What Would Google Do? Part 3

We are entering a post-scarcity economy in which Google is teaching us to manage abundance, challenging the bedrock rule of economics, first written in 1767: the law of supply and demand.

Many industries built their value on scarcity. Airlines, Broadway theaters, and universities had only so many seats, which meant they could charge what they wanted for them. They were scarce and thus more valuable. Newspapers owned the only printing press in town and you didn't, so they could charge you a fortune to reach their audience. Shelf s.p.a.ce in grocery stores was limited, so manufacturers paid for the privilege of selling their boxes there. Television networks had a finite number of minutes in the day with only so many eyeb.a.l.l.s watching, so advertisers competed to buy their commercial time. Scarcity was about control: Those who controlled a scarce resource could set the price for it.

Not anymore. Want to sell your product to a targeted market? You don't need to fight for a spot on the shelf in 1,000 stores; you can now sell to anyone in the world online. Looking for a dress everyone else doesn't have when everyone else shops in the same mall? Today you can find no end of choice only a click and a UPS delivery away. Don't want to buy The New York Times on the newsstand or pay for access to WSJ.com for news on your industry? Now there are countless sources of the same information. Even if The Journal reports a scoop behind its pay wall, once that knowledge is out-quoted, linked, blogged, aggregated, remixed, and emailed all over-it's no longer exclusive and rare. It's no longer possible to maintain that scarcity of information.

Advertising agencies act as if ad inventory were still scarce, though online there is a virtually unlimited supply of advertising opportunities now. Agencies have always liked one-stop shopping. Every fall, they go to network upfront parties, where shows are previewed, wine is poured, and much of the entire season's ad inventory is sold off. Prime slots such as Thursday nights-when studios advertise weekend movie premieres-sell out at ever-higher prices even though the audience watching broadcast TV is getting ever-smaller (and, goes the reasoning, scarcer). Just as n.o.body gets fired in technology for buying IBM, according to the old business rule, n.o.body gets fired in advertising for buying TV. Agencies' willful ignorance of new ad economics is a product of their own economics: They are paid a percentage of the advertising money they spend. The scarcer the ad time, the more it costs; the more it costs, the more agencies spend; the more they spend, the more they earn. That is not a virtuous circle. It's a deathtrap.

Advertising's absurd ma.s.s-media economics have spilled over to online. I shrieked when Advertising Age reported that agencies were complaining of a shortage of ad inventory on the home pages of portals including Yahoo. The agencies were creating a false scarcity. There is no end of unsold ad inventory on billions of pages all over the internet. Many of those pages are far better targeted to their needs and would be cheaper and more efficient than Yahoo's home page. Besides, it's not as if a given advertiser's message is going to be seen by everyone who comes to Yahoo, as not everyone goes to its home page. In print and broadcast, advertisers pay for the entire audience-everyone who reads a magazine is presumed to see every ad. Online, advertisers pay only for the pages on which their ads appear-or, with Google's AdSense, they pay only when a reader clicks on an ad. The internet is a more economical and measurable advertising medium but its efficiency is not in agencies' interest because, remember, the more they spend, the more they earn.

Is there any scarcity left in media? Some argue that our attention is shrinking, but I don't buy that. My attention is constant-I have 24 hours in a day, 18 of them awake and 17 of those sober. I choose what to pay attention to in those hours. I believe my attention is more efficient and spent on greater quality than ever, now that I have more choice and more control over my time. Some argue that trust is scarce. Well, I suppose that's always true, but I now have more sources for news than I have ever had-not just my local newspaper but The Washington Post, the Guardian, the BBC, bloggers I respect, and more. Is quality still scarce? Yes, of course, but the more content that is made, the more opportunities there are for more people to make good content. The challenge is sifting through it all to find that good stuff. Where we see challenges, Googlethink teaches us to look for opportunities. Businesses can be built on the need for sifting: commerce sites that find the best merchandise, news sites that read so we don't have to, and entertainment services that gather the critical opinions of the crowd. The internet kills scarcity and creates opportunities in abundance.

Google has found a business model based on creating, exploiting, and managing abundance: The more content there is for it to organize and the more places there are for it to place its ads, the better. If your business is built on scarcity-and most are-you need to ask how you, too, can manage and exploit abundance.

Join the open-source, gift economy

Many a mogul has marveled at the wonder of the open-source economy. The story is often told: Distributed armies of programmers created the most important software underlying the internet, from the Linux operating system that powers most internet servers to the free Apache web server software that delivers most web pages to the 500 million open-source Firefox browsers that show those pages.

Why do these programmers do this work for free? Because they're generous. They want to be part of something. They care. They may want to stick it to the man (namely, Mr. Gates). And they know that banding together in an open network lets them create a better product than they could if they were to work inside most corporations.

