Why Propping Up Old Business Models Is Bad For The Economy And Bad For Innovation

from the too-big-to-fail? dept

Certainly a common enough theme around these parts is the effort of old companies with legacy business models to do everything in their power (often through regulatory capture and other political tricks) to retain their market position by regulating in a specific way. This means regulations that empower legacy firms specifically, or by outlawing and/or limiting disruptive upstarts. All too often, these firms succeed in convincing politicians (and even the press and some portion of the public) that their own potential failures mean the failure of a larger industry as a whole. And yet, that's almost never the case. In fact, the protectionism often does the exact opposite of that, in that it prevents the necessary innovations from flourishing, thereby limiting an industry and, at times, making it uncompetitive with other industries in other countries.

A recent Planet Money episode discussed this in talking to economist Tim Harford about his new book, Adapt, which talks about how important failure is for economic growth and innovation. This should intuitively make sense for many regular Techdirt readers, since we make this point, in a different manner, quite frequently.

In the Planet Money episode, they do a "walking tour of failure in New York," looking at things like the Gutenberg bible, which many credit with kicking off a revolution in printing, but was a giant commercial failure for Johannes Gutenberg, who put up the money for it, but couldn't find the buyers (yes, for the first printed edition of the best selling book of all time). Elsewhere, they talk about the failure of Woolworth, which had been an early retail innovator, being one of the first retailers to realize that putting goods out where customers could see them and touch them, rather than cramming it all behind a counter, was a good idea. But, eventually, others out-innovated Woolworth as well. In many ways, this reminds me of the book Copycats by Oded Shenkar, which we spoke about last year and which had plenty of similar stories.

Some of the discussion also reminded me of our discussion on the series of economic studies that have shown that people changing jobs is often a key indicator of economic growth because it helps the spread of ideas and innovations faster across the economy. While that might not seem to directly impact the question of "failure," Harford mentions the research of economist Randall Morck, who found that (and I'm paraphrasing from Harford's brief summary of Morck's work) in places where there is greater turnover of big companies failing and upstarts taking their place, there is greater economic growth. I have to admit being unaware of Morck's work previously, but now have it on my list to dig in and check it out. I can definitely see a connection here.

Big companies often get stagnant, focusing less on innovation and more on protecting a market. In the Clayton Christensen world of the Innovator's Dilemma, they focus on incremental innovations and market protectionism. And, as Andy Kessler noted in his most recent book, the innovators, who get around those things and unleash value, are often derided as thieves and criminals for undermining established business models. But what comes out of those upstart efforts is, generally, much better for the consumer. And, on top of that, the collapse of those big firms often allows many of the folks, who did have good ideas and knowledge within those firms, to spread out and to join the more innovative upstarts, which will actually implement and execute on those good ideas, rather than be stymied by bosses who don't want to undercut the old business models.

This is why we should always be wary of efforts by politicians to protect jobs, companies, industries and business models. These efforts may come from a reasonable place -- in the belief that it's for the best to "protect" such a large company. But history has shown over and over again the value of creative destruction and disruptive innovation. While it may take down old legacy players, what rises in its place is almost always better for everyone.


Reader Comments (rss)

(Flattened / Threaded)

  •  
    identicon
    Anonymous Coward, Jun 9th, 2011 @ 10:07pm

    "Political Tricks"... just say bribery already. Our government is flat out corrupt from stem to stern.

     

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      Anonymous Coward, Jun 10th, 2011 @ 12:00am

      Re:

      Seems to me Masnick's pro-piracy business model is out of date. That must be why he is constantly complaining about enforcement: because he is unable to adapt.

      Masnick refuses to accept that the landscape has changed since he started this blog, and he doesn't know how to proceed except by flailing away at the law.

       

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        Jay (profile), Jun 10th, 2011 @ 12:24am

        Re: Re:

        So...

        The landscape has changed but Masnick hasn't.

        Tell me, how is the RIAA doing since the upheaval of CD bundling?

         

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        Richard (profile), Jun 10th, 2011 @ 4:16am

        Re: Re:

        What you call enforcement is actually a vain attempt to stifle innovation by crippling technology.

