08/02/2012 09:54 am ET Updated Oct 02, 2012

Digital Startups Need Learn A Thing Or Two From The Corner Record Store

Music sales have had a rough run of it since going digital. With e-books approaching ubiquity, is publishing ready? On the supply-side, digital means more published writers and far fewer gatekeepers -- resulting in lower sales prices.

At the same time, traditional distribution networks have not adapted to communities created by social media. So is this perfect storm going to capsize a fledgling digital media market? Will informal, often illegal, alternative marketplaces triumph or is this an opportunity for publishers to reconnect with their customer base?

A couple weeks ago, a twenty-something year-old intern from NPR published a piece the gist of which was that in her entire music library of over 11,000 MP3s, she's probably only paid for about thirty. The songs were acquired from a variety of sources -- ripped from the CDs at a college radio station, downloaded illegally, 'borrowed' from friends, etc... They weren't bought and, for the most part, weren't pirated in the traditional sense. In other words, they came to her the same way that all the other information in her life did -- through the on- and off-line self-publishing networks formalized by social networking websites.

And that's music. As e-readers and tablets are approaching ubiquity, the growth of e-book sales is expected -- and, because books contain less raw information than music does, the barriers to transmission are virtually non-existent. It takes about eight minutes to download the entire catalog of the Oxford University Press -- over four-thousand books -- with a high-speed internet connection. A flash drive can hold thousands of e-books; a single email can include dozens.

There's also the little problem of supply... In the seventies, Fran Lebowitz wrote that "every artist wants to be rich and every rich person wants to be an artist." With the rise of digital distribution, the means of production and publishing are available to all -- and everyone, everywhere, wants to be an artist. 81% of Americans believe that they have a book in them; over one-hundred-thousand titles are published each month -- the vast majority by the authors themselves. Sure, the reading and culture-consuming public may be growing too, thanks in part to the rise of ereaders and smartphones, but it's in no way keeping pace with the explosion of content creators.

And therein lies the problem. The start-ups and other new 'bosses' have crunched the numbers and decided that the value of new creative content basically approaches zero. You'd have to play an album on Spotify about three-hundred times for the artist to get the equivalent payout of a single album's sale.

To some extent, this makes sense: As more hours of content are produced, the amount of free time that people have to consume this content basically stays the same; the value of each discrete unit of content declines and approaches zero. Furthermore, brands and advertisers can pay consumers for their time - and the value goes down even more.

As side note, my friend Colin Robinson, publisher of O/R Books, argues that we're ignoring the intrinsic 'value' that a culture object contains within it, but that's a debate I'm willing to have -- citing John Cage's allegory of the breadcrumb. And regardless, we'd both agree that the futures trade in cultural production is kinda depressing.

Depressing enough that some writers see their days as numbered. Twenty years, tops, is how long the UK's Ewan Morison thinks it will take before the professional writer becomes as rare in the wild as a travel agent or a haberdasher... With musicians and other creatives not far behind.

But there's something else that's been happening, too. Something unique to the nature of creative pursuits, that seems to go against the conventional wisdom of the internet: People are returning to the gatekeepers. The rise of social media has allowed word-of-mouth recommendations to scale.

Since the way that information flows has changed (previously from a single source, now through networks), the communities thereby created are transforming. For the better part of the 20th Century, mass media, lead by television, created a culture of celebrity. We gave a bullhorn to a select bunch of broadcasters dedicated, talented or lucky enough to force their way through legions of middle-men and gatekeepers and reach the airwaves, bestseller lists and top-ten charts.

It's allowed a few thousand people to reach levels of self-expression only glimpsed at by a few pre-modern rock-stars like Mozart and Shakespeare. Beginning with print-capitalism and ballooning through the last hundred years, the size of our communities have grown with media penetration, while the entry points to broadcast to such communities have remained heavily guarded and relatively expensive. Benedict Anderson termed these media-created communities 'imagined communities' -- and they direct to how we act -- politically as well as economically.

Call it democratization or disintermediation -- the effect is generally the same. An industry, like travel-booking, once relied on controlled access to information and technical expertise. When the access to this information became universal, and the expertise was replaced by algorithmic search, the need for a human intermediator became redundant. So goes the story of the internet.

Amazon did this with book sales. A store can't hold all the books the way a massive warehouse can -- so make search algorithmic, cut out the bookseller, and -- voila -- hundred-billion dollar company.

And just because most existing digital sales platforms are designed to serve mass market communities, it doesn't mean that imaginary communities based on virtual networks have stopped consuming media. They've just been forced to turn, like shoppers for electronics in Nairobi or DVD buyers in Tehran, to informal sectors when they go shopping for music. Which means the musician doesn't get paid (or gets paid very little). Now, as digital publishing enters the fray, we'll start to face the same challenges.

But there are also opportunities. Social networking takes word-of-mouth and makes it scaleable. When it comes to matters of taste, social media actually disintermediates disintermediating algorithms (sorry). I would always trust the recommendation of a close friend over that of a billion-dollar computer with a teraflop of processing power. Taste is ultimately a sign of consciousness and intelligence. Until we create 'Strong AI', human-curated recommendation will always trump machine-derived ones. Social media gives me those recommendations - the only thing it doesn't give me is a way to act on them. And so I turn to the grey market.

It's very possible that in a digital capitalist economy, we have no economic obligation to pay people to tell a story -- and that writing a book should be something that people do for free. And it's definitely possible that 'liking' a book should be free. But the combination of a creator and a gatekeeper, when done right, can be monetized in this same system. That's what we're already paying for when we buy an album, a concert ticket or a good book -- we buy each story, but we're buying the story of their relationship, too. Whether we're talking about tickets to a Justin Beiber concert or a Murakami novel before a trip to Japan, we're buying our own participation in the story as well. We don't consume culture like we consume gas -- selling it that way is reactionary and probably futile.

The old model relied on bookstores and record shops (recommenders), distributors, publishers and labels (gatekeepers) and content creators. The new model has already replaced recommenders and now threatens the gatekeepers -- replacing both with algorithms. But, before the system even has a chance to fully come into its own, the friction points are starting to show. The Apple and Android app stores, designed from the ground up to function with no gatekeepers on either end, are fundamentally flawed mechanisms when it comes to finding new content -- and both rely on human-curated 'favorites' mini-stores to focus customer attention towards new content.

Streaming sites that rely on computer algorithms to pick your next favorite book or band are novel, but can never compete with the power of an individual recommendation inside your network. Facebook might enter retail in a major way, in an attempt to take down Amazon and Apple, but that might prove antagonistic to their advertising model.

No, the only way that e-books will not become part of an ad-hoc informal sector of free exchange is if models emerge in which work human gatekeepers and tastemakers are packaged together with the media they promote and that these 'package' -- like the published novel of the 20th century -- fairly remunerate both partners. Hopefully, the spirit of the corner bookstore, with a selection you can understand and a person whose taste you can trust, will survive the age of the e-book.