Information Externalities and the Maginot Line

January 9, 2012 in Entrepreneurship, General, Starting up by salim tannous


There is an age-old debate concerning the importance of content and distribution of media products. Sumner Redstone, Chairman of Viacom, famously said: “content is king”. Others claim that distribution can bring exposure and success even to mediocre content while letting good content go unnoticed. What will be the most important success factor for media companies in the coming decade: the control of content or the control of distribution? In this digital era where content is widely available and distribution is easy, who is to be crowned king?

Executives in old media companies will be quick to point out that the audience is at the heart of every decision making process, although one look at market reports and audience ratings will show how dehumanised and prejudistic these reports are in their categorization of people. Marketing reduces us to a very low common denominator, it is bad enough being reduced to a composite portrait; it is worse to be told that at that level we can be manipulated like ants following a pheromone path.


One famous example for how media companies view and manipulate their audience is the blockbuster strategy. De Vany (2004) described the blockbuster strategy as an attempt to create an uninformative information cascade, a phenomenon where people start copying other people’s choices based not on their opinion or evaluation of a film, but from box-office revenues set by early filmgoers. This is why big weekend openings with the presence of the leading actors as well as media coverage are very important for the majors in trying to gain early attendance lead.

Duncan J. Watts described an information cascade as an event where “individuals in a population essentially stop behaving like individuals and start to act more like a coherent mass.”

The economics of long-distance mass distribution systems necessary to reach this constantly increasing and more dispersed relevant population were typified by high up-front costs and low marginal costs of distribution. Because of these economic characteristics, the mass-media model of information and cultural production and transmission became the dominant form of public communication in the twentieth century.

The battle today is over control: control of what kind of content is circulated and by whom, over whom it reaches and how and over how it is consumed. In simple terms, the battle is over the survival of the mass-media model as the dominant form of communication.

According to Feenberg (2002), “Private control of media conglomerates, the machinery of opinion, is incompatible with serious public debate.”  After private interests seized control, the editors of newspapers functioned purely as employees and the newspaper failed as a vehicle for rational-critical debate. Publicity’s function in modern society plays the opposite role it played during the reign of the bourgeois public sphere. Indeed, instead of promoting or enabling rational-critical debate in a public sphere, modern mass media creates a “sham public interest” reminiscent of the “personal prestige and supernatural authority once bestowed by the kind of publicity involved in representation.”This type of publicity has resulted in the creation of a ‘mass’ rather than a ‘public’” (Feenberg, 2002).

Habermas quoted C.W. Mills’s definitions of the terms public and mass as follows:

–         Public: (1) Virtually as many people express opinions as receive them. (2) Public communications are so organized that there is a chance immediately and effectively to answer back any opinion expressed in public. Opinion formed by such discussion (3) readily finds an outlet in effective action, even against—if necessary—the prevailing system of authority. And (4) authoritative institutions do not penetrate the public, which is thus more or less autonomous in its operation. (Habermas, 1998).

–         Mass: (1) far fewer people express opinions than receive them; for the community of publics becomes an abstract collection of individuals who receive impressions from the mass media. (2) The communications that prevail are so organized that it is difficult or impossible for the individual to answer back immediately or with any effect. (3) The realization of opinion in action is controlled by authorities who organize and control the channels of such action. (4) The mass has no autonomy from institutions; on the contrary, agents of authorized institutions penetrate this mass, reducing any autonomy it may have in the formation of opinion by discussion (Habermas, 1998).

“Conclusive word-of-mouth information can break an uninformative information cascade and even turn it against a widely released movie” (De Vany, 2004).

Word-of-mouth is a form of information externality; this concept was born out of a series of experiments in the 1950s conducted by social psychologist Solomon Asch. Asch’s experiments on human decision making in the face of group pressure showed that when faced with uncertainty, people emulate the actions or decisions of others.

