I have been thinking about the psychologically of making money out of free online services largely as a result of having developed some services which have attained healthy traffic, yet failed - like many others to make any profits.

Using free!

Using free as a business model is easily one of the fastest ways to gain traction, However, if the solution provided is too efficient, no new pain will be created and thus there will be no opportunity to make any profits.

Unintended Consequences.

Rarely there are unintended consequences which arise out of new solutions. These ultimately manifest as a new pain for the users and oddly, it is precisely these events which need to be carefully considered during the planning stages of the new concept if it is going to be successful!

Intended Consequences

When providing considerable value to users and thus gaining traction with a free service, I argue the intended consequence should be to crate a new pain! Then one simply charges for the resolution of this new pain.

Interesting Case Studies:

Company : MegaVideo

Value : provides great value with reliable video streaming, a large library of content and good image quality.

Pain: limit of 1 hour free viewing, demanding payment (20 euros = 3 months access) to watch the last part of a film!

Company: Plenty of Fish

Value: provides free online dating networking service.

Pain: creates pain for competitors who then pay to advertise.

Company: Wordpress

Value: provides free blogging software.

Pain: spam, users invest considerable energy into the platform, then suffer huge comment spam issues, resolved with the askima plugin (cost 49 euros).

Summery

Each of the above are interesting examples of companies who have intentionally or unintentionally created services which have gained considerable traction out of free, which has then resulted in a new pain being experienced by either their competition or their users, many of whom have payed for that pain to be resolved.

Is it ethical and does this matter!

Maybe or maybe not (depending on the variables), but what matters more IMO is the resolution of problems and the advancement of technology. I'm sure some will cry foul and accuse thee of simply looking for ways to exploit others pain which is true, but before you can exploit the new pain you have to solve another problem and/or provide considerable value to the target which is the the primary hook, so the end justifies the means and as long as there is added value then most people should be happy...

Update

After being put on death watch about 6 months ago, my own site Doc-Film-Net has again been given notice by the content delivery network who kindly stepped in (after the previous one stepped out) to offer free bandwidth (1Tb per month for this baby), and again the site has been given 7 days notice before the lights will go out unless it pays its own way (fair enough really). Hence, I have just spent the weekend building a Megavideo style payment system, (i.e. you get to watch 30 minutes free per day but are asked to pay for unlimited access) and have just implemented this on Doc-Film-Net. It will be interesting to see how this experiment works out...

Techcrunch UK reports today that the UK government have a ridiculous proposal to waste yet another 15 billion GBP on a nationwide snooping database on the terrorists public.

Thankfully an easy way around this nonsense has already been developed! Privnote allows people to send information via a link in an email. Once opened the link (and message) will instantly self destruct and the sender will be notified that the recipient has received the message.

In a New World Order where paranoia is the emotion of the day, with many nations on DEFCON 3 alert, and secrecy being of paramount importance, there is clearly a need for messages that self destruct!

This is where Privnote comes in to allow anyone (not just the CIA and MI6) to send these self destructing messages. In the current economic downturn, imagine the scenario, you (your name being George Soros) have just been given a top tip (from your man on the inside) that Lloyds of London are about to declare bankruptcy, now of course you need get in quick and start to buy up as many short stocks as you can get your hands on, but secrecy is the only method which will save you from 'a good day for bad news' scandal!

So you head over to Privnote and within a jiffy you have sent your brokers the orders to snap up these stocks that you can offload for a fortune when the market collapses... Now I am sure you and I would not be using this service for any such activity but in a world where the slightest mistake can be reviled by leaving an electronic trail of evidence against you, no one is safe, only those who use Privnote!

P.s. Privnote was designed by one of the very few Startup hubs emerging from Uruguay Insophia.

Alan Greenspan, neo con devil according to the conspiracy theorists, but darling according to Ayn Rand and the Objectivism movement, which advoacted rational individualism and laissez-faire capitalism, now writes in his 2007 autobiography about his feelings and thoughts of how and why he missed the signs of the looming crisis.

I personally find it amazing that he can claim ignorance, given his position, and further it's my belief that he in large part orchestrated the crisis by way of the actions and polices he undertook while acting as the longest standing head of the Federal Reserve (who he once heavily criticized in his earliest writings, and after which was promoted within its ranks).

The bubble was manufactured from 1997 onwards, the economy was pumped with fuel (cheap black oil supported) in a vain attempt to retain US military / political control (by simply printing more greenbacks and thus increasing the deficit withour any regard whatsoever inevitable). Here is THE NY TIMES FORGIVEN TAKE ON HIS AFFAIRS:

http://tinyurl.com/2kx9tb

ONE great puzzle about the recent housing bubble is why even most experts didn’t recognize the bubble as it was forming.

