnatune is lean, nimble, profitable, and growing. It has shown how innovative business models can flourish in the open environment of the Internet. Unlike its bloated, besieged competitors, Magnatune is willing to listen closely to its customers, artists, and licensing clients. It is fair-minded and straightforward; it wants to share the wealth and let the music flow.

Open Networks Spur New Business Models

Openness does not come intuitively to many businesses. Competitive advantage has long been associated with exclusive control and secrecy. But as the Internet’s power expands, conventional businesses are feeling pressures to rethink their “closed” business models. A new breed of “open businesses” is demonstrating that a reliance on open-source software, open content, and an ethic of transparency in dealings with all corporate stakeholders can be tremendously competitive.

Open businesses understand the Great Value Shift discussed in chapter 5—that working through open networks and commons is likely to generate greater consumer attention, engagement, and loyalty—and thus sales—and may outperform a more exclusive regime of control.Working on an open network is also the best way for a company to get smarter faster, and to stay alert to changing market conditions. It bears noting that business models are not an either/or choice—that is, all open or all closed. There is a continuum of choices, as we will see below. Sometimes there are heated strategic and moral debates about what level of openness to adopt, yet the general trend in business today is clear: toward openness. Even as broadcast networks decry the posting of copyrighted television programs on YouTube, they clearly welcome the ratings spikes that ensue. Wireless telephony is fragmented among many
proprietary systems, but pressures are now growing to make them compete on an open platform.7 European regulators are calling for “open document format”standards to prevent Microsoft from abusing its proprietary standards in its Office suite of software. There are even calls for open standards for avatars in virtual worlds like Second Life, The Lounge, and Entropia Universe, so that our digital alter egos can glide from one virtual community to another.

Why this inexorable trend toward openness? Because on open networks, excessive control can be counterproductive. The overall value that can be created through interoperability is usually greater than the value that any single player may reap from maintaining its own “walled network.”9 For a company to reap value from interoperability, however, it must be willing to compete on an open platform and it must be willing to share technical standards, infrastructure, or content with others. Once this occurs, proprietary gains come from competing to find more sophisticated ways to add value in the production chain, rather than fighting to monopolize basic resources. Advantage also accrues to the company that develops trusting relationships with a community of customers.

Free software was one of the earliest demonstrations of the power of online commons as a way to create value. In his classic 1997 essay “The Cathedral and the Bazaar,” hacker Eric S. Raymond provided a seminal analysis explaining how open networks make software development more cost-effective and innovative than software developed by a single firm.10 A wide-open “bazaar” such as the global Linux community can construct a more versatile operating system than one designed by a closed “cathedral” such as Microsoft. “With enough eyes, all bugs are shallow,” Raymond famously declared. Yochai Benkler gave a more formal economic reckoning of the value proposition of open networks in his pioneering 2002 essay “Coase’s Penguin, or, Linux and the Nature of the Firm.”11 The title is a puckish commentary on how GNU/Linux, whose mascot is a penguin, poses an empirical challenge to economist Ronald Coase’s celebrated “transaction cost” theory of the firm. In 1937, Coase stated that the economic rationale for forming a business enterprise is its ability to assert clear property rights and
manage employees and production more efficiently than contracting out to the marketplace.

What is remarkable about peer production on open networks, said Benkler, is that it undercuts the economic rationale for the firm; commons-based peer production can perform certain tasks more efficiently than a corporation. Those tasks must be modular and divisible into small components and capable of being efficiently integrated, Benkler stipulated. The larger point is that value is created on open networks in very different ways than in conventional markets. Asserting proprietary control on network platforms may prevent huge numbers of people from giving your work (free) social visibility, contributing new value to it, or remixing it. “The only thing worse than being sampled on the Internet,” said Siva Vaidhyanathan, with apologies to Oscar Wilde, “is not being sampled on the Internet.”

The New York Times’s experience with its paid subscription service, TimesSelect, offers a great example. The Times once charged about fifty dollars a year for online access to its premier columnists and news archives. Despite attracting more than 227,000 subscribers and generating about $10 million a year in revenue, the Times discontinued the service in 2007.12 A Times executive explained that lost subscription revenues would be more than offset by advertising to a much larger online readership with free access. The Financial Times and the Economist have dropped their paywalls, and the Wall Street Journal in effect has done so by allowing free access via search engines and link sites. From some leading citadels of capitalism, a rough consensus had emerged: exclusivity can decrease the value of online content. While enormous value can be created on open networks, it can take different forms, notes David P. Reed, who studies information architectures.

