Encyclopaedia content licensing and contracts

Microsoft’s announcement in March 2009 that it will discontinue Encarta provides valuable business strategy and management lessons. Encarta is an encyclopaedia offered from 1993 on a CD-ROM disc and subsequently on the web. All will end in 2009.

While money was not the motivator, the crowd that clouds at Wikipedia and elsewhere on the internet has helped starve the business out of Microsoft’s Encarta. That crowd are computer users and they in the sense that they are part of cloud computing sending content by them or others to external hosted servers.

This article is a case study on 250 years of business and legal history relevant to three encyclopaedias – Encarta, Encylopaedia Britannica and Wikipedia. It is structured by three historical periods, or Acts, as we’ve called them here. Our focus is on content licensing for these three publications. Their content includes images, text, video and other data. Like them, others with an interest in methods for making money from content include business consultants, authors, creators, and various intermediaries.

Microsoft’s announcement in March 2009 that it will discontinue Encarta provides valuable business strategy and management lessons. Encarta is an encyclopaedia offered from 1993 on a CD-ROM disc and subsequently on the web. All will end in 2009.

While money was not the motivator, the crowd that clouds at Wikipedia and elsewhere on the internet has helped starve the business out of Microsoft’s Encarta. That crowd are computer users and they in the sense that they are part of cloud computing sending content by them or others to external hosted servers.

This article is a case study on 250 years of business and legal history relevant to three encyclopaedias – Encarta, Encyclopaedia Britannica and Wikipedia. It is structured by three historical periods, or Acts, as we’ve called them here. Our focus is on content licensing for these three publications. Their content includes images, text, video and other data. Like them, others with an interest in methods for making money from content include business consultants, authors, creators, and various intermediaries.

Act One

The year 1768 has significance for the encyclopaedia publishing business. In about that year Encyclopaedia Britannica was launched. It was one of the English language’s first encyclopaedias. In time it sometimes displaced knowledge gatekeepers mentioned above.

It’s success became international. From 1901 Encyclopaedia Britannica’s ownership switched from Scottish to American. Today it is Swiss.

For most of the 20th century the business and commercial operations of Encyclopaedia Britannica reflected those of the classic 20th century U.S. industrial enterprise. Its managers adopted and primed the book publishing industry’s centuries old best practices and modes of operation.

Act One reached a high point in 1990. Encyclopaedia Britannica’s revenues reached US$650 million, a record level. Four things helped it get there.

1. Its quality in content and production values remained unparalleled in the encyclopaedia business.
2. Its sale price was unmatched for any book product of its type. In the United States in the 1980s, its sale price was US$500-$2,000.
3. Its production cost was minuscule relative to that sale price. In the United States in the 1980s the production cost of each set of encyclopaedia’s was US$250.
4. Its sales force was very well trained and very effective. This is how it primed the standard operations it inherited from its book publishing industry sector.

• • The sales force it seems became its competitive advantage. The year 1990 was the peak year for evolution of the Encyclopaedia Britannica’s door to door sales business model.
  • The door to door sales force sold direct to consumers, mostly. They operated under an effective human resources policy. They were trained and they had incentives – they worked on commission.
  • Arriving after dinner, for a few hours the sales pitch of the encyclopaedia’s sales person enraptured the target consumer audience. Proud parents listened, wondering if they could afford to buy their little Jack or Jill these handsome big volumes of intelligent atoms. Many were convinced, recognising the volumes doubled up as impressive and smart home furnishings.

However, just as finances peaked in 1990, that year was also a turning point. A downhill slide in financial terms began as market circumstances changed.

Act Two

Act Two begins in 1993. In that year Microsoft introduced Encarta, a digital multimedia encyclopaedia published in a CD-ROM format. The environment for encyclopaedias was about to change dramatically fast as Microsoft’s collaboration with Intel took center stage in various information sectors. Helping to achieve this was Microsoft’s legal strategy, as we’ll overview in bullet points below.

In the new environment, from the early 1990s onwards, the Encyclopaedia Britannica role in this case study reads like a Willy Loman soliloquy in Arthur Miller’s brilliant play, Death of a Salesman. Loman, formerly a salesman, talks about memories, American Dream glory days… now past, and with no clear path forward as he no longer is able to earn a living.