        It also wastes enormous amounts of taxpayers money clogging up the justice system and distracting law enforcement away from their proper job. If it is "successful" then its only effect will be to empower (for profit) piracy by making it more valuable - just as the war on drugs has made the fortune of the drug dealers.

         

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        DannyB (profile), Jun 10th, 2011 @ 6:13am

        Re: Re:

        The way you smear Masnick for rightfully pointing out that what you call 'enforcement' is actually just a euphemism for censorship and monitoring or interfering with people's free association.

        The fact that you do it instead of actually address the substance of the issues, speaks volumes about the wrongness of your position.

         

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    BeeAitch (profile), Jun 9th, 2011 @ 10:36pm

    Amazing the parallels between copyright maximalists and young-earth creationists. I wonder how many industry shills and pro-IP trolls disbelieve Darwin's theory of evolution?

     

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      Lawrence D'Oliveiro, Jun 9th, 2011 @ 10:56pm

      Re: Coypright Creationists

      Hey, I already patented that!

      Or trademarked it, or something.

      So I demand a payment of 0% royalties.

       

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      Richard (profile), Jun 10th, 2011 @ 4:20am

      Re:

      Actually the analogy that is strongest is with the advocates of badger culling ti control cattle TB in the UK.

      The farmers instinctively want to cull the badgers - because they think "something must be done". Unfortunately for them several good scientific studies have shown that badger culling is actually counter productive (because the surviving badgers spread out to fill the gaps - carrying the disease with them). They just disregard this evidence and carry on bleating the same mantra

       

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      Richard (profile), Jun 10th, 2011 @ 4:23am

      Re:

      Amazing the parallels between copyright maximalists and young-earth creationists.

      Also there is quite a strong parallel with Dawkins style naive atheists too.

       

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      Anonymous Coward, Jun 10th, 2011 @ 12:41pm

      Re:

      @BeeAitch

      Thats not fair. A person can disbelieve Darwin and still support a stance on copyright that is not maximalist. That being said this topic is not about scientific theory into how we came to be but copyright. Let's keep it on topic. :)

       

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        Anonymous Coward, Jun 10th, 2011 @ 1:09pm

        Re: Re:

        The topic is evolution (of business).

        Survival of the fittest vs. artificially propping up a failed business model.

        Failure of bad business models happens naturally, just like failure of bad life models happens in nature.

        Let them fail if they can't adapt. Don't punish those of us who accept evolution just because you believe in the (failed) status quo.

         

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    testcore (profile), Jun 9th, 2011 @ 11:40pm

    This comment is a test and is <= any other artitrarty comment. It is safe to ignore.

     

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    darryl, Jun 9th, 2011 @ 11:49pm

    who is propping up old business models, who needs too ?

    What "old" business models do you see as failing ?

    1. Bible printing
    2. Woolworths

    But what THIS CENTURY ? what TODAY ? (oh, thats right, you cannot think of ANY, that is why you need 500+ year old examples !!!!..... LOL

    looking at things like the Gutenberg bible, which many credit with kicking off a revolution in printing

    It was the FIRST MAJOR BOOK PRINTED WITH A "MOVABLE TYPE PRINTING PRESS"

    Not THE (original) PRINTING PRESS that revolutionised book publishing.

    It was also in the Year 1450, that was SOME TIME AGO..

    You have to go back THAT FAR FOR EXAMPLES !!!!!

    Gee, no wonder your credability is slipping !

    marking the start of the "Gutenberg Revolution" and the age of the printed book. Widely praised for its high aesthetic and artistic qualities,[1] the book has an iconic status. It is an edition of the Vulgate, printed by Johannes Gutenberg, in Mainz, Germany, in the 1450s. Only twenty-one complete copies survive, and they are considered by many sources to be the most valuable books in the world, even though a complete copy has not been sold since 1978.

    Note that, "the most valuable books in the world"

    and the "Gutenberg Revolution"

    Most of the great artists of our time, never made alot of money from their works while they were alive, so by your logic their work is pointless and valueless.

    So next time someone gives you a Picasso you will just throw it away, after all that painter never made any money while he was alive !!

    Big companies often get stagnant, focusing less on innovation and more on protecting a market.

