An Economic Explanation For Why DRM Cannot Open Up New Business Model Opportunities

from the shrinking,-not-expanding,-the-pie dept

Continuing my increasingly lengthy series of posts on the economics of non-scarce goods, I wanted to take a look at an issue that I mentioned in passing earlier this week concerning the ongoing insistence among the entertainment industry (and the DRM industry) that DRM somehow will open up new business models. I’d like to explain why, economically, that doesn’t make sense.

First, to clarify, I should point out that, technically, I mean that it doesn’t make sense that DRM could ever open up feasible or successful business models. Anyone can create a new unsuccessful business model. For example, I’m now selling $1 bills for $1,000. It’s a new business model (well, perhaps not to the dot coms of the original dot com boom), but it’s unlikely to be a successful one (if you disagree, and would like to pay me $1,000 for $1, please use the feedback form above to make arrangements). However, for a new business model to make sense, it needs to provide more value. Providing more value than people can get elsewhere is the reason why a business model succeeds. So, any new business model must be based on adding additional value.

The good news is that value is not a scarce concept. Unfortunately, there are too many in this world who view value and growth as a zero-sum game. They believe that there’s some fundamental limit on the possibility of adding value, and therefore, business models are about moving around a limited amount of value, rather than expanding it. It’s the same fallacy facing those who have trouble understanding zero and infinity in economics. The economist Paul Romer’s discussion on Economic Growth offers a concise explanation for this:

Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding. Possibilities do not add up. They multiply.

Note that it’s the non-scarce products, the recipes and the ideas, that helps expand the value of the limited resources, the ingredients. You expand value by creating new non-scarce goods that make scarce goods more valuable — and you can keep on doing so, indefinitely. Successful new business models are about creating those non-scarce goods and helping them increase value. Any new business model must be based around increasing the overall pie. It’s about recognizing that creating value isn’t about shifting around pieces of a limited economic pie — but making the overall pie bigger.

DRM is fundamentally opposed to this concept. It is not increasing value for the consumer in any way, but about limiting it. It takes the non-scarce goods, the very thing that helps increase value, and constrains them. Those non-scarce goods are what increase the pie and open up new opportunities for those who know where to capture the monetary rewards of that value (within other limited resources). DRM, on the other hand, holds back that value and prevents it from being realized. It shrinks the pie — and no successful business models come out of providing less value and shrinking the overall pie. Fundamentally, DRM cannot create a successful new business model. It can only contain one.


If you’re looking to catch up on the posts in the series, I’ve listed them out below:

Economics Of Abundance Getting Some Well Deserved Attention
The Importance Of Zero In Destroying The Scarcity Myth Of Economics
The Economics Of Abundance Is Not A Moral Issue
A Lack Of Scarcity Has (Almost) Nothing To Do With Piracy
A Lack Of Scarcity Feeds The Long Tail By Increasing The Pie
Why The Lack Of Scarcity In Economics Is Getting More Important Now
History Repeats Itself: How The RIAA Is Like 17th Century French Button-Makers
Infinity Is Your Friend In Economics
Step One To Embracing A Lack Of Scarcity: Recognize What Market You’re Really In
Why I Hope The RIAA Succeeds
Saying You Can’t Compete With Free Is Saying You Can’t Compete Period
Perhaps It’s Not The Entertainment Industry’s Business Model That’s Outdated

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Comments on “An Economic Explanation For Why DRM Cannot Open Up New Business Model Opportunities”

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168 Comments
CoJeff says:

Re: Re:

I certainly don’t! After you stopping paying the monthly fee then the music goes away. This is renting music and I’ll admit to a certain curious nature of a service like that could be nice but certainly not at the current prices. I know a friend that love the subscription service for his boy cause then then he gets to pick a bunch but for me it won’t work. However I don’t worry about a service as my library can play for 3 months straight and is all DRM free. What drm tracks I did have I stripped off.

a says:

DRM is actually a good thing and it is needed.

There, I said it, DRM is a fact of life. That being said, the DRM that has been used by the music industry is not in their best interest.

Companies do need to be able to protect their content, but they also need to ensure that their customers can use their content the way they want. That doesn’t mean being able to send it to their friends, but if they choose to use their content on a pda, a computer, their TV, whatever, they need to be able to do so.

Thinking that DRM is bad is just wrong. Bad DRM is wrong, but DRM itself isn’t.

David says:

Re: DRM good?

Why is there a need for Digital Rights Management? Why is it good? These are the same companies that got as big and powerful as they are in the age of tape recorders and mix tapes. I put every album I ever had on tape at some point, I gave some away, I made copies of others. I purchased music.

Getting rid of drm wont change a thing except it will open up the market for players. The idea that a record company can make you pay for nearly every instance you own of their song is b.s. If they want to make more money, “package, repackage, re-evaluate the costs.” Add new mixes, make new versions.

Music IS non scarce, add value to the product, stop limiting its use. I can give away a book I have. I can give away music I have. I can make a copy and play it in my car. There is no stopping the sharing… but there can be a way to create more value. That or the simplest thing is, like every other institution, RIAA’s companies will have to deal with less profit.

just my two stolen cents.

Alan Mackenzie says:

Re: Re:

Companies don’t “protect” their “content” – they restrict it. The “content” isn’t in any danger – it isn’t going to bombed, it isn’t going to be sexually abused, it isn’t going to slowly fade away. So why are you using this inappropriate and emotionally loaded word “protect”?

Evostick says:

DRM on full value goods, reduces it’s value. But if the DRMed Goods are sold for a much smaller amount then value is created.

I rent films that I would never consider buying. The drm in this case is social (and monetary) becuase I have to return the film. DRM could be used to create a rental product.

Basically, if DRM can be implemented properly, then it can create new products.

I think I agree that it doesn’t add value to an existing product.

Mark says:

Re: Re:

I rent films that I would never consider buying. The drm in this case is social (and monetary) becuase I have to return the film. DRM could be used to create a rental product.

When you “rent” films the actual business model involved is that of a lending library. The way this works is to allow a scarce physical media to be used by many people. It’s a requirement of this that you bring the book, tape, optical disk, etc back to the library within a certain period of time. So that someone else has the ability to use it. There is quite a deal of expense involved in running such a library, including deciding what stock to carry in the first place, ensuring it is sensibly arranged on the shelves, handling issues/returns, dealing with damaged media, chasing copies which arn’t returned on time, etc.
If instead of dealing with physical media libraries handled copies of computer stored “content” then things radically change. No need to decide how many copies of whatever to hold, no need to bother with the whole issue/return thing, no more problems with stock being stolen or defaced. Less actual need for physical libraries. Where you do have a physical library you’d have then selling writable (or R/W) optical disks and portable memory devices (for people who hadn’t brought their own). With a choice between “self service” and having a librarian help you choose what to download.
The idea of files which become unreadable after a certain period of time is rather pointless. If you are running out of storage space you either delete some files or buy more storage media.

John B says:

Not so fast

As much as I hate the MPAA and RIAA and would like to believe that there business model does not add value and is inevitably doomed, this is not the case. As an economist by training, I see a number of problems with your reasoning.

Note that everything I say here applies to movies, too, but for simplicity’s sake, I’m just going to mention music.

First, as someone else here mentioned, the recipes and other intellectual property involved in producing music is scarce in the sense that not everyone has the talent and/or creativity to create music that people want to hear. If you don’t believe me, then you haven’t heard as much non-talented “music” as I have (even though I have very broad taste in music).

If talented musical artists cannot get compensated for their efforts, then they will spend more and more of their time doing other things to pay the bills, even if they like creating music, since they need to eat, have a roof over their heads, etc. In order for artists to get compensated, there needs to be a feedback mechanism where they get compensated if people like their music. If not such mechanism exists, then artists will underallocate the time they spend creating music and spend more time doing things that pay the bills. This is especially true as they get older and the cold hurt more, they need more medical care, etc.

Second, unfortunate as it may be, the music labels do add some value. Not much, but some. As the entities that distribute music, they offer exposure for artists’ music, which can benefit artists and consumers alike. Now, IMHO, they charge many times too much for this service. However, it is hard to deny that the music they distribute is valued by at least some of those who listen to that music. If it didn’t, people wouldn’t buy that music and the music labels would go out of business very quickly. And don’t give me that “brainwashed masses” argument. It’s condescending to the “masses” and intellectually dishonest.

Another argument that reinforces the idea that the music labels offer value to artists is that artists sign up with them. If the artists didn’t think that they would get any value out of the services music labels offer, then they wouldn’t sign up.

Note that many artists don’t sign up with music labels. However, having known many musical artists (I lived in Austin, TX for 5 years, a GREAT city for almost every kind of music, including punk, alternative, psychobilly, etc.), I think that that most often this is not due to the choice of the artist. Most artists would LOVE to be distributed by a label, even ones that create music because they love doing it and don’t really do it for the money, since they know that their music, which they believe in, will reach more people by signing up with a label than by not signing up. Still, some would never sign with a label under any circumstances, and that’s their right.

It seems to me that a business model that would work to get the maximum amount of music to the maximum number of receptive listeners would be an “expiring free listen license”. This would work on the same basic premise that the existing song segment approach uses (where you get to listen to part of a song for free, but if you want to listen to the whole song, you have to buy it). But I think it’s a bit more progressive.

Basically, I would envision a musical website where users would have the opportunity to listen to any music on the site, and they would get to listen to the song a certain number of times (probably something less than 10 times), which might be determined by the artist or by an agreement between the artists and the website, for free. After the user had listened to the song the allocated number of times, the ability to listen to the song would expire, unless the user paid for the song. Ideally, the website would also have other services, such as providing musical suggestions to users, based on their ratings of music they listened to, and artist, song and keyword searches, etc. I think this kind of website would add value to both users and artists alike.

Terry Steichen says:

Scarce versus Non-scarce

Mike,

I think of Wikipedia as taking non-scarce resources (disparate, maybe fragmentary information about topics) and creating a scarce resource (a massive central source of organized information). That seems the opposite of statement that “[y]ou expand value by creating new non-scarce goods that make scarce goods more valuable..”

And a second point, I agree with an earlier commenter, that a ‘recipe’ may be a very scarce resource, if it is a secret or if it is patented. Yet if it has any value, the recipe would allow a (authorized) ‘cook’ to produce exceptional ‘dining experiences’. This also does not seem to fit your stated principle.

Let me say that I’m strongly with you that DRM-based business models are fundamentally flawed, but I suspect my reasons for this belief are different from yours.

Terry Steichen says:

Scarce versus Non-scarce

Mike,

I think of Wikipedia as taking non-scarce resources (disparate, maybe fragmentary information about topics) and creating a scarce resource (a massive central source of organized information). That seems the opposite of statement that “[y]ou expand value by creating new non-scarce goods that make scarce goods more valuable..”

And a second point, I agree with an earlier commenter, that a ‘recipe’ may be a very scarce resource, if it is a secret or if it is patented. Yet if it has any value, the recipe would allow a (authorized) ‘cook’ to produce exceptional ‘dining experiences’. This also does not seem to fit your stated principle.

Let me say that I’m strongly with you that DRM-based business models are fundamentally flawed, but I suspect my reasons for this belief are different from yours.

misanthropic humanist says:

managing abundance

“Possibilities do not add up. They multiply.”

No, they combine factorially.

