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

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

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

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

The good news is that value is not a scarce concept. Unfortunately, there are too many in this world who view value and growth as a zero-sum game. They believe that there's some fundamental limit on the possibility of adding value, and therefore, business models are about moving around a limited amount of value, rather than expanding it. It's the same fallacy facing those who have trouble understanding zero and infinity in economics. The economist Paul Romer's discussion on Economic Growth offers a concise explanation for this:
Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding. Possibilities do not add up. They multiply.
Note that it's the non-scarce products, the recipes and the ideas, that helps expand the value of the limited resources, the ingredients. You expand value by creating new non-scarce goods that make scarce goods more valuable -- and you can keep on doing so, indefinitely. Successful new business models are about creating those non-scarce goods and helping them increase value. Any new business model must be based around increasing the overall pie. It's about recognizing that creating value isn't about shifting around pieces of a limited economic pie -- but making the overall pie bigger.

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

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

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

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  1. identicon
    Anonymous Coward, 4 Mar 2007 @ 11:59pm

    Re: Re: Re: Re:

    Or they'll hire me to write a new book because they know that they can profit in other ways (promotional appearances, speaking engagements, etc.).

    Actually, the problem that you have is that everything is based on your wishful thinking about what people will and will not do. You provide absolutely no data or systematic research to back up such outrageous predictions about human behaviour, relying on anecdotes as 'evidence', yet your pretend that oh! its my problem that I fail to to have faith in your crystal ball thinking. The whole book, music and movie industries should happily follow you to the wonderful land of Oz you have seen in your crystal ball and live happily ever after.

    You think that just because someone got hired for something, this means that an entire industry can be sustained on such a model. Somehow, I must have missed why people aren't exchanging clips for houses en masse.

    It would be helpful if you stop condescending others on their pitiful inability to see the light and just concentrate on proving your point with data

    You're so fond of quoting economic science, now you have the chance to use the scientific method to prove your point instead of the crackpot method of demanding that others prove that your methods are wrong.

    Now, to the point:

    Sell people the experience of seeing the movie. They want to see it on the big screen in comfy seats.

    Provide data to back this claim.

    The existing evidence suggests otherwise : availability of the movie at the same time as thetrical release has led to drop in ticket sales. Also, theatre tickets are at most 50% of the movie's total revenues, the rest coming mainly from DVD sales and rentals. Sometimes theatre tickets are but a meager 25%. There's ample evidence that if people can get the full content for free, they will. So basically the DVD revenues will disappear or be reduced drastically. How are you going to compensate for this? Data and specifics, please.

    but if they come to the theater, give them a discounted ticket on the next movie you make
    Provide data to back this claim.

    Provide data or research to back up the claim that this discount will increase attendance to a point sufficient to compensate for the lost DVD revenues AND the lost ticket revenues due to the discount.


    Or, you start to bundle it with other options.
    Like what? Specifics, please. No hand waving, unless you are willing to accept arguments like "You are wrong for many 'other' reasons".

    Or perhaps give them a special DVD with extras and behind the scenes footage
    Which has a marginal cost of 0 too, so you won't make any profits off that. Content is content, special or not, extras or not.

    Or give them the chance to be an extra in your next movie
    Provide data to back the claim that this will compensate for the lost revenue streams.


    In other words, there are tons of business models
    which you systematically fail to show when pressed.


    Sure, that's why theatre attendance has been decreasing steadily the last 4 years - almost a whopping 9%. And you probably have missed the small detail that theatre revenues account for only a small percent of the total revenue, the majority of the rest being DVDs


    First you're telling us you can prove that you will be a success, and in the very next sentence you're saying it's impossible to prove that you can be a success. If you untangle that know, you'll see where your argument has gone off the rails.

    How about if you pause for a minute and think about what I'm saying instead of just rushing to point my apparent 'contradictions'. Of course that in the real world it is impossible to predict future success from past success. Just as in the real world a movie doesn't cost $10M, it costs $60M on average, and $96M if you include marketing and distribution costs. I was just being benevolent towads you allowing you to prove your point using a less-than-realistic setting.

    You want a realistic and "non contradictory" setting? OK. Be my guest and answer the real-world version of my question:

    I'm a movie director. My movie costs a realistic $96 million dolars, and this is an average cost. I'm not shooting a top-budget, A-stars movie. I have no way of proving it will be a success, no matter how much successful I have been in the past. Where do I get the money from, to make a movie that will be distributed for free. I would like SPECIFICS as for who is going to pay for this movie, and the model must be sustainable for the whole industry, in the sense that it must be able to meet or outperform current movie production (500 movies per year in the US).

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