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
    BIllyG, 6 Mar 2007 @ 6:29am


    This $96 million you're quoting is hogwash, too. If the revenue from movies goes down, the studios will find ways to make movies for less, or they'll go out of business.

    Agreed up to this point. Or they will make less movies, or of less enjoyment quality (YouTube style) or they will take 7 years to make. (StarWreck style), so instead of 500 movies per year, we'll have the tenth part (if lucky). The question is : which scenario do we want?

    I'm not sure why you are going from $96 million dollar movies to $96 dollar movies. Movies will still be able to make money from the cinema and merchandising. All they have to do is lower costs or find new creative ways to increase revenues that fall in line with the new reality. I don't see the quality of films changing significantly. In fact if the average cost of a film decreases we'll probably see more movies.

    Here are just a few ideas off the top of my head to add to the ones that Mike suggested:

    1. Unlike concerts or sporting events, the merchandise for a movie isn't located in the venue. Simply have cinemas with gift shops stocked with the currently showing movie's merchandise to take advantage of some impulse buyers. I'm not saying this will make tons more money but a few percentage points extra sales is worth something.

    2. Salaries will obviously drop to normal levels. Contrary to some of the comments I've read, this won't mean you'll only get shitty actors in films. In fact you might actually get better actors. This is because those that drop out of the business will probably be those "movie stars" that are just in it for the money. But serious "actors" will most definitively continue as they see it as their career. They just won't be commanding million dollar salaries but more realistic thousand dollar salaries. Also, since the cost of a movie is lower, producers might be willing to try a greater variety of actors in their films since they are not gambling as much money. Therefore increased competition as the well of actors will increase.

    3. Cut out the distribution layer. Producers should be taking advantage of the internet as well to get their movies to the cinemas. Who needs the sales pitch from the distributor's salesman when there should be all the resources the cinema owner needs online to decide which movies to get and then be able to download a digital version.

    Again, these are only a few simple ideas but I do believe that innovation and restructuring is possible and inevitable as DRM is destined to be a failed attempt to hold back progress.

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