But let’s move from math to psychology, which I think is far more important in understanding the zero-sum myth. Most people are not comfortable with abundance in Western society. They don’t trust it as a stable state of affairs. Psychiatrists or psychotherapists will probably point to influences in the children of even very rich parents which instill a deep fear of impending scarcity. But in fact this a natural phenomenon, rooted deep within the primate behaviour since we are hunter-gatherers who live on a rotating planet that has seasons. We are essentially programmed to hoarde and worry about availability.

Read the Spolied Bastard strip (I gave a link the other day) where Timmy makes himself vomit by eating all the pies just to make sure that none of the other kids get to have any.

It takes a while to get your head around, but once you recognise the “your gain must be my loss” schema at work you will start to see it all around you in your friends, family, workmates and especially in the world of business and politics. It’s a powerful and common human misunderstanding (pathology is too strong a word, it’s the same counterintuition that means most people don’t understand probablility)

Terry Steichen says:

Business models

Mike,

How is Wikipedia scarce? Wikipedia is increasing value in a different way. It’s taking a non-scarce resource (information) and making it value by helping people find that information (i.e., the scarce resource they’re making more value is attention: people have only so much time and attention to find the information they need. Wikipedia is adding value by applying the non-scarce resource to help make the scarce resource more valuable).

Well its scarce because there’s only one Wikipedia. But the point is that you could certainly build a number of potentially successful business models around Wikipedia. And this seems to contradict your belief about the underlying principle of what must go into a successful business model.

That’s a different situation. That’s where you’ve created artificial scarcity, which is a market inefficiency that won’t last.

I don’t follow you. What’s ‘artificial’ about it? And, why do you conclude that it “won’t last”?

misanthrpic humanist says:

archaic thinking

John. I believe you really have an enourmous journey ahead of you to start to grasp the concepts being discussed here. Sorry, but you are engaging in a 21st century argument with 20th century ideas and I don’t think you realise how different the ideologies discussed on this site are from your position.

“Properly functioning DRM is a mechanism for recovering value.”

Comple nonsense, unless you are using the word incorrectly. It is a mechanism for extracting profit by creating artificial scarcity and lowering the product value. Please take a look at many of the threads on this site and understand that we draw subtle but very important distinctions between “value”, “profit”, “wealth” and “money”.

“For artists, it: (1) offers them exposure and a facility that permits potential listeners to access their music”

It offers no such advantage, in fact it restricts that process. They already have that mechanism which does not require DRM.
It’s called the internet, a system of interconnected servers and routers that provides dissemination of material for practically zero cost.

” and (2) creates a system for a feedback loop of rewards to artists so that they can make a decent living using their talents so that they continue to make new music.”

Firstly, they already have that. See above. There is simply no incentive for an artists to cripple their work and reduce its interoperability with commonly used standard playback systems.

You completely fail to understand the motivation of artists, which is not primarily financial. Musicians whos primary motivation is money tend to make shit music. The old system to which you allude is one which selects only a few artists to be the privillaged benefactors of a system that rewards them at the expense of all other musicans, it is exclusive, devisive and an attempt to perpetuate the zero-sum fallacy that we are arguing against here.

“For users, it provides the opportunity to (1) find music they want to find”

No. That is a search and refinement problem, it has nothing whatsoever to do with DRM.

“(2) find out about new music that they haven’t heard yet; “

Again, what possible relevance does DRM have to the task of selection by categorical similarity in genre?

“(3) listen to new (or not new) music for free; “

Again, DRM plays no part whatsoever in this process which is accomplished by the available tools of P2P, aggregation and DJ sites, netlables and individual artist site indexes.

“and (4) buy it if they want to continue using it indefinitely, which I would think would be valuable (otherwise, they wouldn’t value it).”

You are working with an old paradigm of “buy” and “value” which I suspect involves reducing the “song” to a unit product of fixed cost. The modern internet culture is about building relationships between audiences and artists at a peer level. Many successful models are emerging where the audience pay for music directly to the artist or netlable through subscriptions, donations, and other social exchange currencies (such as promoting, hosting, dissemination). In itself data is just bits, 1s and 0s, it has no value whatsoever. The value is a psychological connection, a relationship between the listener and the artists product in regards to its emotional and cultural context.

“Providing “free” music as the primary method of music distribution in the world isn’t sustainable unless some rich guy decides to spend billion of dollars per year to design and host a site for free.”

Absolute nonsense. Go and search the internet for the MILLIONS of artists out there who now manage and administrate their own output. The modern artist is very technologically savvy and sees maintainance of their own site as part and parcel of the business of dissemination and identity. Hosting and bandwidth is virtually a commodity and these days only absolute amateurs have not taken the step to manage their own output.

“And even then, if artists are not compensated, they will eventually stop producing their art, or at least produce much less of it than they would if they were able to make a decent living off of it.”

Please search the archives and see how many times this erroneous thinking has been shot down in flames. Financial reward is not a precursor to artistic output. There is no one to one or proportional correspondence between cashflow and artistic output. Some of the best bands and solo artists around today have proper day jobs as professionals in other domains. They use this as a platform to make art in their spare time, which eventually becomes an additional income (sometimes exceeding their salary). The old days of the record company sponsored full time artist is virtually dead save for a few plastic manufactured pop acts and touring stadium rock bands from the old guard.

I hope you can get up to speed on the philosophies and observations under discussion here, but it will mean letting go of a lot of what you think you know about the old music business.

with respect

Anonymous Coward says:

Re: archaic thinking

With all due respect, MH, I think I understand this far better than you do. I have been studying these kinds of issues in both academia and the business world since I was in graduate school 16 years ago. I have founded and owned two internet-related businesses (the current one is earning me a nice income), and one of which was music-related (oh, and it was “free”).

I understand value, but I think you have too narrow a definition. DRM helps recover investment. It recovers money. If you don’t think money is valuable, please send me all of yours. I am sure I can find something valuable to do with it.

“For artists, it: (1) offers them exposure and a facility that permits potential listeners to access their music”

It offers no such advantage, in fact it restricts that process. They already have that mechanism which does not require DRM.
It’s called the internet, a system of interconnected servers and routers that provides dissemination of material for practically zero cost.

I don’t think you understand the interrelated points I am making. But first I think I need to clarify something. Time is valuable. To everyone. Without exception. The search costs of finding music that one likes on the wide open internet, in terms of time, have become enormous. And, when you find the music you like, I’m betting that it’s on a website somewhere, where someone has to pay for it. And program it. And maintain it. Etc. Web sites don’t just happen. Web servers don’t just appear. Eventually, they have to be paid for. That’s one reason (not the only one) why the free music model isn’t sustainable.

Don’t get me wrong. I know there will always be “free” music. “Free” music existed long before the computer was invented. People sang and played instruments in their houses for family and friends and didn’t charge a penny for it. But the range of songs was very limited, quality was highly variable and it required a fair amount of effort to produce each time it was heard.

Now, the costs of reproducing the music are much lower. It’s the search costs and the background infrastructure costs that are more important. Organizing the songs, “match-making” (between interested listeners with songs they like) and reducing search time is the advantage of having them on one or more related structured websites. And that doesn’t happen for free for long.

Firstly, they already have that. See above. There is simply no incentive for an artists to cripple their work and reduce its interoperability with commonly used standard playback systems.

You completely fail to understand the motivation of artists, which is not primarily financial. Musicians whos primary motivation is money tend to make shit music. The old system to which you allude is one which selects only a few artists to be the privillaged benefactors of a system that rewards them at the expense of all other musicans, it is exclusive, devisive and an attempt to perpetuate the zero-sum fallacy that we are arguing against here

Money is an incentive. Like it or not, it is. Money is a means. It is the liquid asset that reduced the need for bartering, which was a very cumbersome way of doing business. And I do understand that artists do what they do for reasons other than money, as I have specifically indicated in my previous posts. I like to write. I write poetry and have even won some national awards for it. I do understand the artist motivation very well. I wish I could make a living at it. But, realistically, I can’t. And so, like many other people who like to create, my art is relegated to being a small hobby, since I can’t make a living at it. People will only spend so much time doing something that doesn’t make them a living when there are bills to pay. I’ve lost count of the artist friends that I have had who were talented and did not do their art for the money, but who have either stopped doing their art or do it very rarely because of the pressures of everyday life. Now, if they could make a decent living at it (and I’m not talking riches here, I mean even $20-$40K per year), they would still be doing it. By the way, I do agree with your last sentence in the paragraph above.

No. That is a search and refinement problem, it has nothing whatsoever to do with DRM.

So, who pays for developing and maintaining it? That’s where DRM comes in. It’s a means of financing the necessary infrastructure. I know that sounds like the rationale for the old record labels, and there are some similarities in the logic. But what I am proposing is much closer to the peer-to-peer situation you espouse than I think you realize. Bandwidth and server hosting costs have gotten quite reasonable, but they are not as close to zero as you seem to think. But, to the extent there is competition in the market, which I think there is, these costs will work their way into the business model I am proposing.

Let me clarify something. The system I am envisioning would not charge $1 per song, like iTunes, but probably closer to 10 cents per song, or whatever would cover the costs of establishing and maintaining the system.

Let me ask you this: Which is more efficient, both in terms of IT resources and in terms of user and artists cost in terms of time: 3 million websites on 500,000 servers spread around the globe with no organized connection OR one or a handful of competing sites that actually help organize and track the stuff? Which do you think will have lower search and transaction costs? Now, which do you think is the most likely to be the dominant model?

Vincent Clement (profile) says:

Re: Re: archaic thinking

I understand value, but I think you have too narrow a definition. DRM helps recover investment. It recovers money. If you don’t think money is valuable, please send me all of yours. I am sure I can find something valuable to do with it.

This has nothing to do with how “narrow a definition” we are using. It has to do with perspective. An artist may see value in DRM because, as you say, they believe it will recover their investment. The end consumer sees no value in DRM because it restricts how they can use the content. If the consumer sees no value in DRM, then it is likely to fail, regardless if it is useful to the artist.

The only way for DRM to ‘succeed’ is by passing laws that makes DRM mandatory for all digital sources. And that my friend, is a government approved distortion of an efficient market.

Robert Krawitz says:

Re: Re: archaic thinking

No. That is a search and refinement problem, it has nothing whatsoever to do with DRM.

So, who pays for developing and maintaining it? That’s where DRM comes in. It’s a means of financing the necessary infrastructure. I know that sounds like the rationale for the old record labels, and there are some similarities in the logic. But what I am proposing is much closer to the peer-to-peer situation you espouse than I think you realize. Bandwidth and server hosting costs have gotten quite reasonable, but they are not as close to zero as you seem to think. But, to the extent there is competition in the market, which I think there is, these costs will work their way into the business model I am proposing.

This makes no sense at all. The cost of the bandwidth and hosting is completely independent of the content; it’s the same per gigabyte whether the data being served is music, movies, or Knoppix. In addition, there’s no cost to the original host site in any event if the content is shared peer-to-peer over a different network.

Let me clarify something. The system I am envisioning would not charge $1 per song, like iTunes, but probably closer to 10 cents per song, or whatever would cover the costs of establishing and maintaining the system.

Maintaining what system? The distribution system? In that case, remove the DRM and allow people to develop other distribution systems that are cheaper. If the bandwidth is really more expensive than most people think, the costs of peer to peer sharing will be high enough to compete with people selling unencumbered music off their websites. If it’s as low as most of us think, then for-pay distribution systems won’t be a viable business.