How is open-source not chaos? New York University journalism professor Jay Rosen studied the Firefox project when he wanted to bring similar collaboration to journalism at his Newa.s.signment.net project. He learned that contrary to common misperception, open-source projects are not anarchies. They have leadership and structure. They have people to wrangle the people who want to help. It is elegant organization at work.

Open-source Wikipedia is an incredible resource, a collection of human knowledge vaster and more responsive to change than any encyclopedia. No one who creates it is paid. They contribute out of generosity and ego and because they believe they own it. Note that to make the gift economy work, a project doesn't need its entire community to contribute. Only about 1 percent of those who use Wikipedia create Wikipedia-that is Wikipedia's 1 percent rule. Indeed, if that were doubled, it probably would create chaos. In Here Comes Everybody Here Comes Everybody, NYU professor Clay Shirky, who studies social software, calculated the output of the authors of one article: "[O]f the 129 contributors on the subject of asphalt, a hundred of them contributed only one edit each, while the half-dozen most active editors contributed nearly fifty edits among them, almost a quarter of the total." The most active contributor was 10 times more active than the least active.

Wikipedia is not-for-profit. It has sp.a.w.ned a for-profit search service called Wikia, where users are creating even the algorithms that power it. It has commercial compet.i.tors, such as Mahalo, a human-powered search and guide created by serial entrepreneur Jason Calacanis, who pays his writers. At the 2008 Burda DLD conference in Munich, Calacanis tweaked Jimmy Wales, founder of Wikipedia and Wikia, for not paying for content. Wales responded that n.o.body works for free. "What people do for free is have fun.... We don't look at basketball games and people playing on the weekends and say these people are really suckers doing this for free." People will contribute their intelligence and time if they know they can build something, have influence, gain control, help a fellow customer (more than a company), and claim ownership.

Customers are also generous with ideas. In 2008 Starbucks launched MyStarbucksIdea.com, where its customers were invited to tell the company what to do (following Dell's lead with IdeaStorm; both use Salesforce.com's Ideas platform). The response from customers was immediate and impressive: thousands of ideas, votes, and comments. One customer wanted Starbucks to make ice cubes out of coffee so, when they melt, they would not dilute cold drinks; 7,600 fellow customers immediately agreed. Another customer proposed putting a shelf in bathrooms-for where else can you put your drink when you've drunk too much? A few customers found the thought somehow distasteful, but Starbucks called the suggestion a "sleeper idea" that deserved attention.

Some threads emerged from the suggestions and discussion. Many customers wanted express lines for brewed-coffee orders so they could avoid waiting behind alleged coffee aficionados with their half-this, half-that, skinny, three-pump, no-foam, Frappuwhatevers. Some customers asked to be allowed to send in their orders via iPhone. And some customers suggested-and thousands more agreed-that the chain should enable them to program their regular order into their Starbucks card so they could swipe it as they enter, placing the order and paying for it at the same time, letting them skip the cash-register line. One more proposed a pour-it-yourself corner and another asked for a delivery service. The theme-that is, the problem for Starbucks-was clear: long, slow, inefficient, irritating lines. But not one of these customers started with that complaint. Instead, they offered solutions to fix the problem. All Starbucks had to do was ask.

Chris Bruzzo, the Starbucks chief information officer (and a former Amazon executive who learned much about new ways to relate to customers there), built MyStarbucksIdea. The forum was an extension of what Starbucks employees had experienced for years: When they say where they work, "people open up this to-do list in their heads. They have very specific, detailed ideas," Bruzzo told me. Now Starbucks has given them a public platform to share ideas. Because it is open and customers can react to all suggestions, some ideas gain traction and some die on the vine. Customers help the company by eliminating many of the turkeys (such as offering diet powder in drinks or mixing in whole cookies or renaming the accursed Starbucks sizes in honor of the Olympics, from venti to gold). Other ideas take off (such as giving free birthday brews, which Starbucks then considered).

Bruzzo said it is vital for the company to "close that loop in an authentic way and show the commitment on the part of Starbucks to respond to what we've heard, which is about putting those ideas in action or building those ideas together with customers." In short: "We're truly going to adopt it into our business process, into product development, experience development, and store design." To do that, he a.s.signed 48 "idea partners" from all over the company to enter the discussion with customers, using the forum as a laboratory. They were to become champions for ideas back in their departments "so that literally customers would have a seat at the table when product decisions are made." Starbucks, like Dell, has a parallel version of the platform running behind its wall for employees to share and discuss their own suggestions.

