This month I’ve had five times more traffic than in any other month since I began blogging in Oct 2006, even during woblomo.

Why? I paid Paul Graham a compliment that struck a minor viral nerve, spreading through twitter, facebook, and blogs and sending over six thousand people my way on July 16 alone according to quantcast. Of course most have since dispersed.

Power on the web flows backward through referrals to the sites that people begin their day with, the sources of traffic. Referrals from social media, unpredictable and bursty though they may be, are inexorably on the rise. As they grow, power will shift away from search engines, today’s referral kings. Who knows, this may embolden publishers to take previously unthinkable steps like voluntary delisting, further eroding the value of search. This has all been said before, perhaps best by Mark Cuban starting in 2008. It would be a blow to openness and hurt users, but would spark a fascinating battle.

Another meta note: I installed a new WordPress theme: Suffusion. It’s fantastic: endlessly configurable, bug free, fast, and well designed. I happened upon it by accident when WP 3.0 broke my old theme and I couldn’t be happier. Apparently written by a teenager, I donated to his beer, er, coffee fund.

‘Digital’ means everything and nothing at once. And that’s the point. Music is digital. Movies are digital. Books, news, commentary, communication, ideas, and sexuality are all digital. Even money is digital. Characterizing something as digital conveys no information precisely because most anything can and will be digital. From television to telecom, from Hollywood to Madison Avenue, the transition to digital will take down giants and crown new kings.

Why does digital matter to media? There are three reasons: convergence, copying, and control.

Convergence. Because all content and communication are digital, the delivery mechanism no longer matters. You don’t need a TV to watch television programs. You don’t need a phone to talk to a friend. You don’t need a fax to get faxes or a CD player to hear CDs. All you need is a machine that understands digital and a communications system that carries digital. Today’s best devices for understanding and communicating digital are, respectively, the computer and the Internet. That’s all you need. Tomorrow’s TVs may look and feel and act much like today’s TVs, but rest assured they will be computers in disguise, and they will be connected to the Internet. There’s no inherent reason why Friends should be watched on Thursdays at 8pm on NBC interspersed with commercials. It can, should, and will be watched at the viewer’s leisure, uninterrupted. There is no reason that the biggest “television” phenomenon of 2008 won’t be seen on Yahoo!, for example. [In hindsight, this example was wildly optimistic -- and YouTube/2020 now seems more likely -- though in 2008 viewers flocked to Yahoo! for the Olympics, the election, and short-form video.] Notions of channels and schedules will be virtually meaningless. We already see this happening with DVRs like TiVo, and the blurring will continue with computer/TVs providing access to movies, music, your photo album, weather, news, and the Web. Cable, phone, and satellite companies are providing Internet access. Internet portals and Internet providers are delivering phone calls, movies, TV shows, [radio,] and email all over the same wires [and wavelengths].

There is now, and will continue to be, fierce opposition to convergence from established players. Cable companies objected vehemently to allowing local stations onto satellite TV. Broadcast networks fear TiVo. The Recording Industry Association of America (RIAA) is in a state of panic panicked, suing everyone in sight, including their own customers. Lobbying and lawmaking will slow convergence, but the changes are all but inevitable. While the RIAA and groups like it scramble to rearrange deck chairs on the Titanic, opportunists are busy building entirely new ships.

Copying and Control. Once a piece of media content—whether it is a song, a movie, or an article in a scientific journal—is converted into digital ones and zeros, it can be copied (perfectly) and distributed at almost zero cost. Given the decentralized nature of the Internet and the vagaries of international law, once a piece of content escapes there is almost no reining it in. Current media business models rely on tight controls. Control of scheduling. Control of delivery and distribution. Control of store shelves. Control of artists and content creators. Control of consumers’ attention. But digital content resists nearly all attempts at control. Software and hardware copy-protection schemes are hacked or circumvented. High-quality analog copies of digital content are simply impossible to stop. Artists can self-publish their work and distribute it worldwide. Consumers can suddenly find content that’s not broadcast at primetime or placed at eye level in the store.

Note that digital does not mean the end of marketing, influence, and celebrity. Capturing the public’s interest and attention are still necessary. A self-published song does not magically attract listeners. Talent, personality, advertising, branding, and social forces will still play large roles in driving media success in the digital era. But convergence means that any number of players can provide the marketing and distribution needed, breaking current oligopolies, and almost certainly benefiting artists and consumers alike. Successful business models for the next generation of media companies must address the loss of control on all three fronts: content, artists, and consumers. Content will be copied. Artists will self-publish and shop for marketing services. Consumers will view what they want when they want to.

The New Business of New Media

Media is certainly not dead. Certain aspects will probably never change. People yearn for good stories, for entertainment, for escapism, for information. People flock to charisma and celebrity. People communicate insatiably. From a business perspective, there is undeniable value in having and holding the attention of a number of people.

Although the face of tomorrow’s media is impossible to predict, certain sectors are poised to benefit enormously from the emergence of digital, or are at least less susceptible to its problems.

Here are some winning strategies:

Embrace convergence. Convergence offers almost limitless flexibility in delivering and customizing content. Sports fans can watch an event from any camera, watch real-time animated renderings allowing absolute viewer control, interact with video games with parallel story lines, or chat with other fans. News broadcasts can allow viewers to examine any topic to any depth. Toys can react to signals embedded in Saturday morning cartoons. Consumers can create customized “channels” delivering content tailored to their needs and whims. Companies that capture the voicexyz-over-Internet market will be big winners in the new-media world.