Alan Greenspan, a very serious student of the markets, didn’t see it, and, moreover, he didn’t see the stock market bubble of the 1990s, either. In his 2007 autobiography, “The Age of Turbulence: Adventures in a New World,” he talks at some length about his suspicions in the 1990s that there was irrational exuberance in the stock market. But in the end, he says, he just couldn’t figure it out: “I’d come to realize that we’d never be able to identify irrational exuberance with certainty, much less act on it, until after the fact.”

With the housing bubble, Mr. Greenspan didn’t seem to have any doubt: “I would tell audiences that we were facing not a bubble but a froth — lots of small local bubbles that never grew to a scale that could threaten the health of the overall economy.”

The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks.

Were all these people stupid? It can’t be. We have to consider the possibility that perfectly rational people can get caught up in a bubble. In this connection, it is helpful to refer to an important bit of economic theory about herd behavior.

Three economists, Sushil Bikhchandani, David Hirshleifer and Ivo Welch, in a classic 1992 article, defined what they call “information cascades” that can lead people into serious error. They found that these cascades can affect even perfectly rational people and cause bubblelike phenomena. Why? Ultimately, people sometimes need to rely on the judgment of others, and therein lies the problem. The theory provides a framework for understanding the real estate turbulence we are now observing.

Mr. Bikhchandani and his co-authors present this example: Suppose that a group of individuals must make an important decision, based on useful but incomplete information. Each one of them has received some information relevant to the decision, but the information is incomplete and “noisy” and does not always point to the right conclusion.

Let’s update the example to apply it to the recent bubble: The individuals in the group must each decide whether real estate is a terrific investment and whether to buy some property. Suppose that there is a 60 percent probability that any one person’s information will lead to the right decision.

In other words, that person’s information is useful but not definitive — and not clear enough to make a firm judgment about something as momentous as a market bubble. Perhaps that is how Mr. Greenspan assessed the probability that he could make an accurate judgment about the stock market bubble.

The theory helps explain why he — or anyone trying to verify the existence of a market bubble — may have squelched his own judgment.

The fundamental problem is that the information obtained by any individual — even one as well-placed as the chairman of the Federal Reserve — is bound to be incomplete. If people could somehow hold a national town meeting and share their independent information, they would have the opportunity to see the full weight of the evidence. Any individual errors would be averaged out, and the participants would collectively reach the correct decision.

Of course, such a national town meeting is impossible. Each person makes decisions individually, sequentially, and reveals his decisions through actions — in this case, by entering the housing market and bidding up home prices.

Suppose houses are really of low investment value, but the first person to make a decision reaches the wrong conclusion (which happens, as we have assumed, 40 percent of the time). The first person, A, pays a high price for a home, thus signaling to others that houses are a good investment.

The second person, B, has no problem if his own data seem to confirm the information provided by A’s willingness to pay a high price. But B faces a quandary if his own information seems to contradict A’s judgment. In that case, B would conclude that he has no worthwhile information, and so he must make an arbitrary decision — say, by flipping a coin to decide whether to buy a house.

The result is that even if houses are of low investment value, we may now have two people who make purchasing decisions that reveal their conclusion that houses are a good investment.

As others make purchases at rising prices, more and more people will conclude that these buyers’ information about the market outweighs their own.

Mr. Bikhchandani and his co-authors worked out this rational herding story carefully, and their results show that the probability of the cascade leading to an incorrect assumption is 37 percent. In other words, more than one-third of the time, rational individuals, each given information that is 60 percent accurate, will reach the wrong collective conclusion.

Thus, we should expect to see cascades driving our thinking from time to time, even when everyone is absolutely rational and calculating.

This theory poses a major challenge to the “efficient markets” view of the world, which assumes that investors are like independent-minded voters, relying only on their own information to make decisions. The efficient-markets view holds that the market is wiser than any individual: in aggregate, the market will come to the correct decision. But the theory is flawed because it does not recognize that people must rely on the judgments of others.

NOW, let’s modify the Bikhchandani-Hirshleifer-Welch example again, so that the individuals are no longer purely rational beings. Instead, they are real people, subject to emotional reactions.

Furthermore, these people are being influenced by agencies like the National Association of Realtors, which is conducting a public-relations campaign intended to show that putting money into housing is a reliable way to build wealth. Under these circumstances, it’s easy to understand how even experts could come to believe that housing is a spectacular investment.

It is clear that just such an information cascade helped to create the housing bubble. And it is now possible that a downward cascade will develop — in which rational individuals become excessively pessimistic as they see others bidding down home prices to abnormally low levels.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

STORY OF THE MONTH

Until now it has not been possible for Flash developers to embed Adsense or any other ad-networks ads into a Flash widget. Adobe have made it clear from the beginning that this is something beyond the scope of the technology which has increasingly become a thorn in the side and 'the most serious limitation' for Flash developers to realize profit from their applications.