Evidently ISP’s are able to make a profit at $20/month for essentially unlimited service (much of which is P2P traffic). If a typical song is a 3 MB Ogg or MP3, 10 cents would work out to $33/GB, and I don’t think we’re seeing retail bandwidth charges anything like that.

Let me ask you this: Which is more efficient, both in terms of IT resources and in terms of user and artists cost in terms of time: 3 million websites on 500,000 servers spread around the globe with no organized connection OR one or a handful of competing sites that actually help organize and track the stuff? Which do you think will have lower search and transaction costs? Now, which do you think is the most likely to be the dominant model?

If that is really the case, then a viable model might be to sell subscriptions to the search engine that matched musical tastes up with new music. If it really is the case that people would prefer to pay than to spend the time scouring the net, then there shouldn’t really need to be any DRM, since even if people share their music out it’s going to cost other people more to search the shared music themselves than to pay the search engine. Artists who aren’t well known should be thrilled to receive this kind of exposure, because it would match them up with people really interested in their music (even though they don’t know it yet!).

Isaac (user link) says:

The SellaBand business model

“If I give you a pfennig, you will be one pfennig richer and I’ll be one pfennig poorer. But if I give you an idea, you will have a new idea, but I shall still have it, too.”
— Albert Einstein

There is a new music startup with a business model that does use non-scarce goods to its full potential: SellaBand. They let everyone download the music for free (no DRM). They will generate revenue with ads on the download site, to cover the hosting. They let the community finance the recording by selling $10 parts up front (they can get a refund, so there is no risk), for which they will also receive a limited edition CD. That also provides them with a revenue stream from the interest on the money paid up front. You can read it all on their site, the main feature here is the free downloads and that you can create a sustainable business model that preserves non-scarce goods, meaning: without limiting their use which artificially makes them appear as ‘scarce’-goods.

From the point of view of the ‘common good’ it is highly desirable not to put artificial limitations on non-scarce goods. For example we would like the people in the developing world to be freeloaders when it comes to Wikipedia. That is why I would prefer the SellaBand business model over subscription models. However if too many in the western world try to get a free ride, a subscription model might give better results. I think we should try both and see what works best.

(I’m sorry if this is a double post)

Karine (user link) says:

DRM

Interesting points brought up by all…

I agree DRM is a lose-lose situation for all. Plus anyone can turn a DRM-song into a non DRM-song! I’ve never done it, but I know I could easily. Soon the whole model is going to change anyway, more and more consumers are using encrypted file-sharing to swap files, GigaTribe being the most recent example ( http://www.gigatribe.com ).

The record and movie industry needs to eliminate all middlemen and cut prices in half, THAT will make for a more profitable business.

Maximus (user link) says:

Sorry

Sorry Mike, I think you’re out in left field on this one.

The reason people say that DRM INCREASES the pie is because it can be used to offer different levels of value for different prices.

For example, DRM, with its constraints, would allow you to download a song you can only listen to once. That song would cost substantially less than a song that ‘s totally unlocked. If there is someone who only wants to hear a song once, for, say, $.25 cents, VOILA! you’ve created value. That would be impossible without DRM.

That’s the argument.

-Max

ScytheNoire (profile) says:

John B is so short sighted

I’m shocked how short sighted John B is, he sounds like the RIAA/MPAA is shoving money in his pockets to spew bullshit.

DRM adds no value to a product. Music industries were needed for distribution, but with the internet, and small file size of music, along with broadband, music labels are no longer needed to distribute music. Any one can distribute music.

Music labels used to promote bands, but now bands get better promotion by going online and advertising to their target community. Go to punk sites if you are punk, country sites if you are country.

There are still some hurdles, such as the corruption of the radio industry and the labels controlling what gets played, meaning the same boring crap gets played over and over. But this too is changing.

The music labels are no longer needed. It can all be done on their own. And if a band truly wants good promotion, they would go get a loan if needed, or get private investment, and then spend the money on an actual advertising firm to get true advertisement.

Same is going to be true for movies, the movie industry is going to no longer be needed. Internet speeds will get faster, making movies will get easier with technology, private investors and banks will fund projects worthy of funding, and advertising firms will advertise it.

I look at how popular “This film is not yet rated” was even when the MPAA tried to block it and stop it from reaching the public.

Fact is it’s a new world for media, the MPAA and RIAA have fought against it, and they losing badly. They will die off because they refuse to change with technology and adapt. The future has no need for companies that try to control the content, as there are enough out there to make sure that the control thrives without control.

Good bye RIAA and MPAA, you will not be missed. You were too old, too slow, and too stupid to survive in the 21st century.

I think they could really take some lessons from the porn industry.

By the way, releasing music for free, as promotional for where artists make their real money, in concerts, is the most brilliant move. Too bad that just means cutting out the labels, because they just aren’t needed.

Hal says:

Do you actually know any economics?

Are you familiar with the distinction between public goods and private goods? Public goods are defined as non-rival and non-exclusive. That is, if you give it to someone, you still have it and can give it to someone else; and, if you give it to someone, everyone else can get it. Classic examples are clean air and national defense. Content without DRM is a new example of a public good.

Private goods are conventional physical goods which have opposite properties.

The reason for the distinction is that public goods are under-produced in a free market. That’s why government has to intervene to make sure they get produced. Private companies do not provide clean air, because they can’t limit it to their customers. Public goods are terribly inefficient, economically.

In contrast, private goods are optimally produced by the market. The level of production automatically adjusts to satisfy social needs while reflecting inherent costs.

DRM is fundamentally an attempt to be able to turn content from a public good into a private good. It will act more like a pencil, something that can be controlled and limited and charged for, than lie clean air, which everyone gets automatically without paying for it. And this is a GOOD THING. It means that the levels of production will be optimal even without government regulation.

Without workable DRM, we will have too little content produced, and the only solution will be some kind of government action, lie a tax on downloads which gets fed back to content creators. That’s the direction we are going to end up in if DRM can’t be made to work. It’s no different from pollution control, public safety or other public goods. Sooner or later the government will take over responsibility for them, if the market can’t find a way to privatize them and ensure that the creators and distributors reap the profits from what they create.

Lyle Edwards says:

This is a stupid argument!

So because I lock the front door to my house, somehow I am shrinking the economic pie for furniture, electronics, appliances, jewlery etc.. This is the dumbest argument I have ever heard. Locking my door does not create a new business model, but it sure expands and extends the existing legitimate business models. In fact, by locking my door and adding a security monitoring system, a whole new bsuiness is born. You are foolish to think that just because it is on the internet is shold be free. This is more the attititude of a communist. The collective good. Non-sense. Dribble. Pablum.

Paul says:

Oh Come On!

More than a few years ago, content could not be copied efficiently. I could get a copy of a tape from a friend, but I couldn’t get 1,000 without significant effort. The fact that I could copy something was pretty much ignored because it was impossible to scale up. Nobody really “respected” copyright in any way, people were just practical.

Today, there still is no “respect”. DRM is an attempt to enforce respect for copyright. It fails in this. For the most part, it is ignored, bypassed and broken. The poster saying DRM is an attempt to take music from the public domain and make it private is correct – without effective DRM music will be shared and not paid for because most people aren’t going to pay for it.

Like shareware, perhaps 5% of the people will pay for music. The rest will just listen. As they are doing today. At this level of compensation there is no “promotion” or radio air play. We are looking at a significant change in a large segment of the Western economy because of this. Oh, the artists will find other ways to make money. Not as much, probably, but they won’t starve. But the millions of jobs that today are in music-related industries (distribution, trade publications, radio, stores, etc.) are going to be gone.

It doesn’t have much to do with DRM anymore. DRM is being walked around by the people that it is designed to affect, and it is a short stroll. DRM discussions assume there is an alternative yet to be discovered. It has been discovered, and it is called P2P sharing and advertising supported web sites hosted in foreign countries. You get it for free, today. I don’t see putting the genie back in the bottle has a chance.

If you work for a business that derives revenue from music, I’d be looking for a new line of work. Soon. The change is coming.

Freddie says:

It's all about the benjamins

Something to keep in mind when thinking of how DRM affects the artists. Most artists, not all, but 99%, do not make much money at all off the album sales. Instead they get their paydirt from their own tours. DRM isn’t really affecting the artists, it’s affecting the labels and the RIAA. Why do so many small independent labels support DRM free content? It’s all about money, we all know that, and the more control they can exercise over their product the more money they think they will have. The reality of DRM dieing any time soon is slim to none in the music industry. About as likely as Microsoft open sourcing Vista.

Maximus (user link) says:

Agreed

Agreed. DRM works. It protects content. Circumventing it is just too easy. But remember, circumventing it is ILLEGAL.

Yes, Artists get most of their money from concerts. But, recording fees (which are very high) are paid for by the labels. Without the labels, there would be much fewer artists out there, just the same as if there were no venture capital industry, there would be far fewer startups.

Labels take a chance on an artist and need to make their money back. Ok, they’re evil and price-gouging, but that doesn’t matter. Fact of the matter is that they serve a purpose.

Don’t get me wrong; I don’t like DRM as a consumer. But I recognize that it serves a purpose. Just because we share songs, and don’t respect laws, doesn’t mean that DRM is faulty.

Please understand that there are many good/valid arguments for keeping DRM around. Don’t buy into the hype. Until the music industry finds a whole new way of monetizing music, DRM will be a reality.

-Max

Rusty says:

Re: Agreed

Recording fees are high because the record labels are free to set them. Artists are forced to use the record label’s studio when they sign their contracts. It’s an artificial monopoly. You can convert your basement to a recording studio for much less than the cost of a typical recording session.

As the article says, circumventable DRM only reduces value. It is just as illegal (and easy) to circumvent DRM as it is to pirate content.

However, I generally have to circumvent DRM to watch content on my media center computer or portable music player. Therefore, when I watch a DVD, I break the law.

If I couldn’t circumvent the DRM, I’d have no incentive to pay for the content, except, perhaps, charity for the artists. Indeed, I waited until DeCSS was available until I purchased my first DVD.

I own an HDTV. If BluRay and HD-DVD players were free, and HD movies were half the price of DVD’s, I would still buy DVD’s. The cost of changing my habits to deal with the DRM outweighs the benefit of viewing the content.

I happen to use free (as in “freedom to modify”) open source software for most things (I need it for work, am paid to develop it, and prefer it at home). Any modifiable DRM implementation would allow circumvention. Even if I didn’t use Linux, current DRM is a nightmare for portable music players. Besides, DRM’ed content isn’t guaranteed to play next year.

In all but a few rare cases, artists receive no value from DRM. They don’t profit from album sales and DRM makes it harder for new fans to discover them.

A while ago, I mentioned charity. Much less than 10% of most CD sales go to the artist, while the rest goes to the RIAA. If it were legal, I’d send the money directly to the artist, and download a pirated copy instead. Given the hardware I own, listening to DRMed music is illegal. Since either route is criminal, I guess I’d have to let ethics guide me. That’s bad news for the RIAA.

So, with apologies to Max: “Don’t buy into the hype. Until the artists find a whole new way of monetizing music, abusive record labels will be a reality.”