In his book, Six Degrees: the Science of a Connected Age (2004), Duncan J. Watts says; “In general, economics treats externalities as if they are an inconvenient exception to the rule of pure market interactions”

The same thing can be said about media companies; externalities are inconvenient to them since, as their name shows, they occur outside of their control. Decision externalities are more present today than they were in the pre-Web age and they constitute a serious opponent to the promotional and advertising campaigns of big media companies.

Blogs, wikis and online discussion boards are playing a huge role in enabling rational critical debate in online public spheres. Rating systems on YouTube and Amazon, bookmarking on, eBay’s feedback system, the Wikipedians, the number of friends you have on Facebook and Google’s PageRank algorithm, all of these are mechanisms or manifestations of information externalities.

Feenberg (2002) has argued that the Internet can serve to either “reflect in every institution the logic of modern production” or enable “the flexible testing of possibilities and the development of the new – not hierarchical and standardization but variety and growth of the capacities required to live in a more complex world”.

Through the Digital Millennium Copyright Act and Digital Rights Management, most of the media industry today is in a struggle to keep its control over its content and the various forms of distribution. However, what if this struggle is being fought on the wrong battlefield?

In Synthetic Worlds (2005), Castronova revisits a chapter in World War II to explain that the war will go where people will go. “…while most experts understand a future technology in the current military context, only visionaries see the future technology embedded in the future battlespace that the technology is creating… The technology that gave rise to the tank, also gave rise to a whole network of pavement, stretching across Europe. The roads were not built by the military, they were built by society; and by linking assets in this fashion, society effectively uploaded its entire stock of important, defendable things into a new battlespace, the road network…The French had planned to fight in the rail network (the Maginot Line), but the Germans went ahead and fought in the road network, which was superior in terms of mobility and information transfer. The French misunderstood the technology and fought in the wrong place. The campaign was over in three weeks” (Castronova, 2005).

So what is the future battlefield that technologies are creating today? The answer is You.

Print, photography and broadcasting were until recently the centres of our universe; people would gather around a radio or a television post, they would go to movie theatres or exhibitions to watch a painting on display. Today, the slogan of YouTube summarizes the situation: Broadcast Yourself.

One company that has clearly understood this concept is Facebook. Started in 2004 by Mark Zuckerberg, a student at Harvard, Facebook is a social networking website. One of the characteristics of the website is the newsfeed section, which displays the activities of people who are in a network of friends, yours. The news feed section is a mechanism of information externality, for which the term feed is appropriate since all your friends’ activities are broadcasted for you to see and they in return monitor what you are doing. Facebook is becoming a platform, which means they are allowing other people to build new software tools and businesses on top of their technology. These new applications will be promoted through the news feed section, on the premise that if you see one of your friends downloading and using a new application, you will be tempted to try it yourself. In a sense, Facebook is reinventing the Web. If that sounds a bit pretentious, consider the following:

Websites are the last standing remains of the old mass media model. Websites are like State Cities, every time we need a particular service or want to be part of a certain community online, we have to browse. Google made browsing a much simpler process, but it is still a process; after finding a website that seems the most convincing, in most cases we have to register and there are no guarantees that we will be satisfied by the website we chose or by the community of people present on that website. Therefore, in a way, the Web is built around websites and our activities on the Web are based on these websites and the (sometimes-huge) number of accounts we have.

Facebook and Google+ are creating a social graph, a model of nodes and links in which nodes are people and connections are friendships. In addition, around those nodes, it is building tools and services for everyone to use within his community of friends. Since people are using these applications within a circle(s) of friends, they will not have any surprises concerning the community in which they are practicing the relevant activities. In addition, if they do not happen to like a certain application, all they need to do is remove it and will not find themselves with an overload of accounts.

When historians talk about the Maginot Line, the following words are never far behind, “generals always fight the last war, especially if they have won it”. The current digital battlespace is being shaped by the likes of Facebook and Google and unless you want to find yourself outflanked, outmanoeuvred and ultimately defeated, forget your old tactics and lend a listening ear to your captains.