    Like Ummmmm... what ???? or Who ?

    you mention Woolworths and Gutenberg bible, then WHAT ELSE.

    Woolworths is/was a 'big company' that relied on innovation to compete in the market ?

    You gotta you be living on another planet Mike, they are a big company, they make their profit from SELLING THINGS, from selling products that OTHER COMPANIES MAKE.

    Woolworths does not 'innovate' products, they might try 'new' things (new to you) like their method of product display.

    But that is hardly what I would call innovation in the market place.

    Innovation for companies like Woolworths would be to introduce new product ranges, to introduce microwave ovens when they were first invented.

    And I am very sure those companies do exactly that, otherwise they would NOT SELL ANYTHING.

    What other "big innovation companies" get stagnant, sure some do, but MOST do not.

    Novell, was a 'big innovation' company, as is Microsoft and Racal, plessey, McDonnald Douglas.

    They do not appear to be 'stagnent' that there is little in the way of 'small players' taking over their business due to stagnation.

    There is usually a bevy of small companies trying as hard as possible to EMULATE what the likes of Microsoft is doing, to try to 'ride the bandwagon' of their success.

    But few if any are making significant inroads using the innovations of a big company against the very company that provided those innovations.

    Everyone knows who was first, and they will always trust the group that actually came up with the idea, and was the first to provide that idea for people to use.

    That is why lots of groups try to copy what microsoft has done and is doing, but few of them can do it to the same level of quality and functionality.

    And in the business world there is no prizes for second.

    You would understand that Mike, if you had any clue about 'the busiess world' and how things actually happen in the REAL world.

    (but not how they happen in 'mikes world').


    So Gutenberg Bible and Woolworths, are your focal points for this entire argument !!!..

    WOW, that is enough to convice me !

    But you might want to give a few more (recent and pertanent) examples to support your rant.

    Please ?

    economic studies that have shown that people changing jobs is often a key indicator of economic growth

    What do those studies say about people LOSING their jobs and economic growth?

    Or those changing their jobs, to one that is paying less than their previous job ?

    Or those no longer working in development, but who are now working flipping burgers ?

    Why dont you address those issues Mike ?? too hard ? or dont they support your 'view'?

     

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      The eejit (profile), Jun 9th, 2011 @ 11:54pm

      Re: who is propping up old business models, who needs too ?

      IT means that epople can be emploiyed, not that they WILL.

      And Novell hasn't been innovative in almost a decade. Same with MS. And as for other revolutionary examples - how about this thing we're posting on?

       

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      testcore (profile), Jun 9th, 2011 @ 11:55pm

      Re: who is propping up old business models, who needs too ?

      If you read this site with any regularity, you'd know that *all* of the issues you raise have been addressed. Just not necessarily in this one specific post.

      Troll harder.

       

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      testcore (profile), Jun 10th, 2011 @ 12:03am

      Re: who is propping up old business models, who needs too ?

      Took me a sec to compile simple evidence, here ya go:

      You said, "Everyone knows who was first, and they will always trust the group that actually came up with the idea, and was the first to provide that idea for people to use."

      That's a really good point, thanks for clearing that up, and Mike really should address it.

       

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      Anonymous Coward, Jun 10th, 2011 @ 1:07am

      Re: who is propping up old business models, who needs too ?

      Logic isn't really your strong point is it.

      Woolworth was in the market of selling things, not producing things. Hence they innovated in the market of selling things.


      You want more recent examples. Try Sony. They used to be a major innovator of consumer electronics. These days they just pump out mostly crap products with their trademarks printed on them. They aren't going to last long.

      Look at Yahoo!, they used to be innovators in the search and portal business. They stopped innovating and started becoming irrelevant.


      Look at Palm. They used to be the market leader in handheld computing. They stopped innovating and pumping out the same old stuff, while the market moved on. Where are they now?


      I could go on, but I'd be wasting too much time feeding the trolls.

       

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        Anonymous Coward, Jun 10th, 2011 @ 1:23pm

        Re: Re: who is propping up old business models, who needs too ?

        I wonder if web-trolls have weird hair that comes in fluorescents.