Marc Benioff, the outspoken CEO of Salesforce.com, used the Ideas platform first for his own customers and employees and then opened it up to other companies. "It's like a live focus group that never closes," he said in an email. "I believe that these days, the rapid communication that is enabled by wikis, blogs, Twitter, YouTube, and you name it ensures that no matter what kind of company you are, your customers are having a conversation about your products and practices. The question that every company has to ask is, 'Do I want to be part of this conversation? Do I want to learn from it? Am I willing to innovate on the basis of it?' If you harness the power of this community, you will benefit. If you turn your back on it, you get farther and farther out of touch while compet.i.tors flourish. The dead-end suggestion box and auto reply are symbols of corporate indifference and are no longer tolerated." (If Benioff sounds like Michael Dell on the topic, there's a reason: He was the one who suggested that Dell needed IdeaStorm.) Any company or inst.i.tution could use a platform like this. Governments should use it to gather citizens' suggestions. Editors should use it to solicit and discuss story ideas from readers. Retailers should use it to help decide what goes on shelves. The question is how much companies and inst.i.tutions are willing to open up to the gift economy and let their const.i.tuents take part in their decisions. The gift economy is about more than just listening to customers out of courtesy or respect (now that companies can no longer get away with hiding phone numbers and email addresses and sentencing customers to phone-mail jail). It is about understanding that customers and const.i.tuents want to have a voice and gain control. It is a better way to do business. Can customers help design products? Can citizens help write legislation? Can they a.s.sign journalists? We will ask those questions in the next section of the book.

Are you willing to have your customers sit at the next desk to work with you? They're willing. Try them.

The ma.s.s market is dead-long live the ma.s.s of niches

"Ma.s.ses are other people," sociologist Raymond Williams said in his 1938 book Culture and Society Culture and Society. "There are in fact no ma.s.ses; there are only ways of seeing people as ma.s.ses."

Advertisers, manufacturers, retailers, media companies, and politicians find it convenient to see us as ma.s.ses. It's the essence of their business, their efficiency, their reach, their economy of scale. We are their critical ma.s.s. So for them, our newfound power to stand out and act as individuals, to coalesce into networks of our own, and to rise above them in Google searches-whether we are competing with them or complaining about them-is a supreme irritant, even a threat.

Ma.s.s-based industries and inst.i.tutions worry now about "fragmentation"-a term used by those who control the ma.s.s market. But out here in the market, we call it "choice." Give us more choice and we'll take it. We'll gravitate to our own interests, tastes, and communities. The natural state of life, commerce, and media is choice.

The impending shift away from the ma.s.s-market economy was chronicled famously in Chris Anderson's era-defining 2006 book, The Long Tail The Long Tail. Anderson said that as the internet creates the means to make, find, and pay attention to an unlimited variety of content about anything, culture and commerce will be less dependent on ma.s.s. .h.i.ts. Very few people might watch a single video about how to catch b.u.t.terflies, but when we can create and watch an unlimited supply of such highly targeted content, the total audience for all these niches together will acc.u.mulate to take a sizable share of the audience's attention. In 2008, Anita Elberse challenged Anderson in the Harvard Business Review, arguing that his theory wasn't proving out in practice because a small number of t.i.tles still capture a large share of attention and sales. Anderson handily and graciously dealt with her objections on his blog, LongTail.com, reinterpreting some of Elberse's data and definitions to show that the tail, as he measures it, is indeed a factor: Though consumers still buy many copies of a limited number of hit CDs from Wal-Mart, their attention devoted to music not not sold in Wal-Mart is substantial and growing. sold in Wal-Mart is substantial and growing.

A seminal work in this debate is, believe it or not, a PowerPoint presentation: Umair Haque's New Economics of Media (search Google for "Haque new economics of media" to find it; I also suggest you browse his blog, Bubblegeneration.com, which has influenced Anderson and me). Don't be deterred by his 107 slides and their dizzying economics charts. Haque's lesson is clear: The age of the blockbuster is past. Making money through controlling production, distribution, and marketing is a diminishing game. Haque says media 2.0's three sources of value creation are revelation (finding the good stuff ), aggregation (distribution 2.0), and plasticity (enabling content to be extended through, for example, mashups). This economy, he says, requires openness, decentralization, and connectedness through niches-not blockbusters. The new opportunities lie in the long tail.

I know the arguments to the contrary: the Oscars, the Olympics, Harry Potter Harry Potter, The DaVinci Code The DaVinci Code, American Idol American Idol, Wal-Mart. Yes, stipulated, there will still be blockbusters. But let's also agree to these factors: The tools that enable anyone to create and distribute goods and media will yield almost unlimited choice. The public will increasingly seize upon that choice. The attention given to and thus the value of this new wave of choice will grow. There are new opportunities in enabling, organizing, and monetizing this abundance. The blockbuster strategy always was a gamble; as it continues, it is a bigger gamble than ever. The ma.s.s market's hold over the economy diminishes.

The ma.s.s market was a short-lived phenomenon. It began with the large-scale adoption of television in the mid-1950s-and the consequent death of second and third newspapers in most American cities, yielding one-size-fits-all ma.s.s products in both broadcast and print. It was in the mid-1980s, in the age of the remote control, that I became the TV critic at People magazine, the last great ma.s.s magazine launched in America. In its first decade, the magazine was pretty much a piece of cake to run: Put a star in a big show on the cover and watch it sell. But I remember the day that ended, when my editor and mentor at People, Pat Ryan, yelled at me from the other end of the hall: "TV's dead, Jarvis! It's dead!"

