The Grand Unified Theory On The Economics Of Free

from the have-fun-with-it dept

Ok. I’ll be the first to admit that I’ve taken the long way around in going through my series of posts exploring the economics of goods when scarcity is removed. What I had thought would be a series of 5 or 6 posts, turned into something much longer — but each week people came up with new questions or discussions or objections, and so I tried to spend some time digging down on various pieces of the economics at hand. However, what I haven’t done is tie it all together in one single spot. In the last couple of weeks there’s been tremendous confusion among people from Scott Adams to CNN to various others that have made it abundantly clear that the one thing I’ve failed to do is put the whole concept together in a single place. That’s resulted in people being confused about what I’m actually saying — where they only pick up a tiny piece of the argument or confuse it with the arguments made by others. So, while I still think it was important to go through the details, now is as good a time as any to pull the whole theory together (with some links back to the previous articles in the series).

First off, and this is key, none of what I put forth is about defending unauthorized downloads. I don’t download unauthorized content (never have) and I certainly don’t suggest you do either. You may very well end up in a lawsuit and you may very well end up having to pay a lot of money. It’s just not a good idea. This whole series is from the other perspective — from that of the content creator and hopefully explaining why they should encourage people to get their content for free. That’s because of two important, but simple points:

  1. If done correctly, you can increase your market-size greatly.
  2. If you don’t, someone else will do it correctly, and your existing business model will be in serious trouble

If that first point is explained clearly, then hopefully the second point becomes self-evident. However, many people immediately ask, how is it possible that giving away a product can guarantee that you’ve increased your market size? The first thing to understand is that we’re never suggesting people just give away content and then hope and pray that some secondary market will grant them money. Giving stuff away for free needs to be part of a complete business model that recognizes the economic realities. We’ll get to more details on that in a second.

From a high-level perspective, though, the reason that giving non-scarce products away for free will increase your market size goes back to the same Thomas Jefferson quote that we kicked the series off with:

If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.

What Jefferson noted is the wonderful feature of a non-scarce, or infinite, good that it is effectively a free resource. Once created, it costs nothing to give to someone else, and you still retain the original. In fact, economists have finally realized that this is the very key to economic growth and progress. The infinite resource known as an “idea” that improves what was already there is what increases the size of a market. Or, putting it another way, that infinite resource of a new idea makes an existing scarce resource more valuable. It’s easy to understand that when it’s an idea applied to, say, a machine making it more productive — but it also applies to any infinite resource appropriately bundled with any scarce resource.

The way it works is actually quite easy and fits in with the same basic economics that’s always been in place. Knocking down the barriers of artificial scarcity opens up tremendous new opportunities — just as knocking down the artificial scarcity known as “protectionism” helps to grow markets by creating new opportunities. In this case, those new opportunities have only increased in number as we’ve gone digital, making more content infinite in nature. Where some people have trouble is that those new opportunities may be in different places than the existing opportunities — and those new opportunities may not all be capturable by the creator of the content. Indeed, there will be some externalities created by the free flow of an infinite resource. However, the total amount that any content creator can capture is still much larger than it was before. It’s one of those cases where getting 20% of a huge pie is much better than getting 90% of a tiny pie.

You just start by redefining the market based on the benefits of what you’re providing, rather than the specific product you’re selling. If you’re focused on selling the benefits, then discovering a better way to sell those benefits is seen as a good thing, rather than a threat. You then break down the different components that make up those benefits that you’re selling — and you begin to recognize that every bundle of goods and services that make up the benefit you’re selling has components that are scare as well as components that are infinite. In fact, if you look closely enough, you realize that any scarce product you buy actually has infinite components while any infinite good you see also tends to have scarce components.

Once you’ve broken out the components, however, recognizing that the infinite components are what make the scarce components more valuable at no extra cost, you set those free. Not only do you set those free, you have every incentive to create more of them, and encourage more people to get them. You break them into easily accessible bites. You syndicate them. You hand them out. You make them easy to share and embed and distribute and promote. And, yet, all the while, you know exactly what scarce resources those non-scarce goods are tied to, and you’re ready to sell those scarce resources, recognizing that the more people who are consuming the infinite goods, the more valuable your scarce resource is.

So, the simple bulletpoint version:

  1. Redefine the market based on the benefits
  2. Break the benefits down into scarce and infinite components.
  3. Set the infinite components free, syndicate them, make them easy to get — all to increase the value of the scarce components
  4. Charge for the scarce components that are tied to infinite components

You can apply this to almost any market (though, in some it’s more complex than others). Since this post is already way too long, we’ll just take an easy example of the recording industry:

  1. Redefine the market: The benefit is musical enjoyment
  2. Break the benefits down (not a complete list…): Infinite components: the music itself. Scarce components: access to the musicians, concert tickets, merchandise, creation of new songs, CDs, private concerts, backstage passes, time, anyone’s attention, etc. etc. etc.
  3. Set the infinite components free: Put them on websites, file sharing networks, BitTorrent, social network sites wherever you can, while promoting the free songs and getting more publicity for the band itself — all of which increases the value for the final step
  4. Charge for the scarce components: Concert tickets are more valuable. Access to the band is more valuable. Getting the band to write a special song (sponsorship?) is more valuable. Merchandise is more valuable.

What the band has done in this case is use the infinite good to increase the value of everything else they have to offer. They’ve increased their marketsize by recognizing how they can use the infinite goods as a free promotional resource and made the value of the overall ecosystem around them more valuable. Rather than playing small shows in tiny clubs that don’t pay very well, they get to play large venues with bigger covers. It’s certainly true that there are some externalities — where some people will enjoy the music for free without ever taking part in paying for the scarce components. But, when done right, you’ve increased your market so much that it more than covers the difference. Compare this solution to that of a band that sticks to the old way: they are then limited in the audience that will hear them — especially as more and more bands give their music away for free. Fewer people will be interested in going to their concerts or buying their merchandise or joining their fan clubs — when the benefits are so much greater for following other artists that actually give their music away for free. The end result really is a much bigger market with much greater benefit by expanding the market by using infinite goods to make the scarce goods more valuable.

So there you have it. After many months, one single summary of the economics of “free” and how it can be used to anyone’s advantage. It’s not about defending unauthorized downloads. It’s not even about getting rid of copyright — just recognizing that copyright holders can actually be better off ignoring their own copyrights. It’s very much about showing the key trends that are impacting all infinite goods — and pointing out a clear path to benefiting from it (while making life more difficult on those who refuse to give up their old business models). And we’re giving it to you all… for free. So, enjoy.


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

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Comments on “The Grand Unified Theory On The Economics Of Free”

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173 Comments
Weatherguy says:

Giving Away the Infinate

Perhaps you should print and bind a few hundred copies and send them to the US Patent and Trademark Office. Just this week they issued Google a Patent on counting. Yeah—”counting”, like 1, 2, 3, 4, _, 6, 7, _, 9. Cool huh? Think just how long ago you learned that trick. I’m 62 so I learned it 56 years ago. And, I’m told that counting has been going on for a very long time—no really!

sam says:

hi mike…

i’m not sure that alot of people haven’t “gotten” your scare resources arguments… but i might be wrong.

so for my sake, and my own opinions.. let me rant for a sec..

i’m an artist.. i create music.. i release music… i say to my customers, if you buy my music, you can’t/shouldn’t go copying this for 50K of your closest friends.. nor should you put the music you purchase anywhere where someone/50K people can copy it..

my question to you mike, do you think i should have the right to do this?

it appears that you really want me to essentially give up the model that i want to implement, so i can implement a model more in lines with what you want me to create…

there’s a demand for my music.. otherwise it wouldn’t be copied… there might be a demand for my t-shirts.. but my question back to you.. why can’t i produce my music, and sell it as i want, and create tshirts as well..

you see mike. the cenral tenant/thesis to alot of the “conversations” regarding music/content is that the guy creating it, should then let others have it for free, and i should generate revenue via some other means..

you guys are stating that i should somehow use the music/content as a draw for other revenue generating functions. these arguments/conversations, while nice, are not what i’m interested in. i’m interested, as an artist, in making music, and being able to sell my music.

you as a customer, have a right to say to me, go to hell, that you don’t choose to buy the music. fair enough. what you don’t have the right to do, is to essentially rip the music off…

there is no difference between digital content and physical items…

the blank cd costs $0.05 apiece… it’s the software/music/video on the cd that gives the additional value. the bits are worth something!!

i’m pretty sure that i’m in the minority here on this!

peace

Charles Griswold (user link) says:

Re: Re: Re:

yeah, he wants you to sell t-shirts instead of writing good music

T-shirts? Where t-shirts? I looked all over the Techdirt site and didn’t find any t-shirts for sale. I was so looking forward to proudly wearing my Techdirt “Techegeddon” Tour 2007 t-shirt to work.

Mike, dude, if you want to sell your t-shirts you need to feature the link prominently on your website’s front page. That’s basic website design.

Anonymous Coward says:

Re: Re: Re:

Yeah, I’d like to see Mike put his money where his mouth is. Let’s see him start up a website where he writes content that he gives away for free. And then let’s see him try to make money by using that website as a promotional vehicle to sell ancillary services. Yeah, like that’d ever work.
🙂

Derek Reed says:

Re: Re:

sam –

You said “there is no difference between digital content and physical items…”. But I think it’s a very important distinction between the two. The cost (to the publisher) of reproducing a digital item on a grand scale, with the likes of p2p approaches 0. Where as with even the cheapest physical item, there are still constant costs throughout the process, including the physical materials and transport and storage that do not apply to the digital.

I don’t think the point is necessarily that you have to do this or Mike will get in your face. I think the point is that it can, and will increase overall market share and then profitability. And If you don’t do it, at some point, your competition will.

Andy B (user link) says:

Re: @ Sam

Sam:

Mike has been explicitly clear that he does not support breaking the law. His arguments are that you should distribute your music in a way that people don’t have to.

Your argument goes wrong here: You can choose to market your music any way you please. If you only want to make and sell music, then that is your right. However, consumers are starting to show very strongly that they do not consider obtaining a song and listening to it to be worth very much. The popularity of file trading underscores this. If the market sets the price of listening to your music at $.00001, you have every right to sell your music as your only revenue source, but don’t expect to be very profitable.

The fact is that the music business is changing. The record labels are fighting against it as hard as they can with copyright lawsuits, but that doesn’t change the fact that the market is devaluing access to music. Other content is being similarly devalued. Consumers see that it costs next to nothing to create a new copy of a song, so they don’t see it as being worth $10-$15/album. That necessitates a change in focus to scarce goods and a business model something like what Mike described.

You can run your business any way you want, but if you do not adapt to the market, you will likely not be successful.

Old Guy says:

Re: Re:

Sam, Your point is well-taken. But many artists do not have the opportunity or wherewithal to have their music available to possible listeners through radio/satellite or cable. Allowing at least some of their music to be downloaded and experienced on a free basis, would (on the assumption that they don’t suck) create a much wider fan base then they might have had otherwise. This would more likely than not lead to increased sales. It up to the artist as to how much he’d like the opportunity to make from his effort, as Mike said “However, the total amount that any content creator can capture is still much larger than it was before. It’s one of those cases where getting 20% of a huge pie is much better than getting 90% of a tiny pie.”

Jon Robinson (user link) says:

Re: sam, the starving artist

Sam, you definitely bring up valid concerns that represent the pre-digital mind-set. But you need to break out.
You are right, there is a demand of music, but demand is inversely related to price. That means, since music is practically free to copy and distribute, the demand is high. An artist selling a creation for $20 lowers the demand of his product. (plus you waste resources trying to scare everyone into compliance). Mike is saying that since distributing the creation digitally is free and costs you nothing, it is essentially like an idea, and you will profit more by letting people distribute it for you to increase your fans who will then demand your non-scarce resources, namely YOU, your time, your effort. Your creations are no longer scarce, so you won’t thrive if you do business as if they were.

Examples abound, but take Homestarrunner for free entertainment for example. They make money selling t-shirts, etc, but wouldn’t have the market for the t-shirts if they had tried to charge to view their cartoons.

