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Digital product - when and where is it valuable?

Leo Mullins, Information Age

14/12/2005 12:45:54

The problem with digital product and the Internet There are a lot of perceived problems with the Internet, the overwhelming majority of which are related to security. The nature of these perceived problems, however, generally depends on the precise standpoint of the complainant: Governments see it as anarchistic, a haven for criminals to operate and organise using secure communication technologies, difficult to monitor and administer and therefore a threat to society, law and order. Established market-dominating corporations, now affected by electronic file sharing technology and digital replications of their products, see their businesses threatened by anarchists. Individual Internet users find their computers deluged by spam and infected by malicious software (viruses, spyware, worms, adware etc.).

On the other hand, for all its proclaimed efficiencies, the Internet is still a graveyard for the vast majority of investors trying to build revenue-positive operations based on Internet technologies and associated philosophies based on speed, efficiency, communications, boundary-less organisation architectures, telecommuting and so on. If you hold fast to the idea that inefficient markets are in part characterised by monopolistic domination, then the ICT market should surely be considered to be inefficient despite its greatest aspect, the Internet, being generally described as the basis for efficient commerce.

To add insult to injury, the Internet itself also has an identity problem. It is viewed simultaneously and alternatively by the passing milieu of management consulting gurus as; a new medium of communication, entertainment, sales channels, education facilities, as the new business medium that is changing everything, and much more. The more extreme audiences go so far as to consider the Internet as a way to God, and a way to threaten society. Rather than enter the debate at this level, a more informative view may be to call it what it is and let its uses be decided by its users. To this end, the Internet is simply a global network of computers, nothing more nothing less.

In truth therefore, the nature of the Internet cannot be attributed or be considered as basis for the perceived problems of commercial and economic trading activity in the digital product environment.

A more extensive discussion of the problems of the Internet can probably best be served by another fundamental approach, value. That is, approached at its most basic level like all business problems, the Internet is about value. This value is a function of supply and demand of digital product. Even more plainly, it is about getting it and keeping it, or to put it another way, extracting and protecting value produced by the digital tree growing in the electronic garden fed by the Internet.

For the purposes of this discussion, digital product value is associated with exchange of utility. The increasing ubiquity of the Internet and connectivity convergence towards the Internet is having increasing impacts on all value concepts concerning use and ownership of digital product and digital assets. The terms digital product and digital assets are used to include incidences and process related to all and any data, stored, transmitted, altered, digitally manipulated and exchanged. From e-mail, to video, including VoIP, software, games, music, text, graphics, data storage, security, and any other digitally conveyed value imbedded in hardware to control consumer and industrial appliances.

This paper attempts to explore general perceptions of Internet imperfection and lack of commercial effectiveness in the context of current digital product trade exchange mechanisms. The following brief discussion delves into basic fundamental assumptions of Internet users, their understandings and expectations, in an attempt to distil the relevant elements in order to clearly present the underlying causes of these perceived problems of the Internet. This understanding should significantly help in predicting probable and possible solutions that will, hopefully, indicate the future direction of the Internet's development.

In the beginning Long before the Internet, value was entirely created by physical exchange of goods and services. People's needs were met and generated value by people trading wants and surpluses. At its root, trading is based on the fundamental concept of fair exchange where a party gives up possession of a good or service in reciprocation of another taking possession of an equivalent value good or service and vice versa. Exchange transactions take place by exchanging goods directly (bartering) or using money (or money equivalents), providing primary functions of a store of value and units of measurement to facilitate trading activity.

The reason for trading is for surplus to meet scarcity and is the commercial foundation of human society. The mountain of value attributed to human possessions is founded on trading, a process of exchanging fair value. The act of exchange creates the concept of value by involving opposing forces negotiating perceptions of stored utility to achieve a mutual agreement on value of the units exchanged in trading. Because this value agreement is based on the interactions of willing buyers and willing sellers, the results are consensual, and thereby considered to be the most reliable basis for measurement of value.

It is useful to point out here that as the basis of commerce, trade results in a two-sided transaction recording and measuring separate people's perceptions of value exchanged by the parties involved. In short, the primary aspect of trade is its consensual agreement of value based on perceptions of fairness and equal dealing.