She had just received the latest in a string of bad sales reports on covers featuring stars in top shows. They didn't produce guaranteed hits anymore because Americans were not all watching the same shows. No longer did we wake up as one nation asking, "Who shot J.R.?" Instead, while I was watching MTV, you were watching the History Channel, she was watching the Golf Channel, and the kids were using that new-fangled VCR with its flashing "12:00" or playing video games (never mind that the internet and the iPod had yet to come). Some lament the death of the allegedly grand shared experience of ma.s.s media, portraying it as the electronic fireside around which we sat in a common cultural encounter. I don't. I value choice.

The fragmentation of media threw business strategies into a dither. Advertisers still wanted to buy us en ma.s.se, so media had to work harder to find a ma.s.s to satisfy them. It was then that People shifted from covering the event in the star's career to the event in the star's life, and other publications followed the lead. Bodily fluids journalism, I called it: stories about celebs' deaths, diseases, affairs, scandals, weddings, babies, divorces. The balance of power at mainstream publications-at least on their covers-shifted from news to celebrity, journalism to gossip, editor to PR person, hack to flack. Stars realized the dollar value that their names and faces brought to magazines, and that's when their publicity people took over. Editors used to act as gatekeepers to the most valuable commodity-the audience. But then PR people became gatekeepers to a more valuable a.s.set-celebrity. They would negotiate access, guarantees of covers, photo approval, selection of reporters, and even the ability to pick and change their quotes. PR people held such power because they now held the key to magazines' ability to attract large audiences. Magazines all wrote about the same celebrities and scandals-they went more ma.s.s-but that was because there were fewer topics that would attract lots of buyers. Too many of us were busy watching Discovery instead of Dynasty Dynasty. And that, in turn, changed the economics of TV content. Networks seeing their shrinking ma.s.ses could less afford to gamble on expensive dramatic shows, let alone miniseries (remember them?). They were replaced by so-called reality TV, which was not only cheaper but also more sensational.

What replaces the ma.s.s? The aggregation of the long tail-the ma.s.s of niches-does. We each gravitate to our own interests and, thanks to the new and inexpensive tools of content creation online, there's sure to be something for everyone-and if there isn't, we can make it ourselves. The 500-channel world never materialized. Instead, the billion-choice universe emerged. Internet tracking service comScore said in 2008 that we watched 10 billion videos a month online. Of course, none of them individually had the ratings of the Super Bowl. But together, those 10 billion videos captured a huge amount of our attention. eMarketer says 94 million Americans read 22.6 million blogs in 2007-more than there are newspapers and magazines: blogs about knitting, blogs about heart disease, niche blogs about writing niche blogs. As I write this book, Wikipedia has 2.3 million articles and even it has new compet.i.tors, including the Star Wars Star Wars version, Wookiepedia. Everyone, and every interest, has a place online. version, Wookiepedia. Everyone, and every interest, has a place online.

Advertisers, addicted to one-stop shopping, still spend huge budgets on TV that are way out of proportion to the time the audience spends there versus the time we now spend on the internet. That can't last forever. Soon, agencies will have to work for a living. Instead of reflexively buying slots on primetime TV, they will need to put together networks of smaller media with smaller audiences that add up to a critical ma.s.s. This approach is harder but more targeted and more efficient. Why advertise diapers on a show I watch-next to my teenage kids-when instead Pampers can now advertise on mommy blogs?

As advertisers and agencies catch up with the death of the ma.s.s market, money will flow online that will, in turn, support the creation of new content, which will draw a greater audience, which will earn more money. On and on this virtuous circle will go until broadcast TV is a sh.e.l.l of its former self. There will still be hit shows-the Deal or No Deal Deal or No Deals that pa.s.s for our grand shared experience today-but there will be fewer of them.

Google figured out how to navigate the universe of niches and profit from it. It created a new way for advertisers to reach highly targeted audiences just as they search for and read relevant content. Even more disrupting to old media ways, Google didn't charge for eyeb.a.l.l.s-that is, the size of the audience-but for clicks-that is, action. Advertisers could measure the return on their investment instead of talking to faceless ma.s.ses that may or may not have been listening. More disruption: Google didn't set ad rates as old media did; it let the marketplace set the price of keywords in auctions. Because Google benefits as more ads are clicked on, it is in Google's interest to continue to improve its targeting and effectiveness. That improves both advertisers' efficiency and Google's bottom line. This virtuous circle of virtuous circles is how Google built its empire around the fall of the ma.s.s and the rise of the niche.

You, too, must learn how to make the transition from ma.s.s to niche and how to exploit it. If you're still selling products to the ma.s.ses, you're going to find it harder. If you're making one-size-fits-all products, realize they don't fit everyone. Customers will tell you what they want instead. In the next section of the book, we will examine scenarios for adapting and capitalizing on the move from ma.s.s: how automakers should let us help them make cars, how retailers can help us find unique goods, how universities should help us craft our educations. The shift from ma.s.s is really a shift of power from top to bottom, center to edge, them to us.