One of the most powerful types of network value is what Reed calls “Group-Forming Networks,” or GFNs—or what Benkler might call commons-based peer production and I would
call, less precisely, the commons. Reed talks about “scale-driven value shifts” that occur as a network grows in size. Greater value is mcreated as a network moves from a broadcast model (where “content is king”) to peer production (where transactions dominate) and finally, to a group-forming network or commons (where jointly constructed value is produced and shared). It is unclear, as a theoretical matter, how to characterize the size and behavior of various “value networks” on the Web today. For simplicity’s stake—and because Web platforms are evolving so rapidly— I refer to two general value propositions, Web 2.0 and the commons. Web 2.0 is about creating new types of value through participation in distributed open networks; the commons is a subset of Web 2.0 that describes fairly distinct, self-governed communities that focus on their own interests, which usually do not involve moneymaking. The rise of Web 2.0 platforms and the commons clearly has some serious implications for business strategy and organization. Just consider how Craigslist is displacing millions of dollars of classified newspaper ads; how open-access journals are threatening the economic base of commercial academic journals; and how usergenerated content is competing with network television. At the same time, activities that once occurred through informal social means (finding a date, organizing a gathering, obtaining word-ofmouth recommendations) are increasingly becoming commercial endeavors on the Web. Especially when the commons has strong mechanisms to preserve its value-creating capacity, such as the GPL,
open networks are helping to convert more market activity into commons-based activity, or at least shifting the boundary between commodity markets and proprietary, high-value-added markets. As this dynamic proceeds, the social and the commercial are blurring more than ever before. Many “value chains” that have long sustained conventional businesses are being disrupted. As described in chapter 5, more efficient types of distributed media are disrupting the production/distribution chain that sustains Centralized Media. The Long Tail lets online
consumers “pull” niche products that they want rather than enduring a relentless marketing “push” of products they don’t want. Commons-based peer production is a nonmarket version of the Long Tail: dispersed communities of people with niche interests can find one another, form social communities, bypass the market, and collaborate to create the niche resources that they want. The question facing many businesses is how to develop stable, long-term business models that can coexist with productive commons, if not leverage them for market gain. Their goal is to find ingenious ways to “monetize” the social relationships of online communities (by selling targeted advertising, personal data, niche products, etc.). Open businesses aim to do this in a respectful, public-spirited way; other, more traditional firms may have fewer scruples because, for them, “it’s all about the money.” But here’s the rub: a company can go only so far in monetizing the value-generating capacities of a commons without enclosing it or enraging the commoners.A company may consider itself shrewd for acquiring the copyrights for user-generated content, for example, or for blocking user access to third-party widgets that it disapproves of.  But participants in Web 2.0 communities will protest or simply leave if a corporate host starts to dictate obnoxious policies. A company can try to run its Web 2.0 platform as a feudal fiefdom, but it risks inciting users to revolt and start their own (nonmarket)
online communities, reinventing themselves as commoners. Although there is an implicit social ethic to Web 2.0 platforms,none is necessarily “free” in the Stallman sense of “freedom.”

Unfortunately, there is no clear consensus about how exactly to define an “open business.” Accordingly, assessments of their social, political, or economic virtue can be slippery. Some analysts such as Henry Chesbrough regard a business as “open” if it relaxes or modifies its intellectual property controls, or changes its organizational practices, as a way to reap value from open networks.16 Others believe that an open business should use open-source software, and support the copying and sharing of works through CC or other open-content licenses. Sometimes the idea of open business is yoked to a vaguely defined notion of “social responsibility.” It is not always clear whether this ethic is a moral gloss or a structural feature, but in general open businesses strive to practice a more open, accountable, and socially enlightened vision of commerce.

One champion of this vision is OpenBusiness,a Web site jointly created by Creative Commons UK in partnership with CC Brazil and the FGV Law School in Rio de Janeiro, Brazil. The mission of OpenBusiness is to “analyze and explain models by which people can share their knowledge and creativity with others whilst at the same time enjoying the more traditional incentives of profit, individual success and societal advancement.”17 By its lights, an open business is commons-friendly if it is committed to “transparency,” “sustainable systems,” and to putting “the health and welfare of people above everything else.” An open business also tries to generate as many “positive externalities” as possible—knowledge, social relationships, revenues—which it is willing to share with its stakeholders.

