Wednesday, 8 April 2009

The End of Encarta, the Innovator's Dilemma, and the Tragedy of the Anti-Commons

It was widely reported towards the end of last week that Microsoft will cease production of its encyclopedia software-Encarta. Sales of the PC software will be discontinued by June 2009. Subscribers with premium content will receive a refund for fees paid beyond April 30th, but they will be able to still access the contents on-line until it finally goes offline in October 2009 (a sort of Halloween gift). Japanese subscribers will have access until the end of December 2009 (in time for Christmas).

For those of you who remember the launch of Encarta in the early 1990's, it was widely heralded as spelling the death knell of the printed encyclopedia, first by the easy search and rich text capabilities of the PC software, and later by the added contents available to it via the Internet. (In fact, the original contents of Encarta were licensed from the mass-sale Funk & Wagnalls encyclopedia.) This largely happened in 1996, when the "gold standard" of the encyclopedia world, the Britannica, was forced to sell its rights at less than book value, the victim of the Encarta product.

So what happened? In a statement, Microsoft noted that "Encarta has been a popular product around the world for many years. However, the category of traditional encyclopedias and reference material has changed. People today seek and consume information in considerably different ways than in years past." In more simple terms, it has been replaced by Wikipedia.

I have two related observations in connection with the demise of Encarta. The first is that Clayton Christensen's famous "The Innovator's Dilemma," as described in his landmark book of that name, is at least partially germane. As Christensen noted recently in a Harvard Business School podcast, his notion is based on a product that is blind-sided by a cheaper and more efficient alternative, for which the incumbent is unwilling, or unable, to match, given the nature of is product and the corporate culture in which the incumbent's product is embedded. Here, the decline in cost and increased efficiency came about by the rise of the Wikipedia movement, where royalty payments for contents became a thing of the past due to the royalty-free, collaborative nature of the content providers as well as the sheer scope and ease of both search and content update, all of which left Encarta far back in its wake.

One view of the innovator's dilemma

Second, the Wikipedia movement has put paid the issue of the "tragedy of the anti-commons", which at one time threatened content-gathering exercises such as Encarta. Based on the well-known notion of the "tragedy of the commons" first articulated in the early 1960's (you know, the notion that there are circumstances which are characterized by overuse of an asset when no one person has an interest in preserving the asset, while everyone has a short-term interest in exploiting of the asset, much like the over-grazing of the village commons in pre-modern times), the "tragedy of the anti-commons" turned this notion on its head.

In this situation, developed by Michael Heller in the late 1990's, too many discrete property rights may have the result that a desired project will never get off the ground. Copyright is a great example, where rights clearance may lead to a situation where obtaining rights in the aggregate collection of such proprietary contents may not be achievable. I seem to remember that at the outset of the Encarta project, there was discussion of whether Microsoft could obtain all of the necessary contents if it wished to provide a genuinely broad and diverse array of rich contents, and not simply a digital version of a print encyclopedia. Maybe yes, maybe no, at the time, but certainly irrelevant now, when the issue of proprietary rights in contents is subsumed within a critical mass of content creators, all of whom are willing to part with their individual copyright in favor of the collaborative efforts of the greater community.

No problem of the anti-commons here

So for those of you who keep a scorecard on this kind of thing, it seems that the result of the demise of Encarta is "one to one": the "innovator's dilemma" is alive and well, but "the tragedy of the anti-commons", at least in this context, is a a thing of the past.


Michael F. Martin said...

The tragedy of the anticommons is another name for "transactions costs." Most of the insights from Heller are alreay there (along with more) in Coase's theory of the firm. And the work of people like Oliver Williamson and other new institutional economics scholars has gone even further. There should be more NIE in patent law, but see, for example, anything done recently by Scott Kieff (now at GWU).

Neil Wilkof said...

Michael, thank you for your comment. As a law student at the University of Chicago during the 1970's, "transaction costs" was virtually omnipresent in our courses (Richard Posner was clearly the high priest at the time), and I still keep my marked-up copy of Coase, "The Theory of the Firm. on my desk. Heller has apparently expanded his notion into a book that I think was published in 2008, but I have not yet seen it. In any event, I totally agree with you that Heller's observations can be seen as coming out of the Coase analysis, but I would like to believe that Heller has added to this corpus in a substantial way,even if I have not considered it in depth. I seem to recall an article that I once read that concluded that there are so many different interpretations of what is meant by "transaction costs" that some of the intellectual children and grandchildren of Coase can clearly been seen as making their own material contributions to the issue.

Michael F. Martin said...

You're right of course. The concept of "transactions costs" is highly compact, and sweeps into it several different categories of costs. And Heller and Eisenberg clearly made a contribution by making explicit for non-specialists what was implicit for at least some before -- namely, that transactions costs increase nonlinearly with the number of transactions that need to be completed.

There are some great economists out there who have undertaken a classification of the various "transactions costs." I'm honestly playing a bit of catch up here but since we're on the topic, here are a few posts and papers that caught my attention:

Also, got your email. I'll get back to you shortly.