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, 6 Mar 2007 @ 12:01am

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

    Its symptomatic that you fail to answer the first question about the falsifiability criteria of your theory:

    *Every* scientific theory has a non ambiguous test. Which is yours? Is this a situation you contemplate at all? What is the falsifiability criteria of your theory? What should happen for you to recognize that you are wrong?
    It's basic science :-) (as opposed to crackpottery)

    Based on your theory there would be no progress. Henry Ford never would have gone to mass production, because there was no "DATA"
    Hey, is this an admission that you have no data, either? Now that's a progress. But anyway BEEP! non sequitor
    Excuse me, but I have no theory, its your theory the one who is being put to test. The fact that Henry Ford did what he did doesn't imply in any way that your theory is going to work. Of course, it doesn't imply it's going to fail, either. It's simply totally independant.

    It's a curious view of progress, you have too : making others do what you suggest with their money, because you know better. Show us that you can make more money producing a movie your way and then you can preach others about how to do business.

    Hell, you constantly babble about "many" (no data provided) low-cost movies with spectacular effects and tremendous success, you constantly point at YouTube and millions watching, and yet you don't want to produce even a low cost movie, not to mention a $96M one. Come on, Mike, you yourself say it's not a matter of cost. Do produce a movie to show us you are right.

    Oh, and one more question, just to see if at least you are honest with your own business: Companies whom you sell your personalized blogs with comments and analysis- are they freely allowed to republish and share them?

    If you want data simply look at the history of economic markets. There's tons of data.
    Handwaving again and again. But I can do it, too. See how easy it is:
    "Mike, there are literally tons of data that you are wrong. Just look around".

    It's basic economics that anyone can understand if they took their blinders off.
    Just like the Opportunity Cost you fail to mention sistematically in all your examples. It's basic economics that a rational economic agent will not pick option X that gives him less profit than option Y. And it's also basic economics that just because your model can make a little profit (hell, even giving software for free and accepting donations makes monetary profit), this doesn't make it neither a better model, nor an inevitable one that everyone should adhere to.

    Oh, and you still fail to answer any of the objections previously raised.

    Price gets pushed to marginal costs in competitive markets. The way you make profit is by differentiating (i.e., adding unique value).

    Oh great. So now tell me, how are Shakespearean book publishers differentiating among themselves? There is not one, but many many printed versions of Macbeth, all of them making profits. Many are printed on the very same paper and format, so certainly the fact that they are printed is not what is different. How's that?

    I really feel sorry that you don't seem to be grasping this
    Oh, please don't :-) There are too many people already feeling sorry for me not grasping their new versions of relativity, quantum mechanics, evolution, space exploration and what not.. I don't wanto to bear the burden of having more people feeling sorry for me...

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