It is perhaps best to approach open businesses as an eclectic social phenomenon in search of a theory. As it has been said about Wikipedia, “It works in practice, but not in theory.”18 It is risky to overtheorize phenomena that are still fluid and emerging. Still, specific examples of open business can help us understand some basic principles of open networks,and how some businesses are using CC licenses to build innovative sorts of enterprises. Share the Wealth, Grow a Commercial Ecosystem The idea that a company can make money by giving away something for free seems so counterintuitive, if not ridiculous, that conventional business people tend to dismiss it. Sometimes they protesteth too much, as when Microsoft’s Steve Ballmer compared the GNU GPL to a “cancer”and lambasted open-source software as having “characteristics of communism.”19 In truth, “sharing the wealth” has become a familiar strategy for companies seeking to develop new technology markets. The company that is the first mover in an emerging commercial ecosystem is likely to become the dominant
player, which may enable it to extract a disproportionate share of future market rents. Giving away one’s code or content can be a great way to become a dominant first mover. Netscape was one of the first to demonstrate the power of this model with its release of its famous Navigator browser in 1994.The free distribution to Internet users helped develop the Web as a social and technological ecosystem, while helping fuel sales of Netscape’s Web server software. (This was before Microsoft arrived on the scene with its Internet Explorer,but that’s another story.) At a much larger scale, IBM saw enormous opportunities for building a better product by using GNU/Linux. The system would let IBM leverage other people’s talents at a fraction of the cost and strengthen its service relationships with customers. The company now earns more than $2 billion a year from Linux-related services.

Today, sharing and openness are key to many business strategies. “Open Source: Now It’s an Ecosystem,” wrote BusinessWeek in 2005, describing the “gold rush” of venture capital firms investing in startups with open-source products. Most of them planned to give away their software via the Web and charge for premium versions or for training, maintenance, and support. The pioneers in using open platforms to develop commercial ecosystems on the Internet are Amazon, Google,Yahoo, and eBay. Each has devised systems that let third-party software developers and businesses extend their platform with new applications and business synergies. Each uses systems that dynamically leverage users’ social behaviors and so stimulate business—for example, customer recommendations about books, search algorithms that identify the most popular Web sites, and reputation systems that enhance consumer confidence in sellers.Even Microsoft,eager to expand the ecology of developers using its products, has released 150 of its source code distributions under three “Shared Source” licenses, two of which meet the Free Software Foundation’s definition of “free.” More recently, Facebook has used its phenomenal reach—more than 80 million active users worldwide—as a platform for growing a diversified ecology of applications. The company allows software developers to create custom software programs that do such things as let users share reviews of favorite books, play Scrabble or poker with others online,or send virtual gifts to friends.Some apps are just for fun; others are the infrastructure for independent businesses that sell products and services or advertise. In September 2007, Facebook had more than two thousand software applications being used by at least one hundred people.

Open Content as a Gateway to Commercial Opportunities

Of course, not every business can own a major platform, as Google, eBay, and Facebook do. Still, there are many other opportunities. One of the most popular is to use open platforms to attract an audience, and then strike a deal with an advertiser or commercial distributor, or sell premium services (“get discovered”). Another approach is to use open content to forge a spirited community to which things may be sold (“build a market on a commons”). Get discovered. This dynamic has been played out countless times on YouTube,MySpace, Facebook, and other high-traffic social networking sites. An unknown remix artist suddenly becomes famous when his track is discovered by a network swarm: the story of DJ Danger Mouse that we saw in chapter 6. A band attracts a huge following through viral word of mouth: the story of Jake Shapiro and Two Ton Shoe’s stardom in South Korea. There are even calculated scams to get discovered, like the lonelygirl15 series of videos purportedly shot by a teenage girl in her bedroom, which became a huge Internet sensation in 2006.

As any television network will tell you, the capacity to aggregate audiences is worth a lot of money. The customary way of monetizing this talent is to sell advertising. Or one can parlay newfound name recognition into side deals with the mass media, which have always depended upon “star power” as a draw.Thus,Ana Marie Cox was able to parley her notoriety as a political gossip on her Wonkette blog into a job as Washington editor of Time magazine. Perez Hilton, a Hollywood blogger who attracted a following,was offered  a lucrative perch at the E! cable television channel.We saw in chapter 6 how producer Samuli Torssonen’s Star Wreck attracted millions of Internet viewers, enabling him to strike a deal with Universal Studios to distribute a DVD version.With the same visions of stardom, or at least paying gigs, in mind, thousands of bands now have fan sites, music downloads, and banner ads on MySpace and other sites to promote themselves.

The CC NonCommercial license is one way to help pursue the “get discovered”business strategy. The license allows authors to seek a global Internet audience without having to cede rights to any commercial opportunities. It is not, however, a terribly reliable way to make money, which is why some artists, especially musicians,find fault with the implicit promise of the NC license. Many serious artists regard the NC license as too speculative a mechanism to get paid for one’s creative work. It is a fair complaint, as far as it goes.The real problem is the closed, highly concentrated music industry, which has a hammerlock on marketing, radio play, and distribution. Newcomers and mid-tier talent cannot get past the corporate gatekeepers
to reach an audience, let alone make money.