DSM says:

Re: Re:

Honestly, the people that rationalize theft of media-based IP are broke kids/dumb people that have nothing of value to offer in a similar fashion. Period. Alternatively, you have the crowd that thinks that “artists make too much” and that CDs are ripoffs because the content is “free” (as in the watch you stole from the jewelry store is also “free”). It’s a backwards economic system brought about by people trying to rationalize their anti-social behavior due to their economic situation.

James (user link) says:

Re: Why? Because the market won't let you

“why can’t i produce my music, and sell it as i want, and create tshirts as well?”

You can, but the market isn’t responding to that model anymore. That’s the point of the article: as the music market changes, artists need to change, too. And just as water will find the easiest path down hill, so too will an audience find the easiest way to get a song. You could spend a lot of time and money trying to fight the flow, or you could just go with it. Your choice. We’ll see where the market leaves you.

mgallagher says:

Small suggestion

Mike,

I’ve read the site for years and contributed a link or two. The economics stuff has been really enjoyable – that’s my background, even if it isn’t what I do anymore.

Anyway, I have a small observation to offer: you talk about absence of scarcity and infinite supply. These can’t ever REALLY be true. Marginal costs can’t ever truly be zero, if nothing else there’s the opportunity costs, which can be really small, but there’s always some alternative use of your resources (time, etc.) that would yield some utility.

Instead, does it make sense to introduce the concept of “Microscarcity”? Where MC tends toward, but does not reach zero. NASA uses “microgravity” instead of “zero gravity” for similar reasons. This allows you to make the analysis you have already, but without a bunch of messy math that ends up in divide-by-zero problems.

Plus, you gotta admit “MicroScarcity” is a catchy name for a book. It’s all yours, man, go for it.

-Mark

Andy Blair (user link) says:

Glad to see everything in one place

Well said. It will be very interesting to watch this space in the next couple of years. On the one had we have an industry trying as hard as it can to maintain a poor business model in the face of change, and an IP legal structure that is quickly becoming their last leg standing. On the other we have wave after wave of bad patents and frivolous lawsuits and blatant anticompetetive activity (read: Verizon).

I am hoping we have a “Rubicon” moment where some company does something so blatantly anticompettive and against the spirit of the patent system (to promote innovation) that Congress cannot ignore it and rights the IP ship. It may be naive given the lobbies arrayed against any such movements being truly helpful, but it seems like change is starting to creep into the air.

That Guy says:

Who's in control of the scarce?

I think your argument is well stated and true. But I do however feel that the real world application of the theory doesn’t hold up well.

I do realize that your first point was that you don’t encourage, believe in, or practice the downloading of unauthorized music or other “finished works.”

But that being said, your argument hinges on the originator controlling the free in order to determine the scarce.

What has the music, movie, and software industry so enraged is that control neither. Bands allow for free downloads of tracks ( infinite ) to promote sales of CDs ( scarce ) They then turn around to discover their scarce is now free. Movie makers create a movie ( scarce ) and hand out movie trailers to any site or theater who will play them ( free ) they then turn around to find their scarce is free. Software makers make demos and trials ( free ) to promote the sale of (scarce) full products, only to find their scarce free.

So when these industries try to control the likes of kazaa, youtube, bittorent, people rush to the defense of of the free. Claiming that the corporation can’t see the value of free. But if a content creator can’t control if their works are free and scarce, how can they ever leverage the model?

I can understand how one could counter argument that perhaps bands aren’t in the music business, but the music experience business and they should forsake the value of music sales for the value of merch, concert, etc sales, and how one can argue studios aren’t in the movie business, but in the entertainment experience business but with DVD sales being a major portion of studio revenue and the quality of illegal copies increasing studios will be soon be left with options for zero scarce revenue, and the argument for software makers is even more flimsy because they only make money on the use of their software.

So Mike I agree with you, and you are right that your model works. But its viability in the real world is suspect at best unless creators have more control on whats is scarce and what is free.

chris (profile) says:

Re: Who's in control of the scarce?

one way that video game makers control piracy is to make their games online. you can’t pirate WoW or EQ because you can’t get on their servers without a license key and a paid account (though on many games you can play on unauthorized servers).

the scarcity is the online experience and not necessarily the game itself.

i would imagine that it’s tough to do that for non-interactive content but i don’t remember the last time i bought a DVD (i rent plenty tho) but i have gladly given city of heroes $15 a month for quite some time.

David Barrett (user link) says:

Don't conflate

I think your breakdown is dead on. Totally agree 100%.

But what I think you could clarify more is the difference between what is “smart business”, and what is “currently legal”. These two are not necessarily the same.

Again and again I’ve read you lambast Viacom or other content owners for sending takedown notices to YouTube. You clearly show that it’s not smart business. But what you don’t always make clear is they are legally entitled to do so.

Furthermore, I’ve heard very strong defenses of YouTube and how they’re providing a service that enables smart businesses to get free promotion. But what you don’t always make clear is they are quite possibly breaking the law in doing so.

So I entirely agree with and appreciate your excellent breakdown of how to do smart business in this new age. But what I’d like to see is greater attention to where smart business and the law conflict.

Specifically, I want to know how precisely the law should change, and instructions for how to help you in changing it. These items creep into your writing occasionally, but a more crisp and comprehensive review on the necessary legal changes would make a great addition to what you’ve provided in this article today.

-david

emichan says:

Re: Don't conflate

I don’t think there’s any confusion that these content owners are entitled to send DMCA takedown notices to YouTube or other hosts of infringing content, as long as the content really is infringing. As far as YouTube breaking the law, I think if you go back and read some of the TD posts on the Viacom/Google suit, you’ll see some good analysis of just why YouTube IS operating within the law.

At any rate, Mike and Co aren’t lawyers, and this isn’t a law blog – although they frequently link to exellent law blogs in their posts.

If you’re interested in supporting a great organization that does a lot to protect fair use, internet privacy, etc – you should check out EFF – http://www.eff.org.

respectfully yours,
emi

BadUsername says:

A few ideas

I always thought the best way to make bank in on cd’s and such is to release them ahead of time. Release the CD a month before you release the torrent file or direct download or anything like that yourself. One thing people will pay for is exclusivity. Most everyone can catch whatever’s on tv last night today on the internet, free. However people still watch it the night before from the couch because they wanted to be among the first to see it so they wouldn’t be out of any discussions with their friends the next day at the watercooler.

It’s the same with movies. I don’t go to them in the theater because I can’t get them anywhere else, I certainly can, its that I want to see it now.

I don’t really believe its about scarcity or anything like that, but I’m no econimist.

Andy B (user link) says:

To the Sams of the World

This whole thing really comes down to the basic points originally made in the post:

1. You can make your market bigger by changing the way you make and sell music
2. If you don’t (and you don’t have to! – copyright gives you that choice), someone else will.

When someone else starts making money on music whilst giving it away (and they will), you will no longer be able to make money using your current model. It is at that point you adapt or bust. Such is evolution, in markets as it is in life on earth.

Anonymous Coward says:

Re: To the Sams of the World

When someone else starts making money on music whilst giving it away (and they will), you will no longer be able to make money using your current model. It is at that point you adapt or bust. Such is evolution, in markets as it is in life on earth.

The Sam’s see another option: exterminate the evolving competition and wipe out innovation, for what are evolution and innovation if not synonyms for each other? For example, if the buggy whip makers had been able exterminate the evolution in transportation that led to the innovation known as the automobile they might well still be in business today. The Sam’s realize this.

sam says:

to all you sam haters!!

look, all i really want is for us to agree that i have a right to decide how i want to market/sell my music/content, and that you don’t have a right to copy it. if we can agree on this, then who cares about the rest.

i realize that others can give their content away for free. i don’t have an issue with that. i stand on a table and loudly support them!!

if their model causes me financial pain, i’m not going to run and tell them they have to sell their content, that they can’t give their content away.. of course they can… it’s their content…

as long as we all agree that copying someone else’s content is wrong/theft, then we’re pretty much ok.

now.. the question is, do we all agree on this!

mike, you might be right. an artist might make more $$$ by selling tshirts, and using music as advertsing! who knows. but these kinds of experiments are up to the owner of the content to decide if this is the direction that he/she wishes to go in.

as far as an artist not being able to sell music because someone else is giving their’s away for free.. in some cases, maybe… in others, hell no. i don’t give a damm who you are giving your music away for free.. if miles davis has a new album, i’m buying it… and let’s be real, most of the music by most artists just isn’t that good… there are plenty of bands in austin who’d give their music away, i still wouldn’t listen to it…

different strokes/different folks!! but i’m 40+ years.

and this is the funny thing.. to be a bit sterotypical, i was probably involved with music/distribution on usenet, when most of you guys were in high school!

so i’ve been around distribution models for awhile.. the difference now, is that there seems to be a generation that really hasn’t developed serious hardcore apps/content, and believes that they have a ‘right’ to access the content however/whenever they want…

sorry to diverge from the topic!!

peace.

Anonymous Coward says:

Re: Re:

as long as we all agree that copying someone else’s content is wrong/theft, then we’re pretty much ok.

But is it really theft? The US Supreme court has held that it’s infringement, not theft. Still against the law, but not theft.

Sam, if I light my candle from yours, have I stolen your fire? And will you thereafter go about in darkness without light so as to keep anyone from stealing your fire?

John B says:

Some Problems with Mike's Model

Mike,

Very interesting mix of truths and wishful thinking. Reminds me of Internet Bubble 1.0 Thinking 101.

There are several large holes in your blanket theory, but I will try to briefly outline what I think are the two most significant ones:

1) Nothing is infinite. Even downloading mp3s. The marginal costs are small (my guess is a few pennies per song, at most, exclusive of the wait time on the part of the downloader). But fixed costs are fairly significant, including:
(a) technical costs, such as the cost of the server, the time and other resources to maintain the server and its connection to the Internet, programming costs, etc.;
(b) artistic costs, such as the time and effort it takes to write a new song, time taken to maintain or increase proficiency in singing or musical instruments, time taken to record the music and put it into digital format, etc.; and
(c) the opportunity costs, such as the cost of making music rather than spending time to make more money to pay the rent, time not spent with your friends and/or family, time spent not going to school or training to increase your earning power, etc.

As the volume (what you call market size) grows, these fixed costs become less significant. At a very large scale, say when you are selling out concerts at the MCI Center, they become very small. But 99% of artists never get to anywhere near that scale, so your “infinite good” theory does not apply to them.

2) By de-coupling what is charged for from what creates the most value for the most fans, you de-couple the financial incentive from the most valued activity.

I value new music. I would much rather have new music from 100 different bands than t-shirts from 100 different bands. And I will never have the opportunity to see most of the bands whose music I like because of travel costs, schedule conflicts, just being too old for the crowd, or because the band just does not want to play live shows.

Thus, your model essentially completely excludes any kind of significant financial reimbursement for fixed costs for musical artists who do not want to spend their time designing and making t-shirts and touring around the country. And, because your model only works well when the artist’s audience gets to a certain size, it also encourages the crass commercialism we all love so much ;->.

While I would agree that “true artists” are not “in it for the money”, I have yet to find anyone who prefers not getting paid over getting paid. Some people will create music even if they never make a cent from it. That’s easier for trust fund bunnies than it is for the rest of us, but even some poor working stiffs will do this, at least for a while. But the lack of financial incentive for people to actually just create music (as opposed to making t-shirts and touring around the country) will mean that less music gets made. Because making new music is not free. It takes time and effort.

I think there is a better, more inclusive model that better rewards artists who just want to make music and get some kind of financial reimbursement for his time and effort, even if they cannot make a comfortable living exclusively from creating music.

The model I think would work better would incorporate DRM that kicks in after a certain number of plays (say, 10). This permits people to try music risk-free to the point they can be sure they want to continue to listen to it, before making a decision whether to reward the musician so they can keep listening to it. The basic music-sharing site model would work OK with this, as would a some kind of search engine (think Google) hosted site with a revenue-sharing arrangement with artists.

Mike may argue that, with this model, people will just get DRM-free versions of the songs they like and download those instead. But I think that if true competitive pricing comes into play (and I think it will), I think the per-song costs will settle in the 10 to 20 cent range, which really is not much of an incentive to hunt around the Internet for a DRM-free version of a song.