         

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      Anonymous Coward, Jun 10th, 2011 @ 1:37am

      Re: who is propping up old business models, who needs too ?

      Troll vomit is delicious. Moarpls.

       

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      martyburns (profile), Jun 10th, 2011 @ 3:15am

      Re: who is propping up old business models, who needs too ?

      Double spacing increases your intelligence.

       

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      Richard (profile), Jun 10th, 2011 @ 4:31am

      Re: who is propping up old business models, who needs too ?

      You have to go back THAT FAR FOR EXAMPLES !!!!!

      Gee, no wonder your credability is slipping !


      Your argument is that the examples are old?
      Not that there is anything wrong with them?

      Actually the reason for using old examples is that with an old example we can see how everything worked out subsequently. New examples are less useful because there is the risk that they could be undermined by future events.

      So old examples are better than new ones. Your point is a complete failure.

       

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      Anonymous Coward, Jun 10th, 2011 @ 6:14am

      Re: who is propping up old business models, who needs too ?

      Darryl, your other brother, Darryl, is looking for you.

       

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    Chargone (profile), Jun 10th, 2011 @ 12:21am

    Wow.

    five posts and we have:

    someone obviously fishing for flames.
    a useless shill who seems to have some intelligence but no ability to apply it to anything but being an arse.
    a test post.
    a joke which has been done so often it's less joke and more standing meme.

    this thread's off to a spectacular start, i must say.

    either way, i found it interesting.

    also, i'd suggest that people take a look at 'The Economy of Cities' by Jane Jacobs if they've not already. nicely explains the processes behind why the whole 'creative destruction' bit works... and why supposedly 'efficiant' cities are a great way to run the place into the ground in short order. among other things. doesn't even have anything to do with IP law, but if you accept that patents etc stifle inovation artificailly, and then read that book it becomes apparant just how much of a disaster that can be in the mid to long term.

     

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    Hawkeye, Jun 10th, 2011 @ 1:19am

    Propping Up Old Business Models

    The economic collapse is happening at a rapid rate. Most citizens live in a economic situation they neither comprehend nor gain from. The reality is speculators sowed the seeds of their own downfall by bidding up asset values using unsustainable leverage and easy credit -- a way of life that become entrenched in culture until every idiot out there was certain asset price can't drop back to past levels. Check out the ridiculous comments from property spruikers on forums such as australianpropertyforum.com to see how entrenched is this "markets always rise" myth! US governments have a woeful record in providing a fair asset markets. Many European countries have better models that operate more equitably for everyone, yet even still, those Euro countries must still bail out their banking systems. Anyway, the moral is no one gains from asset price inflation in the end, because bubbles always pop. Sure, we hear claims from the spruikers that prices will rise forever, but when most people are priced out of the market then something has got to give. Now the ponzi scheme is finally collapsing (it was inevitable), and so today's underclass will have the last laugh when asset values do drop up to 50%, which is happening already in many places around the world.

    Hawkeye
    Housing Affordability Forum

     

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      Chargone (profile), Jun 10th, 2011 @ 4:16am

      Re: Propping Up Old Business Models

      unfortunate fact: the current entrenched economic theory denies the existance of bubbles. (well, current a couple of years ago, and had been for decades).

      there's also an entrenched line of thinking in economics than when reality doesn't match the model, reality is doing it wrong.

      these are not helpful.

      (go have a look at the book 'Economyths'. it's quite interesting. can't remember the author's name off the top of my head though.)

       

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      Richard (profile), Jun 10th, 2011 @ 4:59am

      Re: Propping Up Old Business Models

      It's not the "old" that is the problem - rather it's the desire to live for ever off a one time deal.

      This is the true common thread between copyright maximalists, patent trolls and property speculators. It is old - just like murder, theft and all the other sins - but it will be constantly re-invented as technology advances.

       

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        Greevar (profile), Jun 10th, 2011 @ 10:50am

        Re: Re: Propping Up Old Business Models

        This! Exactly this! That's what America and capitalism is all about these days. Win and win big, just once. Then, live off the spoils of your conquest for the rest of your life without contributing to society except for your consumption. That's the American dream these days.