The ma.s.s market is dead. It committed suicide. Google just handed it the gun.

Google commodifies everything

In the earliest days of the web, I watched focus groups where users thought there was this amazing new company that had acquired all the content you could imagine about every subject possible, as if from the merger of a library, a newspaper, a magazine, and a weather service. That company was Netscape. It merely made the first commercial browser that took readers to those other companies' sites. But Netscape got the credit.

Today, that amazing brand is Google. People go online looking for something, find the answer, and often don't know where they found it. Google found it. They're savvier today and know that Google doesn't own all the content it links to. But that doesn't matter, so long as they find what they want-and Google is d.a.m.ned good at that. That's great for users but bad for brands. Here you work your buns off creating a brand online; you build technology and staff to maintain your site; you spend a fortune on marketing and search-engine optimization to get people to find it; you tell advertisers how many users come to your page and like your brand. But in the end, huge numbers of users don't recall coming to your site and don't credit your brand. When I worked on newspaper sites, we knew we had more users than the research said. The problem was, when users were asked where they had seen a piece of information that could have come only from us, they often couldn't remember. Google found it for them. Google diluted our brands.

Google has turned commodification into a business strategy. Content is commodified: Google makes it just about as easy for you to find what I've written on a topic as what Newsweek has written. Once was, brands organized information but now Google does. Media are commodified: Google places marketers' ads on sites without telling them where the ads will appear. It places those ads not as an ad agency would-on the basis of the audience size, demographics, trust, or value of a media brand-but on the coincidence of words on a page. The value of the ad depends only on how many people click on it. Thus the media brand behind the content where the ad appears becomes less critical and less valuable. Even the audience is commodified: There's little that distinguishes one of us from another-not age, income, gender, education, interest, all the things advertisers historically paid for. Everybody's like everybody else. We're just users. We might as well be pork bellies. And advertisers are commodified: Their text ads look alike, without their expensive logos and brand messages. You'd think they'd object, but they don't mind because they pay only for clicks. Google has cleverly reduced the risk in advertising, so advertisers let Google drive.

It isn't all bad. The leveling of the playing field the internet and Google engineered also made it possible for a tiny store selling a niche product to find its ideal customer or for a mere blogger to swim alongside big, old media. But in that process, it's ironic that our unique ident.i.ties, personalities, brands, qualifications, interests, relationships, and reputations as publishers-the values the internet enables-can be lost even as we can be found via Google.

What do we do about the threat of commodification? One smart response is to play by Google's rules and take Google's money as About.com has done. Or you can join networks with other specialized niches to reach critical ma.s.s, as Glam.com has done. Or get people to link to you and talk about you because you're just so d.a.m.ned good, as Apple does. Or place your ads on highly targeted sites where you know your customers are, sponsoring that mommy blog with free baby food for loyal readers. Develop a deep relationship with your const.i.tuents so they come back to you directly, not just through Google search but by using social services such as Facebook. Serve the niche well rather than the ma.s.s badly.

Welcome to the Google economy

In April 2008, just as America was diving into recession, Google announced another amazing and profitable quarter. The New York Times story was headlined, "Google defies economy." It should have read, "Google defines economy."

Old definitions of our economy measured the performance of big companies and their impact on each other (see: the Dow Jones Industrial Average). Media and advertising served only large companies because only they could afford to advertise in large outlets. Manufacturers could get retail s.p.a.ce only if they operated under the economies of scale. That was the ma.s.s economy. Then Google's marketplace for advertisers of all sizes introduced the small-is-the-new-big ecosystem, the ma.s.s-of-niches economy.

That Google's advertising is run in an auction marketplace means that its economy is more fluid; it fills in voids. When an economic downturn affects, say, travel, a magazine such as Conde Nast Traveler will suffer-airlines and resorts will advertise less and there aren't more big advertisers to fill the gap at Traveler's price. But on Google, if American Airlines and the Ritz aren't buying the keyword "Paris" this month, other advertisers may buy it. The price of that keyword may decline with demand, but in Google's very broad economy, the prices of other keywords (e.g., "foreclosure" and "credit") may rise.

This practically unlimited supply of advertisers in a fluid marketplace appears to be a new economic model that may insulate Google from some of the dynamics of an economy built on ma.s.s and scarcity. Google has its own economy.

Google also reflects our new and emerging economic reality. In the financial meltdown that reached full flame in the fall of 2008, we saw not just the failure of mortgages, derivatives, banks, and regulation. We saw the dawn of a new economy that could best be viewed and understood through the lens of Google, the one company that-by design or by luck-was built for the emerging world order. As banks, companies, and even nations faltered, Google still announced profits rising 26 percent.