Eric says:

Promotional music ... future

Many artists use music as a purely promotional purpose these days, which shows us something interesting: Artists realizing their real value as artists and not entertainers. An example I will use: http://www.generationtrance.com/
DJ Gt and Project c do promotional work with other artists who communicate on their website. They post all their music for download as well as play on DI.FM, internet radio.

Anonymous Coward says:

Imminent collapse of the music industry predicted

I’m still amused by the posts by people like John B. DRM-free digital music has been available for >17 years on CDs. The ability to rip the music and distribute it digitally has been available for > 10 years. Clearly, since the cost of copyright violating distribution is so low, the music industry has already economically collapsed.

Or maybe, as the evidence clearly demonstrates, people are not the criminal sociopaths that the Harvard Business Review explains that corporations are (especially when acting as the economist’s idealized rational economic agents).

The myth that “not having to pay” equals “no one will pay” is false. It is repeatedly demonstrated to be false by economists when engaging is socio-/psychological experimentation, much to their near-sighted astonishment. People are not rational economic agents. People do no value money monotonically (much less linearly or logarithmically, as various models predict they should). People do not evaluate risk rationally.

In short, people do not enact the self-destructive behaviour that economic theory predicts. Since the theory doesn’t match the facts, the conclusions are bogus. One might as well latch onto the conclusions derived from a theory of the aether or of phlogiston.

Now, in a market occupied by rational economic agents (corporations being a much closer approximation in real life), one can correctly predict the collapse of the market under a free distribution model. So, don’t sell free music to corporations. Problem solved.

Esteban says:

it doesn't matter.

As long as there are people who buy CD’s and rip them to their computers/iPods, there will be illegally distributed copies of all kinds of media floating around because these are the same people who use torrents and other P2P’s such as Limewire. I would know. I’m one of them.

Even though the dispute over DRM is important, it is ultimately irrelevant as long as CD’s and DVD’s are not protected.

Alexander says:

Um. No. It’s not at all. A car is scarce. If I take your car, you no longer have it. If I copy your song, you still have it. That’s the entire root of this discussion.

So what? Ok, invest two years of your life writing a book. Now I come and copy it, Hey, you still have it!. Be happy. Life’s good. Next time your kid comes asking why you can’t buy him X or your wife asks for Y, tell them : “I’m an artist – I can’t waste my time earning money. I have an inner desire for writing for free”.

No matter how you twist it, the fact is that many artists are financially motivated. Yes, there are some who aren’t (or at least say so, which is doubtful at best). About quality – Shit or not – well, that’s your personal oppinion which cannot be used to prove anything. Your shit is someone else’s celestial music, and vice versa. The fact that people go to Britney Spears’ concerts and pay for her CDs clearly show that it’s not shit for them.

But I propose you a challenge. Let’s say I’m as talented as [insert your favourite director here]. No one knows me, and I want to make a movie. Let’s assume that we both know 100% for sure people will like this movie. Combined production costs are $10M. Ok, now tell me – what do I do? (specifics, please, no generic reasoning). Where do I get this money from?

Robert Krawitz says:

Re: Re:

But I propose you a challenge. Let’s say I’m as talented as [insert your favourite director here]. No one knows me, and I want to make a movie. Let’s assume that we both know 100% for sure people will like this movie. Combined production costs are $10M. Ok, now tell me – what do I do? (specifics, please, no generic reasoning). Where do I get this money from?

Knock the production costs down.

Alexander says:

Re: Re: Re:

Knock the production costs down.

That’s a nonanswer. The production costs are what are. Or else, explain to me how do you go to a computer shop and “knock the cost of the computer down”. After all computers are needed to make digital effects. Costumes are needed for the actors. Sets and models are needed. Cars are crashed. Feel free to explain to me how do I “knock these costs down”. I might as well start applying your method in my own life.

Robert Krawitz says:

Re: Re: Re: Re:

That’s a nonanswer. The production costs are what are. Or else, explain to me how do you go to a computer shop and “knock the cost of the computer down”. After all computers are needed to make digital effects. Costumes are needed for the actors. Sets and models are needed. Cars are crashed. Feel free to explain to me how do I “knock these costs down”. I might as well start applying your method in my own life.

Your scenario is actually farfetched in its own right — even with perfect “protection” you really have no way of knowing in advance whether a movie will be profitable.

As far as knocking costs down, it’s all in the details, just as in real life. Hire less expensive actors or convince them to accept less upfront in exchange for more of the take. Find cheaper costume suppliers. Hold down on the special effects. Keep looking for ways to economize. The production costs are what you choose to spend on; they aren’t “what they are”. The Blair Witch Project was a successful movie on a tight budget — what was it, something less than $100K, right?

How do I knock the costs of computers down? Take a look at what Dell, for example, does — use cheaper components, optimize the manufacturing process, etc.

jcp says:

Refutation

I refute it thus! ebay.

After a scan of your article, it appears you are not considering the considerable market activity in collectibles. Here is a market based primarily on false scarcity. For an easy example, baseball cards. By creating a false scarcity trading is encouraged at every level. The cards themselves have little inherent value, either economic or entertainment. In fact their origin is as a freebie for buying the gum. The actual economic activity and all of the enjoyment is in the collecting, trading, viewing, etc. of an artificially scarce product.

Now some might say that the original can be labeled or watermarked or somehow identified as special and it’s scarcity will remain, but if the market is flooded, even with poor copies, the scarcity is elusive and the after-market of collecting can not survive.

For examples of this business model, I refer you to Topps, Swatch, Hamilton Mint, Lladro, and most modern artists.
-jcp-

Daniel Eran Dilger (user link) says:

DRM is not a value add, but simply loss protection

“Successful new business models are about creating those non-scarce goods and helping them increase value.”

The article presents reasonable ideas, then suddenly jumps upon DRM in a non sequitur that sounds like the Chewbacca Defense.

DRM isn’t a value add process, it’s loss prevention. Inventory tags on retail goods and the locks on the doors of businesses don’t “add value” or create goods or new business models, they protect goods from being taken without payment. DRM does the same.

DRM is like taking the recipes you talk about and making them difficult to remove from your kitchen. Users have to come to your kitchen to buy your finished goods, enabling you to profit from the recipe ideas you created, and encouraging you to develop new recipes to profit further.

In the digital realm, the scarcity that creates value in marketed goods is not the CD or the media files, but the intelligence and artistic talent that created the work. If you allow anyone to take it and copy it, your goods become valueless because of the near infinite supply of unauthorized duplication.

Anonymous Coward says:

Loss protection for whom?

DRM that retained IP control for the artist is what you describe in your example. In the music world, DRM retains IP control for the truck driver. I.e., DRM supports control by the middle man. In a world where baked goods can be copied effortlessly and transmitted effortlessly, DRM only seems like a good idea for the truck driver; the baker and the consumer both perceive a reduction in value — the baker because now the consumer can no longer engage in viral marketing by sharing (plenty of examples in both the music and print worlds where online “free as in freedom” access to the back catalog has increased current sales) and the consumer because now the *truck driver* gets to dictate where and when the consumer may eat.

The role of the middleman is increasingly irrelevant. An efficient market would already have eliminated most of the cost burden created by the irrelevant portions of the labels’s costs. DRM is an attempt to enshrine this inefficiency. (… and also ensures that no work ever enters the public domain. Why should the DRM expire or be circumventable when the copyright expires?)

Anonymous Coward says:

Bankrolling without middelmen

To respond to Alexander…

Method 1) Use the method that was popular from before the Enlightenment until now in Eurpoe. Find a rich benefactor to bankroll your art. Worked for Bach. Worked for Mozart (more or less).

Method 2) Use the method that replaced that — used up until the present, which I will call the “Evil Dead” method, since that movie used this method. Find private investors. Convince them you’ll make money on your movie.

Method 3) Used for the past several hundred years. Start a corporation for the purpose of making your movie. IPO the company. Thereby securing public investing. Go make your movie.

Method 4) Practiced for the past few hundred years, especially viable now. We’ll call this “The Call of Cthulhu” method, because it was used to make that film. See http://www.cthulhulives.org/cocmovie/ . It amounts to: start an NPO, accept a lot of free help.

Method 5) Since you mentioned computerized CG, the movie you have in mind is suitable for the “SETI@Home” method. All the CG is free since you get it from people who donate spare cycles to your project, solely for a credit, telling their friends all about it, and maybe getting a free copy when it’s done. (For more examples, see Folding@Home, distributed.net, BOINC, et al.)

The cost of Production *can* be reduced. $10M is a typical “management” compromise between dollars, hands, and time. If you can spend longer getting it out the door, it can cost vastly less. See: “Star Trek” New Voyages” ( http://www.newvoyages.com/ ) for an example.

Method 6) Put up a web site, take donations, make your movie. Currently being tried with “A Swarm of Angels”. http://www.aswarmofangels.com/

BIllyG says:

DRM == Artificial Scarcity

It’s quite simple really. Distribution is now free. Business models based on the scarcity of physical goods, like CDs, are dead. DRM is a desperate attempt to get back control of the distribution channel by creating an artificial scarcity. Consumers will reject DRM and it will continue to fail.

This does not mean that new business models can’t be created, but the old ones have most definitively run their course.

Alex N says:

Interesting argument, but completely wrong

By the same argument as this article, copyright enforcement in general diminishes value. That is pretty ignorant. Indeed, prohibiting people from duplicating DVDs and books en-masse, and posting commercial software on web sites, are all manifestations of “rights management.” DRM is simply the enforcement of that same rule that doesn’t allow you to photocopy and distribute books. Because digital content is so easily copied and distributed, the copyright protection needs to match. No longer does a simple copyright notice, but some sort of barrier is necessary.

Without DRM, the production of content and the surrounding economies will collapse.

We would all like all of our content and software for free. Unfortunately, that is an absurd goal.

Alexander says:

Use the method that was popular from before the Enlightenment until now in Eurpoe. Find a rich benefactor to bankroll your art. Worked for Bach. Worked for Mozart (more or less).
Except if you consider the ‘small’ nuance that you can immediately see and judge what Mozart does before you patronize him, but until you have spent a good quantity of your money you can’t see the quality of a movie. As an example, the average cost of an 1h pilot episode for a series is in the *millions* range. But hey, if this system goes as back as the middle ages, I’m sure there are plenty of $10M movies from unknown moviemakers that have benefited from it. Feel free to illustrate me on specific examples.

Method 2) Use the method that replaced that — used up until the present, which I will call the “Evil Dead” method, since that movie used this method. Find private investors. Convince them you’ll make money on your movie.
Except that you are definitely not going to make money. After all, once the movie is created, marginal cost is zero. Anyone can get it for free. Oh, but you still have it, so be don’t worry. Life’s good. Abundance. Where can I download a free legal copy of Evil Deeds, by the way?

Used for the past several hundred years. Start a corporation for the purpose of making your movie. IPO the company. Thereby securing public investing. Go make your movie.
Same as above. Do you buy shares from companies that do not plan to make money, and whom you do not know? Then I don’t know why you expect others to do. By the way, I have an idea for a great movie that won’t make any money. Feel free to send me your dollars. Also, feel free to point me examples of freely downloadable movies made this way. I guess there should be lot of them, if the method is so popular and successful and has such a long history.

