Kevin Kelly and economies of scope

A couple of weeks ago Kevin Kelly wrote on his blog about the question of value in network economy, in the article “Better Than Free”. While this author is always a source of interesting ideas, I was not quite sure how to make sense of his argument. Mostly because it fluctuated between economies of scale and economies of scope. In a manner of setting the problem of declining value of copies in the environment where copying is easy, Kelly uses economies of scale as a framework for his question (the ease of sharing and copying on the web), and as a way of answering he switches to the line of reasoning that belongs to theeconomies of scope. Not sure if he makes a link between the two. Actually, I suspect that he doesn’t because he mentions advertising as an already known “answer” to free content. Advertising belongs to “scale” thinking (the more eyeballs, the better).

But as it’s already also well known, digital networks don’t necessarily work that way. Not all nodes are the same, and some nodes (people) are well, more influential then others (who do you follow on Twitter? and why?) If I follow Kelly’s argument, when network is both very big, and also transmits data by means of sharing & copying it, the value of what is copied evaporates. (I like to think of it as a shifting locus of value on the web). In this situation, the [economic] advantage starts to move towards something else, and that “something else” he listed in 8 categories (immediacy, personalization, interpretation, authenticity, accessibility, embodiment, patronage, and findability). These are all demand-side advantages.

Kelly’s question is valid enough, and actually super-relevant for digital marketing and branding: “the previous round of wealth in this economy was built on selling precious copies, so the free flow of free copies tends to undermine the established order. If reproductions of our best efforts are free, how can we keep going? To put it simply, how does one make money selling free copies?” He goes on to answer his question: “The simplest way I can put it is thus: When copies are super abundant, they become worthless. When copies are super abundant, stuff which can’t be copied becomes scarce and valuable.” And right here resides my problem. The copies are really not worthless, it’s just that something else becomes more important. And that’s people & dynamics of their relationships.

If that’s really the case, then the explanatory potential of economies of scope is actually much better suited to explain web’s network economy. [Kelly does mention that, “the money in this networked economy does not follow the path of the copies. Rather it follows the path of attention, and attention has its own circuits.”] So why not look at the dynamics of attention & size and shape of networks on the demand side?? It really does make much more sense to shift the focus from copies (and disappearing production-side advantages related to them) towards the organization of their distribution on the demand side. That is, to put the focus on the network dynamics of sharing, influence, and consumption of products and information. How do we share, why, when, and what?

Economies of scope refer to efficiencies associated with the perception of the role and importance of the end-customer. So think some of the stuff that Kelly mentions (customization, interpretation, findability — and basically everything else that shapes dynamics of info sharing in social media). To attract people to certain products/services/content because those products and services somehow fit in their life: they are perceived as relevant and helpful and fun and socially useful and self-promotional and whatever other thing may apply (CPB got it right again with Whopper Sacrifice, and Twitter does it right almost always, think TweetDeck). Solutions like this create, in economic terms, competitive advantage via creating unequal access to customers [also known as “demand” competitive advantage & customer captivity (being repeatedly be socially&informationally useful to customers … stuff like that)]. Customer captivity arises from consumers’ habits, searching costs, and switching costs = all very tangible things. So it’s mostly about how people actually behave and what they value in their social networks, rather than some intangible stuff, like authenticity. At the end, it may not be a question of copies after all. Different story.

This post was first published on I [Love] Marketing on January 11, 2009