There are now literally hundreds of millions of Flash widgets embedded all over the web, mostly on third party sites, where the widget developers would JUST LOVE to monitise that content with Adsense and other ad networks.

So a solution for this Major Dilemma is long over due and the prize for best hackers of the year goes to Scribd who have just launched a new product (IPAPER) that incorporates the said invention.

In their own words and from their site come these lovely words:

Monetize Your Documents

If you have documents on your website, you could be missing out on a monetization opportunity. You advertise on your web pages, why not your documents? iPaper integrates a sophisticated ad system by Google that automatically targets ads to the content of your documents. By switching to iPaper, you can immediately begin to monetize your documents. All you have to do is collect the checks.

Click image to see a working example Flash widget with Adsense.

Hacked Solution

Now as they have cracked / hacked a way round one of the greatest limitations of Flash widgets this is going to revolutionize the web! Specifically increasing incentives for the hundreds of thousands of developers who are using Flash to make embeddable features for third party networks such as Facebook et al.

No one has yet come up with any serious solutions for monitising Flash content to date. The workarrounds have been to get ads into the widgets with pre/post rolls and overlays as seen on Veoh.

None of these alternative methods have gained any serious traction so far. Adsense is still the most popular ad network out there with its simple setup process, relevant ads, and no shortage of paying advertisers!

I am currently awaiting comment from Adobe and Google about this hack which IMO is one of the most disruptive technologies to NOT be announced this year. We will update this article further as breaking news comes in.

Major kudos / applause goes out to the Scribd hackers who obviously have some ultra dangerous developers and luckily for the world at large, are currently in bonafide work!

Award For Best Hacker of Hacks

The source code for their hack can be found Here. The first hacker to develop an API thus opening this as a feature for use by third parities will get more link juice than honey ever harvested and will also win our award for the best Hacker of Hacks this year!

Bonne Chance

This is a guest post republished from the socialist worker and explains in more detail some of the history to the current looming crisis in the funny money markets:

From Northern Rock to the subprime mortgage scandal, financial markets are in turmoil. Jacob Middleton looks at what lies behind the current crisis

The ongoing woes of Northern Rock continue to the extent that even the latter-day Thatcherite Lib Dem Treasury spokesperson, Vince Cable, is calling for it to be nationalised. It is clear that something is seriously amiss in the financial system. Capitalism seems unable to shake off the growing sense of crisis.

The root of the problem lies in the failure of profits to recover to the levels seen in the decades after the Second World War. From the early 1970s onwards, the world economy, which had for years grown, began to slow down.

Growth slowed, profits slumped, and unemployment returned to the heart of the system. The tendency of the rate of profit to fall, a long term feature of capitalism that Karl Marx had identified 100 years previously, reasserted itself.

The response of governments throughout the world, tentatively at first but gathering pace over the next 20 years, was to introduce the measures we now know as neoliberalism.

First, great chunks of the state itself were broken up and sold off, releasing huge sums into private capitals’ hands – one estimate suggests that around one third of all the value in all the world’s stock exchanges comes from privatisation.

Second, controls on the movement of goods, services and – especially – money from country to country were removed, allowing capital to move more freely around the globe.

Third, and most fundamentally, attacks were made on working class standards of living. Capitalism makes profits from paying workers less than the value of what they produce. Often the quickest and easiest way to restore profits is to pay workers less – either directly, in their pay packages, or indirectly, through attacks on the welfare state.

In the US this assault on the working class was successful – between 1975 and 1995 average real wages for full-time male workers in the US stagnated, or even declined slightly. Elsewhere the attacks were less thoroughgoing, but in Europe the welfare systems that had been the social democratic parties’ proudest achievements were whittled away, and job insecurity was increased.

Stagnant

These attacks had some success in boosting profits. Growth returned to some areas of the system, but was unevenly distributed – the US economy boomed in the late 1990s and early part of this century, while those in what is now the eurozone in general remained stagnant. Growth was not generalised throughout the developed world.

The picture was even more mixed in the underdeveloped economies. While a few – China being the most spectacular example – were able to hook themselves into the global economy, many, such as those in sub-Saharan Africa, went into steady decline.

There was no return to capitalism’s post-war “golden age”. But the relative underlying weakness of the recovery was masked by the explosive growth of the world financial system.

Financial markets and financial institutions play a very specific role under capitalism. They help coordinate the system, moving capital to wherever it can make the greatest profit.

An individual capitalist may not be able to see where the best profits can be made, anywhere in the world, but the financial markets, collectively, can do this, taking money and redistributing it according to the returns it can make.