The digital age has extended the geographical reach of traders and increased the speed of trade transactions to vastly increase the scope and range of traded goods. More importantly, it has seen in a vast accumulation of data to support the creation of new value and information never before available. Although the Internet has introduced scale and new complexity to traditional trading, it has changed none of its fundamentals. The basis of Internet problems

Contrary to the usual expectation of decreased value from increased supply, the digital age has created increases in value from increases in the supply of information. Further, with the advent of global digital communication, this digital product (information, data, and the ability to manipulate data, or software) has added new and different goods for people to exchange. The value of this information is growing and will potentially far exceed that of traditionally traded physical goods as mass markets fracture into higher and higher-valued niche markets catering more and more to individual needs.

In the digital environment, new complexities are introduced to the trading process. The most obvious is the almost infinite capacity to replicate valuable digital product, the implication being that it enables surpluses to meet needs without exchanging possession. That is, one party still has their product after they have sold it. Other complexities relate to the high-speed degradation of data's value, instantaneous transactions, global transactions, transaction volumes, and in addition, problems attributed to the incorporeal intrinsic nature of the traded goods introduced to the trading equation.

The result is a conundrum: Trading, the very system responsible for creating value also becomes the system that can instantly destroy the value created.

Unless the ability to replicate data is kept in the hands of the supplier, the value of a surplus data commodity vanishes once trading commences. Where suppliers of data product are unable to prevent buyers from distributing these data products, the value of the surplus will collapse after the first trade. The scarcity need, which is the basis for the data value, is quickly fulfilled because the new possessor of the data can replicate it and globally distributes it instantly, without cost.

When data is traded for money, it will also be noted that a kernel of unfairness is injected into the exchange this being that one of the parties is exchanging money that is given up, and the other party exchanges data, which is not given up. This additional complexity arises in the digital trading environment because it unsettles the essential need to balance the exchange. In this case, the exchange of possessions can be validly perceived as one-sided because one party has exchanged data, which he retains, and the other money, which he doesn't retain.

This results in fundamental contravention of the human expectation of fairness in a trade exchange, and undermines the sense of credible value agreement being a product of the exchange. Even acknowledging that value received is represented by money given up, humans tend to measure other people's money when deciding fairness.

An example of these phenomena is most clearly illustrated today by the struggle of the establishment to prevent the collapse of the traditional product-based music industry. It is caused by the growth of file sharing networks like Napster and Kazaa.. Another is the fight by the movie Industry to curb the 36 per cent a year growth of the DVD piracy market.

Impact of the Internet problems However, the scale of the problem is more extensively felt as the Internet grows and connectivity increases. There are a number of major, long-running debates and increasingly fractious confrontations taking place at present that have the capacity to determine the direction and nature of the Internet, and development of value of digital product in the future.

These issues of data and value trading basically fuel these debates between the forces taking opposing positions in regard to commercial development of the Internet. They are exacerbated by the resulting perceptions of unfair trade exchanges, further impacted by the trade exchanges occurring partially in the digital (incorporeal) environment, and partially in the human (corporeal) environment. That is, data being exchanged for money.

The principle areas of debate and confrontation are between the establishment controllers of traditional trading market mechanisms, the suppliers, and the buyers, individuals who dispute the fundamental value attributes of the supplier's surplus and who can now do something about it:

• File sharing - "who owns the music". • Open source code licensing - "free or open code licensing vs propriety code licensing". • Patenting software code - "ownership of ideas and application of copyright law". • Software on demand, software as a service - "price of access to software", • Copyright of data and content ownership - "stopping piracy without destroying distribution channels". A common solution to trading and exchange of value in the digital market lies at the heart of all of these confrontations and debates. This solution can only be implemented when the problem is commonly understood and the solution's identity agreed as a result of the market re-evaluating its common underlying assumptions of the trade equation in the market's trade processes.

Traditional goods are exchanged from surpluses in order to meet needs. The value of a unit of trade is a measure of its perceived ability to meet the needs to the party acquiring it. This can be called its utility value as established by trading.

At the most basic level of trading,corporeal or tangible physical goods, the utility value of goods exchanged is indelibly bound up in the physical nature of the item exchanged. That is, an axe is an axe.

With the development of human society there occur increases in the complexity of human needs. This adds components that make up the potential utility value of a tangible physical unit of trade. Correspondingly, there is a lessening of the link between the physical nature of the traded items and its unit of utility measure. With sophistication, more and more extraneous factors begin to add to the make-up of utility value of an item attributed by a purchaser. This is most clearly evident in the value of items susceptible to brand marketing, and in the fashion and antiques markets.

