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, 8 Mar 2007 @ 4:26am

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

    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?

    Why should i? Is there any relationship between what they two did and what you are saying? If there was data, would this prove anything? No. If there wasn't data, would this prove anything? No.

    People take risks (with or without data) and either fail or succeed. Some succeed (Ford, Bill Gates) some (the majority) don't. And this is so obvious that it is a tautology. And it doesn't prove neither that your model or that any particular model will work.

    The fact that you have to resort to some irrelevant, hand-picked cases from the past that bear no relationship to your statements only shows how baseless your claims are.

    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.

    Sorry, but science does not work that way, just in case you weren't listening in the university. It's not the duty of the scientific community (or mine, in particular) to prove wrong every crackpot scientific theory that comes along. It's the duty of their authors to prove it correct. If someone comes along with a new theory of relativity, its his duty to prove it, not my duty to disprove it. Same with your novel economic models.

    But hey, let's try.
    First, we use data obtained using "Mike's data method":
    Take the examples of Ford, Bill Gates or the entire music industry, for eample.
    Ok, now we use "Mike's logical reasoning": From the above data, it follows that you are wrong. QED.

    I'd ask you to explain the situation in Italy. Prior to 1978, its patent law ....Italian pharma industry post-1978. The domestic industry basically dried up.

    Do you have any data or research for this?. DON'T WORRY I will provide the data from which you derive your claims, hoping you that in the future, you'll know what "data" means and provide data for your claims, which are so far baseless.
    AFAIK, this claim comes from, for example,
    http://www.dklevine.com/papers/ip.ch.9.m1004.pdf

    Except that Italy wasn't producing new drugs, it was producing new molecular entities. Which is not quite the same. And what is a NME?
    Well, the FDA has the anwer:

    http://www.fda.gov/cder/orange/supplement/cspreface.htm

    So NMEs are certainly not drugs. I can,too, produce NMEs at incredible rate in my garage. But to turn a NME into a pharmaceitual drug, these NMEs need to be studied in order to know how they behave within the human body, whether there are any counterindications, whether they can be applied to specific risk groups and finally, they need to be approved by the oversight agency before being deployed industrially. And no, Italy was not the top producer of drugs by any means.
    Want more research?

    http://www.oblon.com/media/index.php?id=61

    So it would be helpful if you stop dragging that disproved and worn-out nonexample, and provide some meaningful data instead.

    If you've picked up ANYTHING from this conversation you should realize that I don't think anyone "owns" ideas
    Regardless of what you think, psychology has long ago proved (even experimentally) that people ARE attached to the ideas they have created, and that's why they will go to huge lengths before admitting that their ideas maybe wrong.

    Which is your case, by the way. You have twice failed to anwser a very simple question that every scientist is taught to ask himself: What experiment proves you wrong? Every scientific theory is falsifiable. Is your theory scientific? Then provide a non ambiguous experiment or put up and admit it is not scientific. I also asked you if you contemplated the possibility of being wrong, and you dindn't answer such an obvious question. Unlike you, I have no trouble admitting that I may be wrong. And when you say something that makes sense (like the issue of copyrights in your business), I have no trouble acknowledging it. It would be useful if you, too, learnt to examine facts on their merits alone.

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

    Oh, don't worry, I'd rather spend my time in more profitable ventures. Remember : Opportunity cost - basic economics :-)

    Sarcastic as we both can be, it remains a fact that you are not doing or willing to do what you are preaching about.



    http://www.no-treason.com/archives/2006/01/24/on-the-italian-pharmaceutical-industry/

    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).

    Of course you didn't say it. I said it, hoping that you wouldn't need the intermediate steps to finish the reasoning. But it seems that you do need it explained in detail. Ok, I'll refresh your basic economic lessons, for free:

    Market drives prices to MC, but not unconditionally. If you undust your basic economics books, this only happens under some circumstances : in a free market that does not have price-control systems and when there are no significant entry barriers (If you think
    because in the absence of price-control systems and entry barriers, any competitor can sell the same thing that I sell, accepting less profit and therefore charging less. But obviously book sellers are making a profit, and since Macbeth has existed for about 400 years, it's certainly not that the market hasn't had time to drive prices to MC. So how's that? Obviously one of the premises is violated. What stops a competitor from doing what the Price=MC hypothesis says? copryight He cannot sell the same book that I'm selling, because I own the copyrights of the introduction text, footnotes, cover art and illustrations and all these things you mentioned as differentiating factors.

    So take your choice: Either accept copyright is the price control system that allows Shakespearean book sellers to continue to sell at a profit OR reject the theory that market drives prices to MC.

    Oh, and here's some data for you:

    FINALLY! Now you REALLY, INCREDIBLY, SURPRISINGLY are providing A piece of data (because both links point ultimately to the same article). WOW.

    But before commenting on the data you provide, I'm confused. I provided some MPAA data previously, and you said: "Pointing me to MPAA data is pretty funny. You realize how often that data has been destroyed? It's so wrong it's not even worth commenting on".

    Now it's you the one who's pointing to MPAA data... How's that? Do you only use the data that suits your thesis? (By the way, crackpots also do it : from all the available data, they'll pick what it suits them, and everything else is a conspiration or is wrong just because they say so).

    So help me with this one: Is MPAA data valid or not?

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