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
    Alexander, 5 Mar 2007 @ 4:21am

    Re: Re: Re: Re: Re: Re:

    Nope. They'll follow it or they'll go out of business. It's that simple.

    I see... You've seen the future, right?

    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.

    Well, feel free to provide some of that data. Specifics, please.

    You promote the hell out of the movie online.
    What does this mean, in figures, and how do you do that? Oh, I forgot that costs don't matter to you (your own words). So we can spend.. what? $2 Billion in online promotion. Wow, I'm pretty sure everyone will dream our movie with such a promotion

    If someone attends the movie they get a discount on your next movie or another movie at that theater
    You are repeating yourself without answering my objection to that very same idea. Repeating something a thousand times won't make it true.

    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.
    This is a variation of the previous one. So, besides slashing DVD profits to zero, you propose slashing movie theatre profits, too??? Oh man...No wonder you envision the future of the movie industry as a giant YouTube.

    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)
    What will stop someone else for selling the very same copied DVD at half my price? Not in the theatre, but on the street. Profit goes to him,until price =MC in which case everyone stops making profit.

    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
    Oh! A code?!?!?!!? Wow! Access control!. One step more and you'll be proposing DRMs. What would stop me from distributing that code or from selling DVDs with that code?

    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

    Ok, agreed that this two *may be* viable. Now please provide hard data about them.

    So your data is meaningless here, since the theaters haven't realized what their real business is.

    Sure Mike, sure. You just act like the crackpots who regularly reinvent the theory of gravity

    - You say something, and don't provide any data, you keep talking about vague "inevitables", "many studies", blah blah blah.

    - When confronted with contradicting data, it's the others that don't understand what they have been doing, and "of course" the data is meaningless. And of course, you don't provide any data disproving it, either.

    - The theatres, the movie studios, the music companies don't have a clue about what their business is. That's right. They've been making billions of profits by sheer luck and chance.

    - Production costs dont' matter. "Entry barriers? What's that?" I just bought yesterday a Core Duo processor at margin costs ($10)...or did I just dream it?

    - Of course, you have (and sell) the cure for all the ailments of all the content-producing industries, because you have seen the future and know for sure what will happen and what people will do in all the possible example cases

    With such a profound insight into human nature and the future, it's strange that you are not a billionaire.

    Only one element of the crackpot rethoric is missing and it's the conspiration/paranoia. I wonder when will you say that someone hides data, or that someone is after your ideas, or that the "establishment" is supressing your business methods.

    But I have no trouble providing MY data, something you have yet to do a single time. By the way, if the data is meaningless, why are you interested? sp

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