In an attempt to bridge the sharing economy with the market, and thereby open up some new channels of commercial distribution for commoners, the Creative Commons in late 2007 introduced a new protocol,CC+.The new project aims to make it easier for the owners of NC-licensed content to signal that agreements, products, or services beyond the scope of the CC licenses are on offer—for example, commercial licensing, warranties, or higherquality copies. A photographer who has hundreds of NC-licensed photos on Flickr would be able to continue to let people use those photos for noncommercial purposes—but through CC+, he could also sell licensing rights to those who want to use the photos for commercial purposes. CC+ is a metadata architecture and standard that allows third-party intermediaries to develop services for consummating commercial transactions. People can use CC+ as a simple “click-through”mechanism for acquiring commercial rights for music, photos, text, and other content.

One of the earliest “copyright management” companies to take advantage of the CC+ standard was RightsAgent, a Cambridge, Massachusetts, company founded by Rudy Rouhana. RightsAgent essentially acts as a go-between for people who create NC-licensed works on the Web and those who wish to buy rights to use them for commercial purposes. Just as PayPal facilitates the exchange of money on the Internet, so RightsAgent aspires to be a paid intermediary for facilitating the sale of user-generated content. The rise of CC+ and associated companies brings to mind Niva Elkin-Koren’s warning that the Creative Commons licenses can be a slippery slope that merely promotes a property-oriented, transactional mentality—the opposite of the commons. On the other hand, many people operating in the noncommercial sharing economy, such as musicians and photographers, have long complained that, as much as they enjoy participating in the commons, they still need to earn a livelihood.

Revver is another company that has developed an ingenious way to promote the sharing of content,yet still monetize it based on the scale of its circulation. Revver is a Los Angeles–based startup that hosts user-generated video. All videos are embedded with a special tracking tag that displays an ad at the end. Like Google’s Ad- 0Words system, which charges advertisers for user “click-throughs” on ad links adjacent to Web content,Revver charges advertisers for every time a viewer clicks on an ad. The number of ad views can be tabulated, and Revver splits ad revenues 50-50 with video creators. Key to the whole business model is the use of the CC Attribution- NonCommercial-No Derivatives license. The license allows the videos to be legally shared, but prohibits anyone from modifying them or using them for commercial purposes.

One of the most-viewed videos on Revver sparked a minor pop trend.It showed kids dropping Mentos candies into bottles of Coca- Cola, which produces an explosive chemical reaction. The video is said to have generated around $30,000.26 So is new media going to feature silly cat videos and stupid stunts? Steven Starr, a co-founder of Revver, concedes the ubiquity of such videos, but is quick to point to “budding auteurs like Goodnight Burbank, Happy Slip, Studio8 and LoadingReadyRun, all building audiences.” He also notes that online, creators “can take incredible risks with format and genre, can grow their own audience at a fraction of network costs, can enjoy free syndication, hosting, audience-building and ad services at their disposal.” is another video content-sharing Web site that splits ad revenues with video creators (although it is not automatic; users must “opt in”).Unlike many videos on YouTube and Revver, tends to feature more professional-quality productions and serialized episodes, in part because its founders grew out of the “videoblogging” community. espouses an open business ethic, with shout-outs to “democratization, openness, and sustainability.” While there is a tradition for companies to spout their high-minded principles, puts some bite into this claim by offering an open platform that supports many video formats and open metadata standards. And it allows content to be downloaded and shared on other sites. Users can also apply Creative Commons licenses to their videos, which can then be identified by CC-friendly search engines. For all these reasons, Lessig has singled out as a “true sharing site,” in contrast to YouTube, which he calls a “faking sharing site” that “gives you tools to make it seem as if there’s sharing, but in fact, all the tools drive traffic and control back to a single site.”28 Lessig’s blog post on provoked a heated response from blogger Nicholas Carr, a former executive editor of the Harvard Business Review. The contretemps is worth a close look because it illuminates the tensions between Web 2.0 as a business platform and Web 2.0 as a commons platform. In castigating YouTube as a “fake sharing site,” Carr accused Lessig of sounding like Chairman Mao trying to root out counterrevolutionary forces (that is, capitalism) with “the ideology of digital communalism.”