In Google's economy, companies will no longer grow to critical ma.s.s by borrowing ma.s.sive capital to make ma.s.sive acquisitions-at least not for the foreseeable future. Instead, they need to learn from Google and grow by building platforms to help others prosper. Indeed, growth will come less from owning a.s.sets inside one company and ama.s.sing risk there than from enabling others in a network to build their own value, reducing their cost, and spreading their risk. That is Google's way.

New Business Reality

Atoms are a drag Middlemen are doomed Free is a business model Decide what business you're in

Atoms are a drag

Stuff is just so last-century. n.o.body wants to handle stuff anymore. It's inconvenient and expensive. If you have stuff, to paraphrase the late, great George Carlin, you have to find a place for it. You must buy the raw stuff you'll use to make your stuff. Then you have to store your stuff, pack it inside more stuff, and ship it along with other stuff. Not to mention that you have to pay to hold an inventory of stuff and you risk your stuff going out of style, in which case you'll be stuck with a lot of useless, old stuff. Anybody can reverse-engineer your stuff and make the same stuff. Now you may argue that their stuff isn't as good as your stuff-as Carlin said, "Have you noticed that their stuff is s.h.i.t and your s.h.i.t is stuff?"-but once there's compet.i.tive stuff, you'll probably have to charge less for your stuff to sell more of it. Stuff is a pain. Digits aren't.

Since the dawn of industry, controlling things and the means to make, market, and distribute them has defined businesses. Carmakers sold cars, newspapers papers, book publishers books. They identified-and limited themselves-by their products. We are what we make.

Magazine companies sell what? Magazines? Not so fast. In 2008, Colin Crawford, an executive at the tech publisher IDG Communications, bragged that his was no longer a print company. IDG had crossed the Rubicon from print to digital two years earlier when its growth in online revenue exceeded the decline in its print revenue. As a result, Crawford blogged, his team could focus on "the changing needs of their customers" and on new online and mobile products and event businesses. The staff was, he said, "unburdened by print."

Print had become a burden to a print company. It's expensive to produce content for print, expensive to manufacture, and expensive to deliver. Print limits your s.p.a.ce and your ability to give readers all they want. It restricts your timing and ability to keep readers up-to-the-minute. Print is already stale when it's fresh. It is one-size-fits-all and can't be adapted to the needs of each customer. It comes with no ability to click for more. It can't be searched or forwarded. It has no archive. It kills trees. It uses energy. And you really should recycle it, though that's a pain. Print sucks. Stuff sucks.

So who wants stuff? Not Amazon. Yes, Jeff Bezos built a great company around selling things: books, gadgets, hardware, almost anything that can be delivered to our door. Just as Craig Newmark of craigslist is blamed (unfairly) for driving a stake through the heart of papers, Bezos is blamed for crippling bookstores, with independent outlets dying and even chains suffering. But who can blame shoppers for going to Amazon with its discounts, convenience, and selection?

Bezos is as clever about stuff as he can be. He holds as little inventory as possible, getting more merchandise as needed when we order it. He owns no stores, pays no retail rent, hires no sales clerks. He doesn't own the shipping infrastructure he uses but gets the best possible deal he can with outside services because he wields such huge volume. Because of that volume, he negotiates the best prices from suppliers. He pa.s.ses a portion of those savings-the internet dividend-to his customers, which only builds his volume even higher. It's a business of efficiencies, volume, turnover, and tight margins.

I bought Amazon stock and I'm holding onto it, not because Bezos built the better bookstore but because he is creating digital equity. He sells his retail services to other merchants, sending them customers online and taking a cut, in some cases warehousing and shipping their inventory and charging for the services. He also took the computer infrastructure he had to build and offered it to any company as a low-cost, pay-as-you-go service: computing power, storage, databases, and a mechanism for paying programmers. Countless companies now use Amazon Web Services as their backend, foregoing or at least forestalling investments in computers and software. Amazon has also created the infrastructure for an on-demand workforce called Mechanical Turk (named after a phony chess-playing automaton from 1769 that had a human chess master hidden inside). Companies post a repet.i.tive task to be done and anyone can earn money-as little as one cent per task-by verifying the address in a picture, for example, or categorizing content. It's a flexible marketplace for labor. With all these services, Amazon is supporting a wave of entrepreneurial effort. Why would a bookstore do that? Amazon turned its cost center into a profit center-and beat Google to the opportunity (Google later followed suit).

Bezos is not building a stuff company. I believe he is building a knowledge company. No one knows more about what identifiable individuals buy than Amazon-not even Wal-Mart (to them, we are mostly a ma.s.s) or the credit card company (they can't necessarily see what products we buy at the grocery store). Amazon knows what we bought, when we bought it, and what else we bought with it. It can try out sales pitches to see which work best. It knows enough to predict what we might want so it can entice us to buy it. It has captured millions of reviews and ratings of every imaginable product from people who have bought and used them: a more valuable repository of consumer reports, I'd say, than Consumer Reports itself. No one knows more about the stuff we buy than Bezos. Handling stuff becomes a small price to pay to become so smart.

