Structured Viral Communication: the Political Economy and Social

STRUCTURED VIRAL COMMUNICATIONS: THE POLITICAL ECONOMY AND SOCIAL ORGANIZATION OF DIGITAL DISINTERMEDIATION MARK COOPER* INTRODUCTION ..................................................................................... 16 I.THE TRANSFORMATIVE POWER OF STRUCTURED VIRAL COMMUNICATIONS .................................................................... 19 A. Viral Communications Overwhelms Centralized Communications .................................................................. 19 B. The Challenges and Advantages of Structured Viral Organizations ....................................................................... 21 II.DIGITAL DISINTERMEDIATION IN THE MUSIC SECTOR ........ 22 A. The Tight Oligopoly in the Physical Music Business ............ 25 1. Collusion on Price ............................................................ 25 2. Anti-Consumer Bundling ................................................ 28 B. The Emergence of a Digital Music Business .......................... 30 1. The Transaction Cost Transformation ............................ 30 2. The Artists’ View .............................................................. 31 3. The Welfare Economics of the New Industry ................. 37 C. Extensions of Digital Economics to Other Sectors ................ 38 1. Newspapers ....................................................................... 38 2. Book publishing ................................................................ 38 3. Video ................................................................................. 40 4. Avoiding the Nightmare on Elm Street ........................... 41 III. POLITICAL ACTION AND THE OBAMA CAMPAIGN ORGANIZATION .......................................................................... 47 A. The Magnitude of Change ..................................................... 48 B. The Internal Structure of the Structured Viral Organization Model ............................................................. 49 * Dr. Mark Cooper is committed to public interest advocacy and academic research. He is Director of Research at the Consumer Federation of America. He is also a Fellow at the Vermont Law School Institute for Energy and the Environment, a Senior Adjunct Fellow at Silicon Flatirons, and a Fellow at The Donald McGannon Communications Center of Fordham University. 15 16 J. ON TELECOMM. & HIGH TECH. L. [Vol. 9 1. Recruitment and Training ................................................ 50 2. Motivation and Monitoring ............................................. 52 3. Management and Coordination ....................................... 57 C. Exploiting the Communications Resource ............................. 62 CONCLUSION ......................................................................................... 67 INTRODUCTION This paper applies a new institutional economic analysis of what I call “structured viral communications” to two of the most interesting stories of cyberspace: (1) digital disintermediation in the music business; and (2) the 2008 Obama campaign. The paper positions the analysis between two extreme views of the digital revolution’s impact on traditional business models. At one extreme is the Internet fairytale of “free everything”;1 on the other end are the copyright-holder sob stories of pirates “stealing everything.”2 While there is a certain amount of truth in each view, both overstate their case and, consequently, offer a fundamentally flawed account that provides a faulty basis for policymaking. The “Internet fairytale” dramatically overestimates the ease of cost recovery in a world of low marginal costs. Moreover, it underestimates the challenge of organizing the economic relationships needed to recover substantial average costs and achieve long-term viability. The Internet fairytale also violates the first principle of the free software movement: “‘[F]ree’ as in ‘free speech,’ not as in ‘free beer.’”3 The failure to carefully define what “free” is endangers the achievement of what it is and could be. Failing to deal with long run recovery of real costs gives excessive credence to the sob story of the copyright holders, who, of course, demand far more control over free speech than is needed to cover their costs. However, the “copyright-holder sob story” vastly overestimates the role of piracy in the decline of revenues and underestimates the benefits of economic efficiency. What could be a reasonable argument in support of incentivizing content creation quickly deteriorates into a legitimation of the abuse of market power and the defense of efforts to capture economic rents made available by technological innovation. By overreaching on the claim of piracy, proponents of this view undermine 1. See, e.g., CHRIS ANDERSON, FREE: THE FUTURE OF A RADICAL PRICE 3, 13 (2009). 2. See, e.g., Preston R. Padden, EVP, Worldwide Gov’t Relations, Walt Disney Co., Building a Framework for Efficient Enforcement, Remarks at the Silicon Flatirons Conference: The Digital Broadband Migration: Information Policy for the Next Administration (Feb. 11, 2008). 3. GNU Operating System, http://www.gnu.org (last visited Oct. 12, 2010). 2011] STRUCTURED VIRAL COMMUNICATIONS 17 the case for copyright. The new institutional economic framework is ideally suited to combine these two accounts and extract valid organizational insights. It integrates the economics of production costs and transaction costs by stressing the challenges of institutionalizing social and economic relations in durable, resource-generating organizations. Douglass C. North, a Nobel laureate and leading practitioner of new institutional economics, summarizes the framework as follows: Institutions provide the basic structure by which human beings throughout history have created order and attempted to reduce uncertainty in exchange. Together with the technology employed, they determine transaction and transformation costs and hence the profitability and feasibility of engaging in economic activity. It concerns the endless struggle of human beings to solve the problems of cooperation so that they may reap the advantages not only of technology, but also of all the other facets of human endeavor that constitute civilization.4 The problem of cooperation is dramatically affected by new communications technologies because they transform the logic of collective action.5 The need for cooperation and organization, however, does not disappear, but the ability to achieve cooperation and organization is transformed. The framework of analysis for the organizational challenges of structured viral communications is taken from the work of Elinor Ostrom, another Nobel laureate in economics, whose work is founded on a critique of neoclassical economics. Ostrom has identified the critical challenges in organization/institution building and has shown that communications are critical to building durable institutions to solve the problem of managing “common pool resources” (“CPR”). In CPR dilemmas where individuals do not know one another, cannot communicate effectively, and thus cannot develop agreements, norms, and sanctions, aggregate predictions derived from models of rational individuals in a noncooperative game receive substantial support. These are sparse environments . 4. DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE 118, 133 (1990). 5. Arthur Lupia & Gisela Sin, Which Public Goods are Endangered?: How Evolving Communication Technologies Affect the Logic of Collective Action, 117 PUB. CHOICE 315, 329 (2003). 18 J. ON TELECOMM. & HIGH TECH. L. [Vol. 9 . In richer environments that vary from the institutionally sparse homeland of noncooperative game theory. [s]imply allowing individuals to talk with one another is a sufficient change in the decision environment to make a substantial difference in behavior . .6 The recognition of shared interest—the collective payoff that flows from cooperation—also plays a key role in the analysis of social organization to cooperatively exploit the CPR. When substantial benefits can be gained by arriving at a joint plan of action for a series of future interactions, individuals may have in their repertoire of heuristics simple sharing rules to propose, backed up by a presumption that others will use something like a measured response. If in addition, individuals have learned how a monitoring and sanctioning system enhances the likelihood that agreements will be sustained, they are capable of setting up and operating their own enforcement mechanism.7 [A]ppropriators of a common resource might take into account more than the individual benefits and costs they receive from following or breaking the rules that coordinate resource use. If they include the opportunity costs of foregone joint benefits and the expected costs of developing new rules if defecting behavior leads to the breakdown of existing arrangements, appropriators may recognize incentives to maintain those arrangements by adopting a cooperative strategy over numerous iterations.8 Digital disintermediation breaks down incumbent social and economic relations of production, but establishing durable new relations requires institution building. This paper is organized as follows: Part I presents an overview of the argument, relying on graphic presentations and a critique of the “Internet fairytale.” Part II is a study of the music sector, the first major example of digital disintermediation. This part provides an analysis that highlights the economic aspects of a sector that resisted the transformation.

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