Like Mao, Lessig and his comrades are not only on the wrong side of human nature and the wrong side of culture; they’re also on the wrong side of history. They fooled themselves into believing that Web 2.0 was introducing a new economic system—a system of “social production”—that would serve as the foundation of a democratic, utopian model of culture creation.They were wrong.Web 2.0’s economic system has turned out to be, in effect if not intent, a system of exploitation rather than a system of emancipation. By putting the means of production into the hands of the masses but withholding from those same masses any ownership over the product of their work,Web 2.0 provides an incredibly efficient mechanism to harvest the economic value of the free labor provided by the very, very many and concentrate it into the hands of the very, very few. The Cultural Revolution is over. It ended before it even began. The victors are the counterrevolutionaries. And they have $1.65 billion [a reference to the sale price of YouTube to Google] to prove it.

Lessig’s response, a warm-up for a new book, Remix, released in late 2008, pointed out that there are really three different economies on the Internet—commercial, sharing, and hybrid. The hybrid economy now emerging is difficult to understand, he suggested, because it “neither gives away everything, nor does it keep everything.” The challenge of open business models, Lessig argues, is to discover the “golden mean.”

It can be hard to conceptualize a “hybrid sector” when we are accustomed to dividing the world into “private” and “public” sectors, and “profit-making” and “nonprofit” enterprises. Open business models quickly run up against deep-seated prejudices that associate property with “freedom”and sharing with “communism.” How can there be a middle ground? Although some like Nicholas Carr seem to hanker for the predatory enterprises of an earlier capitalism, only this time on Web 2.0 platforms, that is not likely to happen in a world of distributed computing. Power is too dispersed for predators to survive very long, and besides, the commoners are too empowered.

Build a market on a commons. A number of online business models are based on building communities of deep social affection and respect, and then using the community as a platform for selling merchandise, advertising, or products. Interestingly, some of the most successful “customer relationship” models revolve around music. The Grateful Dead’s strategy of building a business around a rabid fan base (discussed in chapter 6) occurred well before the Internet became prevalent. It is paradigmatic of the digital age, nonetheless. If the band had locked up its music and prohibited free taping of its concert performances and sharing of homemade tapes, it would have effectively weakened the fan base that sustained its business model. Sharing concert tapes actually made Deadheads more inclined to buy t-shirts, official music releases, and concert tickets because the tape sharing deepened the community’s identity and quasi-spiritual ethic. The Grateful Dead’s focus on touring as opposed to studio albums not only intensified the sharing ethic of its fan base, it obliged the band to “keep on truckin’ ” in order to keep earning money.

The Brazilian tecnobrega music scene discussed briefly in chapter 7 is another example of artists making money through respectful, in-person relationships with their fans. In the town of Belém,Brazil, tecnobrega artists release about four hundred CDs every year, but none are sold in stores; street vendors sell them for $1.50 apiece.The CDs function mostly as advertising for live “sound system” parties on the outskirts of town that attract as many as five thousand people and use state-of-the-art audio technology. Immediately following the performances, some artists also sell a significant number of “instant CDs” that are of better quality (and more expensive) than those sold in the streets. (Interestingly, street sales do not compete with after-concert sales.)

“In their live presentations, the tecnobrega DJ’s usually acknowledge the presence of people from various neighborhoods,and this acknowledgement is of great value to the audience, leading thousands of buy copies of the recorded live presentation,” said Ronaldo Lemos of CC Brazil, who has studied Brazil’s record industry. 30 The same basic model is also at work in other grassroots musical genres in Brazil, such as baile funk, which originated in the shantytowns of Rio de Janeiro.

Artists make most of their money from these live performances, not from CDs, said Lemos. Bands earn an average of $1,100 per solo performance at these events,and $700 when playing with other bands—this, in a region where the average monthly income is $350. Altogether, Lemos estimates that the sound system parties as abusiness sector earn $1.5 million per month, on fixed assets of $8 million.

“The band Calypso has been approached several times by traditional record labels,” said Lemos, “but they turned down all the offers. The reason is that they make more money by means of the existing business model. In an interview with the largest Brazilian newspaper, the singer of the band said,‘We do not fight the pirates. We have become big because of piracy, which has taken our music to cities where they would never have been.’ ” Calypso has sold more than 5 million albums in Brazil and is known for attracting as many as fifty thousand people to its concerts, Lemos said.