It amounts to: start an NPO, accept a lot of free help.
In 2005 , about 530 new movies were produced. marketed and distributed in the US, at an average cost of $96M per movie. That makes 50 billion dollars in costs. The total charitable donations in the US the same year (which was the year of the asian tsunami donations, by the way) were 250 billion. Good luck achieving a 20% increase in charitable donations for anything, much less movie making. Or are you going to scale down production of movies? We’ll have… how many? 10 ,20 movies per year?

The cost of Production *can* be reduced. $10M is a typical “management”
Actually, even if you remove marketing and distributionc osts, the average movie costs six times that amount. Today, and that’s a fact. Just because you want or think that costs can be reduced to less than 1/6th of their present value doesn’t make it so. But if your plan is so good, please do talk to movie companies so that they implement it. After all, I doubt they would have any objections in cutting their costs in 5/6ths, especially if you offer your idea for free (because its marginal cost of thinking of it again is 0). After you are done, I’d be glad to examine your results (as opposed to your whishful thinking)

Since you mentioned computerized CG, the movie you have in mind is suitable for the “SETI@Home” method. All the CG is free

Sure. Come work for me, for free, if you don’t mind. If you don’t work for free, I don’t know why you expect others (modellers, artists, animators) to do it. CG is not only *rendering*. Or do you believe models and animations appear out ouf thin air? And Seti@Home has quite a bit of server-side iron and bandwidth which is not free, either. Ironically, Paramount Pictures donated $100,000 to Seti@Home for the project to start

Method 6) Put up a web site, take donations, make your movie. Currently being tried with “A Swarm of Angels”. http://www.aswarmofangels.com/

Yeah,well : let’s see. Its currently March 2007. The project started at least in January 2006 (there are archived news from that month). So in 15 months they have managed to get 900+ angels @ 50 dollars each = $40.000 WOW! Not bad for a target of $2,500,000.
May I expect this movie to be released in the next five years? Is this going to be production rate of movies in your economic model?

Anonymous Coward says:

Flawed reasoning

The analogy is flawed. The scarce things of value in your example are the raw ingredients and the final product – the cake, if you will. In music and movies, the scarce things of value is high quality performances.

Absent DRM, consumers can only obtain the scarce quality performance by purchasing another (less scarce) resource – some physical media, or limited access to an actual performance. All of these forms come with “limits”. The ticket to the live performance usually prohibits recording, or your ability to record is “low quality”, relatively speaking. The CD or DVD requires a player of some sort and physical space to store the media.

DRM merely defines a different way (a recipe) to enjoy the scarce performance.

It is adding a (non-scarce, economically speaking) resource – DRM, an idea – to provide another means for consumers to obtain access to the (scarce) performance. It is baking the raw ingredients of value (the one time, studio performance, well mixed and engineered) using a different recipe. DRM is expanding the pie, not shrinking it. I don’t need additional storage space for physical media. I don’t need to pay for 12 tracks to enjoy 1.

I still have those choices, mind you, as I also have the choice to limit my purchases to those performers who do not invoke copyright protection for their work. So in no way does DRM limit consumer choice, it merely provides an additional choice that has a different value proposition for both producers and consumers. Some people obviously like it, others clearly do not. Until too few people do, DRM will remain a viable, successful business model. Just like the telegraph.

Alexander says:

Your scenario is actually farfetched in its own right — even with perfect “protection” you really have no way of knowing in advance whether a movie will be profitable
Of course you don’t. But I was trying to be benevolent towards Mike by removing subjective issues like quality and such. If a 100% guaranteed movie can’t get $10M, how on earth will a real movie get them?

Also, I never spoke about being profitable. I only said that people “will like it”. How do you plan being profitable? After you make your movie, your marginal cost is zero. Anyone can get a copy for free (and you keep your copy, yes). So, how do you plan being profitable (This, assuming that you get the money to make the movie in the first place, which has still not been answered).

Hire less expensive actors or convince them to accept less upfront in exchange for more of the take. Find cheaper costume suppliers. Hold down on the special effects. Keep looking for ways to economize.

Excuse me, but that’s a different movie. My movie comes with these costumes, that cost X, these actors that cost Y, and special effects that require hardware Z and that’s why I’m able to say it will be likable. Or are you saying that people don’t care about what appears in a movie? They don’t care if instead of Tom Cruise you pick JohnUnknown? If instead of state-of-the-art effects you use soft cork decors built by inexperienced art students on their free time?

Well, they do. An obvious example : “Abre los ojos” and “Vanilla Sky” are essentially the same story and movie. But one features high-profile actors and effects, and the other doesn’t. Results: check for yourself:
http://imdb.com/title/tt0125659/business
http://imdb.com/title/tt0259711/business

The Blair Witch Project was a successful movie on a tight budget — what was it, something less than $100K, right?
So what? Nobody is saying that I cannot make a YouTube video for $5 and become a millionaire because I do something funny or stupid for the first time ever. We are speaking about sustainable business models for all artists. Doing a stupid video is not “sustainable”, because my next video doing the same thing or something else will probably not earn me a penny. Blair Witch 2 had many times the initial budget and was a bummer. Obviously curiosity and novelty played a factor in the initial success.

Oh, and by the way, current movie production average is $60 Million. I’m only asking for $10 Million. I’ve already some magic cost reduction and am capable of making a 100% guaranteed movie for 1/6th of the real-world cost. Even with this utopic setup, I’m not getting any real answer about where this money is going to come from if I plan letting people get the movie for free.

How do I knock the costs of computers down? Take a look at what Dell, for example, does — use cheaper components, optimize the manufacturing process, etc.
Again, generic nonanswers and hand-waiving. I’m not speaking about Dell, I’m speaking about movie making. How do I, the movie maker and not the computer builder, drive down my computer costs. By picking a cheaper computer? Wow! That’s surely something that hasn’t occurred to movie industry executives. For some arcane reasons surely they are picking the most expensive computers available, just to keep production costs high.

I’ll be more specific.
Do you have some concrete cost reduction idea that studios aren’t currently using?

Alexander says:

Oh, and this one:

convince them to accept less upfront in exchange for more of the take.

Take?. What take? The movie is going to be downloaded for free. Marginal cost is zero, remember?

Will you come to work for me for 1/10th of your current salary?. I promise you a 60% of whatever I make from my software, which I will be distributing for free.

Russell McOrmond (user link) says:

How are people defining DRM? Is it a "sale" or a "

Whever I see a thread talking about DRM I have to ask what definition they are using: the marketing term “Digital Rights Management”, the more correct “Digital Restrictions Management”, or something else?

I often use it as an acronym for “Dishonest Relationship Misinformation”. I use it to mean the abuse of a technical measure to lock down hardware which the person holding the keys does not own, and the encoding of content such that it is only interoperable with these locked down devices.

I have no problem with laws which protect technologies which lock down devices where the keys are held by the owner of the device, or even with the encoding of content such that it can only be decoded by these types of devices. What I am opposed to is calling a relationship a purchase that is really a “rental” (IE: the person receiving the content doesn’t own the hardware — they are “renting” it from someone else).

Once we are honest about what the relationship is, we can then expand current consumer protection laws to protect those renting from abuses of their privacy and other rights. But I am fundamentally opposed to being dishonest about the relationship we are discussing, and companies should not be allowed to claim they are “selling” something that is locked down where the owner is not given all keys.

I believe that “DRM”, as I have defined it, should not only not be legally protected — it should be outlawed. If people want to create new rental-based business models, then that and other situations where the owner of a device wants to lock down their own devices should be legally protected.

If you are a Canadian, please sign the Petition to protect Information Technology property rights.

Robert Krawitz says:

Make people actually *want* to buy it!

Hire less expensive actors or convince them to accept less upfront in exchange for more of the take. Find cheaper costume suppliers. Hold down on the special effects. Keep looking for ways to economize.

Excuse me, but that’s a different movie. My movie comes with these costumes, that cost X, these actors that cost Y, and special effects that require hardware Z and that’s why I’m able to say it will be likable. Or are you saying that people don’t care about what appears in a movie? They don’t care if instead of Tom Cruise you pick JohnUnknown? If instead of state-of-the-art effects you use soft cork decors built by inexperienced art students on their free time?

Either find that $1E+07 somewhere, or give up on it, or be creative and find ways to knock that price down or to make people actually want to buy your stuff, but don’t ask the law to protect your dream.

Try this: everyone who buys a copy of the movie from you in the first two years gets entered into a lottery for an all expense paid vacation, where they get to meet the stars of the movie and maybe even be an extra in the next movie. Set the odds at 1 in 100,000 or such, so that enough people win to make it interesting, but you still come out ahead. If 10,000,000 people buy a copy then you have to give away 100 vacations, but at (say) $10 per copy you’ve made out pretty well.

People could still download, share, what have you the movie, but they don’t get a chance to party with their favorite movie star for a week. Given the number of celebrity worshippers there seem to be, you’d probably get a good deal of interest in this. People who are just interested in the movie could download it free or share it; if they later decide they’d like a shot at the vacation they could then buy a copy. Heck, I suspect some people would buy multiple copies just to get multiple chances.

Now you’re selling something that actually is scarce — the opportunity to hobnob with the stars. Obviously you’re not going to make a lot of money after the contest ends (although you could keep extending it), but that kind of business model might just do well.

Other ideas: every time somebody spends money at your store (buys a copy of a movie, buys merchandise, goes to a theatre showing a movie) they earn points that can be redeemed for anything from merchandise to vacations. The top spenders even get celebrity-type recognition — everyone who’s spent more than $20,000 on “schtuff” gets invited to an Oscar party, and maybe the top spenders even get invited to the Oscars. But you only get credit for what you buy, not for what you download. Just make sure that everyone who actually buys something gets some skin in the game.

These are just ideas — if these folks are as creative as they think they are, they’ll come up with a lot more.

Anonymous Coward says:

Re: Make people actually *want* to buy it!

Either find that $1E+07 somewhere, or give up on it, or be creative and find ways to knock that price down or to make people actually want to buy your stuff, but don’t ask the law to protect your dream.

Handwaving.

Try this: everyone who buys a copy of the movie from you in the first two years gets entered into a lottery for an all expense paid vacation,
You know, this is the first reasonable thing I the whole discussion. Now please provide some evidence that this works. I’m pretty sure it has been tried, you you might as well research it and come back with hard data.

These are just ideas — if these folks are as creative as they think they are, they’ll come up with a lot more
This, however, is not reasonable. It’s more handwaving.

Robert Krawitz says:

Re: Re: Make people actually *want* to buy it!

Either find that $1E+07 somewhere, or give up on it, or be creative and find ways to knock that price down or to make people actually want to buy your stuff, but don’t ask the law to protect your dream.

Handwaving.

Actually, the colloquial expression is “fish or cut bait”. It’s not my problem to make sure that your chosen business model succeeds.

Try this: everyone who buys a copy of the movie from you in the first two years gets entered into a lottery for an all expense paid vacation,

You know, this is the first reasonable thing I the whole discussion. Now please provide some evidence that this works. I’m pretty sure it has been tried, you you might as well research it and come back with hard data.

I have no clue whether it will succeed or not. I’m just suggesting a business model that has the potential to work in the presence of very low distribution costs (in other words, where the third-party distribution costs are no higher than yours, so that you have to compete against alternate distribution channels). Doubtless there would be a lot of fine tuning.

These are just ideas — if these folks are as creative as they think they are, they’ll come up with a lot more

This, however, is not reasonable. It’s more handwaving.

