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), 7 Mar 2007 @ 10:43am

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

    Alexander, this is getting tiresome.

    I point to lots of evidence and you come back to "that's not the right evidence."

    It's the equivalent of me asking you to show me the data to prove that my model won't work. Go ahead. Prove it! Where's the data?!

    While you're at it, can you also show me the data from before Henry Ford introduced the model T showing that it would sell well? Can you show me the data from before Microsoft introduced Windows that it would make Bill Gates the richest man in the world?

    Come on, prove it!!

    Hah.. Will you make up your mind? Is or isn't there data in the movie industry supporting your assertions?.

    There is, and I gave it to you. Yet you weren't happy, so I went to a second type of proof, which is economic example by proxy. I'll not that you totally ignored the support given by that example, but that's not too surprising.

    I only said YOUR model is not going to work. I didn't say there is no alternative model.

    Where's your proof? Come on! You keep talking about the importance of scientific proof. Please PROVE (WITH DATA!) that my model won't work. Otherwise, based on your logic, we need to assume my model absolutely will work.

    Does it hurt so much your ego to acknowledge that there are other alternatives apart from yours?

    Yikes. I've been asking people to help come up with new models for the industry for years. It doesn't hurt my ego at all. I'm encouraging it. Why do you think we have these forums? Why do you think we keep discussing this? It's because we want people to come up with the ideas.

    If you've picked up ANYTHING from this conversation you should realize that I don't think anyone "owns" ideas -- so why the hell would it hurt my ego if someone else came up with a better model?!? That's what I WANT! The whole point is that by sharing ideas you end up building something better. But, the problem is that your idea simply seems to be to lock stuff up -- and I've shown why that doesn't work and why that is a business model destined to fail.

    You didn't answer about when are you going to produce your low-cost series of movies to show that your model works...

    I didn't realize I had appointed you to our board of directors. When the time comes you'll see what we're doing.

    Holy cow!!!. So you are saying that, the example you yourself put forward as a proof that noncopyrighted content continues to sell, suddenly it turns out that publishers manage to sell books with a profit because they differentiate themselves by the part that IS copyrighted. Hmmm... curious conclusion, Mike....

    Okay. You really can't be that slow to pick this stuff up, can you? You're just trying to have fun now, right? I never said anything about copyright. Nothing in what I described requires copyright. The fact that it is covered by copyright is meaningless to the model (which I had already pointed out).

    You have a funny way of arguing, Alexander, and it doesn't reflect well on you. I point out a very specific example to highlight a single point A. Then you respond by screaming "but that doesn't explain point B!!!!!!" So then I go and explain point B with a specific example that explains point B, and you respond "but that doesn't explain point A!!!!!"

    Take all the different examples and put them together, and the model becomes quite clear. I apologize if I haven't been able to express that clearly to you.

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