Years before 1993, it seems perhaps even before the peak year of 1990, Encyclopaedia Britannica rejected a Microsoft offer to collaborate.

Part of Encyclopaedia Britannica’s reason was that it would disturb its then highly effective door to door sales force and affect its sales margin.This is the credible view of Shane Greenstein and Michelle Devereux, authors of the Kellogg management article, The Crisis at Encyclopædia Britannica.

A further plot nuance for the changing environment of the 1990s is that Encyclopaedia Britannica had not been blind-sided.

From the late 1980s it had begun a project to test “new media” as it was then sometimes known, ie multimedia content available at the time only really effectively on CD-ROMs. Today consumers take it for granted as most of what’s on the web is multimedia. But it is worth noting that to deliver multimedia in the background are technical developments that have made it possible to display more than alphanumeric code (ie words and numbers) on computer screens.

The technology and full market roll out by Encyclopaedia Britannica involved one of its divisions, Compton’s Encyclopaedia.

A Comton’s Encyclopedia CD-ROM version was released in 1991. It involved a noteworthy pricing policy. In the United States, and maybe elsewhere, if you bought the printed Compton’s volumes you got the Compton’s CD-ROM disc for “free”. However, if you just wanted the CD-ROM disc alone, you had to pay US$895.

Whether the obstacle was this pricing policy, the product’s multimedia quality in the digital format, or the limited market at the time (few had computers with CD-ROM players) or something else, for Encyclopaedia Britannica its Compton’s Encyclopaedia on CD-ROM strategy failed or was discontinued.

Encarta arrived in the environment just as Encyclopaedia Britannica sold its new media division in 1993 to the Chicago Tribune for US$57 million.

In terms of content quality, Encarta was a toy compared to the gold standard of Encyclopaedia Britannica. Encarta wasn’t perhaps better than Compton’s Encyclopaedia. This did not matter for millions of users. Consider these facts, commercial stabs by Encarta into the body of Encyclopaedia Britannica:

• Initially Encarta came with a great price, it was “free” when bundled with purchase of a new PC.
  • This is an example of “free as a business model”. An impact of the model can be to reshape consumer perceptions about a competitor’s pricing policy.
  • As is even more evident today in 2009, “free as a business model” can be devastating for those who charge for their content. This is in play in the battle between traditional media (films, books, music, magazines, newspapers etc) with digital media (mostly content on the web or mobile smart phones.
• Faced by a changing digital media environment and related new consumer habits, Encyclopaedia Britannica has never seemed to have worked out a sustainable growth strategy since the early 1990s.
• By 1996 its revenues had fallen to US$325 million. In that year it sold 55,000 copies and it sold the entire Encyclopaedia Britannica business to private investors for US$135 million.

Although it killed many information vendor competitors, Encarta was not a honey pot for Microsoft. We suspect it has been a financial drain for Microsoft, except for perhaps a short part of its life 1993 to 2009 life when it served Microsoft’s need to promote its core offerings – Microsoft’s Windows operating system and software applications.

As lawyers and consultants we see the interwoven business and legal features of this case study. We turn now to the legal features.

To weave the “free” Encarta product into people’s habits, Microsoft’s outflanked Encyclopaedia Britannica supported by its adopted intellectual property licensing strategy. In basic terms this involved the use of written contracts. (In passing, the same strategy also helped Microsoft vanquish better operating systems offered by Apple, Sun and other competitors lost in the dust of computer business history.)

Microsoft licensed three things to get a stream of buzz and bucks from computer vendors, and later Windows-addicted consumer and business computer users.

• First, for quality, Microsoft licensed-in content from a third party – Funk & Wagnells encyclopaedia. To that core text and images, Microsoft applied its in-house digital media smarts, part of its newly developed in-house competency. They added audio files, video files and other bells and wistles to Encarta.
• Second, Microsoft licensed-out, again using a written contract, its Windows operating system to computer hardware manufacturers to preload that operating system software before the computer was sold to wholesalers or direct to end users.
  • When a customer bought a computer, the customer received the computer, Windows and a bundled offering which in the early 1990s included Encarta as a “free” add-on product.
  • Critically, Microsoft’s distribution network became vastly greater in scale and scope than the shoe leather sales force used by Encyclopaedia Britannica or even what could be achieved by Encyclopaedia Britannica Online. The network diffused innovations from Microsoft faster than those by competitors.
• Third, Microsoft licensed-out its product to end users with a written end user licence. By tearing open the Encarta shrink wrap the users agreed to enter into a legal “shrink wrap licence” directly with Microsoft.