Theoretically, financial markets make capitalism work “better” – they will hunt the places where highest profits can be made, and so (theoretically) boost profits throughout the system.

However, the financial system carries two great risks. First, it can misjudge real profits and simply indulge in speculation, with financial markets talking themselves into a frenzy of ever increasing share prices, based on not much more than the whims of traders. These are called “bubbles” and the consequences, when they burst, can be dramatic.

Second, the speed and flexibility with which the financial system can find profits may also turn it against capitalism as a whole, rapidly transmitting a crisis in a single economy into others. This is known as “contagion” – the crisis in one region spreading very rapidly to others.

Since the London stockmarket’s so-called “Big Bang” in 1986, when electronic trading was introduced and many of its old rules were torn up, the City was able to build on its historic role to become one of the most important hubs of the new global financial system. The value of traded shares in London has increased by fifteenfold since then, from £161 billion in 1986 to £2.49 trillion today.

Money can be moved round the world at the press of a button. Financial institutions are able to scour the globe looking for profitable opportunities for investment, moving into and out of markets, buying and selling shares, with incredible speed. With some recovery in profit rates on the back of attacks on working class living standards, financial markets were able to suck in more and more money and capital, and so inflate themselves to greater heights.

Moreover, the expansion and growing sophistication of the financial system created an intriguing new possibility for capitalism. It is in every individual capitalists’ interests to pay workers as little as possible to boost profits. But if every capitalist did that, workers would not be able, collectively, to afford what the capitalists, collectively, are selling. What is good for one capitalist is not necessarily good for the system as a whole.

However, by offering cheap loans to workers, capitalists could simultaneously pay workers less and still sell their goods and services. The expansion of the financial system allowed them to do that, tying workers into global finance with cheap loans and easy credit.

The effects are dramatic. In Britain, where this process has perhaps gone furthest, real wages have for the last few years grown weakly, if at all. Yet consumer spending has risen by 40 percent since 1998.

The gap between weak wage growth and rapidly rising consumer expenditure was closed by consumer credit, with individuals in Britain now owing over £1.2 trillion.

But because the underlying rate of profit, though somewhat recovered, remained too low to produce a generalised expansion of capitalism, this new high speed financial system actually rested on very rickety foundations. It could shuffle money around the globe at breakneck speed, but the flow of real profits into the system was much less dramatic.

This increased the risk of speculative “bubbles” developing, and the last 20 years have seen a succession of these, inflating and bursting. But they have not, until now, hit the core of the system.

The bursting of the dotcom bubble in the early part of this decade resulted in some high profile fraud convictions, and some spectacular losses, but swift action by the US government bank, the Federal Reserve Board, prevented it spilling over too far into the real economy.

The Federal Reserve did this by creating another bubble, in the property market, slashing interest rates and encouraging many millions of Americans to keep on borrowing and consuming.

Borrowers

As the property bubble continued to expand, more and more consumers were pulled into its orbit. The subprime lenders sought out, and mis-sold mortgages to, people who otherwise could not afford a mortgage. There were reports of subprime loans being made to those without any income at all.

This is very risky. People who cannot afford interest payments on their loans are at a high risk of defaulting on them, and a small wobble in the property market meant many of these very marginal borrowers suddenly could not afford to keep up with their interest payments. Mortgage lenders were left with billions of dollars of bad debt.

The sophistication of the financial system had encouraged the major banks to engage in increasingly speculative activities. They had been responsible for loaning money to the subprime lenders, who in turn passed the credit on to their own customers. The banks, realising they had difficulties, began to panic. They called in some of their loans, and stopped lending money to each other.

Northern Rock relied on this inter-bank lending to make its money. Banks lend money at a much cheaper rate to each other than they do to you or I – they trust each other not to default, and so charge less.

When banks stopped lending to each other, the company was in serious trouble. And due to the way the financial system ties capitalism together, a serious problem in one small part of the system can rapidly turn into a serious problem, system-wide.

In addition, years of deliberate government policy have tied consumers into the financial system as never before. British consumers owe, on average, 163 percent of the earnings in debt.

The system relies on their borrowing, and others like them across the developed world, to keep running. So a crisis developing in the financial system has the potential not only to hit capitalists’ investments – it can hit workers’ consumption.

The last time a financial crisis threatened, the Federal Reserve was able to create a property bubble to keep the system afloat. If the property bubble bursts, it is hard to see what bubble the central banks can create next.

The only real way to deal with this crisis is to boost profits by hammering workers. This helps explain Gordon Brown’s enthusiasm for a public sector pay freeze – he hopes that he can give a lead to British capitalism generally by weakening workers’ confidence and keep wages down. He wants them to pay the price for the capitalists’ crisis.

The following should be read alongside this article:
» Financial graphs

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