        Copyright supporters, patent holders, and real estate traders embody this ideal immensely. They take extreme offense to anyone that threatens their ticket to easy and ever-lasting income that doesn't require the input of more labor. I wish I could perform my labor once and demand the income I feel I supposedly deserve like these leeches do!

        Wow, what if everyone was entitled to do that? Everyone can do a minimal amount of labor and do nothing while they rake in the money! What would happen? Nobody would be doing anything and the whole thing would collapse on itself. It would encourage people to do as little as possible while still reaping the benefits.

        It's sad how these people think they are special because they can't sell their art as a physical product because it's easy to copy and share. So, they demand the government make laws to enable it and take away rights from everyone else. I'd call it genius but, as we can all see, it's not working anymore.

         

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    Anonymous Coward, Jun 10th, 2011 @ 5:05am

    What is important here is that the old business models you rail against are failing only because of illegal activities. If the law was duly enforced, those old business models would still be the successful ones.

    If we were looking at a better business model wiping out an old model, you might have something. But what we have now is illegal activity decimating industries without a real replacement model.

     

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      DannyB (profile), Jun 10th, 2011 @ 6:26am

      Re:

      It is always amusing to watch the people guilty of regulatory capture and now judicial capture fall back on 'illegal activity'.

      When people want to BUY your product in a modern convenient form; NOT selling it to them at a reasonable price is a plan for failure. So instead, change the laws.

       

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      Anonymous Coward, Jun 10th, 2011 @ 7:24am

      Re:

      "If the law was duly enforced, those old business models would still be the successful ones."

      Did somebody invent a way from magically stopping people to behave like people? Can we use it to eliminate stupid people first? Please?

       

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        The eejit (profile), Jun 10th, 2011 @ 8:03am

        Re: Re:

        Apparently, eugenics still exists in the minds of maximalists. They're trying to breed a new kind of artist - one that doesn't use them.

         

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        Anonymous Coward, Jun 10th, 2011 @ 8:05am

        Re: Re:

        That isn't the point. There is no replacement business model here. The record labels stop selling the music, and there will be little business at all. This isn't going from a horse drawn carriage to an automobile, this is going from a horse drawn carriage to walking.

        There is no new business model here.

         

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          Prisoner 201, Jun 10th, 2011 @ 9:11am

          Re: Re: Re:

          "There is no new business model here."

          Let me guess, you are on the board of directors of a large media industry corporation, right?

          Because that mantra is what is killing gatekeeper industries, not piracy.

           

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            Anonymous Coward, Jun 10th, 2011 @ 9:41am

            Re: Re: Re: Re:

            MOG, Pandora, iTunes, Qrocity, Rhapsody, icloud, etc.

            Tons of new business models.

            Greedy pirates still don't want to pay artists for entertaining them.

            You people have no argument. None.

             

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              Jay (profile), Jun 10th, 2011 @ 10:13am

              Re: Re: Re: Re: Re:

              Pandora - High licensing fees makes it bad for them to keep above the red

              iTunes - frenemy to the industry

              Qrocity - Sony's bass-ackwards view of music when they can't get security right

              Rhapsody - subscription only service

              icloud - decent music service but still limited

              "You people have no argument. None."

              So tell me. Why is it taking so long for Spotify to work in the US when it's made so much money for industry in Europe?

               

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                Anonymous Coward, Jun 10th, 2011 @ 5:36pm

                Re: Re: Re: Re: Re: Re:

                Pandora- about to have an IPO

                itunes- awesome service used by millions

                Qrocity AND Mog AND Spotify AND Rhapsody- the new reality used by millions.

                iCloud- one of the final nails in the pirates hope to destroy labels and musicians.

                Like I said, you people have no argument.

                Freetard is freetarded.

                Every time.

                 

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                  Jay (profile), Jun 10th, 2011 @ 11:40pm

                  Re: Re: Re: Re: Re: Re: Re:

                  Pandora - False promise of profitability

                  iTunes - Still stands as a frenemy to the Big Four. Makes them money but the labels still complain about how they're not making enough.

                  Qrocity - Proprietary service for the Sony PS3

                  Mog - Limited by AT&T's plans and service. Unless you have unlimited streaming, it's pointless to use it.