Amazon is positioned perfectly for the transition to digital content delivery. It is selling and delivering books to PCs and its Kindle e-book reader. It is selling movies direct to our TV sets. It is selling music downloads. Amazon has built a strong position in content thanks to innovations ranging from reviews to searching inside books to automated recommendations. By reflex, many of us go to Amazon to check out products before we buy them. That is Amazon's brand and value, as much as the stuff it sells.

Bezos built a digital knowledge and service empire. Just as fast-food joints make more money selling c.o.ke than cheeseburgers and some retail chains have built more value in real estate than merchandise sales, Bezos doesn't really make his money pushing atoms. Like Google, he creates value by getting smart and building bits.

Are you limited by your stuff? If a magazine publisher no longer thinks of itself as a magazine company and if a bookstore can build a knowledge company, then ask what you can be. Where is your true value? I'll bet it's not in the atoms you move around. It's in what you know or how you serve or how you can antic.i.p.ate needs, isn't it?

Middlemen are doomed

n.o.body likes a middleman. Well, except for my very nice literary agent. When she read in the proposal for this book that middlemen were doomed, she protested: "But that's me, Jeff." Sorry to say, yes. When she sold the book to the publisher, you could say that she sold her own professional obit.

Then again, she did make the sale. Without her-and her relationship with publishers-my proposal wouldn't have gotten into three houses, which led to an auction that raised the price (boy, was that fun). Even though my agent charges a higher commission than a real-estate agent (much higher), she increased my advance by more than the amount of the commission she was paid. Her agency also provides editorial, legal, and marketing advice. My agent made the marketplace more efficient and added value for me. She also makes the business more efficient for publishers, sifting through an abundance of book ideas and writers.

When I went to work as an online executive at a media conglomerate in the 1990s, I was delighted that I would get to work with a book publisher as it went online. But my boss warned me that I shouldn't get too excited. He explained that a publisher doesn't have direct relationships with readers (bookstores do) or even with talent (agents do). Publishing, he said, is a distribution business. Publishers, too, are middlemen.

Today, technology and the internet have fostered new self-publishing companies-Lulu.com, Blurb.com-that enable authors to have their books designed, printed, sold, and distributed and to keep a much higher proportion of the sale price-up to 80 percent, versus the roughly 15 percent of the hardcover price authors receive from mainstream publishers (minus the agent's 15 percent). Authors can sell their books directly to readers via Amazon as well. But, of course, mainstream publishers will argue that because they have relationships with bookstores for sales and with media outlets for promotion, they are able to sell many times more books for a higher profit than an author can when selling directly. They'd be right-for now. This is why even I, cyberguy, chose to have this book published the old-fashioned way: Because the book and my ideas will be distributed and promoted broadly and I will likely make more money. My publisher is adding value. In the next section of the book, we examine how book publishers need to update their business and their books for the Google age.

For all middlemen, the clock is ticking and the question of value is looming. Every time Google makes a direct connection, a middleman's value is diminished. Are you a middleman? If the web is hurting rather than helping your business, the answer is probably yes. If you make the marketplace more efficient, if you solve problems of abundance and confusion and add value, good. But even if you do, anyone can use the internet to undercut you-to craigslist you. If you make your living telling people what they can't do because you control resources or relationships, if you work in a closed marketplace where information and choice are controlled and value is obscured, then your days are numbered. I'm talking to you, car salesmen, advertising agencies, government bureaucrats, insurance-office benefit-deniers, head hunters, travel agents (oh, sorry, they're already nearly extinct), and real-estate agents.

The internet abhors inefficiency, eliminating it whenever Google, Amazon, eBay, craigslist, et al connect buyer to seller, demand to fulfillment, question to answer, SWF to SWM. Economist Umair Haque, blogging for the Harvard Business Review, sees a shift from an economy built on inefficient marketplaces, where ownership and control are centralized, to an economy built on efficiency, where information is open and the power resides nearer the edges. "Compet.i.tive advantage is fundamentally about making markets work less efficiently," he said. "One catastrophically effective way to do that is to hide and obscure information-to gain bargaining power relative to the guy on the other side of the table." The new way to succeed is to do the opposite: "Release information bottlenecks and make things more liquid." In other words, stop trying to make money by interfering in transactions.

Consider my least favorite inefficient marketplace: real estate. I hate paying agents 6 percent commission for doing so little. They, in turn, hate it when I talk about them on my blog. What we think of real-estate agents around the world is an open secret. A 2008 survey by the British Journalism Review found that real-estate agents are the least-trusted professionals, worse even than tabloid reporters. Only 10 percent of Britons trust them.