Embrace copying. There is no doubt that a large part of the business value of media lies in its ability to influence (usually via advertising), which in turn benefits most from widespread adoption. For a business built on influence, free and unfettered copying should be encouraged rather than litigated. Not everything has to be free. In some cases, people will pay to get content faster. Live events are the most obvious situation where copies are less valuable than originals. People may pay for live feeds of sporting events, for example. In many cases, people will pay for higher-quality content, for example higher-resolution movies or better-sounding music. For example, with a good digital rights management system, pristine digital copies might be sold for a small premium, even while slightly tarnished analog copies (which are essentially unstoppable) proliferate. People may pay a premium for convenience, anonymity, quality assurance, or to obtain versions stripped of commercial messages. Clearly delineated commercials are a problem in a world where time shifting and copying are prevalent: people will simply skip commercials. So commercial messages must be embedded directly in the content, using product placement or endorsements.

Real-time gambling offers a natural source of revenue for sporting events and other live events. Real-time gambling is spreading quickly throughout the UK and Europe, where it is well regulated and taxed. Real-time gambling offers a situation where live feeds are essential, and copies less damaging. In fact, wide dissemination of copies could be valuable as a marketing device to drive interest in the live events and concurrent gambling services.

And there’s no doubt that digital representations of social ties add value. Facebook does improve people’s lives.¹

The puzzle, and one of the key challenges facing companies like Facebook, Google, and Yahoo!., is how social media can make money. So far the evidence is most users won’t pay directly, which leaves ideas like virtual goods, community marketplaces, app stores, and, of course, advertising. Unfortunately, although we know great ways to advertise to people searching, and decent ways to advertise to people viewing content, it’s less clear how to advertise to people communicating.

P&G’s Ted McConnell puts it bluntly:

What in heaven’s name made you think you could monetize the real estate in which somebody is breaking up with their girlfriend?

Riffing off of this quote, Wired asks the $15 billion question: Is social advertising an oxymoron?:

So, what if social media and advertising just don’t mix?

SocialMedia.com, a social advertising startup, begs to differ (hat tip to Cong Yu), reacting to the same provocative McConnell quote. Their answer:

Advertisers only pay when users volunteer to say something about the brand to their friends.

Indeed, this sort of paid version of Bem+Wom (“BEtter Mousetrap + Word Of Mouth”) — more on this in the next post — is one of the first things people think of when pondering how to monetize a social network. But can it work well and if so, how?

In the media industry (e.g., books, celebs, movies, music, tv, web), predicting success largely boils down to predicting popularity.

Predicting popularity would be wonderfully easy, if it weren’t for one inconvenient truth: people herd. If only people were as fiercely independent as they sometimes claim to be — if everyone decided what they liked independently, without regard to what others said — then polling would be the only technology we would need. A small audience poll would foreshadow popularity with high accuracy.

Alas, such is not the case. No one consumes media in a vacuum. People are persuaded by influencers and influenced by persuaders. People respond in whole or in part to the counsel of critics, peers, viruses, and (yes) advertisers. So, what becomes popular is not simply a matter of what is good. What becomes popular depends on a complex dynamic process of spreading influence that’s hard to track and even harder to predict.

Columbia sociologist (and I’m happy to note future Yahoo) Duncan Watts and his colleagues conducted an artful study — described eloquently in the NY Times — asking just how much of media success reflects the true quality of the product, and how much is due to the quirks of social influence. In a series of carefully controlled experiments, the authors tease apart two distinct factors in a song’s ultimate success: (1) the inherent quality of the song, or the degree people like the song if presented it in isolation, and (2) dumb luck, or the extent the song happens by chance to get some of the best early buzz, snowballing it to the top of the charts in a self-fulfilling prophesy. Lo and behold, they found that, while inherent quality does matter, the luck of the draw plays at least as big a role in determining a song’s ultimate success.

If so, Big Media might be forgiven for their notoriously poor record of picking winners. Over and over, BM hoists on us stinkers like Gigli and stale knockoffs like Treasure Hunters. (In prediction lingo, these are false positives.) At the same time, BM snubbed (at least initially) some cultural institutions like Star Wars and Seinfeld. (False negatives.)

So, are media executives making the best of a bad situation, eking out as much signal as possible from an inherently noisy process? Or might some other institution yield forecasts with fewer false-atives?

I think you know where this is going. Prediction markets for media!

Media Predict is exactly that: a new prediction market aimed at forecasting media success. I’d like to congratulate founder Brent Stinski on a spectacular launch done right. Media Predict sprinted out of the gates with a deal with Simon & Schuster’s Touchstone Books and a companion piece in the NY Times, spawning coverage in The Economist and NPR. (Also congrats to Inkling Markets, the “powered by” provider.) More importantly, the website is clean, clear, complete (enough), and ready for launch.

I first met Brent Stinski in 2006 at Collabria’s NYC Prediction Markets Summit and his concept impressed me. Among the flury of recent play money PM startups, Media Predict’s business plan seems one of the most credible. The site taps simultaneously into the wisdom of crowds ethos, the user-generated content explosion, artists’ anti-establishment streak, and the public’s ambivalence toward Big Media. (The latter two factors are epitomized no more vehemently and eloquently than in an essay by Courtney Love, and stoke the fires of sites like Garage Band, Magnatune, Creative Commons, Lulu, Kinooga, and even MySpace, not to mention mashup fever, open source, anti-DRM-ism, etc.)

The New York publishing world is ridiculing Simon & Schuster for ceding its editorial power to the crowd. (In fact, S&S reserves the right to choose any book or none at all.)

Time will tell whether prediction markets can be better than (or at least more cost effective than) traditional media executives. One thing is for certain: one way or another, the power structure in the publishing world is changing rapidly and dramatically (no one sees and explains this better than Tim O’Reilly). My bet is that many artists and consumers will emerge feeling better than ever.