                  Rhapsody - Subscription service that isn't as prevalent nowadays. Used by millions, but still not as large as the former Napster.

                  iCloud - Labels bitching about licensing.

                  Spotify - Still not in the US

                  "Like I said, you people have no argument."

                  No, you just never research into what exactly the problems are. Then try to make some argument that it's all doing well. So, again, I ask. Why is it taking so long for Spotify to come to the US?

                  Or do we go into Round 3 where I pull up articles for every last problem of each service and how it's gimped for the US market?

                   

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                    Anonymous Coward, Jun 11th, 2011 @ 3:28am

                    Re: Re: Re: Re: Re: Re: Re: Re:

                    What?

                    Why would the US need spotify?

                    We have MOG.

                    And qriocity and pandora and napster, etc etc

                     

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                      Jay (profile), Jun 11th, 2011 @ 3:05pm

                      Re: Re: Re: Re: Re: Re: Re: Re: Re:

                      All of them the current suggestions are quite limited in what they can offer by the labels.

                      I didn't even hear about MOG myself and wouldn't use it for my phone simply because of the streaming issues with AT&T currently.

                      Spotify, I would use and share with, because I don't believe in a subscription service. Allowing the record labels to pick and choose what services are legal or illegal based on various features continues to keep the services limited in the US.

                       

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              Anonymous Coward, Jun 10th, 2011 @ 10:49am

              Re: Re: Re: Re: Re:

              Yes, an industry's failure to sell things that people would willingly pay for is someone else's fault. Gotcha.

               

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              Richard (profile), Jun 11th, 2011 @ 3:01pm

              Re: Re: Re: Re: Re:

              MOG, Pandora, iTunes, Qrocity, Rhapsody, icloud, etc.

              Tons of new business models.

              Greedy pirates still don't want to pay artists for entertaining them.


              iTunes charges around $1 a song - and gives ~10c to the artist.

              Rumvi charges 15c a song and still pays the artist something.

              Therefore iTunes is ripping off either the artist or the consumer at least 75c a song.

              That is the common pattern with the major labels since forever. Greed at the expense of both customer and artist.

              If the major labels had offered their catalogues at Rumvi prices (or even at Rumvi plus an extra 10c for the artist) then piracy would never have taken off.

               

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          Greevar (profile), Jun 10th, 2011 @ 11:20am

          Re: Re: Re:

          There is no new model? Then you aren't trying hard enough and just want someone to hand over more control that is becoming more and more irrelevant. The horse buggy gave way to the automobile because it was what people wanted. Nobody wants collections of recorded music on plastic discs anymore, they want to download it and put it on any device they desire. They also want to share it with their friends so they can become fans of that artist too. There is nothing you can do to change this either. It's been going on for decades and the music industry (not to be confused with the recording industry) still exists.

          People want the freedom to do with their music as they please and nothing is going to stop them. You best just learn to accept that and build a business around it. Oh, I forget! Label execs aren't creative, otherwise they'd be making the music rather than selling it!

           

          reply to this | link to this | view in chronology ]

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    Hephaestus (profile), Jun 10th, 2011 @ 10:47am

    I agree ...

    ... and would like to point out one more thing. Not only is propping up business models bad for inovation. When they finally do fail, they do so all at once, and leave a huge mess behind.

     

    reply to this | link to this | view in chronology ]

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    Gene Cavanaugh (profile), Jun 10th, 2011 @ 1:10pm

    Innovation

    Great article! I agree with all that was said!
    I will say, to me the greatest threat is big business (or "defensive" IP, especially patents - where the real purpose is not to "protect an invention" or "promote progress", it is to make litigation so expensive that, whether an invention is involved or not, it is too expensive to fight!
    I am personally (after working with defensive patenting until I became too repulsed to continue) believe most defensive patents DO NOT include an invention!
    But, small entity IP (especially patenting) doesn't work, even though litigation is cheap, and inventions (and if you work with me, execution) are involved, don't work because small entities don't have much money!
    There is also a tendency for small entities to want to do things "the way the big boys do" - so, to cut their own throats.

     

    reply to this | link to this | view in chronology ]


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