But real-estate agents have nothing to fear from me-or, they think, the internet-because they control one of the last dark pools of restricted information left in business: the multiple-listing service (MLS) database of properties for sale. If your house isn't listed there, buyers won't see it and other agents won't show and sell it. But only real-estate agents can list homes in the MLS. I call that monopolistic restraint of trade. Real-estate agents call it service. The U.S. Justice Department called it ant.i.trust, and in 2008 it reached a settlement with the National a.s.sociation of Realtors to open up the multiple-listing service somewhat to discount brokers. It was a small victory against the middleman.

Agents say they bring you pricing expertise. But in the U.S., Zillow. com will give you an automated estimate of your home's worth based on comparable sales in your area. Zillow tracks its own accuracy, comparing actual sale prices with its estimates. So much for that bit of expertise from Ms. Agent.

Agents say they market your home. Pshaw. They used to advertise a selection of homes in the Sunday paper, but those ads promoted their agencies as much as marketing specific properties. Real-estate ads are like grocery ads that entice you to come in because flank steak is on sale or because one house caught your eye. Now, thanks to the internet, there's less need for agencies to advertise in papers. Real-estate agents can save money by putting listings on their own web sites or even on craigslist and Zillow. They rarely pa.s.s those savings on to homeowners.

Agents say they bring their expertise to buyers, not just sellers. When I bought homes, I went to agents so I could see the multiple-listing service and pick out my prospects. The only real service the agent provided was hauling me around and letting me into homes.

"A real-estate agent may see you not so much as an ally but as a mark," Steven D. Levitt and Stephen J. Dubner wrote in their 2005 paean to seeing things differently, Freakonomics Freakonomics. They cited a study that found that real-estate agents keep their own homes on the market an average of 10 days longer than homes they represent-and agents sell their own homes at prices 3 percent higher. Levitt and Dubner explained that it's more efficient for agents if they can get you to sell quickly, even if for a few dollars less. "Here," they wrote, "is the agent's main weapon: the conversion of information into fear." In the long run, Zillow and similar services will become smarter than the smartest agent. On the internet, more information equals more power and value. (In the next section of the book, I'll outline how I propose to replace real-estate agents.) In the early 1990s, when I worked with newspapers, I predicted that real-estate agents would desert papers for online. I advised newspapers to get into the real-estate business themselves, becoming agents just so they could get access to the multiple-listing data. Newspapers are not in the publishing business but are in the information business, and the MLS is the key to the information that mattered. G.o.d no, the publishers said, we don't want to rock the boat with agents and lose that ad revenue. But papers were bound to lose it anyway.

Newspapers didn't know what business they were in and didn't know who their true customers were. They thought they were in the business of selling real-estate ads, not serving homeowners (aka readers). Newspapers even tried to discourage homeowners from posting their own for-sale-by-owner ads because agents saw those homeowners as compet.i.tion. Staying loyal to real-estate agents over readers did newspapers no good. The agents didn't return the loyalty. Newspaper cla.s.sified revenue in real estate, jobs, and cars fell from $19.6 billion in 2000 to $14.2 billion in 2007 (adjusted for inflation, that's a drop of about 40 percent). If newspapers had seen just how dire their future was, they might have gone around the agents they had protected and freed up information for readers. But soon it was too late. Though real-estate ads increased as home prices rose, the home bubble eventually burst in 2008, and papers' last gravy train derailed.

Real-estate agents and papers are not alone as middlemen, the proprietors of inefficient marketplaces. The monopolies, duopolies, oligopolies, cartels, and controlled marketplaces enjoyed by cable companies, phone companies, broadcasters, advertising agencies, health-care companies, and government are challenged by the internet's open marketplace of information. Google isn't their compet.i.tor. Google is the weapon their compet.i.tors wield.

Free is a business model

Free is impossible to compete against. The most efficient marketplace is a free marketplace. Money gets in the way. It costs money to market and to acquire customers so you can sell things to them. It costs money to take payments. Charging customers stops some unknown number of them from getting your product or using your service, which stops you from having a relationship with them. Money costs money.

Obviously, that's absurd. The goal of any business is to collect money and make a profit. The most sensible way to do that is to charge the people who consume what you produce, right? Not always. Return to the chapter on networks, where new-age phone companies (Skype), retail marketplaces (Amazon, eBay), and cla.s.sified-ad marketplaces (craigslist) grow larger by charging less, even nothing.

As much as I abuse media for operating under the rules of the old economy, let it be said that more than a century ago they created a new model built on not charging customers full freight. Rather than making readers or viewers cover costs, media charge the people who want to reach the people they reach-they charge advertisers. That is what makes broadcast free and newspapers and magazines inexpensive. A high-end magazine might cost $4$5 per copy to produce and distribute; it might cost another $20$30 to market to acquire that subscriber. Yet many successful monthly magazines charge their readers only $1 per copy to subscribe; it's nearly free. A publisher in this scenario is in the hole $50 or more per subscriber in the first year (that improves every time readers renew). Clearly, though, magazines make money from ads-enough to dig themselves out of that hole and earn an impressive profit through the side door.