The Economy in Germany

The Internet – a virtual El Dorado for music, information, software and games, and nearly all of it for free! So who is paying for it and where does the money go? Professor Gisela Schmalz, media economist and author of the book “No Economy: Wie der Gratiswahn das Internet zerstört” (lit. How free stuff is destroying the Internet), explains developments.

Who is paying for all of this free stuff? And how sustainable is it as a model?

Online users are not used to paying for digital images, texts, music or films. As soon as even the most minimal price comes into play, most of them continue their search elsewhere for free offers, even if the quality is worse. Free content is paid for by the people who create it, either in the form of paid staff or through other expenses. On top of that, the people who put it online are often not even the creators. This free culture is only sustainable if something innovative for the online community comes out of it. If information is just being taken and not further developed, and the people who create are not getting paid, the source will most likely disappear. Then only the largest providers of so-called “valuable” content will be able to survive and they will in turn be able to dictate the prices for it.

The constant free offerings is destroying the market for digital products from information and photos to software and music – and not only on the Internet. It is ruining the livelihood of its originators. At some point quality will become rare and expensive, and is there a way out of this cycle?

In this digital age, the creativity of content originators can no longer be limited to just the craft of writing, making music, taking pictures or filming videos. If these people work as journalists or artists and want to make a living doing it, they have to be just as creative in thinking of business models for their wares, or in finding fair online partners to market and distribute their products. Advanced Internet users could use the various trading platforms or payment systems readily available on the web to establish their own businesses online. Markets on the Internet also allow for direct exchange between providers and consumers. It’s even possible to work with customers to create products and pricing models that are tailored directly to their special wishes.

You warn of the growing monopolization of big brands like Google and Yahoo!

Ideally, users shouldn’t reveal their entire activity histories, e-mail, purchasing and other data to just one provider such as Google. They should pay attention to not letting any one provider get too big. Instead, they should be using the vast array of options on the Internet. Monopolists threaten diversity. They build fenced-in gardens in an open field, so to speak, and create a lock-in effect. In some cases, changing providers even comes with transaction costs to the customer. These types of spaces include the iTunes Store or the App Store, which operate best with the various Apple products, or the Amazon site with the eBook-Kindle package. Apple and Amazon link certain types of data with certain devices and are able to then set the prices and conditions in that area. They bind content providers and customers to their model and grow as a result of that obligation. Other providers will naturally have a hard time growing in the shadows of such enormous companies.

The Internet is a “No Economy”. You write in your blog that, “What happens on the Internet is devoid of all the basic requirements for a marketplace: 1) prices for digital infrastructure and content, 2) clear property rights, and 3) a balanced competitive environment.” Where must progress be made in order to make the Internet a real market, if you will, a “Yes Economy”?

By spreading Internet competence. By that I mean overall knowledge of the Internet, economic know-how and the ability to critique the system. Educational institutions and companies should also get involved in explaining the Internet, and what goes on out there, in order to give reasonably competent users the chance to contribute to keeping the medium free, innovative and diversified.

You see opportunities in the development of Internet micro markets as a counter to the “No Economy”. It would be a marketplace, or many small marketplaces, oriented to the very individual needs of users, one that would actively include customers in the development of products, like the Spreadshirt site for example. But does that work in the world of digital products?

Spreadshirt functions on the “mass customization” model: individual t-shirts for the mass market. It works thanks to online communication and fewer modules required for production. What providers like Spreadshirt or MyMuesli do could also be applied a la carte to individualized newspapers, personalized radio stations or video-on-demand platforms.

In the “No Economy”, media companies seem to be undermining their own efforts. Is there a place for the media in the “Yes Economy”?

Media companies, as distributors of content, face the challenge of providing reasonable arguments for why they should be earning money on the Internet. Otherwise they will be getting little or no money for their services. Because advertising money is typically not enough to run a media business, the online models have begun to make up the shortfall in revenues. It is no longer enough to have an online presence that matches your print media one-to-one and then expect people to pay for it.