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Welcome to People vs Algorithms #32.
I look for patterns in media, business and culture. My POV is informed by 30 years of leadership in media and advertising businesses, most recently as global President of Hearst Magazines, one of the largest publishers in the world.
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This week had me thinking about economic intangibles, the non-physical things that a person or company owns like trademarks and copyright. I refer to them as IP (intellectual property). IP covers a broad set of intangible assets that create proprietary value around a product, service or process. More simply, and for the purposes of this discussion, let's think of them as the brand and the things that give it meaning, be it in entertainment (Star Wars), fashion (Gucci), a service (UBER) a human (Depp). Of course, IP is only as valuable as the product or service underneath it that someone is willing to pay for. IP has never been more important to a company’s value equation. It only gets more complicated from here.
I’ve been getting off at the Canal Street stop in New York recently. This is what probably set off this little missive. If you’ve spent any time on Canal Street it’s a familiar site — the fake handbag bazaar. Level of activity ebbs and flows with tourist seasons and, I presume, law enforcement priorities. Activity is concentrated on Canal but the action gets dragged to other tourist activity zones further uptown. And, increasingly in corners of the internet like Reddit.
The Canal sellers are typically mask wearing, middle-aged Asian women, polite but aggressive. The tactics have matured over the years, the range of products broadened. To accommodate product line expansion and, I assume, to defend against enforcement pressure, many now carry laminated inventory cards, indiscriminately propositioning tourists and subway riders with offers for bags, watches, bracelets and more, all emblazoned with logos from our favorite luxury brands.
With luxury goods, IP value is established over decades, rooted first in craftsmanship, premium pricing and status driven by an aspirational customer cohort. As a brand’s lore fortifies, its products achieve Veblen status — demand curve inversion where higher prices result in increased demand. Price becomes a signature of status and self reinforcing component of the overall value proposition. The bootleg business is a natural way to undermine luxury premiums with interesting moral consequences beyond the transaction. After you buy a fake bag do you represent it as the real thing? Does the initial act spawn an exhausting cycle of post-purchase misrepresentation?
A far bigger marketplace can be found on the internet. An active sub-Reddit dedicated to the pursuit of fake merchandise is called “RepLadies.” Here, some 200,000 members trade tips and photos on the best places to access a dizzying array of fake goods from online sellers. A recent Cut piece, “The Rich New York Women Who Love Their Fake Birkins” highlights a community of wealthy women whose hobbyist pursuit of the best “replica” products has become the backbone of an online community. Thanks to the relentless march of industrial sophistication, the products are becoming increasingly difficult to separate from the real thing, a result that surprised the author when she took the fake bag to an authenticator at an Upper East Side consignment store and was offered half of its retail value, 5x what she paid:
As well as aesthetic accuracy, many have the same date codes, stamps, locks, French-tannery labels, and serial numbers used to distinguish their real counterparts…. One RepLady heard this last theory from a popular Hermès replicator. “They buy an authentic, and they rip that bitch apart, and they use it like a pattern,” she tells me. “And they get better and better with every new one that comes out.”
From the brand’s perspective, one has to wonder if counterfeit activity might generate unexpected marketing benefits. I suspect the knock-off buyer would not have purchased the real thing at 10-20x the price. Does this buyer serve to increase awareness and aspiration with a broader market and, in turn, grow demand for the real thing? Does it risk negatively shifting premium product context?
The Grateful Dead Principle
Media bootlegging is another form of IP subversion, with more immediate revenue impact. Bootleg DVDs or modern equivalent of bootleg content streams or more pervasive password sharing are all forms of IP theft. Over the long history of bootleg media activity, it's been hard to convince consumers that activity is wrong or that someone other than the invisible “man” is hurt by the act. Not until easy to use, all you can eat services like Spotify arrived, did the hassle of stealing IP outweigh the convenience of an organized access platform at a low monthly price.
In other cases, sharing and repackaging is encouraged. Think of this as the “Grateful Dead Rule”. The Dead built huge IP value and community by allowing fans to freely record and share live recordings, stimulating audience growth, interconnectivity and loyalty. Opening their IP to community participation created long term franchise value.
Snoop’s my neighbor
The metaverse will take IP complexity to the next level. Take for example the notion of real estate. In the real world you live in your house, it protects you from the elements and bad guys. Real estate value are driven by long historical trends, and underlying conveniences like proximity to transportation, schools and commercial centers. Virtual real estate, the stuff some people want you to buy now, does not share the same virtues. When you want to leave my virtual place and go to your virtual place, why walk when you can just teleport. It’s kinda like the distance between two domain names, separated by a hyperlink or the time it takes to type a URL into the browser. Spatial advantages evaporate. Except the metaverse is presumably a visual environment and I just built a house on a nice plot of pixels and you now you want to put a grotesque brutalist mansion right beside my joint? Do I just pack up my bag of pixels and move it to another set of coordinates? But I live next to Snoop in the metaverse and everybody wants a place at these coordinates. These are new conceptual territories to contemplate where property rights and intellectual property rights collide.