So what? I’m not the one trying to make money off this. I just threw out a couple of ideas.

Alexander says:

Re: Re: Re: Make people actually *want* to buy it!

Actually, the colloquial expression is “fish or cut bait”. It’s not my problem to make sure that your chosen business model succeeds
Ha! Now I have to prove your argument? How’s that?. You are the one who is saying that the movie industry can continue making money and movies if they were distributing them for free. So excuse me, but that’s for you to prove.

So what? I’m not the one trying to make money off this. I just threw out a couple of ideas.

But of course…. I also have a couple of ideas how you could make money working for me for free. Of course, I don’t know if it will work, but so what? I’m not the one trying to make money off this. I’m just throwing out ideas. So don’t hesitate, come to work for me for free. You are creative, I’m sure you’ll find ways to make money off this kind of relationship.

Isaac (user link) says:

Re: Make people actually *want* to buy it!

I thought of the lottery model as well for raising money (it seems to have worked for The Great Wall of China). What I had in mind, is a big money jackpot – which should make it irresistible not to enter the lottery, so this is to attract a lot of participants – and all the other prices in the form of non-scarce goods, instead of scarce money.

This should not be started with movies first, music is best suited to start such a model. Once it gains in popularity and more tickets are sold, then other non-scarce goods can be given as prizes as well, like: e-Books, movies, games and software. At some point the non-scarce prizes that all the participants are guaranteed to win, could become the dominant reason to enter the lottery.

Take this simplified example: let’s say that you sell $10 tickets online, and you are going to sell 20 million tickets worldwide. You use half for the money jackpot of $100 million, the other half you use to fund the recording of albums ($50k each, consisting of $30k cost and $20k profit for artists and producers). That comes down to 2,000 music albums. All the participants win the prize of downloading those 2,000 albums for free. If you sell 200 million tickets worldwide, that would be 20,000 albums that everyone wins. That might be a bit much, so you could lose 200 albums and instead of those do one movie (at $10 million). Or 200 e-Books, or a computer game, or a piece of software. This lottery, instead of having a fixed draw date, it could have a fixed target, like 20 million tickets. So only once all those tickets have been sold there will be draw. This approach is used by SellaBand to raise the $50k to record a music CD. So there is no risk that you won’t sell enough tickets. The participants can get a refund at any time before all the 20 million tickets have been sold. So there is also no risk in it for the participants.

Because it is difficult to predict human behavior we could simply make small modifications to the model and test them in practice. For example money from the jackpot could be shifted to the non-scarce prizes, and see if people will still buy tickets then. Also instead of giving just the participants free access to the non-scarce prizes, a part of those prizes could be made available to everyone (so not only to those that entered the lottery). Maybe it would be possible to successfully move to a lottery with no money jackpot, but only non-scarce prizes that can be freely downloaded by everyone. At that point it can’t be classified as a lottery anymore, it would be voluntary cooperation in the form of $10 donations. This way people could experience the great things that are possible when we cooperate, and then they might not try to get a free ride, because of the risk that it would collapse this venture, and that could result in a loss of millions of dollars worth of non-scarce prizes in the future.

I think such a lottery model with non-scarce prizes can become very successful very fast.

Alexander says:

Re: Re: Make people actually *want* to buy it!

Hmm.. Congratulations because actually the reasoning is sound, specific, and down-to-details.

it seems to have worked for The Great Wall of China
This I don’t understand. Are you referring to reconstruction work or to the initial building?

All the participants win the prize of downloading those 2,000 albums for free
Do you agree with the ‘free-content- theory? I mean can I copy this album?

Because it is difficult to predict human behavior we could simply make small modifications to the model and test them in practice
When you say we, are you willing to experiment with your own money? Because the problem with all these movie-industry doomsayers is that they are never willing to experiment with their own money in that sector. They always give mouthfuls of advice about how others should run their businesses, but never are willing to actually get financing for a decent (not YouTube sh*t) movie, produce it and give it for free to see if their bombastic theory works.

Isaac (user link) says:

Re: Re: Re: Make people actually *want* to buy it!

“it seems to have worked for The Great Wall of China”
This I don’t understand. Are you referring to reconstruction work or to the initial building?

The initial construction is said to have been financed by funds raised with lotteries, but I can only give you Wikipedia and this source and I don’t know if their information is accurate. But the point was that throughout the ages lotteries have shown to be very successful in raising funds.

“All the participants win the prize of downloading those 2,000 albums for free”
Do you agree with the ‘free-content- theory? I mean can I copy this album?

Yes and you can. Getting the attention of 200 million people is very valuable, you can get revenue from selling advertisement space on your download portal. Artists can reach a large audience which can be beneficial for their CD sales, t-shirts and concert tickets. It can be done sustainable.

“Because it is difficult to predict human behavior we could simply make small modifications to the model and test them in practice”
When you say we, are you willing to experiment with your own money?

I would love to get the chance to invest some money in SellaBand, but like most other startups they are not open to small investors. But if for example Google with their huge worldwide audience would try such a venture then I would buy shares in Google.
As for investing in the production of free content, I already do that on SellaBand by investing in the recording of albums. $50k needs to be raised for a professional recording. For every $10 part that I buy, I get a limited edition CD, which also could become a collectors item and thus more valuable. I also get a share of the profits from advertisements and CD sales. But if you buy just one part in a band, then the profits might not be important to you at all. It’s the same for the artists, because due to the increased publicity they might increase their revenue from their gigs and they now posses a professional recording which is good for promoting their performances. And they probably haven’t invested a lot of their own money in the recording. For SellaBand it is also not needed as they didn’t put their own money in and they can cover the costs with revenue from ads and the interest on the money deposited in the escrow account. Profit of course would be desirable as it can be fed back into the system and make it grow faster. The bigger it gets, the better it works.

I think there are many more who would like to invest, but they don’t have the money to start a new business, so they will need to convince a couple of venture capitalists to invest their money which is difficult. Also because I think there is a chance that an established company (or lottery) that already has a huge audience, could see your success and copy your model and immediately have the upper hand because they already have a huge number of users (or a lot of content to attract them). Imagine what would happen if Google or a big lottery would copy what SellaBand does.

Alexander says:

Re: Re: Re:2 Make people actually *want* to buy

The initial construction is said to have been financed by funds raised with lotteries,
WTH??!?! Sorry, your sources are wrong. It was ‘financed’ by means of taking crops from peasants and slave work. I don’t know if there was some kind of minor lottery at some point of time, but the bulk of it – certainly not.

But the point was that throughout the ages lotteries have shown to be very successful in raising funds.
Where does this follow from? Any specific (and accurate, as opposed to the Great Wall) examples of this? Throughout the ages, slave work has shown to be very successful.

Take this simplified example: let’s say that you sell $10 tickets online, ….All the participants win the prize of downloading those 2,000 albums for free.
Yes and you can. (copy the album)
So if I can copy an album for free when it comes out, why should I pay for a lottery that gives me as a prize…. the ability to download it for free? I may merely wait for others to pay for it, and then get it for free.

But like most other startups they are not open to small investors.
Ok, you don’t have enough money. But you surely do have enough time. Are you willing to put your ideas to test by investing the free time in 5 years of your life making a low-budget movie?

I think there are many more who would like to invest, but they don’t have the money to start a new business,
This is no excuse. I started my business with a big round zero in my account. And it is and has always been profitable, even during the dot.com crash.

Håkon Alstadheim (profile) says:

What about the game?

Your reasoning about (real, not monetary) value makes total sense to me, but what about the “game”?

As I see it we have three types of actors; creators, distributors and consumers. The old way enabled the distributors to collect huge profits, sharing some with a few select artists. The new way will wipe out the “mega star” and the distributor (concert promoters will still exist though). Will we be able to transition from one to the other, despite what the labels do to stop the change?

The total “utility” for consumers will probably be constant in terms of music-enjoyment, plus some for the added convenience and cheaper access. This is where the labels disagree with me, their only argument is that free copying means stifling creation. Remuneration and sense of success for artists will probably be redistributed both among artists and also away from artists to consumers. The labels will be total losers, consumers the only clear winners.

We as consumers have potential allies in the “marginal” artists. The labels have allies among main-stream mega-sellers., Promising/good but still marginal artists have a good chance of being picked up by a major label and defecting, if the labels can afford to offer a deal.

The “bleeding” of the labels is an autonomous, self perpetuating process. As new DRM schemes are added, someone sits down to break them just because they can. If the breaking happens sufficiently fast to bleed the labels dry, they will have to give in, and settle for a minor role as promoters and managers.

Anonymous Coward says:

60% of the take

Alexander, are you offering 60% of the distribution revenue or 60% of the merchandising revenue?

One common error in most of your posts is believing the only revenue stream is from distribution. Distribution is dead. There’s no value-add in distribution.

The other common error is believing that the charged cost is the distribution cost. Even now, the end cost is the sum of costs of production, distribution, and others. Just because one component goes to zero does not mean all end-buyer costs go to zero.

Further, it is a falsehood that zero duplication cost = infinite theft of goods. Otherwise everyone would already have a copy of every song ever released on CD. That this is not the case proves that people actually will pay for product, even if it is available for free.

Do you have any more straw men?

Alexander says:

Re: 60% of the take

Alexander, are you offering 60% of the distribution revenue or 60% of the merchandising revenue?

60% of whatever I make through any means. Do you have any data about the average revenue a movie makes through merchandising?

The other common error is believing that the charged cost is the distribution cost. Even now, the end cost is the sum of costs of production, distribution, and others.
Wow, what an economic nonsense. “Charged cost”? What’s that – the price?. The price is certainly NOT the sum of the above quantities.

Further, it is a falsehood that zero duplication cost = infinite theft of goods.
And you call straw man? Where did I speak about infinites, theft, duplication and things like these?. I am speaking about accepting Mike’s premise that the price of the movie is 0 and therefore people are able to get it legally for free. It is Mike’s premise, not mine.

Otherwise everyone would already have a copy of every song ever released on CD.>
hat this is not the case proves that people actually will pay for product, even if it is available for free.

So the fact that air is free and yet people don’t have all of it proves somehow that they are willing to pay for it?
What a nonsense. It only proves that people are not interested in every single CD, just as they aren’t interested in owning all the air as long as they have the part they need.

Graham says:

Logical flaw in your reasoning

It seems that the article asserts the following:

1. Successful business models must necessarily increase value.
2. DRM does not increase value for the consumer.
3. Therefore, DRM cannot be a successful business model.

#3 does not follow from #1 and #2. If DRM business models could increase value for the producer by a greater amount than they decrease value for the consumer, then they could be successful.

To demonstrate the conclusion, the article would need to show that increased consumer value is specifically necessary for success, or that DRM is also incapable of increasing producer value, or that any increase in producer value necessarily incurs a greater decrease in consumer value. None of these are addressed.

Also, I take exception to the use of “value” as a universally countable quantity. Suppose DRM goes away, consumers gain easier access to a huge library of free content, and a small group of professional artists lose their jobs. Would that represent an overall increase or decrease in “value?” How do you measure it?

-Graham

BIllyG says:

Profits

This $96 million you’re quoting is hogwash, too. If the revenue from movies goes down, the studios will find ways to make movies for less, or they’ll go out of business.


