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

Filed Under: techdirt feature

Reader Comments

Subscribe: RSS

View by: Time | Thread

  1. icon
    Mike (profile), 5 Mar 2007 @ 2:57am

    Re: Re: Re:

    First - A real movie doesn't cost $10 Million, it costs $96 Million. By requesting 'only' 1/6th of the real price, I think I've made quite a reduction, haven't I?

    Yeah, but you're still focused on cost, not benefit. I honestly don't care about the cost, because the cost half of the equation is meaningless without the benefit. The point is that if you can provide more value, then there's money to be made. I've describe how pretty clearly, though you seem to want to deny it.

    Second - Of course costs can be reduced. Of course the same movie can be made with sub-par actors, less special effects and so on. And of course people will like it less, because they are not stupid. I did provide a quite illustrating and recent specific example.

    Right. That's why millions of people watch stuff on YouTube all the time.

    That's why Star Wreck, a zero budget movie has done so incredibly well.

    Sorry, not buying your argument here.

    Third - Pretending that costs can be reduced somehow trivially is insulting all who work in the industry by calling them dumbs

    Actually, there have been plenty of economic studies on this very issue -- and what they've discovered is that, no, movie studios aren't very good at reducing costs, due to the way the industry is structured. So part of what this model does is force them to get in line.

    I challenge you also to provide evidence that there are cost-saving measures (that do not impact revenues) that are NOT being applied currently.

    I think the success of many cheap independent films, often with tremendous special effects does a pretty good job of that on its own.

    Also, I request permission to copy, distribute and republish all the contents of (including everything that techdirt produces that has a margin cost of 0), for free and without paying you or anyone, and without any limitations or conditions. Don't worry, after I get it you will still have it. Let's see if your money is where your mouth is.

    Oh, PLEASE go for it. You certainly don't need our permission. We've discussed this before (are you new here?) There are already about 4 or 5 sites put up by folks who do exactly that. They just copy everything we write. They sometimes give us credit, but more often strip off our name. That's cool. You know why? Because it's a total waste of their time. They don't provide the actual value, so no one reads it. The folks who know better simply know to come to our site. After all, part of the value we provide is in the discussions and the fact that you can ask us direct questions. That doesn't happen when people copy our site.

    Honestly, all that happens is the few people who discover the knockoff site eventually realize all the content originated at Techdirt, and they come here.

    So please go right ahead and copy, distribute and republish all the contents of Techdirt. THANK YOU for helping to better advertise and distribute our stuff! I'd bet that it won't be worth your time, but if it turns out that it is, that only improves our own standing as well.

    So, please go for it. I'd appreciate it if you let us know where and how you're doing this so we can track it ourselves, but if not, that's cool too.

    Good luck and THANKS!

Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here

Subscribe to the Techdirt Daily newsletter

Comment Options:

  • Use markdown. Use plain text.
  • Remember name/email/url (set a cookie)

Follow Techdirt
Insider Shop - Show Your Support!

Report this ad  |  Hide Techdirt ads
Essential Reading
Techdirt Deals
Report this ad  |  Hide Techdirt ads
Techdirt Insider Chat
Report this ad  |  Hide Techdirt ads
Recent Stories
Report this ad  |  Hide Techdirt ads


Email This

This feature is only available to registered users. Register or sign in to use it.