A16 just wrote a good post about valuing virtual real estate if you are interested (A16 has become the official propaganda wing of the crytpo party and are publishing good stuff including this podcast). Ryan at Garbage day reacted with an interesting take, riffing “If you had the limitless creative freedom of a virtual world, why would you live in a mansion? How utterly devoid of imagination do you have to be to buy a digital simulation of big house on an island?”
IP hedge on digital value destruction
As the world virtualizes, more time is spent in digital environments using digital things. Here, stuff is just infinitely replicable bits, the value of IP grows disproportionately. Increasingly companies are forced to manage value across physical and digital domains. IP is the lynchpin.
Real world commoditization pressure marches ceaselessly forward. We have become increasingly sophisticated in manufacturing “craft” at scale. Often, premium goods differentiate with hand-crafted imperfection, not mechanical precision. IP grows in importance as the remaining path to premium. It gives things meaning. Meaning is the source of differentiation.
Further, distribution is always king and in digital realms IP represents an important metal shortcut in the mind of the consumer. As such it represents a type of intangible distribution. We Google because Google works well. But we Google because it's a memorable verb. We Google because the idea is clearly understood and pervasive.
To be sure, the IP of a thing is the hardest part of the value chain to replicate, but easy to lose when neglected. Differentiation exists along a continuum. The most basic form is price or value. Next you have functional differentiation. Its value depends on the value of features and substitutes for them. Of course, the most enduring type of difference, next to unique, differentiated IP, is the network effects that any system or software ecosystem engenders. This is the source of market power for platform companies and the reason why a company like Facebook would historically spend aggressively to buy up entrants who challenge their network position.
Software-driven positions used to be a source of difference. Today, 99% of software is open source and market power has shifted to the intersection of hardware and software, and the provisions of SAAS services via the cloud. Apple has software, hardware and network effects (and retail distribution) the source of sustained leadership in mobile, taking 90% of the category profits with 30% market share.
Collabs are a modern strategy to cross breed IP pools with the intention of adding dimension to a brand, growing a fan base and spreading IP to new sources of value capture. It is becoming increasingly popular to exploit intersections between fashion IP and technology-driven products and services.
This week Oura ring, a useful on-finger health and sleep monitor, announced a collaboration with Gucci, much like the Apple Watch x Hermès partnership struck a couple of years back. The Oura ring retails for about $300, the Gucci x Oura at $950.
Some collabs are top down. Others come from the community. This morning at my local coffee shop, I ran across a spectacular pair of bejeweled Crocs festooned with fake Prada shield logos. IP never truly dies, it just goes into hibernation waiting for narrative resuscitation and recontextualization. Thank god this happened to Crocs.
Surely Justin Bieber had something to do with the resurgence. In other news JB has decided to lend his IP to the most celebrated of Canadian fast service coffee brands, Tim Hortons. Biebs Brew is another in what has become a lucrative trend combining fast food favorites and influencer endorsement.
Everywhere I went this week, I was reminded of its importance. I had lunch with a hotelier whose hotel brand had become so iconic and desirable that the income earning surface area of the physical property was much smaller than the Hotel brand’s potential. What was the best way to exploit the imbalance? This is a common opportunity that usually results in physical expansion or the amplification of the brand to a broader set of product partnerships.
I just spent some time with team from Racquet Mag, who are doing an admirable job of bringing a new, stylish take to the game of tennis. As a publishing category, tennis is hard to make money at, the advertising market is small and the subscription potential limited. Racquet has executed a range of collaborations from Adidas to watchmaker Maurice de Mauriac in an effort to monetize their unique POV on the game. Their “major” in the media ecosystem is dependent on an ability to cross breed IP.
In the age of IP, the collab mindset is essential for brands in virtually all consumer categories.
Human IP and attention gas
The Heard / Depp circus is a recent case study in IP redemption and what happens when the social army of content creators wants a piece of the IP action. Last Wednesday the jury handed down a decision in the trial in what was one of the most watched court cases in history, a speculated 500M people tuned in to live broadcasts on Law and Crime Network on YouTube. The social and legal implications will be endlessly analyzed, but the case, like OJ’s before it, represents what happens when real life drama, supercharged with celebrity, becomes monetizable fodder in the internet meat grinder. Truth fades into narrative. The whole affair mimics fan fiction. In the metaverse Amber Heard is unlikeable and Johnny Depp is nostalgia. Heard is an unredeemable character. Like the drunken swashbuckling misanthrope Jack Sparrow, Depp will surely be redeemed.
