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. icon
    Mike (profile), 5 Mar 2007 @ 2:47am

    Re: Re: Re: Re: Re:

    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.

    Nope. They'll follow it or they'll go out of business. It's that simple. The ones who are slow will discover how screwed they are after others adopt the model and start making a lot more money with it.

    You think that just because someone got hired for something, this means that an entire industry can be sustained on such a model.

    The entire industry already is sustained by this model. It's just that you don't realize it yet. No one sells non-scarce resources. They simply sell scarce resources related to that non-scarce resource. You sell the experience of the movie. Or the convenience of finding a song. You do not sell the actual content. So it's always been the way the industry has done business -- the problem is that THEY don't realize it, which is why THEY are having trouble recognizing how to change with the market, thinking they need DRM when they don't.

    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

    Sure, as I pointed out the entire industry is already supported this way so that should be a pretty significant amount of data right there. The problem is that the industry itself misinterprets the data, thinking they really are selling "music" or "movies" when that's not the case.

    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.

    No, the reason for this is because (again) the industry misunderstands its own market. If it concentrated on making the *experience* of going to the movies better, then there'd be little to worry about from competition from DVDs. By the way, can you cite where your data is from?

    However, the point is that if the theater owners realized they were selling the experience, they'd make the experience a hell of a lot better. They'd make "going out" to the movies a big social experience. People "go out" to clubs despite the fact they can listen to music at home for free. Why? Because they like the experience of going out. With movies it should be no different. So your data is meaningless here, since the theaters haven't realized what their real business is.

    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.

    Sure, just look at EVERY SINGLE INNOVATION to hit the entertainment industry, and notice how it increases the overall pie. Why? For the exact reason described in the article: because it adds an additional non-scarce resource that can be copied infinitely at no extra cost. That's what increases the pie. All you need to do is figure out where to capture that money.

    And the good thing (well, not for you) is if you can't do it, then someone else will -- and those of you who don't will be out of business.

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

    I already listed a bunch. Just because you ignore them doesn't mean I need to do more work for you.

    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

    Again, because of their own failure to embrace this model. It's inevitable. Once they embrace the model, attendance will pick up again.

    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).

    Ok. Sure (though I thought I already did this). You promote the hell out of the movie online. You make sure that it's showing in top notch theaters that actually understand the value of the moviegoing experience and you give people plenty of other reasons to attend (many of which I listed above), but I'll throw them out again, with some new ones:

    * If someone attends the movie they get a discount on your next movie or another movie at that theater

    * If someone attends the movie, as they walk out they get (or can buy cheaply) the official DVD with a bunch of extras (much more convenient than downloading it)

    * The stars of your movie make guest (perhaps surprise) appearances at various theaters to talk about the movie. That encourages people to go out and see it.

    * You give anyone who attends the movie a lottery ticket to be in your next movie as an extra

    * The ticket stub from attending the movie can be handed to a friend and they can use it to get into the movie at a slight discount.

    * After you leave the movie the back of the ticket has a code on it that lets you access a special chat room online to discuss the movie with others who actually saw it in the theater.

    * For seeing the movie, you get a chance to win a trip to a party with the cast of your next movie

    Etc. etc. etc. The list is pretty long if you start to think about all the possibilities.

    But here's why you end up making your money back (assuming the movie is any good). You have much better marketing for the film now. You can actually use the content to market it. You have a much better movie going experience, because the theaters finally recognize that they're selling an experience, so rather than hating going out, more people are going out. Some of the ideas above help entice more people to go to the theater, because not only are they getting an awesome night out and a chance to see a great movie on a big screen with a great sound system with friends, they also have all these other great perks that they would never get just watching the movie at home.

    All in all, you're going to end up making a lot more money that way -- because the overall experience is better, the pie has increased and more people are going to be willing to pay for the awesome experience.

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