Another highly successful open business model in the Brazilian music scene is TramaVirtual, an open platform on which more than 15,000 musicians have uploaded some 35,000 albums.Fans can then download the music for free. While this does not sound like a promising business proposition, it makes a lot of sense in the context of Brazil’s music marketplace. Major record labels release a minuscule number of new Brazilian music CDs each year, and they sell for about $10 to $15.32 Only the cultured elite can afford music CDs, and the native musical talent—which is plentiful in Brazil—has no place to go.With such a constricted marketplace,TramaVirtual has become hugely popular by showcasing new and interesting music. TramaVirtual’s artistic and social cachet—itself the product of open sharing in a commons—has enabled it to develop a highly respected brand identity. “By exploiting the trademark,” said Lemos, “Trama has been able to create parallel businesses that work with music, but not in the same way that a record label does.”33 For instance, Trama created a business that sponsors free concerts at universities under its trademark sponsorship. It then sells marketing rights at the concerts to cosmetic makers and car companies. Musicians have gained wide public exposure through Trama, and then used that association to negotiate international record and marketing deals for themselves. CSS (Cansei de Ser Sexy) won a record contract with the American label Sub Pop, for example.

For the past five years, a related business model for music on an international scale has been emerging in Luxembourg.In only three years, Jamendo has amassed a huge international following in much the same way as TramaVirtual—by attracting music fans to its open platform for free music sharing. (The name Jamendo is a mix of the words jam and crescendo.) The site is not a music retailer but a repository for free music—with a business model overlay to pay the bills.

Jamendo’s purpose is not to maximize returns to shareholders, in other words, but to service musicians and fans in a self-sustaining way. It makes most of its money from “tip jar” donations from fans and from advertising on the Web pages and streamed music. Ad revenues are shared 50-50 with artists, and any donations are passed along to individual artists, minus a small transaction fee.

The Jamendo community is sizable and growing. By 2008 it had more than 357,000 active members from around the world. Part
of the draw is the catalog of more than 10,000 albums, all free. Unlike Magnatune, Jamendo does not select the artists that are featured on its site; everyone is welcome to upload his or her music.To help fans identify music they like, the site offers many sophisticated tools. There are some 60,000 member-written reviews, custom playlists, community ratings of albums, and “folksonomy” tags for albums and songs.* Fans are urged to download music through peerto- peer networks such as BitTorrent and eMule because it reduces Jamendo’s bandwidth expenses.

“Users can listen,download,review, remix,and ‘widgetize,’ ”said Sylvain Zimmer, the founder and chief technology officer of Jamendo. As part of its commitment to musicians, the site has a forum * Folksonomies, a cross of taxonomy and folk, are essentially user-generated tags attached to each song and album,which enables categories of music to emerge from the “bottom up,” as fans regard the music, rather than through top-down marketing categories. for artists and listings of concerts, as well as open APIs* so the Jamendo ecosystem can be integrated into other software.

What’s striking about Jamendo is its nonchalant international feel, as if it were only natural to browse for “deathmetal,” “powerpop,” “hypnotique,” “ambient,” “psytrance,” and “jazzrock” on the same site. (These are just a few of the scores of folksonomy tags that can be used to browse the catalog.) “We are a Babel, not a label,”said Zimmer,who reports that India and Japan are heavy downloaders of Jamendo music. Complete, official versions of the site are available in French, the original language for the site, and now English and German. Incomplete versions of the site are available in Spanish, Polish, Portuguese, Russian, Turkish, Italian, Swedish, Czech, and Ukrainian.

Virtually all the albums on Jamendo use one or more of the six basic CC licenses. The CC ethic is a perfect match for the company’s community-driven business model, said Zimmer. “The best way of detecting CC-incompatible content and commercial uses of NC-licensed work is the community. The Creative Commons makes the community feel more confident and active.”34 He adds that if the site’s managers run too many ads, “the community will tell you.”

Commoners as Co-creators of Value

For businesses operating on open networks, it is a mistake to regard people merely as customers; they are collaborators and even coinvestors. As more companies learn to interact closely with their customers, it is only natural that conversations about the product or service become more intimate and collaborative. The roles of the * An API is an “application programming interface,”a set of protocols that enable a software application to operate on a computer operating system, library, or service. Many companies use proprietary APIs to retain control over who may develop applications that will interoperate with their software. Other companies that wish to encourage development of compatible applications—
and thus promote a software ecosystem entwined with the operating system or service—use open APIs. “consumer” and “producer” are starting to blur, leading to what some business analysts call the “prosumer”35 and the “decentralized co-creation of value.”36 The basic idea is that online social communities are becoming staging areas for the advancement of business objectives. Businesses see these communities as cost-effective ways to identify promising innovations, commercialize them more rapidly, tap into more reliable market intelligence, and nurture customer goodwill.