Agreed up to this point. Or they will make less movies, or of less enjoyment quality (YouTube style) or they will take 7 years to make. (StarWreck style), so instead of 500 movies per year, we’ll have the tenth part (if lucky). The question is : which scenario do we want?

I’m not sure why you are going from $96 million dollar movies to $96 dollar movies. Movies will still be able to make money from the cinema and merchandising. All they have to do is lower costs or find new creative ways to increase revenues that fall in line with the new reality. I don’t see the quality of films changing significantly. In fact if the average cost of a film decreases we’ll probably see more movies.

Here are just a few ideas off the top of my head to add to the ones that Mike suggested:

1. Unlike concerts or sporting events, the merchandise for a movie isn’t located in the venue. Simply have cinemas with gift shops stocked with the currently showing movie’s merchandise to take advantage of some impulse buyers. I’m not saying this will make tons more money but a few percentage points extra sales is worth something.

2. Salaries will obviously drop to normal levels. Contrary to some of the comments I’ve read, this won’t mean you’ll only get shitty actors in films. In fact you might actually get better actors. This is because those that drop out of the business will probably be those “movie stars” that are just in it for the money. But serious “actors” will most definitively continue as they see it as their career. They just won’t be commanding million dollar salaries but more realistic thousand dollar salaries. Also, since the cost of a movie is lower, producers might be willing to try a greater variety of actors in their films since they are not gambling as much money. Therefore increased competition as the well of actors will increase.

3. Cut out the distribution layer. Producers should be taking advantage of the internet as well to get their movies to the cinemas. Who needs the sales pitch from the distributor’s salesman when there should be all the resources the cinema owner needs online to decide which movies to get and then be able to download a digital version.

Again, these are only a few simple ideas but I do believe that innovation and restructuring is possible and inevitable as DRM is destined to be a failed attempt to hold back progress.

Alexander says:

Re: Profits

BillyG, I’ll ask you the same three questions:

1) Do you agree with copyright law? I’m not asking about DRMs, but just about the notion of intellectual property and copyright.

2) if breaking a law becomes almost trivial and costless, does this mean that the law should be dropped?

3) These ideas you provide, are you willing to risk your own money and time on them?

BIllyG says:

Re: Re: Profits

Hi Alexander,


1) Do you agree with copyright law? I’m not asking about DRMs, but just about the notion of intellectual property and copyright.

IP is an artificially state mandated monopoly whose purpose is to foster the creation and dissemination of ideas. Since it is a monopoly the laws need to be balanced between the creator and the public. Hence fair use provisions and limited terms. The goals are good but if the laws are not balanced, can’t achieve their stated goals, or are no longer needed then the laws need to be changed.

For example, does a term of the author’s life + 70 years make sense (How is Elvis gonna create more works)? Are software patents the driving force between innovation in the software industry or a tool to be used against competitors. Here’s a quote from Bill Gates himself on the matter:

“If people had understood how patents would be granted when most of today’s ideas were invented and had taken out patents, the industry would be at a complete stand-still today.”


2) if breaking a law becomes almost trivial and costless, does this mean that the law should be dropped?

Laws are made to serve a society. If a law doesn’t do so then it should be rejected. In the case of downloading, millions of people are saying that they don’t think they should pay for something who’s marginal cost is close to zero.


3) These ideas you provide, are you willing to risk your own money and time on them?

This is an odd way to frame the problem. If you’re in an industry you do what you need to do to survive. If movies, like any other industry, start making less money then they work on ways to return to profitability. Be it by lowering costs, delivering more competitive products, or adjust their market strategy. If you want an example of one of my ideas in action here it is:
http://ibtimes.com/articles/20070305/instant-films.htm

Most of the comments on this blog have been very intelligent but I’m dissapointed by the pro-DRM gang’s pessimism. The internet has allowed any digitizable good to be instantly and freely available around the globe. This is an incredible achievement. Of course business models dependant on the old distribution methods are dead. Just as business models based on monks hand copying books where finished once the printing press came out. A business model is dead but and new ones will emerge. But the need to create art as has been the case throughout human history will continue.

P.S. Check out “Piracy is Good” for an example of a new business model for TV shows in the new internet age:
http://video.google.com/videoplay?docid=-1720068211869162779&q=piracy+is+good

BIllyG says:

To the DRM increases value crowd

To the “DRM increases value for the producers” crowd please allow me to posit the following hypothetical use of DRM in another industry. Instead of using DRM to maintain an industry in it’s current state, I’ll use it to “augment” a current industry. If you do in fact believe that DRM adds value then you should find this use of DRM tenable.

Let’s say the auto industry decides to use DRM. They decide that the buyer of the car should be the only one allowed to drive it. You have to sign a contract when you buy a car to this effect. A thumb print reader on the steering wheel enforces the contract. So once you buy the car you are no longer allowed to lend it to anybody else to drive (such as your wife or teenager).

So for the auto industry this is great. Families that share a car would now be forced to buy an extra car. Hell, they could even extract more “value” by charging a license transfer fee when somebody tries to sell their car. Eventually maybe even add thumb print readers to the passengers seats and charge a per seat license fee as well.

As some have characterized DRM, this scenario provides plenty of extra “value” for producers

The result is obvious. Consumers will overwhelmingly reject this because intrinsically they know that an artificial scarcity has been added. A black market for steering wheel replacements would be created overnight. The auto industry would sue consumers and ask politicians to create laws to punish consumers.

If you can defend this scenario then I can imagine you being pro DRM on digital media but otherwise you’d have to agree that DRM can’t ever succeed.

Isaac (user link) says:

Make people actually *want* to

So if I can copy an album for free when it comes out, why should I pay for a lottery that gives me as a prize…. the ability to download it for free? I may merely wait for others to pay for it, and then get it for free.

Exactly! Why do people donate money to Wikipedia? Why do they spend their time writing/editing Wikipedia? Maybe it feels good to do it, to help others, with no strings attached. Maybe it is just because we think that when we like a service/product and we want it to sustain/grow, then it is just considered good manner to donate some money/time if you can. You don’t have to go overboard and donate all your money/time. If enough users do this then it can work and then we don’t need to do all the extra work to prevent others from using it. Just like when someone asks me to pass the salt, then I’m not going to try to make an agreement first that the other will at some point pass me the potatoes. I’m just going to do it and it is likely that the other will do something in return for me, even though he doesn’t have to. It saves us a lot of work if we just cooperate voluntarily.

Just because it can go wrong, doesn’t mean it will. Wikipedia could go wrong, but it hasn’t so far. And when it doesn’t go wrong it can generate a lot of free-content and demand for paid-content downloads might drop, because there are plenty of free alternatives to enjoy. As the free content gets more attention, and paid-content less attention, that might result in a drop of CD sales and ticket sales for the paid-content artists, against a rise for free-content artists. I would expect this to eat away at the top and feed at the bottom.

The long tail in the music business would just grow fatter/longer. There are plenty of (unsigned) artists that do not get a lot of publicity who will sign up for this, because for them it will be a better model. The free-content can be used to attract the music fans. Once you’ve got their attention you can use that to promote other artists and if they like it they might decide to invest as well. It doesn’t require the current labels and their artists to adopt this model, but they could adopt it, I don’t know if it would turn out better for them. I think that if we consumers were organized we could make them an offer that would be better for the artists and for the consumers. But with that sort of power we could also get an even better deal for ourselves at the cost of the artists. So if the consumers unite and the artists unite, then there would be a balance of power that could result in a fair deal between the two. But the the labels won’t get to decide whether the consumers will unite (form a ‘Union’).

I don’t know what will happen here, with personalized internet radio stations, and personal play lists. Maybe people like to pick everything themselves with a wide variety of choices (internet), but they might just like to be served with limited choices (traditional radio and tv) and content that is more mainstream. People probably like both, so there would be some sort of balance, but I expect the internet to take plenty of attention away from traditional channels.

So if getting attention becomes more and more difficult and more free-content alternatives become available, it might be better for them to switch to free-content as well. Maybe it is already a better option now. But the problem is that they can’t try both options and see which one works best now, can we?

Alexander says:

Re: Make people actually *want

Isaac,

Exactly! Why do people donate money to Wikipedia? Why do they spend their time writing/editing Wikipedia? Maybe it feels good to do it, to help others

Ahem.. Weren’t we speaking about lotteries? Are you proposing a completely different, donation-based system?
Or are you trying to say that because people donate to Wikipedia, this somehow implies they are going to participate in a lottery whose prize is something that they can get for free anyway? Doesn’t seem to make much sense.

Isaac, this has already been discussed above, and nobody replied to the very simple numbers I offered. Current movie production is at about $50 Billion / year in the US only. Total charity donations for EVERYTHING in the US are $250 Billion. and they have been flat for about two years. It is simply not realistic to assume that charity donations can be increased to $300 Billion (a whopping 20% increase) to cover the costs of making the current level of movies. And that doesn’t include neither the music nor the publishing sectors.

Of course, if you are willing to put up with 20 movies per year, as opposed to the current level of 500, then it may work.

But the problem is that they can’t try both options and see which one works best now, can we?

All is very beautiful, now the only thing that remains is that if you believe this to work, why don’t you take the risk? I asked you a very specific questionk, and I would like an answer:

even if you hive no money, you have time. Are you willing to put your ideas to test by investing the free time in 5 years of your life making a low-budget movie that uses the revenue methods you suggest?

Isaac (user link) says:

Make people actually *want

Alexander,

As I have said the first time, it could start as a lottery and through experiments with changing the model we could see if it is possible to transfer away from a big money jackpot and prizes only for ticket holders, towards only non-scarce prizes available for download to everyone for free. At that point it can’t classified as a lottery anymore and would mainly be a donation-based system with advertisement support. Whether such a transition could fully succeed we just have to wait and see. It is possible in theory, but it is also possible that it would fail. Wikipedia could also fail, because people can use it for free without ever making a donation, but it hasn’t failed so far. So I can’t claim that when people can get it for free, that they will still pay/donate, but neither can you claim that when people can get it for free, that they won’t pay/donate anymore. Some will, some won’t. Whether enough will still pay is what we could test in practice.

If it doesn’t work then the target of 200 million in donations (20 million tickets) would not be reached and those who donated could lose faith and decide to get a refund after a while, and then no prizes would be made available for no one, because the 4,000 albums don’t get recorded. That would be the price we pay for defecting in great numbers instead of cooperating, we all lose (compared to what could have been). Well we still have our $10 each and could try if we could get something for it with the same value as those 4,000 albums (content) would have been worth to us, which I think will be quite difficult. So next time those who defected the last time might decide to cooperate and donate $10.

As I have said before music is the most suitable candidate to start such a model. You keep bringing up movies, I’m talking about music. Once we can make it work for music we can see if we can make it work for e-Books, then small software applications, then movies, then larger software packages, maybe even research projects (knowledge). So if you have a problem with the numbers I gave for music and lotteries, we could discuss those.

And like I also said before I already invest in music, again not movies. I’m starting with music, not movies! I never said that someone should do what you said. Why don’t I take the risk of starting my own company with this business model for music? Coming up with a business model, is something different than running a business. But I don’t have to because there is already SellaBand which uses the model of free-content downloads and I invest time and money in them (after all they get interest on my deposits). I share my ideas with them and try to help to promote them. They have contacts in the music industry that I haven’t got, they’ve got a head start, …. All in all, I think it is better to give SellaBand my support by investing some of my time and money in them, then to try to start something similar myself (And if you click on that link you will see that I’m not the only one). If they would let me buy shares in their company I would. So yes I’m backing this free-content model with my time and money, and I also donate to Wikipedia in case you wanted to know.