So in summary: Mike’s thinking works for large-scale commercially-oriented artists, but my model (which I have posted here before) works for the other 98% of artists who just want to create music. Oh, and my model works for commercially-oriented artists, too, but just does not overwhelmingly favor them the way Mike’s model does.

Anonymous Coward says:

Re: Some Problems with Mike's Model

Nothing is infinite.

But some things approach infinity. Particularly things that are divided by things that approach zero.

The marginal costs are small…

Approaching zero; leading to other things that approach infinity.

Check out the fundamental theorems of calculus, it’s all there. Unless you don’t believe in calculus either.

Devin says:

Re: Some Problems with Mike's Model

1) Nothing is infinite. Even downloading mp3s. The marginal costs are small (my guess is a few pennies per song, at most, exclusive of the wait time on the part of the downloader). But fixed costs are fairly significant

As the volume (what you call market size) grows, these fixed costs become less significant. At a very large scale, say when you are selling out concerts at the MCI Center, they become very small. But 99% of artists never get to anywhere near that scale, so your “infinite good” theory does not apply to them.

This is nit-picking. Infinite, or close to it, costs involved with the internet we can say are already in existence. As if people don’t already pay for their own hosting etc. just to share pictures of their dogs! Who doesn’t have an internet connection, computer and harddrive space etc. already, to be able to copy/send a song? And what band doesn’t already have a free myspace who’s only cost is the time to personalize it? To say that small bands would be disadvantaged in this model isn’t true.

As for my own point, this model from the band’s point of view practically exists already. Shows and scarcities sales are where bands make most of their money, with labels getting most of the cd sales for their distribution and marketing. So to go from the current model to Mike’s is really only to replace distributors with the internet, who would almost cancel themselves out of the equation. I think such a transition would be more transparent to most bands than you realize.

Finally, Mike you clear up a lot of your points in these comments, i would try and work them into the main article.

Cannen says:

Is the math ok?

~ mike pulls out all his hair in frustration and starts thinking about finding a hammer ~

For those who don’t understand, another analogy is “An ounce from the many far out-weights a pound from the few”. Lets use some simple logic. Where before an artist might have had (simple numbers) 100 fans, with Mike’s model, they have the potential for 100,000 fans. If 100% of the 100 fans purchased artist related material at $50/ea, that would add up to $5,000 for the artist/label. Whereas if 10% of the 100,000 purchased artist related material at $50/ea, that would be $500,000. If you were an artist, and you could give away your music for a 1000x increase in fans and make $495,000 more than before, which would you choose?

In addition, labels could sign small artists and do the same thing. Currently a small artist doesn’t stand to get as much attention as a mega star. With Mike’s distro-model, the labels do the same thing with the little guys and make as much as they did before on the big ones.

In the model, using the 100,000 number, the labels have 90,000 customers to win over. All those customers who may be listening to free music. These the companies have the opportunity of turning into paying customers through merchandising or services or whatever. In the current model they have to make the 100 buying more than $50 worth of “X” each to make more money. In Mike’s model, they only have to get a few more of the remaining 90,000 to buy something. This opens the opportunities up of offering a little something different to capture the attention of the other 90%. You have a lot more room to move and maneuver.

To recap, and just so everyone understands – give away the music, create a bigger fan base.

(customers) x (percent who buy) = (customers who will buy) —
(customers who will buy) x (amount of purchase) = (money made)

100 x 100% = 100 — 100 x $50ea. = $5,000
100,000 x 10% = 10,000 — 10,000 x $50ea. = $500,000

Raymond says:

Comics

I’ve had a good time reading these comments but lots of them seem to miss the point. I think maybe a different example will help.

Think about comics. I read 5 different webcomics every day. I will point out that these comics are free and globally available and that I live far far away from those who write them (Australia). As a contented reader and vaguely social person when I find something really funny I can’t help but share it. I link the comic to whoever is currently online.

All the writers have to do is be funny (their service) and I’m happy to use some of my resources to promote them. If I target my sharing to people who will enjoy the comic I have potentially increased their readership. This happens. Some of them also advertise scarce stuff. I bought some of it. In a global market there are lots of people willing to play if they know about you. The stuff was reasonably priced so I went for it.

You might be one of those people who just want to consume but that’s ok. If you don’t share then you’re not part of the market. If you do share you’re advertising. If your advertising leads other people to buy then it’s worked.

Back to music, you use the songs as advertising. If your songs are good people will share them for you: “Have you heard this song? It’s great!”. It’s getting quite common that real people share things faster and better than traditional advertising. I’m happy only listening to a few bands that I know I like and I like to show that I like them by wearing them or using their products.

Mike: you may like to check out http://www.tmbg.com and see how they fit your example. I might just wear them…

Anonymous Coward says:

Your argument was good, your basis of thinking accurate, but if you want people on your side don’t use such a crappy example.

The music industry to me is called that for the soul purpose of the music. That’s all I want, I don’t want to see them, know their names, wear their shirts, scratch their CDs, or even read any commentary about their music. If I didn’t understand it, or in it at least find something I identify with, then I wouldn’t like it. So, why would I want the writer to explain to me what I understand or don’t care about?

Maybe you’ll come back at me saying there aren’t enough people who think like me, and there probably aren’t because too many people care about too much more than the music these days. Apparently it’s cool to be a real fan and real fans watch the videos, look at the pictures, and buy the extra useless merchandise.

Your example succeeds completely if, and only if, the band releases tolerable but poor quality (bit rate) songs, and then completely controls the better quality songs. If they can’t completely control those, any piracy resulting in court action with an intelligible lawyer will say the protected content of the band is not a bit rate number, it’s the artistic effort put into a song that may or may not have a good quality final release. And, that to think something like that would be ludicrous, because to the same measure you buy a book for the words, and the author is paid for the words. You’re not paying for, nor is the author responsible for, the font size, type, color, or even the quality of the pages it’s being typed on.

rEdEyEz says:

Raging against the machine...

This paradigm shift may be a little too difficult for some artists to accept, because ( much like one responder who “only likes to make music”) it literally forces them to become responsible businessmen.

Success will be determined by the relationship you have with your customers, and how good of a businessman you are in a very competitive market.

Distribution companies will need to accept it as well, and evolve into service providers with innovative marketing, or they too will litigate themselves out of the industry.

Quickly fading are the days of irresponsible primadonna “superstar” with his head in a mountain of blow, and soon-to-be-gone are the days of the behemoth record companies that churn out shitty quality products, screw over their contract artists and their customers.

I can’t tell you how many times I’ve thrown away CD’s because the production quality, replication quality, and/or production engineering have been horrendous. (…regardless of good or bad CONTENT)

Quite frankly, I see this as all quite refreshing, because it’s all evolving in the right direction:

better availability
better accountability
better quality
better rewards for the artists/businessmen that create REAL art.

CRTisMe says:

Some Problematic Assumptions

Mike,

Thank you for the series.. It has been interesting and has value and has helped me to refine my business model. I have been trying to put my finger on scattered thoughts where my business experience doesnt’t jibe with the assumptions in your theory:

1. I have found that it costs a great deal of money to give something (even an intangible with no distribution costs) away for free. Your assumption that there is zero cost for this is suspect. Every musician I know spends hours every day (even while on tour) hitting multiple social and music sites to keep their name and blogs and music mentions out there. A common technique for them to utilize to be controversial (kinda like you) but as you know it takes a deep amount of resources to keep fighting vigorously.
2. Several times above you cite that if someone doesn’t execute your model and tries to compete with your new model they will get snowed under and underpriced. For this to be true then all music would have to fit a strict economic “commodities” definition. Poll anyone, anywhere, anytime and they will refute this theory you have that music is a straight up “commodity” with any one piece of music substituting cleanly for any other.
3. I was not an economics major but it seems like you are confusing “macro” and “micro” economic theory. You are basically arguing “micro” economic theory and trying to extrapolate it into “macro”. You may (or may not) be correct to argue that individual bands could follow the model that you suggest and make it work in certain sets of circumstances having to do with band life stages and capitalization levels and ability to tour. However if everyone followed that model then the pie would get smaller. On a macro level we already have every band following your free model because everything is available for free peer-to-peer. According to your theory then, the total pie for CDs, concerts, tee-shirts, paid downloads should have blossumed in this period. Obviously that has not been the case- the pie has gotten smaller even as paid downloads have grown. Our macro economic system has a certain paradoxical nature to it. “Greedy” corporations can lead to societal good. And in your model of “good sharing” at the micro level can have unintended consequences at the societal level.

Please, keep on exploring this important issue.

Not Mike says:

Re: Some Problematic Assumptions

Poll anyone, anywhere, anytime and they will refute this theory you have…

Really? Do you have any evidence to back that up?

On a macro level we already have every band following your free model because everything is available for free peer-to-peer.

Gosh, you mean they switched over to Mike’s model without telling anyone? I guess it must be working out pretty well for them.

According to your theory then, the total pie for CDs, concerts, tee-shirts, paid downloads should have blossumed in this period. Obviously that has not been the case- the pie has gotten smaller even as paid downloads have grown.

I seem to recall reading that the industry’s profits have been up since the internet came along.

James Stevens (profile) says:

I'd like to point something out

Some of you are saying it would cost the musician money per song to release online (via P2P). Once 1 song is created, it can be infinitely duplicated for virtually no cost. So you pay for the cost of creating the single MP3 (which is still a very small amount) and then you let P2P do the rest of the work; there’s not a fixed cost for each song you release online.

Let me just say something from personal experience: I’m a 3rd year college student and I download music via P2P. I don’t upload, but I download a fair amount of music. If I hear of a good band from a friend, I’ll download some songs by that artist via P2P. Sometimes I’ll download a song and put it on my iPod after hearing it on the radio. If I like the song I’ll download more music from that same artist. The fact is, if P2P weren’t available, I wouldn’t have a clue about some of the music I listen to now.

Perfect example: I hear a song by Rise Against on the radio. I like it, so I download it and then I download more Rise Against music. I like most of their music, so now I’ve decided to go to a Rise Against concert in Dallas at the Palladium Ballroom on June 15th, 2007. I’ll be buying the tickets soon. I asked some of my friends to go with me because it’s more fun with them. Tickets cost $30 each. Myself and about 6 other friends are going. All because I liked most of Rise Against’s music. The only reason I was able to listen to more of their music is because of P2P file-sharing.

Bands are starting to realize truths just like these… and it’s not just me, many of my friends find out about good music and then buy merchandise… and *SHOCK* sometimes even CDs even though they could easily download it. But they sampled the music first because of file-sharing. Bands will not pass up this free advertising and promotion… so those sticking to the old ways WILL be left behind.

I don’t care if some of you guys think the fundamental economics don’t work with this way of thinking or you’ll say “Oh, that won’t actually work in the real world.” The direction my generation is going… all artists who capitalize on this opportunity will benefit, those who go against won’t live up to their maximum potential.

And 2 more things to add: 1. The music STILL has to be good, or else I wouldn’t go to their concerts and buy their merchandise. 2. My generation is the record labels’ and musicians’ biggest customer; as Mike has been saying record labels have been suing the hell out of their best customers.

Ed Duffy (user link) says:

Economics of Free

I agree with your assessment wholeheartedly. Now, add some more examples, elaborate a bit without getting long-winded, maybe some illustrations (we can help with that if you need it), and produce a 300 page best seller The Economics of Free Stuff.

It would be a great companion to books like Blue Ocean Strategies, Wikinomics, Freakonomics.

Best of luck. In any case thanks for what you’ve done already. Keep it up!

Gert-Jan says:

It's not the model, it's the outcome

First a few facts:
– it costs almost nothing to distribute content electronically
– all around the world, it is legal to distribute the content that you created yourself
– the market “doesn’t care” if a musician can’t make a living

Some may argue that in the end, “we” are all better off with the current situation where copying without permission is illegal, and illegal content distribution is prosecuted.

however, this is not what market pressure or evolution is about.

If there are content creators that make a living, and they find out that their revenue is increased by the promotion of their free music, then this will happen. For example, an African band that freely distributes their music and asks for donations on their website.