In terms of marketing and human resources, Microsoft stretched its sales force wider and further than Encyclopaedia Britannica could ever hope. Moreover, it’s sale force was unpaid and did not require training by Microsoft.

In terms of law, Microsoft used intellectual property content licensing as a business tool. The tool was customised, ie contracts were crafted in a number of respects to specially suit the new environment. One element of one of those types of contracts played a part in the long anti-trust war Microsoft had with competitors and state governments in the United States. Microsoft won.

As consumers sold themselves to Microsoft, its products became the standard.

Act Three

In Act Three, the wisdom of the crowd came into play. Clouds started forming in the encyclopaedia environment in the late 1990s, but really kicked in with Web 2.0 developments from about 2003. The changing environment brought with it changing user habits in accessing, storing, adapting, sharing and using information in the United States and then elsewhere. By the late 1990s the web had become prominent, today it is ubiquitous.

Now here’s the genius behind the new era for encyclopaedias the crowd both consumed content and generated content. Web 2.0 technologies arrived making it easier for the crowd (ie users) to (ie send content by them or others to external hosted servers). The crowd cloud benefiting from the network effect.

In 2009 the crowd cloud swarms and challenges the business models, contracts and content licensing arrangements of traditional media, traditional stores and some traditional knowledge, information or entertainment business.

The crowd clouds in various ways. It does it via personal or third party websites; smart mobile phones; blogs; uploaded online videos, photos, games, animations and slideshows; peer-to-peer (P2P) software and exchange networks, and wikis like Wikipedia.

The crowd cloud rained on Encarta’s parade. With the caveat that the following statistics only tell part of the story, here’s a current snapshot:

• Encarta has about 50,000 articles
• Encyclopaedia Britannica online has 120,000 articles (the print version has 73,645 and the DVD version has over 100,000)
• Wikipedia has 2.7 million

In 2008 in the U.S. the Encyclopaedia Britannica was available for US$1,395 for the print edition, US$70 per year for web access, and US$49.95 for the Britannica Deluxe Edition 2007 DVD.

The Wikipedia crowd cloud has this pricing policy under attack. It also has the “gold” standard label for Encyclopaedia Britannica content under constant attack. In recent years report after report claims Wikipedia articles are about as accurate as those of Encyclopaedia Britannica. From the United States there is evidence that in court decisions the number of quotes from Wikipedia equal or exceed those from Encyclopaedia Britannica.

If you’ve read this far, congratulations, you’ll recognise the significance of this next point. Recognising the cloud crowd, and as reported in Wikipedia, “On 22 January 2009, Britannica’s president, Jorge Cauz, announced that the company would be accepting edits and additions to the online Britannica website from the public.”

In Summary

Encarta first entered the encyclopaedia scene in the early 1990s. It took up the opportunity created by the changing environment and habits associated with computers and in particular a then new peripheral for them, CD-ROM players. Two decades later, with another shift in the environment now to cloud computing, Microsoft decided to discontinue Encarta.

However, for those who earn a living from content, intellectual property content licensing survives as an organisational and legal tool.

Like the Encarta story, the Wikipedia story is also partly a tale involving clever content licensing. Its content is licensed from users and licensed to users using an effective contract dealing with intellectual property considerations. To quote the Wikipedia page on Wikipedia: “All text in Wikipedia is covered by GNU Free Documentation License (GFDL), a copyleft license permitting the redistribution, creation of derivative works, and commercial use of content while authors retain copyright of their work.^” Such contracts impose deal points between creators, intermediaries and users, recording each party’s legal rights and obligations.

The table below summarises some key points of this case study.

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Noric Dilanchian

Noric Dilanchian is a lawyer, author and educator practising in areas of business law for almost four decades, with a focus on contract drafting and review, and the commercialisation of content, technology, digital assets and intellectual property. Linked In |YouTube

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