Amateurs who share with one another through a loose social commons have always been a source of fresh ideas.Tech analyst Elliot Maxwell (citing Lessig) notes how volunteers helped compile the Oxford English Dictionary by contributing examples of vernacular usage;how the Homebrew Computer Club in the San Francisco Bay area developed many elements of the first successful personal computer;and how sharing among auto enthusiasts helped generate many of the most important early automotive innovations.37 In our time, hackers were the ones who developed ingenious ways to use unlicensed electromagnetic spectrum as a commons,which we now know as Wi-Fi.They tinkered with the iPod to come up with podcasts, a new genre of broadcasting that commercial broadcasters now emulate.38 Numerous self-organized commons have incubated profitable businesses.Two movie buffs created the Internet Movie Database as separate Usenet newsgroups in 1989; six years later they had grown so large that they had merged and converted into a business that was later sold to Amazon.39 The Compact Disc Database was a free database of software applications that looks up information about audio CDs via the Internet. It was originally developed by a community of music fans as a shared database, but in 2000 it had grown big enough that it was sold and renamed Gracenote.40 A commons can be highly generative because its participants are tinkering and innovating for their own sake—for fun, to meet a challenge, to help someone out. Amateurs are not constrained by conventional business ideas about what may be marketable and profitable.They do not have to meet the investment expectations of venture capitalists and Wall Street.Yet once promising new ideas do surface in the commons,market players can play a useful role in supplying capital and management expertise to develop, improve, and commercialize an invention.

Because online commons are such a rich source of new ideas, the most farsighted companies are trying to learn how they might be harnessed to help them innovate and compete more effectively. MIT professor Eric von Hippel is one of the foremost researchers of this process. His 2005 book Democratizing Innovation describes how the leading participants in high-performance sports—extreme skiing, mountain biking, skateboarding, surfing, and hot-rodding—are forming “innovation communities” that work closely with manufacturers. 41 The most active practitioners of these sports are intimately familiar with the equipment and have their own imaginative ideas about what types of innovations the sport needs. Indeed,many of them have already jerry-rigged their own innovations—better cockpit ventilation in sailplanes, improved boot and bindings on snowboards, a method for cutting loose a trapped rope used by canyon climbers. For companies willing to listen to and collaborate with users, says von Hippel,“communities of interest are morphing into communities of creation and communities of production.” “Users that innovate can develop exactly what they want, rather than relying on manufacturers to act as their (often very imperfect) agents,” von Hippel writes. “Moreover, individuals users do not have to develop everything they need on their own: they can benefit from innovations developed and freely shared by others.”42 Besides finding empirical examples of this trend, von Hippel has developed a theoretical vocabulary for understanding how collaborative innovation occurs. He probes the user motivations for “free revealing” of their knowledge, the attractive economics that fuel “users’ low-cost innovation niches,” and the public policies that sometimes thwart user-driven innovation (patent rights for a field may be fragmented, anticopying restrictions such as the Digital Millennium Copyright Act may prevent user tinkering, etc.).

User-driven innovation is not as esoteric as the “extreme sports” examples may suggest. It is, in fact, a growing paradigm. In one of the more celebrated examples, Lego, the Danish toymaker, invited some of its most fanatic users to help it redesign its Mind-storms robotics kit. The kits are meant to let kids (and adults) build a variety of customized robots out of a wild assortment of plastic Lego pieces, programmable software, sensors, and motors.43 In 2004, when some Lego users reverse-engineered the robotic “brain” for the Mindstorms kit and put their findings on the Internet, Lego at first contemplated legal action. Upon reflection, however, Lego realized that hackers could be a valuable source of new ideas for making its forthcoming Mindstorms kit more interesting and cool. Lego decided to write a “right to hack” provision into the Mindstorms software license, “giving hobbyists explicit permission to let their imaginations run wild,” as Brendan I. Koerner wrote in Wired magazine. “Soon, dozens of Web sites were hosting thirdparty programs that help Mindstorms users build robots that Lego had never dreamed of: soda machines, blackjack dealers, even toilet scrubbers. Hardware mavens designed sensors that were far more sophisticated than the touch and light sensors included in the factory kit.”44 It turns out that not only are Lego fans happy to advise the company, the open process “engenders goodwill and creates a buzz among the zealots, a critical asset for products like Mindstorms that rely on word-of-mouth evangelism,” said Koerner. In the end, he concluded, the Mindstorm community of fanatics has done “far more to add value to Lego’s robotics kit than the company itself.” Another improbable success in distributed, user-driven innovation is Threadless, a Chicago-based t-shirt company.Threadless sells hundreds of original t-shirt designs, each of which is selected by the user community from among more than eight hundred designs submitted every week. The proposed designs are rated on a scale of one to five by the Web site’s more than 600,000 active users.Winners receive cash awards, recognition on the Web site, and their names on the t-shirt label. Every week,Threadless offers six to ten new t-shirts featuring the winning designs.