If the supply of free music grows, the demand for payed music will shrink. In time, consumers will not be willing to pay $20 for a CD with 10 songs. Does this mean that some US/EU musicians will lose their job? If they stick to their current business model? Most likely!

If I were a musician, I would want to make music too, and not bother with selling T-shirts. But it just doesn’t work that way. The only way to stop the market pressure would be to block not just the illegal content distribution, but also all “free” content. Anything less is insufficient. I don’t think our society is willing to do that (if it is possible at all).

So this series of articles should be a wakeup call for everyone who is currently “overcharging” content that can be copied cheaply. Whether it be copyrighted material or not. In time, market pressure will force your prices down. For some artists/studios/businesses it might no longer be opportunistic to keep doing what they are doing.

Saygin? says:

The artist is right, but wrong

The artist is right that there is a demand for his music. But he’s also wrong, which contributes to why so many people don’t get what Mike is saying.

Mike’s model argues that perhaps there is not a demand for YOUR music. There is a demand for music. So make YOUR music freely available in as many ways as possible. You can do this because digital formats has released content from its media of distribution. The listeners don’t need a physical CD or record to hear your music. Recognize that music, digitized, is an infinite resource.

Then, after releasing your music widely, creating, or feeding a market demand for your talent, sell the scarce resources: the physical CD, the time spent with you performing, etc.

The physical CD you want to sell is not your music. And, as an artist, the audience’s need for entertainment or artistic exposure is not satisfied by buying a CD.

This last point is similar to Mike’s many arguments about the experience of going to the theater to see a movie. The need to see Spiderman #10 can be met in a number of ways. Yet the experience of going to a theater cannot be recreated on an iPod, or in a living room. Separate the scarce and infinite components to strengthen a business model.

I am sympathetic to the artist who doesn’t want to sell t-shirts, but only wants to create music. However, a desire to do one thing will not necessarily square with the real world need to do that thing plus another.

CRTisMe says:

Pie Size Follow Up

Mike,

Well argued on your rebuttal. In regards to your below quote:

Secondly, I totally disagree with your claim that the pie has gotten smaller. It’s true that the pie of *CD sales* has gotten smaller, but that’s a small component. The pie for the overall *music* industry has grown — just not all in the ways you might expect. A recent report noted that the music industry is actually booming in many areas. A lot more music is being produced. There are more live shows. More instruments are being sold. More technology for recording is being sold. In other words, the overall music industry is making a lot more money. The trick for musicians is to make sure they can capture a big enough piece of that pie. But, the pie itself is clearly growing.

Certainly if you include in the pie

things like iPod hardware, MP3 players, music recording software and sample libraries, broadband adoption rates, even increased sales of computers to handle multimedia duties, etc

then the pie has gotten bigger. The correct pie share analysis here at this stage is beyond my current capabilities (and other studies have struggled to answer the same issue).

There are some big time players who have in essence invaded into the music space because it does benefit them (and by the way the whole ecosystem). Clearly there are winners and losers in the new music/technological world and you are doing a good job of detailing. Others have touched upon these issues by using North California (tech companies, Web2.0, Apple) against the South California (Hollywood, LA music scene, content) to picture the battle going on.

Regards till next time.

Broke Musician says:

Two quotes that make me ask “What planet are you people living on??!?!

Do you have an iPod? Yeah, you paid for that, right? It’s a scarce good. The more popular the music is, the more popular the iPod is — so a company like Apple now actually has incentive to pay some money to good musicians to make more good new music.

Certainly if you include in the pie things like iPod hardware, MP3 players, music recording software and sample libraries, broadband adoption rates, even increased sales of computers to handle multimedia duties, etc then the pie has gotten bigger.

This is absurd.

Yeah, musicians are going to get a cut from Apple for Ipod sales. Amp, microphone, and emquipment companies will start giving bands money, too! Because they’re helping make the pie bigger for these companies!

The last time I checked, corporations don’t pay anybody anything they don’t have to. If you can find ANY instance of this sort of thing happening (companies that produce hardware paying, voluntarily, those who provide free content) in the real world, please give examples.

Anonymous Coward says:

Re: Re:

If you can find ANY instance of this sort of thing happening (companies that produce hardware paying, voluntarily, those who provide free content) in the real world, please give examples.

I find it hard to believe that you’re a real musician but have never into a musical instrument store. My local musician shops have all kinds of instruments and accessories with signature endorsements by famous musicians. The manufacturers pay these musicians for their endorsements.

Wisdom of Cowards says:

Walk the talk

Nice post. Too bad I’m not authorized to do anything with it.

First off, and this is key, none of what I put forth is about defending unauthorized downloads. I don’t download unauthorized content (never have) and I certainly don’t suggest you do either. You may very well end up in a lawsuit and you may very well end up having to pay a lot of money. It’s just not a good idea. This whole series is from the other perspective — from that of the content creator and hopefully explaining why they should encourage people to get their content for free.

Er, time to walk the talk, no?

Bav says:

Seems so basic

The debate seems to have died off here…I’ll chime in with complete agreement in this model. What better way for aspiring musicians to get their music (and name) out in the market than to put it out for free! The beauty of this model is that it works at both ends. The new musician can take advantage of ease of promotion while the seasoned musician can take advantage of promoting themselves and their new music very low – zero cost.

The downside? This doesn’t work. Your music is not in demand and you move on sooner rather than later…again at significant savings.

James Wu says:

Just common sense?

The ideas in this post sound reasonable and are well argued… though I can’t help but wonder if Mike is over complicating things by trying to tie in economic theory. There is really no need to bring out marginal cost, scarcity, …

If you are a no-name band that’s just starting out, how will you make money? You can try to sell music, but you need a fanbase. So… you’ll need to market yourself. Giving away your music for free is definitely a means of spreading the word. And if every other startup band is doing so, you’ll kind of forced to go along as well. Heck, you’d do concerts for free, give away schwag for free, etc just to spread your name further.

If you are Metallica, however, what do you care? You can keep on charging 20 bucks per CD and prohibiting others from illegally copying your music. You already have the fan base and you already have the demand. What does it matter if distributing music has a zero marginal cost?

I think this is just common sense. No economic theory needed.

Gabor Klein says:

Scarcity music and free goods

From your comments I can see that you too have been caught up in the music-as-free-content mania that has swept the world with the advent of internet technology.

First of all, you mistake music as a free resource. It’s like mistaking water for oil. Both are liquids but you can’t run a car on water. Music is not a song, nor the beautiful expression of an artists soul, something that connects with an audience. It is the sound made by a combination of notes and melodies. Great songs are scarce and always will be. A Beatles song, a Led Zeppelin song, a Dylan song…Most of the music on the internet is awful. There’s a lot of “good” music as well but “great” music that captures the soul and the people that can make it remains scarce. AND it should be treated as a scarce resource and not flooded into the market with all the other “free goods”. If you mix enough water into oil you won’t be able to run a car on it either.

The business model you describe simpy doesn’t work. Concerts, merchandising, etc all drive the artist to the most difficult and expensive part of the business model. Putting a crew together, dropping your jobs and going on the road. Buy any gas lately? This makes it MORE difficult for bands to grow and disseminate rather than easier. There is no evidence that sell through of a viable economic product is the result of the “new content model”. CD’s are not selling through, digital downloads are controlled and not an adequate cash replacement model and because of market fraqgmentation, bands can’t afford to go on the road for more than a few weeks at a time.

I guess people and artists have a choice. They can wade through all the “free” crap out there and be unsatisfied or they can try to find a way to identify “great” content and pay for it. This is why we have a resurgence of “classic” music. The kids in college have gone back to the selectively filtered “classic” works. Artists who believe they are worth something should keep their works scarce while using the new technologies to help people find them. In the end we need a trusted filter that is egalitarian and free of economic control which allows artists and content users to find each other.

Jean Camp (user link) says:

irony

So here we have a person giving away ad-supported (aka “free beer”) to digest, and make simple all of this:
http://opensource.mit.edu/online_papers.php
(economics of free)

With some reference to this:
http://web.si.umich.edu/tprc/papers/2006/573/TPRC_final.pdf
(bittorrents function as broadcast to increase demand for the paid product)

And others arguing that rating, simplification, and ordering (e.g. what is valuable) are not valuable markets.

Interesting.

Market me this says:

Although I am no economist, I have been a musician for over fifteen years and I am acquainted with what goes on when it comes to making music as a viable business model.

There is a major problem with your theory Mike, although I much appreciate your effort and time to talk about this. The problem as I see it is surprisingly absent from your critics, suggesting to me they don’t understand how the music industry actually works.

You seem to be making the mistake that if songs are distributed for free that somehow that makes the demand for the artist (and his/her scarce product) proportional (even at low percentage) to the level of that distribution. Nothing could be further from the truth.

You can have your song on a million web sights; you might even get people who have never heard of you to download one of your songs in the 10,000 others they have. But you will only get those people who download a bazillion songs anyhow, your chances of them actually giving your song a chance is next to zero.

The point is that marketing is king in the music industry. I will take James Stevens who posted above as a perfect example. Were did he hear this “new music” that he downloaded? What avenue was responsible for his “hearing” the music? You guessed it: Radio. I don’t like to be a pessimist, but when it comes to music people are sheep like they are in almost no other arena. It’s ALL about marketing, and viral marketing for Indie bands. A person like what they think is good, and what is good has for the most part been constructed by the record companies. The vast majority of people do not get their music tastes and “likes” from browsing the internet. They cant, there is too much content. There are hundreds of thousands of bands and artists with content on the net, yet none of them are making it “big”. Why? Are they all that bad?

The facts are people can only really like music by about 10 bands/artists at any one time. The human mind can only handle this much, having 10,000 songs really doesn’t matter because most of that stuff is old, already created not new, and the rest wont be listened too. Even if you had 10 new bands that you liked every month (a huge leap, it’s more like 1 every year, if that, for most people) where are you going to hear them? Do you think people are going to wade through miles of junk to get the ten bands they are going to like? Not likely.

So this comes back to marketing. To be successful under your model, its not enough to have your songs for free everywhere, you have to have your songs making an impact, rising above the crowd. The general public, and even many musicians and music critics are under the false “supernatural” idea that the business is driven by this unseen hand of meritocracy. This simply isn’t the case; the best music doesn’t rise to the top, the marketed (and slickly produced) rises to the top, just think Spice Girls and Brittany Spears, as sad as that is. Every once in a while in the industry you have a “saviour” like a Nirvana or the like, an exception to the rule, but this only happens once in a blue moon and its not the norm. And even Nirvana had to make a music video, how much did that cost?
My point is that, without marketing, none of this matters. The only real way to market a band (assuming they have the songs to deliver) is to spend $$$. Where, now that there is no money from the actual recorded music are artists going to get this money from? It’s a catch twenty two, something that occurs all the time in this great “free-market’ economy of ours. It’s a basic investment principle: without the cash to invest in marketing your group you’re never going to make the cash to invest in marketing your group. Record companies have been the traditional vehicles for doing this, like the great music VISA card, and they have made their money on physically recorded media. Now that their revenue stream is dried up, guess where they are turning? Yep, the poor artists. So then in order to get popular you now have to sell even more of your soul to the record company, because they want revenue from you concerts, and your t-shirts and every other thing they can get their hands on, because their traditional revenue streams have gone.

