• by Lydia Loizides , Op-Ed Contributor, May 8, 2008

I wrote a paper back in December for Herrick, Feinstein LLP. about everyone's favorite topic d'jour: user-generated content. I started the paper last week and am continuing this week.  As always, proper credit is required, so here it goes: This article appears in "User-Generated Content: New Business Models and Legal Issues," edited by Jeff Liebenson and published by the IAEL (International Association of Entertainment Lawyers).

PART ONE: DEFINITIONS

The application of a common nomenclature in this discussion of the impact that user generated content (UGC) has had on the entertainment industry is essential. As such, the term UGC will, in this paper, be defined as: any content that is the direct result of a consumer's manipulation of existing or creation of new content that is audio/visual in its nature. In this case, this paper will examine the UGC in three forms: 1) professionally -produced content that has been captured and/or manipulated by a consumer and re-distributed online; 2) professional content originally produced for distribution online; and 3) semi-professional content originally produced for distribution online.

The Network Effect
In the early -1980's, Robert Metcalf coined the term "network effect" to describe a the momentum that causes a good or service to gain in value to an individual based on the number of other individuals that have purchased the good or service.  More succinctly, the number of prior consumers or adopters is a determining factor in the value of the product or service to the next consumer.  As more and more of the products or services are adopted, [then] all members of the community receive an increasing benefit by each transaction.

One of the key benefits of the network effect is critical mass. Simply stated, critical mass refers to the point at which the adoption or usage of a particular product or service becomes economically viable as a market. This phenomenon usually occurs when said product or service is in use or has been adopted by 15% to -20 %of the target market. For example, when the VCR reached approximately 18% penetration of U.S. TV households, three things occurred: the economies of scale for production and distribution of the technology itself resulted in price decreases; the price cuts helped spur faster consumer adoption; and this in turn prompted studios and producers to make more content available more quickly for rental and for eventually for sale. What was a simple playback and recording technology turned into a multi-billion-dollar market in less than five years after reaching the point of critical mass.

3 Types of Distribution Networks
In 1964, Paul Baran published a seminal piece of research entitled On Distributed Communications I. Introduction to Distributed Communications Networks.  In it, he outlined a third, more effective network model, one that differed from the 2 common models - centralized and decentralized. The distributed communication model was one of the base elements of the development of ARPANET in that, for the first time, the introduction of redundancy as elemental to the sustainability of the network was proven. (See Figure 1 http://lydialoizides.blogs.com/techieandthemedia/) .

PART TWO: DISCUSSION OF THE APPLICATION OF THE NETWORK EFFECT, CRITICAL MASS AND DISTRIBUTED NETWORKS THEORY TO THE DEVELOPMENT OF PROFITABLE USER GENERATED CONTENT BUSINESS MODELS

 
At the core of the explosion of UGC are the social networking platforms that are used as the main points of distribution.  Called "sharing," UGC is often viewed as a form of self-expression by users who, for the first time in history, have been liberated by technology to self-publish anything from photographs, text and video on any topic or interest that may take their fancy. 

The basis of a social network is key to the development of profitable business models. Wikipedia defines a social network as thus:

"A social network is a social structure made of nodes (which are generally individuals or organizations) that are tied by one or more specific types of interdependency, such as values, visions, idea, financial exchange, friends, kinship, dislike, conflict, trade, Web links, sexual relations, disease transmission (epidemiology), or airline routes.

Social network analysis views social relationships in terms of nodes and ties. Nodes are the individual(s) [...] within the networks, and ties are the relationships between the [individuals]. There can be many kinds of ties between the nodes. Research in a number of academic fields has shown that social networks operate on many levels, from families up to the level of nations, and play a critical role in determining the way problems are solved, organizations are run, and the degree to which individuals succeed in achieving their goals.

In its simplest form, a social network is a map of all of the relevant ties between the nodes being studied. The network can also be used to determine the social capital of individual [persons, products or services]. These concepts are often displayed in a social network diagram, where nodes are the points and ties are the lines."3 (See Figure 2 http://lydialoizides.blogs.com/techieandthemedia/)

The last 24 months has seen growth in the number of Web sites that are enabling the storage and distribution of user-generated content (UGC).  The UGC movement started with the explosion of Web-based blogging applications housed in such sites as Blogger.com and Moveable Type. Others soon followed and within a single generation, the launch of YouTube, arguably most famous for its purchase price of $1.65B by Google in 2006, and MySpace, are the behemoths in the UGC space that is now comprised of hundreds, if not thousands, of sites. The challenge faced by most social networks is the monetization of professional and semi-professional content, especially as traditional media companies step up their efforts to thwart what they term the piracy of their content.

To date, now mature online advertising methods and metrics have been implemented as a means to monetize UGC. The question remains as to whether or not there is a more effective and evolved approach to monetizing UGC. The author would argue that the answer lies in the very basis of social networks and the application of the network effect to the way UGC moves across and within these constructs.  

The reader will recognize the similarities between the formation of a distributed network and that of a social network.  The ties between nodes are remarkably similar in both models. Armed with that similarity, if the individual now represents a single piece of UGC or asset to be monetized, the basis for the hypothesis becomes clearer.

More specifically, if each UGC asset is valued by the number of times it is it replicated or tied to similar content (the same way that a product or service gains in value the more times it is adopted, purchased or utilized), then the assumption that the higher the replication or redundancy of access that asset, the higher the value, meaning that the benefits of network effect are realized faster on distributed networks versus centralized or decentralize networks simply by the very nature of the ties that bind the nodes or, in this case, the UGC assets. And, as such, the benefits of critical mass in the increase in demand of value as it relates to a UGC asset will be achieved at a faster rate based on the size of the network itself.  

PART THREE: CONCLUSION

It is the belief of the author that the development of profitable UGC content business models lies in the application of the principles that underlie the formation for social networks, the way that individuals share and communicate with each other vis -a -vis the use of UGC as a form of self -expression and the resultant network effect that takes place when the content, in aggregate, can grow members, ties and UGC assets at a doubling rate.  This, as has been proven in other content and technology markets, is the point of critical mass. 

It should be the intent of every social network platform provider to develop and deploy tools that will enable the professional and semi-professional UGC creator to leverage a syndication model on a per UGC asset basis in order to reach critical mass in reach and consumption. Why? Only at the point when distributors understand and internalize that a centralized, and even decentralized architecture for the purposes of supporting and monetizing UGC will cap once the audience has matured. Tools such as RSS, widgets, and other syndication technologies are the basis for which the next generation of social networks will be able to leverage the ties that bind UGC assets and, more importantly, value and subsequent monetization not only of UGC assets but of the entire community as a whole.