In 2006, the company sold more than 1.5 million t-shirts without any traditional kind of marketing. Its business model is so rooted in the user community that Threadless co-founders Jake Nickell and Jacob DeHart have declined offers to sell their t-shirts through conventional, big-name retailers. Threadless’s business model has helped it overcome two major challenges in the apparel industry, write Harvard Business School professor Karim R. Lakhani and consultant Jill A.Panetta—the ability “to attract the right design talent at the right time to create recurring fashion hits,” and the ability “ to forecast sales so as to be better able to match production cycles with demand cycles.”

A number of companies have started successful enterprises based on the use of wikis, the open Web platforms that allow anyone to contribute and edit content and collaborate. Evan Prodromou, the founder of Wikitravel, a free set of worldwide travel guides, has identified four major types of wiki businesses: service providers who sell access to wikis (Wikispace, wetpaint, PBwiki); content hosters of wikis (wikiHow,Wikitravel,Wikia); consultants who advise companies how to run their own wikis (Socialtext); and content developers (WikiBiz, an offshoot of Wikipedia).

Since the success of a wiki-based business depends upon honoring the integrity of wiki users, Prodromou scorns what he sees as the backhanded strategies of business models based on “wikinomics” and “crowdsourcing.” He sees such models as sly attempts to get “suckers” to do free work for the entrepreneur owning the business. A sustainable commercial wiki, said Prodromou at a conference, respects the community of users and does not try to exploit them.It strives to fulfill a “noble purpose”for users and demonstrate in a transparent way that it offers value .Any hint of trickery or calculation begins to sow distrust and erode the community. Yet any wiki-based business must be able to set boundaries that allow the owners to make responsible business decisions; those decisions, however,must respect the wiki community’s values.

It is hard to predict what new models of “decentralized cocreation of value” will take root and flourish, but the experiments are certainly proliferating. Staples, the office supplies store, now hosts a contest inviting the public to suggest inventions that Staples can develop and sell under the its brand name.47 A number of massmarket advertisers have hosted competitions inviting users to create ads for their products. One of the more interesting frontiers in userdriven innovation is tapping the audience for investment capital. SellaBand (“You are the record company”) is a Web site that invites bands to recruit five thousand “Believers” to invest $10 apiece in their favorite bands; upon reaching the $50,000 mark, a band can make a professional recording, which is then posted on the Sella- Band site for free downloads. Bands and fans can split advertising revenues with SellaBand.48 Robert Greenwald, the activist documentary filmmaker, used e-mail solicitations, social networks, and the blogosphere to ask ordinary citizens to help finance his 2006 film Iraq for Sale: The War Profiteers.


Reintegrating the Sharing and Commercial Economies

If there is persistent skepticism about the very idea of open business models, from both business traditionalists focused on the bottom line and commoners committed to sharing, it is because the commons and the commercial economy seem to represent such divergent moral values and social orders. One depends upon reciprocal exchanges of monetary value, with the help of individual property rights and contracts; the other depends upon the informal social circulation of value, without individual property rights or quid pro quos. A market is impersonal, transactional, and oriented to a bottom line; a commons tends to be personal and social and oriented to continuous relationships, shared values, and identity.

Yet, as the examples above show, the market and the commons interpenetrate each other, yin/yang style. Each “adds value” to the other in synergistic ways. Historically, this has always been true. Adam Smith,the author of The Wealth of Nations,was also the author of The Theory of Moral Sentiments, about the moral and social norms that undergird market activity. The market has always depended upon the hidden subsidies of the commons (folk stories, vernacular motifs, amateur creativity) to drive its engine of wealth creation. And the commons builds its sharing regimes amid the material wealth produced by the market (free software is developed on commercially produced computers).

What has changed in recent years is our perceptions. The actual role of the commons in creative endeavors has become more culturally legible. For businesses to function well on Web 2.0 platforms, they must more consciously integrate social and market relationships in functional, sustainable ways. If the results sometimes seem novel, if not bizarre, it is partly because networking technologies are making us more aware that markets are not ahistorical, universal entities; they are rooted in social relationships. Open business models recognize this very elemental truth, and in this sense represent a grand gambit to go back to the future.


David Bollier is the Editor of and the author of Silent Theft: The Private Plunder of Our Commons Wealth (Routledge) and Viral Spiral: How the Commoners Built a Digital Republic of Their Own (New Press) from which this chapter has been extracted. He can be contacted at
Viral Spiral: How the Commoners Built a Digital Republic of Their Own (New Press)