This is the point that is missing. Distribution means nothing. Marketing is everything. Marketing costs $$$. Cash that the traditional record companies used to be able to afford, and now they cannot. What will fill the void?

yenvalmar says:

market me this

as somebody who does a fair amount of work in creating music videos for bands, occasionally as a paid part of one of these economic equations, and occasionally for free also, i think this is a very good point-

basically i think its going to be very hard for anyone to make a lot of money on entertainment, anywhere in the system.

on the other hand i have no problem with this at all.

its going to be more like in the middle ages where being a minstrel wasnt necessarily a very high class position. so it goes. regardless of what songs sell a lot of copies i think profit motive wasnt foremost in the creation of most music any of us like. or if it was, only in the sense that “the kids are gonna love this, itll sell a million”.. which is a case of capitolism working okay in my book.

i think the film world is also interesting in this context because the distribution cost is also free but the production costs are typically quite high, and for perhaps more obvious reasons in movies than in audio production- blowing up cars etc.

but basically you can do anything for free, or in any case trivially low cost, if you are persuasive enough. having a big credit card in the form of a record label greases the wheels but im not convinced that its a good thing for the level of artwork produced in the world for the wheels to be greased in that way, by those people for their profit motive, even if it does in the process finance the occasional cool thing.

yenvalmar says:

market me this

film is also a cost of giving away the “product” for free but selling an experince, i.e. ticket sales at theaters- although for awhile DVD sales were a big revenue stream, the film industry came into being in a situation where the only money they made was ticket sales at the door and its going back that way too. so what?

yenvalmar says:

hardware companies fill the void

by the way. apple and sony have been on top of this for 10 years at least. you still have to pay for the hardware and so thats the only people with money any more. why do you think microsoft started making consoles, to sell copies of windows? they arent complete idiots through and through over there, its because hardware is going to be the only thing standing once all software is free and the net has destroyed the entertainment industry.

welcome to reality everyone- a huge amount of content gets created by funding from hardware companies. through sony owning hollywood and also through things like ATI paying artists like me to make stupid demos just to sell theeir new video cards. and on and on.

yenvalmar says:

hardware companies fill the void

another score for the hardware companies, if your hardware is really succesfull you can create a monopolistic condition in your own product ecosystem and charge for sht that normally WOULD be free, like apple has done with itunes.

and you can also gain by controlling hardware the way sony does by developing first party games for their own playstation, to make money by selling the games themselves somewhat but also to sell the hardware first and foremost. thats why th first party games have way larger budgets than most third party games that must actually make money from the game itself.

fun world eh.

yenvalmar says:

also note the total death of PC based gaming

at one time a big part of the overall game industry. games now make as much money as film and movies do if not more, so i think they are worth mentioning in a computer based discussion.

but the games which sell copies sell those copies mainly cause its more of a pain to pirate console based software. the ease of doing this completely discouraged pc gaming to the point where its essentially dead compared to the level of development even by indie developers making xbox live arcade games.

games were also among the first things supposedly of value to be very widely pirated. i know i was trading games for many many years before mp3 came around or it was possible to get feature movies online.

so i think its a good harbinger for how things are going to go elsewhere in the entertainment world.

yenvalmar says:

and to any artists who think this will change much if anything

meet the new boss, same as the old boss.

apple will hire all the a and r guys that got fired by the collapsing record companies and life as usual will go on till capitolism itself folds. probably all of us creatives will get a bit less money and maybe more of us will get jobs.

yenvalmar says:

sorry for the chain posts- a summary

i am a professional artist so i hope that excuses my flakiness somewhat.

to sum up all that crap i see things going two ways-

one the traditional big budget credit card to finance for profit commercial entertainment role will be and already has been largely filled by hardware manufacturers- the sector of the economy that specialized in selling products that can now be reproduced and distributed for essentially free, is going to just go away as it stands today. (barely stands we might add.)

second, for “independant” musicians who dont want to participate in the big money system, there are, thanks to free distribution, many more opportunities to reach a large audience, which will very likely have a miniscule “sell through” rate but still potentially enough for many entertainers, bands, filmmakers etc to make a modest living or supplementary income equal to any hard costs incurred in creating the recording, movie whatever. (buying gear, blowing up cars, etc). computers have also greatly lowered the production costs, though not to zero, a gigantic amount, so it doesnt cost more than a few thousand in hardware to make a completely professional recording and consumer distribution of media of any sort these days.

yenvalmar says:

the once exeption to the death of pc gaming is of course

online games, where the subscription is the money maker and the game itself is often free. so yet again i think the points in this article are relevant, the thing that has to be sold has shifted away from the product itself.

will this encourage better products to be made in the end? i think it will, a better product will still encourage sales of whatever you are really selling. the whole thing is a bit funny but till capitolism totally gives way we will have to live with some paradoxes.

Lloyd Shugart (user link) says:

This Concept is Market Tested=Market Failure

http://techdirt.com/articles/20080425/124144950.shtml

Re: Utopia by Mike on Jun 11th, 2008 @ 3:29am by Lloyd Shugart on Jun 11th, 2008 @ 9:35amBr>

If this model worked Open Source would have displaced the current model long ago, at the very least created a market share, that competes. The Open Source companies that are able to achieve any success, are the ones who rely on the current model to protect their most valuable part of the product.

Another fine example of this market failure is Made in Japan it wasn’t until they left the cheap valueless economic model and invested in R&D protected by IP, to create products of quality, that the consumer market would in fact value, as demonstrated by their willingness to pay a higher price. Now made in Japan=Value Lacking any IP protection the investment capital required to make this market change simply would not exist.

The models propounded above fail to provide the capital to make the leap to free. If I increase my market share from 100 to 100,000 I have a cost to get there, now short of having a trust fund, or infinite capital how do I get there? I have to go to the capital markets, I have to either collateralize with other valuable assets, or I have to have a product protected by IP to the extent the the investor feels safe on their return. My cost on that return is directly related to the risk. My cost of capital is either going to be very low for something well protected, or very high as related to the risk. Now all of those things come against my bottom line.

Lloyd Shugart (user link) says:

“invisible hand”

Joseph E. Stiglitz

http://en.wikipedia.org/wiki/Invisible_hand

The Nobel Prize economist (2001) Joseph E. Stiglitz says: “the reason that the invisible hand often seems invisible is that it is often not there.” (Making Globalization Work, 2006) [2]. Stiglitz explains his position:

Adam Smith, the father of modern economics, is often cited as arguing for the “invisible hand” and free markets: firms, in the pursuit of profits, are led, as if by an invisible hand, to do what is best for the world. But unlike his followers, Adam Smith was aware of some of the limitations of free markets, and research since then has further clarified why free markets, by themselves, often do not lead to what is best. As I put it in my new book, Making Globalization Work, the reason that the invisible hand often seems invisible is that it is often not there.

Whenever there are “externalities”—where the actions of an individual have impacts on others for which they do not pay or for which they are not compensated—markets will not work well. Some of the important instances have been long understood—environmental externalities. Markets, by themselves, will produce too much pollution. Markets, by themselves, will also produce too little basic research. (Remember, the government was responsible for financing most of the important scientific breakthroughs, including the internet and the first telegraph line, and most of the advances in bio-tech.)

But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always.

Government plays an important role in banking and securities regulation, and a host of other areas: some regulation is required to make markets work. Government is needed, almost all would agree, at a minimum to enforce contracts and property rights.

The real debate today is about finding the right balance between the market and government (and the third “sector”—non-governmental non-profit organizations.) Both are needed. They can each complement each other. This balance will differ from time to time and place to place. [2]

Lloyd Shugart (user link) says:

If there were no incentives for those who discover

http://weblog.ipcentral.info/archives/drm/

A resource with which to analyze arguments against IPRs is Innovation and its Discontents, Princeton Univ Press (2004), where Professors Jaffe-Lerner outlined the basic tenets for patents. The scholars noted the relationship between innovation costs and marketing, as well as the role of commercialization. Its significant that in a book critiquing the current patent system, Jaffe-Lerner highlighted baselines for IPRs that critics have overlooked.

If there were no incentives for those who discover and develop new technology, it is likely that fewer innovations would be developed, slowing progress and the benefits it brings. Potential inventors realize that without adequate protection rivals will rapidly copy their discoveries, and that therefore innovation is at best an uncertain route to future profits. As a result, companies would be unlikely to spend significant amounts of money on R&D that is the source of new products and processes in a modern economy. They would instead choose to spend their money pursuing other activities- for example, marketing campaigns…


our capitalist free-enterprise systems has demonstrated a unique ability to generate new technology: industrialized economies have increased their economic productivity more in the last two centuries than in all the millennia of previous human history. The basis for this advance is firms’ pursuit of profit, which forces them to innovate.

Society benefits from creators and innovators investing in more than selling t-shirts. Society needs innovation in IT, not ways of marketing t-shirts! Basic research-product development are high risk ventures, advertising for t-shirts is not. It’s a bit ironic that IPR critics would not have creators leverage the phenomenon known as the Internet for anything more than advertising. The difference in margins between delivering products/services online versus selling t-shirts alone suggest that enabling creators to tap the Internet would lend to more innovation and consumer welfare.

Mike (user link) says:

This Concept is Market Tested=Market Failure

If this model worked Open Source would have displaced the current model long ago, at the very least created a market share, that competes.

Hmm. The internet is mostly based on open source software. Linux has the vast majority of server implementations out there.

I’d say it competes very well.

Lacking any IP protection the investment capital required to make this market change simply would not exist.

I pointed out how false this statement is in a comment on the link you posted above.

Take a look at the actual research and you’ll discover that there’s plenty of investment without IP.

The models propounded above fail to provide the capital to make the leap to free

Again, history suggests otherwise. Look at the research of Eric Schiff, Davide Levine, Michele Boldrin and Petra Moser, and then come back and admit you made an assumption here that isn’t true.

I have to go to the capital markets, I have to either collateralize with other valuable assets, or I have to have a product protected by IP to the extent the the investor feels safe on their return.

You’re falsely assuming the return needs to come directly from selling IP.

Do you know how much money IBM makes from services related to Linux these days?

Mike (user link) says:

�invisible hand�

http://en.wikipedia.org/wiki/Invisible_hand

Um. Wikipedia isn’t exactly the most reliable source for economic theory… but ok.

As for Stiglitz, he’s done great work (and, I should note, he’s against pharmaceutical patents), but when were his statements on externalities made?

Romer’s recent research has opened up a whole new vein of exploration concerning the classical theory of externalities that are not at all reflected in the Stiglitz comments you quote.

But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always.

Indeed. That is what the recent research has shown, but MANY of those externalities are *positive* not negative. You need gov’t intervention to deal with the positive externalities, not the negative ones.

Government is needed, almost all would agree, at a minimum to enforce contracts and property rights.

On this we agree — but copyright and patents are not property. They’re artificially monopolies on infinite goods. Very different.

Mike (user link) says:

If there were no incentives for those who discover

If there were no incentives for those who discover and develop new technology, it is likely that fewer innovations would be developed, slowing progress and the benefits it brings.

“It is likely?” Very scientific. How about looking at the actual research that’s been done.

Specifically, how about actually looking at Jaffe-Lerner’s research on the impact of patents on innovation, rather than PFF’s weak summary of it.

Or, how about looking at Bessen/Meurer’s research. Or Eric Schiff’s. Or Levine/Boldrin. Or Petra Moser.

Lloyd Shugart (user link) says:

Let's Pull Back the Big Black 45. Curtain by Lloyd Shugart on Jun 12th, 2008 @ 11:02am

Mike, my response is here http://techdirt.com/article.php?sid=20080425/124144950#c644

excerpt Mike, I guess I am having a hard time discerning what you are truly advocating. It appears to me that as opposed to providing a true journalistic approach, you have moved to the side of “Cheerleader”. In my mind a true journalist seeks information in all of it’s glory on both sides, then presents that in an unbiased way, which allows the reader to draw his/her own conclusions based on that info, along with his/her other factual investigations.

You have a habit of taking bits and pieces from other presentations and skewing them to support you argument (Cheerleading).

Mike (user link) says:

Let's Pull Back the Big Black 45. Curtain by Lloyd Shugart on Jun 12th, 2008 @ 11:02am


excerpt Mike, I guess I am having a hard time discerning what you are truly advocating. It appears to me that as opposed to providing a true journalistic approach, you have moved to the side of “Cheerleader”. In my mind a true journalist seeks information in all of it’s glory on both sides, then presents that in an unbiased way, which allows the reader to draw his/her own conclusions based on that info, along with his/her other factual investigations.

I responded there, but again, I will note that I am not a journalist. I am an analyst, and what I write here is my insight and analysis based on my research, backed up by plenty of evidence.

Telling me I need to pretend I’m a journalist is silly and meaningless. It’s a way to not actually respond to the issues.

Cameron (user link) says:

Legal control

The only power record companies has is legal power. They sign an artist and have exclusive rights to sell their music. It is a bureaucratic power and has no intrinsic value. The only value is that ‘we got here first so you have to pay us to get it.’