In the modern trading environment the utility value of an item of exchange varies along a spectrum from that of a commodity where physical attributes equals utility, through to fashionable products where utility value is only a vague value aspect tenuously attributed to its physical existence.

The trading systems of today have evolved out of physical goods trading and adapted along with human society to cope with a huge range of value concepts, from commodities to brands. It is able to do this because even at the highest levels of complex value measurement, the underlying physical nature of the traded item is always present.

With the advent of the digital age, this link between a traded item's physical attributes and its utility has vanished.

Trading systems have attempted to cope with this by pretending it didn't happen and some interesting and elegant work-arounds have evolved. The principal one has been to artificially create a physical attribute with which to link and identify utility value. This is the reason for the box that software applications have always, until recently, been sold in. To reinforce and secure the physical attribute, the trading system also developed the concepts of encryption and licensing that have created the licence management and security industry.

Licensing and encryption have developed extensively as extension of the link between data's utility value and its physical attributes in order to manage and administer the box or the physical media of the digital product. Vastly complex licence and sophisticated encryption technology has been developed to better represent a pretence of physical attribute of digital products in trade transactions.

However, as the Internet has developed and bandwidth increases, the viability and usefulness of this artificial physical attribute has become an increasing liability to the efficient trading of digital product. This is mainly because the utility of data can never be adequately represented by a licence or a physical representation.

Licensing and encryption have become instead the basis for mechanisms to introduce inefficiency to the market place. This market inefficiency is clearly evidenced by overpriced software, increasing piracy, and monopolistic trading environments, further witnessed by the increasingly critical written contents of the relevant trade journals and communications.

Conclusion The solution must therefore lie in recognising that the utility value of data cannot be efficiently traded at the "point of physical exchange", rather it be recognised at the "point of utility exchange". That value must be determined where and when data or information is accessed or used.

The originating source of Internet discontent must therefore be attributed to the lack of an Internet-based commercial layer required to measure this point of utility exchange value. Without a commercial layer there is no inherent security and no business metrics to administer the ownership of digital product and thus control their use at their owners' direction. The Internet currently has no inherent functionality to support and facilitate the conduct and needs of proper trading of digital product.

Trading digital product that focuses on the value produced as a fundamental element of value exchange eliminates the current problems of digital product trading. This will require technology to secure data and information continuously, authenticate users at its point of use, use accurate, flexible measurement metrics to measure and report all and any value exchanges, subject to trade rules, auditable enforced agreements between suppliers and consumers covering access to uniquely identified events, agreed and understood value concepts.

All this is required in real time, or near real time, meeting the needs of the existing digital environment on a global basis. The traditionally understood fundamental elements of trading will continue to drive the exchange of value as never before.

The present debates and confrontations of the digital market are part of the process of changes now being experienced in the digital product market as unsustainable trading practices become increasingly inefficient. This must lead to a general collapse of traditional practices over time. The move to trading digital product and data at its point of use seems therefore inevitable. The technology to support point-of-use data already exists and the market is demanding it. Software on demand, software as a service, and pay-as-you-use are terms that were unknown a year ago but are now common terms and concepts in the digital product market place.

The future of the traditional software industry as we have known it, based largely around boxed software product, the enterprise software industry of big deals, and concentrated corporate and local computing, is untenable. The next generation of digital product value builders is going to be serviced-based. Hardware value is going to become totally dependent on the services that it supports; that is, hardware sales models will follow those of the mobile phone market, being free hardware connected to pay-as-you-use software services. Above all, value is all about measurement. The accounting and consulting professions must take notice if it they are to be relevant in the development of the future of business systems and processes. The centre of this digital product trading revolution must be the implementation and use of a commercial billing layer on the Internet to enable the collection and supply of all the business metrics required to support the measurement of usage, of access and information at the time of value generation.

The days of trading based in the physical possession of software and virtually free, unhindered and uncontrolled distribution of digital content must surely be numbered.

Optimiser was founded in 1996 by its CEO, Leo Mullins, to incorporate his successful oil and gas consulting business. Its objective was to use the Internet to create a virtual management consultancy, uniting various consultants to provide a more efficient and productive service portfolio to the Australasian oil and gas industry. imullins@optimiser.com