Alexander says:

Re: DRM

I’d like to know if you think DRM technology will ever actually succeed in controlling all digital media or will rampant piracy continue unabated.

Unlike the trend here, I’ll provide a clear answer: I do not think DRM will succeed. I do not think it is necessary, either. But I do not think free content will be the model, either. What do I think? Three things :

1) That content will have a cost so low that pirating it won’t be worth the risk of getting caught. You buy the “right to view the movie” for $2 to $6 for example. And you can execute this right as many times as you want, in any format you want : streamed to your computer, wified to your portable console, in a theatre (for a much reduced additional cost, if any. Just present the proof of purchase. They’ll sort revenue distribution among themselves afterwards), downloadable as a burnable DVD with cover art, etc.

2) More content will be produced for display technologies that are not accessible to home users: IMAX, 3D, Motion cinema, Hemispheric cinema, Interactive cinema, Immersive Virtual Reality, and new technologies yet to arrive (project Brainstorm, anyone?). Which was long due.

3) More emphasis will be put on non-copiable, physical sutff : merchandising, posters, clothes, etc.

BTW, I’d like also a clear-cut answer to the 2nd and 3rd question I aksed you :-).

2) if breaking a law becomes almost trivial and costless, does this mean that the law should be dropped?

You answered about what the role of laws is, but I didn’t ask about how laws are made or whom they serve. I asked …(paste (2) here )…

3) These ideas you provide, are you willing to risk your own money and time on them?

You didn’t provide an answer. It was a question related to you yourself personally.

BTW, I saw the presentation of this guy, but I’m afraid he’s got quite a few things messed up:

I’m surprised is that noone asked him a very basic question: A cable network ad costs what it costs not because the show is funny according to someone’s subjective oppinion, but because of the measurable audience it has. It’s easy to say a posteriori that an Ad on Star Wars is worth so an so. How are you going to know the audience size some free content will have, in order to make the advertiser pay for a tiny logo on it?

Also, comparing a logo with a 30 sec ad is nonsense, and that’s another thing noone asked. Even if the 30 sec ad costs the same and reaches only 1/10th of the audience, it is still better. The aim of an advertisment is not “to reach audience”. It is, basically, to make sales. Everything else (call it brand identity, brand awareness, etc. revolves around the ultimate aim of sellig you something).

Thus, conversion rate times audience is the important factor, not audience alone. An ad with a conversion rate of 0 will drive its company to bakrpucy even if every single critter in the universe saw it.

And what’s the conversion rate of a logo? How many kids are going to ask their dads for a McDonalds when seeing a 30′ McDonalds ad in the middle of a movie on Disney TV? I can bet any amount that they will be orders of magnitude more than the kids asking for a McDonalds just because of some tiny logo on a movie, which by the way the brain will filter after a while, just as we don’t notice cable TV logos either. This is not hypothesis. It’s a proven psychological fact. Or brains are trained by evolution to pay attention to changing things, not to constant impulses.

So there cannot be any sort of comparison between a 30′, or a 15′ ad and a wimpy logo.

Jean Camp (user link) says:

data and the obvious

Short version of Mike:
People will pay for quality, reliability, and trustworthy content.
Free content has no backing so it may be low quality, not reliable or have malicious embedded content.
DRM by definition makes things less reliable (won’t play; expires; etc.); is not trustworthy**; and may limit quality of content via Varian’s versioning argument*.
In the choice between DRM and free, free is better.
The choice between DRM-free and free as in beer, DRM-free is better even at a price. Thus Apple rakes in money selling that which can be downloaded.

Summary: Mike does not reference well but he has a clear understanding of the issues.

Entire bibliographies are at
http://infosecon.net/workshop/bibliography.php
and
http://opensource.mit.edu/online_papers.php

In another comment I point to the time series data which illustrate that movies downloads generate sales:
Michael D. Smith and Rahul Telang, Competing with Free: The Impact of Movie Broadcasts on DVD Sales and Internet Piracy DIMACS Workshop on Information Security Economics January 18 – 19, 2007 DIMACS Center, Rutgers, NJ.
http://dimacs.rutgers.edu/Workshops/InformationSecurity/slides/smith.ppt

refs from above:
**Ross Anderson, Cryptology and Competition Policy-Issues with Trusted Computing, Second Workshop on the Economics of Information Security, 2003, College Park, MD, available online, at http://www.cpppe.umd.edu/rhsmith3/papers/Final_session1_anderson.pdf.

*Information Rules: A Strategic Guide to the Network Economy by Carl Shapiro and Hal R. Varian; 1998

JEDIDIAH says:

Oh Come On!

> Like shareware, perhaps 5% of the people will pay for
> music. The rest will just listen. As they are doing today.
> At this level of compensation there is no “promotion” or
> radio air play. We are looking at a significant change in a
> large segment of the Western economy because of this.

Why? These people were probably “just listening to the radio” before. Content has ALWAYS been gratis. There have been easy and legal means for people to get content without paying for it. “Piracy” wasn’t even necessary. You could just turn on the radio or TV.

Back in the day, getting to listen/watch some work once was pretty trivial to do for free. It was also perfectly legal.

JEDIDIAH says:

Re:

> But I propose you a challenge. Let’s say I’m as talented
> as [insert your favourite director here]. No one knows
> me, and I want to make a movie. Let’s assume that we both
> know 100% for sure people will like this movie. Combined
> production costs are $10M. Ok, now tell me – what do I
> do? (specifics, please, no generic reasoning). Where do I
> get this money from?

“No one knows” you would be the big hurdle. Nevermind anything else.

Now lets examine a scenario that’s much less of a fantasy:
You have done the “spending 2 years writing a book bit” and now have yourself a publishing deal. You’ve sold your soul to the old school publisher hoping t get rich.

Now you find yourself doing your own promotion because your publisher really doesn’t care about you. Unless you are Metallica or JK Rowling you just don’t get any effort spent on you. You are stuck doing your own promotion and selling your own book.

This is publishing’s dirty little secret. Well, it’s not really a secret if you actually bother to “follow” artists that aren’t in the Top 10. A successful indie band or cult author may find that they make less than a waiter at Denny’s. This has nothing to do with “piracy”.

The market may be small. They may be under promoted. And the publisher gets a big piece of the action.

It’s a shame that you can “tip” recording arists.

“Here’s X extra. Give it to the band.”

Peter Harrison says:

Not so fast

I also agree that artists need compensation, but I am somewhat more cynical about the role of the labels. The role of the big labels has been primarily one of channel control. By ensuring that channels such as record stores, radio and TV all sold and played their content they had control over which artists became successful.

Artists sign up because they know that without a record deal they can’t get on the radio, won’t get onto TV and won’t be able to get CD’s in music stores.

Now, along comes this upstart Internet thingy and suddenly musicians can promote and sell their content online. Perhaps not everyone, but a substantial number of people are willing to buy content to support the artist. And the thing is that an artist only needs to get 10% of the revenue they did from the traditional distribution model before they are earning more.

The real threat to the big labels isn’t that people will steal existing music they are selling, but that artists will realise that they don’t need them any more, and they will lose control of the channel. Their power is in their control of what music we hear; if they lose control of what we listen to the game will be over.

DRM therefore isn’t about protecting the content at all. Its about protecting the channel. It’s about ensuring that you won’t get a recorder which will play nice with your computer. That way it will block artists who are not signed up and not transmitted on traditional TV from accessing the digital TV ecosystem via the Internet.

Anon. says:

Do YOU actually know any economics?

Making a public good into a private good is not a good thing. It’s actually a destructive act.

Internalizing externalities is a good thing, but you don’t do that by making a public good into a private good, at least not in most cases. In most cases you destroy positive externalities without internalizing negative externalities — disaster, economically speaking. DRM is one of those “disaster” cases.

J (user link) says:

I was dissapointed with this article.

I feel that your article makes a 1 dimensional point that can be summed up as: DRM is not an effective use of resources. Though I agree with your point that it only hurts the end-user and does little to nothing to curb the prevalence of digital piracy, I fail to see what your article contributes to the discussion beyond that of waving a stick around shouting “Digital Rights Management iz retard’d.” Please construct your arguments using examples and evidence in the future. To satirically illustrate my point, please consider my comments in light of this quote:

“Now is the winter of our discontent made glorious summer by this son of York,” -Shakespere, ‘Richard III’ I quoted an irrelevant partial thought written by a dead Englishman and now my argument has weight.

Nobody says:

Good DRM is DRM that nobody even notices/thinks of as DRM. Look at steam, this is technically DRM but its not an issue because steam makes content more accessible instead of less!

The problem is the companies that tend to want DRM almost always want bad DRM. This is because it really isn’t about what they say it is. DRM is frequently being used to leverage control (not just of end users, but between companies) and prop up outdated business models against new competition.

reencryption-tv (user link) says:

Rights Enforcement Encryption

DRM is designed to work as ReEncryption Economics and its Practice Model that equates Copyright-Protection with Copyright-Promotion, meaning that Security and Productivity aren’t Trade-Offs.

After Aereo, Outline what’s happening now is that Consumers are allowed to set Two Legal Choices via Cloud License Server to “provably” re-transmit the Free OTA Broadcast over the Internet, One is Provable Secondary Use like Virtual Cable Operator with Section 111 License and the Other is Provable Fair Use with Section 107 Defense to a Claim of Copyright Infringement.

Bleh says:

Just Look at Keurig

I remember back when Keurig and Tassimo were just entering the market. Tassimo had a massive marketing movement behind it and I knew a lot of people jumped on it. I wasn’t satisfied with it due to the barcode reader requirement for the pods not to mention a higher price than Keurig. Keurig I was impressed with for the fact any generic pod could be used and the conventional grinds could be used. I simply chose Keurig just for that feature over Tassimo. When I wanted a unique flavour coffee I’d pick up a few boxes of pods.

Present day .. Tassimo just isn’t easily found on the shelves, Keurigs are; THEN the CEO knucklehead decides to go DRM styled pods and machines … a la Tassimo … When the time comes my Keurig goes down, I’m done and out.

I just can’t get behind DRM control anything.

Marcus (profile) says:

"Digital Restrictions Management"

What is stopping a business from rendering DRM content that was legally purchased unusable forcing the “owner” to pay more money to listen to or view this content? What is stopping a company from rendering a legally owned copy unusable if it is sold to someone else even if there was nothing restricting this owner from selling their copy to someone else? In such a transaction the creator doesn’t make profits since this person purchased the content from this person used rather than buying a brand new copy. What if legally purchased content is incorrectly flagged as illegally purchased content? Under DRM a person no longer physically owns this content and a company could decide to render their content useless at any time or their content could be inadvertently rendered useless due to a software bug.

Anonymous Coward says:

Your buying the product doesn’t mean it is yours. You have the right to listen or watch for personal use, and that right can be rescinded. Just ask the folks in Redmond. That being said there are many ways to circumvent DRM, there is big business in software that does it, and advertises it as such. But a simple screen recorder or an audio out line to the microphone in line should have the desired effect. itunes is big business, who would have thought? Not me, I would rather purchase a hard copy so not to be beholden to Cupertino.

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