Artists should be signed non-exclusively. Signing an artist means you have the right to distribute their music, but more than one music label can sign the artist. The label will only be as powerful as its ability to distribute (something of actual value).

Also, artists can sign with more than one label and get more distribution and the labels only make money when they distribute the music.

Pat says:

Sam and his old business model

You are missing the point. What Mike is simply saying is that there IS an alternative to the “make music, sell music” model that will still make money. On top of that, the “make music, sell music” model worked when copying music wasn’t as easy as copy+paste, but now it is a model that fights technology in (arguably) a losing battle.

The alternative (free music, sell things that can’t copy+paste) uses the technology that the old business model fights against. In other words, it follows the river instead of trying to divert it.

No where did he say that you HAVE to switch, he simply said that if you dont, you will more than likely get buried by the other artists that embrace the new business model.

I dont see why this has to be a thing where everyone has to agree on one model and stick to it, thats the OPPOSITE of what this article is saying. Try new things or don’t, and the market will decide what models work and what don’t. Also, what works or not is likely to shift, a lot, and I would think the key to being successful is being able to adapt to the market, instead of trying to make the market follow you.

Last thought, the current business model is only being held up by tons of lawyers and lobbyists fighting natural evolution, while the model and ideas proposed here fight nothing at all and doesn’t require extra people that have nothing to do with music to be paid with money from your sales.

David Touve says:

As if...

So. This article seems to ignore the other dimensions of scarcity that already face musicians.

(1) Scarce number of venues. If more artists attempt to make their living performing in venues, this increase in supply will drive down the willing price paid by venues for artists.

Already, the live music data suggest that revenue are becoming increasingly focused upon a smaller set of performers. How will giving music away for free increase the number of venues?

(2) Scarcity of attention. We humans already have thousands of requests each day for our attention. How exactly is it that musicians will increase their stake of this scarcity simply by giving things away?

Giving music away will simply increase the volume of media groping for my attention. The result is a tournament, the spoils of which will accrue to a smaller percentage of artists.

(3) Thousands of artists giving their music away does not increase the value of any one artist’s concert tickets, t-shirt, etc. Giving something away is in no way a competitive advantage in this marketplace – anyone can do it.

Sameer says:

Analogy

This is a interesting idea to toil and Mike full credit for dealing with every objection patiently. Not unusual I must say and I quote from a advt. “An idea is not a idea if it aint objected”.

Does this model of your’s have an analogy to the “Cash Back Credit Card schemes” that the banks were playing with.And what the scheme essentially said was you spend a certain amount on your card and we(bank) pay you back a percentage of it in cash. Now in its most obvious sense this sounds weird, where the bank provides you credit to buy items and in turn gives you cash for buying more credit. It is true that the Banks do not lose money by running such a scheme but what they promote is the something that is scare, which is affinity to spend on using the same card again and again.

If for a while we assume Mike’s theory does generate a net higher equilibira for both the consumer and producer, wonder how can it be applied to the Medical Industry where the money an individual medical practitioner makes is directly proportional to the number of patients he sees, but offering this service for free to grab more patients thru the internet might prove counter productive.

Dave Lane (user link) says:

Extreme patience

Hi Mike, can I just say that, in addition to being sooo right in your arguments, your patience is astounding in the face of so many meat axes swinging and profoundly missing the mark. Please keep up the good work. I’ve got a whole cluster of open source companies here in New Zealand who, if nothing else, get your model. Also, we use it every day. And we make a good living. I also make music and art that I produce available online… under a Creative Commons license because I want to share it.

For those who don’t believe in a free lunch: look at all the people who actually *pay money* as well as countless hours of their time (and many people say that time = money) to be able to put their thoughts, pictures, music, etc. online. For anyone to view. For free. Billions of pages of it. If that’s not a free lunch, I don’t know what is. Look at Google. Wikipedia. Remixter.

Eventually, those vehement naysayers will finally get it. I suspect that their invective stems from the fact that they’re making money with the current model and are clutching to it for dear life, because doing otherwise would mean: a) thinking, b) working, c) competing… They just feel threatened the same way that the typewriter/buggy wip/telegraph/oil lamp globe manufacturers and vaudeville performers and traveling circuses dreaded the advent of the wordprocessor/automobile/telephone/light bulb, movies, and television, etc. I just hope they’re not ruined by investing everything in a dying model. Adapt or perish. It’s simple.

Dave

Laurel LaFlamme (profile) says:

Reply to Free Music Thread

I am not in the Music Industry, but I am a lover of music. When I see things like “download for 0.99” it instantly wreaks of spam to me – there is no real value there at $0.99 and I don’t waist my time.

When I get a musical tidbit I love for free, I almost always go back and purchase the whole CD. I don’t know the technical term for this syndrome. Perhaps it has something to do with “you were so nice to me, thanks for the freebie, I now have respect for you” and am more likely to buy your product.

That sounds like a contradiction coming out of my own mouth…0.50 is cheesy, but “free” has value? Well, it does because it’s a gift to me. You appreciate me so much you gave me a gift!

The “buy my stuff for fity-cents” seems so gimmicky to a consumer like me. The freebie-effect works.

I have so much respect for you when you reveal your passion QUOTE: “I i’m an artist.. i create music.. i release music…”

What struck me the most and what rings true for me is Mike’s statement: “What the band has done in this case is use the infinite good to increase the value of everything else they have to offer.”

BINGO! That is sooo it in a nutshell. I also think that your intense passion for your craft & Art can be making you miss the boat a little. (just a little).

I really enjoyed your article, Mike, and the comment thread was very informative!

Jonas (user link) says:

Economics of free

Hi Sam,

Here’s my opinion on this —

Of course you have a right to charge what you want for your music and to demand that it not be copied. However, I think what people are trying to excpress (in a confused way) is that more artists could understand that they may earn more while charging less for their works — it doesn’t even have to necessarily be free. The idea is just that because bits are now easily moveable, this creates a business opportunity to actually potentially make more money by charging less, but selling more, or by charging less but selling other things along the side which you wouldn’t have otherwise had the chance to sell.

I think the idea of “free” side-tracks the discussion. Think of it more as “charging less” than as “giving it away free”. Free is the extreme. But I think another example that fits this thinking would be charging $5 for a CD for example — instead of the mythical, decided upon at some time in the past, and for some reason never really changed standard $15 price point.

Cheers,

Jonas

BobC says:

Infinite?

Mr. Masnick.

The first thing you need to do is remove the word “infinite” from the discussion. There is no such thing as an infinite resource and it distorts the actual dynamics. I’m not being snarky. It’s important to keep a certain level of intellectual rigor.

People pay what they are willing. But people are also willing to NOT pay if they can get away with it. If I have a fruit tree, it is considered theft if you pick the fruit for yourself. In order to prevent this unwanted outcome, I can put up a fence. You seem to be saying “lets tear down all the fences and everybody will be happy”.

Anonymous Coward says:

Infinite?

You aren’t understanding what’s going on, are you? Let’s use your analogy. If I pick an apple from your tree, it’s gone. You’ll never see it, again. If, however, you have a magical tree that instantly replicates the apple that I picked, then what are you out? Nothing. Because the apple is still there to be picked. It’s an infinite good, because you can keep picking and picking, and never run out.

tHe dIrt tHaT moVes says:

Re:

Hmmm… I seem to remember there was something inveted a few years ago called “radio” based on this economic model. Give away your music, sell advertising, subscriptions, your body, whatever. If people aren’t willing to pay for what you’ve got, was it ever really valuable in the first place? (Jefferson) The is no “Paradigm shift” (Which is measured in eons anyway) here, this the natural course of events as humankind industrializes, creates it’s post-industrial society, and slides into the Marxian Utopia (or is it Marxian ‘Freedonia?’ (for those born before 1975))

-diRt.

CG says:

Another reason why this cannot work?

I know I’m coming a bit late in the discussion, but I’d still like to add my two cents: this is the internet, after all!

The problem in my opinion is that while the theory should work (and has been proven to work in other markets, as some people have remarked), as far as the music industry is concerned, they cannot just abandon the old business model based on the artificial scarcity of the song and find a new scarce resource that will compensate the loss of the original income.

Allow me to elaborate: I think peer to peer networks give us a good idea of how the market would behave if we moved to this new economic model, because although currently illegal for this particular copyrighted content, they make music distribution effectively free like the theory suggests, and the people using them should already be allocating their money toward the scarce resources whose value has been increased by the free ones.

I don’t have any hard data to back this up, but I’d bet that the revenues linked to the scarce components listed in the article like access to the musicians, merchandise and so on haven’t increased much. Probably not even the demand for new songs by the same artists, since with so many songs to listen to, whether the next good song comes from them or from the next band you’ll listen to for free doesn’t really matter.

But there are indeed scarce components that you *need* to enjoy music and that would thus benefit from the free resource. I would start with a good broadband connection, then a shiny new portable music player, and probably a good content provider/filtering service to avoid having to listen to too much music that doesn’t suit your tastes between the good songs (also known as ‘crap’). Maybe you can add other items, but I think a decent summary would be: music related hardware and services. And while we may disagree on the cause, I think we can say easily that the market for those has greatly increased during the past few years.

Presented like this, the problem the music industry suffers becomes obvious: it sells neither. Since they came too late on the market, the industry (and artists, since in this, their interest should align) only gets a cut of the action on the service side (paying downloads, web radios, …) because the songs themselves are not yet free (as royalties), and I don’t think they get much on the hardware side either (I remember reading that they tried to get money from the iThings sales without success, at least).

I’ll conclude this rant (it sure looks like one, by now) by saying that this “grand unified theory of free” can only work if the people who benefit from the increased value of the scarce resources end up paying the cost of producing the “free” ones that support them. It probably works in the free software world because the people that produce a software look like the most able to provide support for it (which is the main revenue model, I think), but I don’t think it can be a viable alternative for most artists (and for the industry in general) in the current economy.

Nick says:

If I have a fruit tree, it is considered theft if you pick the fruit for yourself. In order to prevent this unwanted outcome, I can put up a fence. You seem to be saying “lets tear down all the fences and everybody will be happy”.

A more accurate analogy would be: You have a magical orange tree, as Anonymous Coward suggests, that creates infinite fruit, all you have to do is maintain the tree, you also have a massive sign that says, “FREE ORANGES”. Next to the tree, you sell a whole buch of products you created from the infinite fruit, juice, muffins, etc. The sign and oranges draw people in that otherwise would not have come, some buy things, some don’t.

John (user link) says:

My 2cents - infinitely copied

First, thank you Mike for creating this and patiently responding to all of the comments. I’ve read the whole thing over a few months and it’s quite educational – better than any Presidential Debate or University Lecture. And it was FREE!
Example of a big name artist making money through digital distribution

Additionally the UK Music market made more money in very tough economic times but including a drop in physical sales.

The “stats” that the global pie is shrinking

And yet, why is this “one industry”? (Legally signing artists to contracts, Recording them with technology, Marketing their product, Distributing the product, Lobbying governments, Lawsuits and Enforcement) … could they buy radio stations, sell advertising, and still be in the same industry?

The RIAA spend money to defend their business model:
Tenenbaum $675,000 fine

Thomas $220,000 fine

RIAA Lobbying costs

As I don’t imagine that amounts awarded will pay for all of the RIAA legal fees considering how long it will take to get them out of the defendants. But it’s obvious that lots of lawyers can make an ugly example out of someone.

Note that this has nothing to do with the principles of enjoyment, betterment of society, or artist re-imbursement. U.S Constitution on Copyright:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors…the exclusive Right to their…Writings”

Ironically, previously, Sony were the defendants in a case about technology and IP.

Did that ruin the industry?

“In 1992 videocassettes accounted for over 50 percent of movie receipts…”
page 199, Industry and firm studies by Carol Horton Tremblay


Did Television ruin the Movie Industry? What about DVD’s? Or movie rentals?

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

As statistics and examples are infinite, (both for and against), I’ll skip to the “scarce stuff”, good ideas…

If I give you a widget and you give me a widget, we each still only have 1 widget.

If I give you an idea, and you give me an idea, we now both have 2 ideas.

Technology has made it so that what we called a widget (a song, a movie, etc.) can now be copied and transferred like an idea.

