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Bellowing at Microsoft, Part Two: Infrastructure to Support Clubs

"Arguing in My Spare Time," No. 4.13

by Arnold Kling

March 29, 2001

On the Internet, how are content providers going to get paid? How can writers, musicians, and computer programmers get paid in an environment where the marginal costs of distribution are zero?

For years, I have been arguing that "clubs" represent one form of solution to this problem. See essays number 9, 10, 11, and 88, and also Equilibrium in the Market for Rock'n'roll.

What Microsoft should do is develop the infrastructure for content providers to create clubs and to allocate subscription revenue. This would facilitate the development of the "club" model for supporting content.

For example, I believe that the Wall Street Journal subscription model is flawed, because you are restricted to the content of the Journal While this restriction obviously makes sense for the dead-trees version of the Wall Street Journal, on the Internet there is no reason for your subscription bundle not to include other sites as well.

Instead, imagine if the Wall Street Journal offered you a menu of one hundred other sites, from which you could choose any twenty to go along with your subscription to the online Wall Street Journal. With these added choices, the number of subscribers would increase.

Under this bundling scenario, the Wall Street Journal would share revenue with other sites in its bundle according to an allocation scheme of its design. As long as the revenue allocated to other sites is sufficient to induce them to participate but less than the additional revenue that comes from increasing the number of subscriptions relative to the stand-alone offering, both the Journal and the other sites will gain from this arrangement.

As far as technical implementation is concerned, this is somewhat like the creation of so-called "affiliate marketing." For example, allows any web site to set up an account by which that site can promote a book, link to Amazon, and receive a portion of the revenue from the sale of the book. Amazon's engineers have developed software that makes the process of becoming an affiliate very simple.

Microsoft engineers could set up software that would make it easy for any web site to offer subscription bundles that include other web sites. It could set up standard methods for consumers to obtain subscriptions and select bundles. It could set up standard methods by which sites offer revenue-sharing terms to one another and accept or reject such terms.

I have not spent nearly as much time as I would like doing research about Internet porn, but I have the sense that there are communities of porn sites that operate using something like this infrastructure. That is, the consumer obtains a "pass" or a "virtual membership card" on one site, and this also gives the consumer access to affiliated sites. That is the sort of model that I am proposing for journalism, music, and software.

In equilibrium, we might wind up with a few "mass" clubs in each sector, where the membership cost is low and the selection of content is generic. In addition, we might wind up with a large number of "niche" clubs that offer subscription bundles of narrower interest. Whereas the "mass" clubs might cost less than $30 a year, the "niche" clubs might cost $100 a year are more. This is because the smaller number of subscribers will only support the online content if each subscriber pays more money.

Web sites that affiliate with clubs will need software support. They will want to see reports on how well the different clubs with which they affiliate are performing in giving them revenue. They will want to be able to adjust what is available on their sites to different users based on different levels of membership. They will want to be able to process payments to and from other sites as part of revenue-sharing arrangements.

In the preceding essay, I talked about three conditions that need to be satisfied to make a product successful from Microsoft's perspective. The table below shows how these conditions would be met by providing Club Infrastructure Support.

Key to SuccessHow Club Infrastructure Support Would Fit
Focuses on SoftwareMicrosoft's role would be to develop programs, interfaces, and standards. For example, Microsoft would develop specifications for how any site can invite another site to participate in a club.
Levers Microsoft's installed base and network effectsMicrosoft can ensure that future versions of its browser make it easy for consumers to join clubs. In addition, it can ensure that future versions of its web site development tools make it easy for a web site owner to set up clubs and to join other clubs.
Levers the development work of other software vendorsOne of the basic categories of clubs could be a software club. If you join the club, you are entitled to download and upgrade the software of firms that belong to the club. Small software companies that otherwise would have difficulty marketing software could focus on writing software and let the club take care of generating revenue.

In conclusion, developing infrastructure for forming clubs or subscription bundles would seem to be a plausible strategy for Microsoft.

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