Depp is a perfect case study of compromised IP value. Redemption is as much a financial as a moral question. Post trial, the Depp narrative has been sufficiently twisted to create an opening for IP rejuvenation. Given the outpouring of support and the generation of a confusing new personal narrative, Depp will find a path from fallen star to bankable celebrity. Backers will look not at the perspective of institutional media but the groundswell of social support and important commercial metrics like the surging sales of his Sauvage cologne.
Now the economic incentives to cover the case stretch across a global cadre of content creators, from established media to Vietnamese Facebook content optimizers, homeschooled 15 year old YouTube creators to a TikTok famous husband and wife pair of legal eagles. As VICE’s Anna Merlan writes, “There’s an enormous amount of attention and money to be gained from weighing in on this trial, which is why news outlets and would-be influencers alike are spending so much time commentating on it… The trial isn’t just being memeified—it’s turning into an opportunity for monetization and attention.”
An important piece from New York Mag entitled “The Mainstream Media has Lost the Depp-Heard Trial” speculates on the moment as important powershift from institutional media as defining “objective” IP lens to a new TikTok powered “creator” reporter. The phenomenon of citizen journalism has been growing in importance forever, but this particular intersection of news, celebrity and true crime made its impact more profound:
At the same time, a new media class has exploded: creators and influencers working all the lanes, from lifestyle fluff to political opinion to citizen court reporters. Critical and suspicious of the stuffy traditional media, these social-media accounts comment on and sometimes even start the biggest conversations of the moment. They post fast and often — sometimes hundreds of times a day — and don’t have to pretend they’re objective. In fact, they’ve shown that news consumers are delighted when they pick sides. The most successful of them are sophisticated visual storytellers who know how to captivate an audience — and, as we’ve seen this spring, they have no qualms about flogging a famous woman.
Now, on account of a real time marketplace that programmatically aligns attention and money, incentives can trickle down to the hobbyist. This week in the New Yorker, “How the Internet Turned Us Into Content Machines,” describes how the internet has turned us into content slaves, seekers of “content capital”:
In his new book, “The Internet Is Not What You Think It Is,” Justin E. H. Smith, a professor of philosophy at the Université Paris Cité, argues that “the present situation is intolerable, but there is also no going back.” Too much of human experience has been flattened into a single “technological portal,” Smith writes. “The more you use the Internet, the more your individuality warps into a brand, and your subjectivity transforms into an algorithmically plottable vector of activity.”
Ok, this is only kinda about IP and more about how weird the modern media world is. But I felt like including it, especially the fact that to celebrate his legal victory, Depp just ordered $62,000 of indian food. Holy masala!
I will leave you with this. Web3 embodies one of the essential contradictions in IP management; when do you set something free to encourage viral spread, and when do you lock it down to manage its integrity and value potential. Central to the disruptive potential of Web3 is the notion of composability, the idea rooted in the open source movement that everything on the blockchain is lego like — open, reusable and interoperable. At the same time, the blockchain concept is fundamentally about a decentralized leger of ownership, asset valuation and tradability of anything, increasingly intangible, non-fungible digital goods. In effect it embodies the principles we’ve discussed above, the need for IP to be free and cross bred to harness community power and collective energy, and the need for ownership to align economic incentives for everybody involved.
Be nice to yourselves this week.../ Troy
6 worthy links:
1. “The Power of Product Thinking” from A16:
Product thinkers love to discuss their favorite products, of course, but not just what they personally liked or disliked; rather, they seek to understand the broader question of why a product might or might not work for a broader set of people. The very best product thinkers are voracious about understanding why things work. A product thinking mindset might lead one to study what makes TikTok so popular, or what leads to Figma’s growth within an organization, or what the characteristics of popular marketplaces are.
2. “We tracked what happens after TikTok songs go viral,” a short doc from Vox:
3. Is this image real or robot generated. Test yourself.
5. “Triangle of Sadness” wins Cannes Palme D’Or. I am looking forward to seeing it.
6. Who are the new elite and what does it say about our country. From Pirate Wires.
Back in the 90s, a lot of people wanted to be as rich as Bill Gates. But did anyone ever want to be like him? Today, kids around the country have posters of Elon on their wall. From the ashes of sclerotic 20th Century loser culture could finally rise a new kind of shitposting techno-king: unapologetically successful, unafraid, and influential. He will have fans. His fans will vote.
It goes on…