Distinctions between analysts, experts, journalists, professors, etc. seem trivial – someone has an idea and explains it with true examples.

So here we have common sense about selling things, now “changed” by technology, put in the perspective of economics.

The phonograph and other technologies commoditized what was previously a service and created an industry. Now technology has greatly reduced the intrinic cost of distributing that commodity. So perhaps more profit should be found from selling it as a service again. Or finding new ways of commoditizing it.

Google Adwords profits from a free service and they’re a technology/media company.

I’m sure there are other links on the internet but for people who have gotten all the way to my comment, maybe you’d like to read about “Better Than Free”

Marketing does cost money (though if you read “The Google Story” you’ll find that Google spent very little on marketing), and Britney Spears is huge due to marketing.

BUT technology not only reduces the cost of Distribution, this InterWebNet also reduces the cost of Marketing. (MySpace, Email, Band Websites, Entertainment News Websites, etc.)

Technology quantifies “x downloads” or “x plays” of a particular song whereas before it was estimates of Radio listeners.

While it is possible for the current model to continue to profit, it’s anti free market and anti evolution. And to take advantage of the efficiency of many of the technologies (Does the RIAA have a website, use email, create pdf’s?), but to claim that others are illegal or encourage illegal behaviour is disingenuous.

If you’re an artist, go ahead, make music. But as the jazz pianist Tee Carson once told me, “Music, what a great life. I don’t know about the money, but what a great life”.

If musicians are “demoted” to only making money from their performances and advertising, like athletes, then I’m sure they too will find a way to cope.
Highest earning US Athletes

There was even a time when athletes didn’t make money from playing…

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Krissy McCollogh says:

Look no further than the fashion industry for a clear, decisive example of creativity being able to push trademark value without the need for overbearing IP protection. The rights to make the exact same clothing are given freely to anyone who would attempt to “copy” the creator’s work without being required to pay the original creator or even ask their permission to “copy” their designs, even if for profit. The only scarce resource which requires legal protection is that of the given trademark.

Clothing designs which are universally allowed to be copied, while the competition of directly copied(non-trademark infringing) clothing based upon the original designs being allowed to compete in the same market, are what makes the fashion industry one of the most creative and innovative industries in existence. No matter what they can create, it absolutely will be copied immediately, and by competitors no less, so they must always continue innovating new designs time and again to stay current. Or in other words: the polar opposite of what the entertainment industry does.

Even though they don’t want to admit or acknowledge it yet, the entertainment industry is in this position already, they just haven’t been forced by law to do as the fashion industry must do (yet). In this instance though, it is the customers themselves who are bypassing the monopolistic artificial scarcity model rather than the government being called on by the customers to force the industry to give the model up by force to promote creativity and innovation for the good of the industry as a whole. Not that the government would necessarily come to the aid of the customers if/when called upon in this issue, but that is a problem for another discussion.

Is the fashion industry able to exploit a monopoly on ideas to protect extreme and arguably undeserved profits for itself spanning ridiculously large periods of time? No, and for many good reasons. Does this mean that they are somehow unable to survive, and in fact thrive, just because they are not propped up by a government-installed system to guarantee them a monopoly along with a competition-free environment in which to do business? It’s actually quite the opposite…

The designs, no matter how much time and equitable cost input is dedicated to their design, are always free. The design is no more than an idea, which once shared with even one person, is no longer your exclusive property anymore. When you buy their product you are paying for the tangible good… the brand… the trademark. You are paying for the original instead of a knock-off for no other reason than to reward a trademark owner for their innovation. You can have the same clothing for less, of course, but you will not be supporting the people who designed it and you may not see the next installment if enough people refuse to buy the original. Good thing “everyone” doesn’t “always” pick the cheapest route or this system would have imploded on itself decades ago. The entertainment industry is in it’s infancy still and has a lot to learn yet… if we can ever get it, as a whole, to mature beyond the courtroom temper tantrums and other infantile nonsense maybe it will learn to be a responsible adult.

The people who would buy these copies or even illegal knock-offs(file sharing/P2P/second hand sales) probably do so because they do not have the money to afford the originals(direct purchase of content which benefits and supports the content creator) anyway, and thus, were never really a part of the target market for the original creator in the first place. They are the target market of the copy/knock-off manufacturers because the costs associated with the originals often remove these consumers from their market by default via financial exclusion.

Won’t be long now… until entertainment is deemed “utilitarian” as well and loses all these ridiculous protections and gets forced to focus once again on the heart of copyright’s *real* purpose: to promote innovation and creativity. Right now, their business seems to serve only to stifle innovation and keep creativity locked away. For profit.

willbates (profile) says:

Very good points, they may very well make higher profits this way. It would be an interesting experiment anyhow. I particularly like your thoughts about a ‘free’ good feeding into paid goods. Just be careful when you try to get technical about economics because some of the finer points are not really true, for example, music downloads (even if free) are not strictly speaking infinite as it is a function of population, download speed, duration of popularity etc. I know this may seem picky in this example but an economic theory has to have multiple (if not universal) application. Just be careful rigidly arguing a good is infinite. very nice ideas though.

Eric (user link) says:

Today I wanted to listen to the album. Had Feed The Animals been a typical DRM-infested, iTunes download I would have had to ante up again for it. What I probably would have done is just moved along and listened to something else instead. After, who wants to pay for the same album twice?

But because ?pay as you want? existed I downloaded it again off the Girl Talk website. And now I am happily listening to Play Your Part (free stream on Lala here). And I?m blogging about Girl Talk. And I?ll Twitter the blog post. And the odds that I?ll go see Girl Talk next time they?re in town just went up. Fat loss Factor

Anonymous Coward says:

Infinite?

No, it’s an excellent analogy. And to answer your rebuttal, a fruit tree is infinite; you pick an apple, another one grows back.

The problem is that if everyone is simply picking all the grower’s apples for free, and no one is paying for them, the grower goes out of business.

Unless of course he makes all that money back selling “Barney’s Orchard” t-shirts…

Anonymous Coward says:

Re:

Are you leaving out the cost of maintaining the orchard? Can that cost be negated by selling “Barney’s Orchard” T-shirts and coffee cups? Is that why Barney went into the orchard business? To sell merch?

The analogy to recorded music is perfect and it demonstrates why Masnick’s “Grand Theory” is a grand failure.

Anon. says:

Who's in control of the scarce?

DVD and CD producers are in the AUTHENTICATION business. They are providing the “stamp of authorization” on the DVD or CD stating that it is a genuine copy of what the artist intended. This is a valuable good which people will pay for.

Of course, the MPAA/RIAA megacorporation members’ tendency to use crappy, damaged, cut masters kind of ruins that. But it’s still true for an individual band or small studio.

Anon. says:

Re:

Again, this wasn’t mentioned, but *authentication* of tracks (as being complete, recorded-as-the-band-intended, etc.) is a service, and a scarce one, which bands can charge for. Likewise, in a book, you pay for the *authentication* of the text, as opposed to the unreliable copies you might get off the Internet. You’re not paying for the text itself.

AC says:

Some Problems with Mike's Model

Limited time free play is not a business model – it is at best a hack to prolong the traditional business model. I will dare ( as an anonymous coward) to go where Mike din’t; there is a very good chance that 98% of artists who want to make money from their Music, simply will not be able to unless they consider packaging it with “other stuff”. Bear with me , I will elaborate. The size of the market (consumers, competitors)is a two sided sword. Larger markets offer sellers access to more consumers, but also at the same time offer consumers more options. Before the massive internet penetration, the smaller artists were exposed to smaller markets, giving them the option of being not-mainstream as one of the differentiators along with other differentiatots like “local falvor”, “niche style” etc with only limited threat of other smaller artists from around the world to compete for the same small share of the pie(consumer attention- which has the potential to translate into $).

Now the nature of the world has changed, breaking those geographical barriers of entry (distribution primarily, but also marketing – all of which can be online)- hence the smaller artists/new artists have to compete with a larger number of sellers. Fortunately they do have a much larger pie to share, as they can also reach the wider world – in simple terms one could argue that it levels the playing filed. BUT,one of the aspects of the changed world is that it is a difficult to control the distribution of content ( DRM is only a minor inconvenience for those seeking to take away your control over distribution)-hence if some of the sellers, adopt the free content business model as a promotional tool to sell “other stuff” which is scarce, the “traditional” sellers wanting to sell their stuff would loose out. Take into account, all the pirates who will make your stuff available for free anyway – the only viable option left is to adapt your business model. The free content Business model seems to me as the most viable option. Record companies, would in view have to evolve into advertising companies ( that is what they have been doing all along essentially) and offer services to the artists to help differentiate them and grab a piece of the pie (attention) in the increasingly crowded market place.

Rob says:

bandwidth isn't free

every byte of data is held somewhere and has to be moved around.

when i pirate a movie through my cell phone it can cost me over 40 dollars. 10 dollars a gig, at 4 gigs for a 720p movie.
it seems to me that moving forward fines for using bandwidth will increase rather than decrease – these fines did not originally exist and they have only gotten heavier since their inception.
i looked up metallica flac on google and found it on the pirate bay. 14 cds at 18gigs. on 3g that’s 180 dollars. i use metallica as my example because of how much they don’t want to be pirated and how easy it is to find them ;D
there is a maximum fine of 50 dollars on my wired internet also. i easily reach the max fine monthly even without piracy.

the downloader isn’t the only guy paying for data. web hosts cost money too. storage costs money. upstream costs money.

Anonymous Coward says:

Re:

“And you have every right to *try* to do so. What you don’t have the right to is have it guaranteed that you’ll make money. All I’m trying to do is warn you that your business model is going to go away.”

This is what makes me laugh…YOU Mike, are guaranteed to make money at your job, right? You don’t have to work for “maybe” making money. So why should other people do so?

Selling the scarce doesn’t work for every content creator; it might work for us musicians and maybe movie theaters to an extent, but people like software creators and game devs don’t have a “scarce” product. People that want a program or a game don’t want stupid bs like shirts or stickers; they want the main product. Sure a few people might want a t-shirt of their favorite game or a sticker of a program’s logo, but most people want the main deal…and for the people that do want the stupid bs, they are usually not willing to pay a fair price for it. I know this because I follow quite a few game devs on their facebook, and people always bitch about how a hoodie or a shirt should only be like 10 or 20 dollars. That is not a fair price for the content creator, especially if it’s their only revenue stream like you want them to have.

It’s not always possible to control the main product and the scarce; if a band releases their music for free in hopes to sell the scarce, what happens if BOTH are free to consumers? It’s easy to just copy a sticker, and I’m sure if someone took an image to a printing service to have it put on a shirt, they could do that too since those places really don’t check if someone actually has the right to use those images. You can literally type up a bullshit letter and scribble a signature, and these shops will usually accept it. Sure this will still cost some money, but $5 for a cheap t-shirt and maybe another fee for the shop to print the image is probably less than what the content creator can afford to charge. So Mike, your favorite phrase seems to be “you need to adapt” when it comes to content creators; how would someone “adapt” in this situation when EVERY product they offer can be obtained for free or a cost lower than what is offered?

Nathanael says:

Some Problems with Mike's Model

Late reply, but John B, you’re wrong, and hilariously you’re wrong because you don’t understand economics. I guess your Masters wasn’t worth much.

Fixed costs do not affect pricing pressure in a *competitive market* — this is econ 101, the efficient markets theorem. The “new listener” market for music is quite close to a competitive market.

Every economist knows that in a truly competitive market *profits go to zero*.

You’ve just noticed the fact that most companies are not actually in a competitive market. Competitive markets are rare and no seller wants to be in one. Companies are usually in a market with very few sellers — and therefore, as price setters, can charge a premium over marginal costs. Which they do.

One of the things a musician or artist is trying to do is to change the market they’re in, so that people do not perceive other people’s music as an alternative to theirs. At that point the musician is in a monopolistic market and can charge more than marginal costs. This is why, for example, *after* releasing multiple albums for free and getting lots of fans, a musician can charge an arm and a leg for exclusive early access to the next release. Or an comic strip artist can publish 2000 comics for free… and then have people pay $100 a pop, or more, for a single sketch of a character.

Mike is actually describing the process of market differentiation. Don’t be “some musician selling music” — make an effort, by *giving stuff away*, to become “THAT MUSICIAN I LOVE”, and then you are in a market where you can make profits.

Nathanael says:

PC games are now free.

Free as in free and open source.

It’s taken a while for programmers to replicate some of the key genres, but at this point games are works of art worked on “for the love of the art”.

No, they’re not profit-makers and nobody’s going to make a living off of them. So what? They don’t take THAT much time to create. People are still making them and people who enjoy them are still playing them. This has happened to text adventures (as early as the 1990s), to CRPGs, to arcade-style games, to action games, to action sims, and now even to world sims (which actually seem to be harder to write than most other genres).

Nathanael says:

If there were no incentives for those who discover

Incentives are good.

*Monopolies are bad* — and worse, the studies have shown that monopolies like patents and copyrights are *sucky incentives*. Getting paid upfront to create something, that’s an incentive.

That is now the model in the software industry. Some company needs software which does X. There is no such software. The company pays someone to create it. Then it is released free.

Stipends are an incentive. Patents aren’t.

Nathanael says:

Re:

Orchards maintain themselves, barring plagues of locusts. But we’re getting kind of off topic.

Barney’s best move is to sell *authentication*, which is always scarce.

“Genuine Barney’s Orchard Apples”.

The biggest market error which the MPAA/RIAA have made is in crappy releasing — releasing bad masters, cut masters, masters hit with the brick-wall limiter, censored masters, etc. *This means that they do not provide authentication*. That is the only thing they were selling. People will still pay a lot to make sure they have a copy of Yellow Submarine which sounds exactly like the original release, or as-aired episodes of The Muppet Show — and the record companies *don’t even bother*, and the movie companies rarely bother. This means *pirated copies often have better authentication* than “official” copies.

Nathanael says:

Bandwidth is close enough to free.

Cell phones will cost more to download than wired, a lot more; over-the-air bandwidth is actually noticeably scarce, but wired bandwidth isn’t. Even at the inflated costs in the US (which has monopolistic ISPs) bandwidth costs are miniscule. And the bandwidth costs are much lower in Europe.

Insignificant costs — too small to charge for.

Hosting costs money, but little enough that enormous numbers of people buy it for sheer vanity. Again close enough to free for most analytical purposes, unless the art you’re generating is multi-terabyte in size.

Tony says:

The Grand Unified Theory On The Economics Of Free - Comment from 'Sam'

On the comment from “sam, May 3rd, 2007 @ 1:34pm”
I didn’t feel that Mike was suggesting you MUST give anything away for free. I took it that Mike was arguing that it make sense in certain circumstances. I do feel that with regard to many musicians the argument fell down though – not every musician can command large venues if his music is of a narrow interest, and not every musician can get a decent deal from tour organisers.

Oak Truncheon (profile) says:

As if...

If the demand for venues increases, their numbers will, eventually, increase. A lag is to be expected. But, the attention deficit, (pardon), problem is far more thorny and fundamental to the entire situation.
Offering a partial solution to this problem is the basic service provided by Google, iTunes etc. The useful sorting out of an overwhelming volume of info. So far no one has come up with anything like a complete solution, and the long term data ceiling issues may yet render all these innovations moot. Like yeast in a beer vat, the internet may be smothered in its own growth components.

J Public says:

Free Services = Free Money

If we observe all the free and popular websites like google and facebook are run by the members of the same micro community that also controls the fed, banks and media.

Take away the control of fed there by ending free money money supply to this micro minority community and all “free” websites like google, facebook will fold up in 18 months.

Google, facebook are collecting way too much information about users and when you give someone a stick they will hit you and then other people will join together and hit them back history will continue as ususal.

AllanA (profile) says:

Free is good

I am sorry but anyone who thinks NOT giving something for free is good marketing will soon if not already have their business model going bye bye. I started my own website a couple of years ago, sports related, There are literally hundreds of sports type websites that were out there way before me. Every year visitors to my site have grown, why?

1. Marketing- Gave away a free e-book on the intricacy’s of sports card collecting. Learning SEO, which has gotten me listed in bing/google/yahoo top ten searches for some key words. All of this marketing if done yourself can cost you nothing.

— my point is Artists need to learn how to market themselves. And that’s the point I think Mike is making. Learn how to market and your profits will be better.

— How? create a website (domain-$12/year, Host-$30-$50/month) Have contests for fans, chances to win merchandise,concert tickets etc.

— With new small recording studios I’ve seen that charge small fee’s(like here, local casino has one and for as little as a few hundred dollars you can use it for i think 1-2 hours)

— Yes big studios offer more and market for you but they also take much of your money,

— Do it yourself, Promote yourself, Release your content(music) as you see fit. Maybe 1 song free to everyone from your new album, downloadable from your site.

— You will never get rid of Piracy its the same argument for gun control, gun laws only harm legal gun owners cause you can’t keep criminals from getting guns and you can’t keep people from pirating content as long as the content is out there somewhere, its a battle that can’t be one so

YOU MUST ADAPT.

Torg (profile) says:

Nothing Free

It’s comments like this that make me think that people don’t really grasp what “free” and “infinite” mean here. I’ve seen a number of comments here in the vein of “nothing is really free” and “everything is finite”, which while true are also completely wrong. For economic purposes, a file is free and infinite. It is not possible for iTunes or the Pirate Bay to run out of Metallica albums; they have the data, and even if everyone in the world downloaded several copies from each they would not have lost a bit of it. Supply expands to meet demand without any additional input; that is the only useful definition of a free and infinite resource. Even air is more limited than data. It’s annoying seeing people repeating wise-sounding generalizations and pretending that what they said is actually insightful or relevant.

shane (profile) says:

I Don't Guess Mike is Answering

Your “business model” depends on an organization that you have nothing to do with. It’s not “yours”. You don’t make copies for a living. You perform for a living. You should concentrate on getting paid more every time you perform, and on performing more often.

In order to do that, you might consider giving copies of your music away. Reason being, copying your music is free anyway. The only way you ever get, or got, paid was by getting the government to threaten people with jail time and heavy fines for doing something they really don’t need you for to begin with. That’s not nice of you, and indeed it is not some sort of innate right you have.

If you find it hard to make money singing and dancing, you might consider some other line of work, and sing and dance for fun like most of the rest of us do.

Not meaning any offense, but I am worn out by the requirements you and other artists put on our lives, then get upset that we are all somehow putting you out somehow.

I can get free music every Sunday at church. You know why? Because they have a message that the music helps sell.

Do you have a message? I mean, apart from, “Please give me money?”

shane (profile) says:

Who's in control of the scarce?

I have a hard time imagining anything related to movies that would be scarce if the movie itself was free. I don’t even particularly like theaters. Movies are an example of something that should be made either to promote a message you yourself want promoted, or else made for a sponsor who wants the movie made.

I suspect the way to go about making movies for entertainment is to cast about for people who want a certain kind of movie made, or else write a story and pitch the idea of making the movie, then looking for people to fund the project.

There are legitimate concerns about the business model of using the free to market the scarce, but none of them are worth trading in our civil rights for, and that is the root problem. Technology has advanced to the point that it is now impossible to hide the fact that IP laws directly violate ideas of free expression and civil rights concerning free speech and press.

Daniel says:

Move with it or sink

I’m a music creator too. I sometimes think about how sweet it was when a band was the sole source of the music. You needed the band to enjoy the song. But those days are long gone. I think the overall quality and discipline of music creation has suffered for it, but it is what it is. Music started leaving the musicians hands when he first wrote it and someone else could learn it. SInce then the recorded medium has taken possession to the point where you have to consider that the moment you create something, you no longer own it. It’s the only way to see it and not get angry. It’s no longer yours. What I think this young man is trying to say is that even though it is no longer yours, you can still benefit from it’s creation. These times, oh these times, they are a changin….

tracyanne (profile) says:

sam

Mike hasn’t taken away your right to do anything you want with your music.

He hasn’t even advocated that you give up any rights to your music.

Nor has he advocated that anyone who places your music on file sharing, against your wishes, has any right to do so.

You are still free to attempt to sell your music in any way you choose.

You may, if you wish, and you certainly appear to want to, continue to sell your music in exactly the same way as you have already been doing.

You are also free to take on board any suggestions Mike has made.

What you seem to have misunderstood is some simple facts of life.

That fact is that whether you like it or not, whether you try to protect your music with DRM or not, whether it is legal or not to do so, your music WILL get shared on file sharing, if enough people like it enough.

Given that you don’t want your music shared in this manner, you are also free to spend as much money, time , and other resources to try to stop this from happening.

You are also free to do nothing other than complain about it.

You are free also to take advantage of this fact, and find ways to make additional income from it.

The choice, as they say, is yours.

Speaking as a musician, I’d rather find ways to generate income from it, but well… that’s just me.

freediverx says:

Re:

Don’t forget that Mike’s specialty is PR
yeah, he wants you to sell t-shirts instead of writing good music

No, I think his point is that by giving away your music and making sure it’s as easy to share as possible, you will expand the interest in your music so much that you’ll be able to make more money selling t-shirts than you could have just selling the music to a much smaller audience.

Morat says:

An excellent article and a (usually) interesting discussion.

I appreciate that most DRM related stuff is to do with entertainment, but I’d have expected to see more discussion about how the business model affects other industries as it’s not solely applicable to any one type of business. Krissy McCollogh (Jun 20th, 2010 @ 11:12pm, post 129) made some excellent points about the fashion industry and how something similar works there, but it seems to have been ignored.

Anything digital is expressly designed to be freely copied. If the good you produce is distributed in a digital format, you can either try to place obstacles in the path of that copying (which will cost you money and (historically) will only work for a short time) or you can use that to your advantage. Mr. Masnick is trying to point out some of the ways you can take advantage of it in general terms. I don’t think it’s really fair to ask him to come up with an all-inclusive New Musicians Business Plan as some of the comments seem to be asking for.

Jay Dee (profile) says:

An Example

Bruce Sterling’s book, “The Hacker Crackdown: Law and Disorder on the Electronic Frontier” is an excellent example of this phenomena. When it was first published in 1992, Mr. Sterling decided to allow electronic versions to be circulated for free. I expect that Mr. Sterling felt this was a story that needed to be widely read and it is indeed worth reading.

Whatever his reasoning, print copies sell out immediately when they hit the shelves. When a new run is scheduled, advance orders snap up the run and the few books that actually make it to a book shelf disappear within hours. I have a copy simply because, in 2012, I happened across a bookstore employee putting three copies on the shelf. I took a copy for me; the others were gone before I left the store.

For those interested in reading this book, Project Gutenberg now has it.

Spamtrap (profile) says:

An Example

Bruce Sterling’s book, “The Hacker Crackdown: Law and Disorder on the Electronic Frontier” is an excellent example of this phenomena. When it was first published in 1992, Mr. Sterling decided to allow e-book versions to be circulated for free.

Whatever his reasoning, the result is that print copies sell out immediately when they hit the shelves. New runs are promptly snapped up by advance orders. I have my copy simply because I found a bookstore employee putting three copies on the shelf in 2012. I took my copy. The other two were gone before I left the store.

cris says:

to complement what you say we can consider the case where cellphone companies sell, say, $10 devices with $10 calls included which makes the device, in the consumer perspective, virtually free, but what these carriers acknowledged was that the device was merely a token to access their value added network to make calls. perhaps we can extend this further: for instance, every scarce product has a brand, and this immaterial component relates with the individual perception about the product so has the same qualities of an idea. and trying to push this ideas into the market companies in a way not only give away some views or perspectives about their brand but actually pay for it trough advertising. i think this happens also when companies give away limited versions of their product for free to promote and encourage the purchase of the main or premium version, like in software or movie trailers

Desolo Sub Humus says:

You know, that was one of the many things I liked about living in South Korea for a while. When a business holds a Grand Opening, it’s expected that everything, or at least most things, are free on that day.

Opening a new coffee house? Free coffee for everyone the first day. New PC ban (internet cafe)? n-minutes of internet access for free the first day. Business that carry on that tradition generally do quite well. Businesses that don’t, well, I never really did find any as the only ones I’d heard about had gone out of business.

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