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 @ 1:24pm

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

    1) Alexander demands Mike shows A
    2) Mike shows A
    3) Alexander says "That doesn't prove B!!"
    4) Mikes shows B
    5) Alexander says "That doesn't prove A!"

    Actually, its funnier:

    1) Alexander demands data or research on A
    2) Mike says (literally) "Look at the whole music industry"
    3) Alexander again demands data or research on A
    4) Mike says (literally) "Look at what Ford did".
    5) Alxxander again demands data or research on A
    6) Mike says (literally) "Look at what Bill Gates did"
    7) ...
    and finally we come (today) to:

    N) Mike (finally) says: there isn't data. before the business model has been put in place.

    The point is simple. In describing economic business models, there isn't data before the business model has been put in place.

    Great. So you finally agree that you have not been providing data, because there is none. Good for you. It took you quite a long to reach to that conclusion, but it's welcome that you are unable to provide data because there is no data.

    Ok, do we now agree that there is no data for your business model?

    because economics involves a huge number of variables, economists don't do "proofs" in the typical scientific sense like you're discussing.

    Oh, I guess it's you the one who should update your books... Seems you've never heard about multivariate statistical analysis. There are many ways to examine correlation in a multivariate environment, to prove or disprove statistical hypotheses, and it is done routinely. No wonder you systematically fail to provide any data : you haven't noticed economics has changed quite a lot since the age of "blah blah" economic theories.

    You're really stretching here
    Well, if mentioning that there's a veeery veeery small difference between "inventing random new molecules" and "inventing drugs that actually do something" is "stretching", then Ok, I'm stretching.

    . You do understand what proxy data is, right? You do understand why it's used, right? I'm not going to explain that to you from scratch.

    Oh please do. I'm specially curious to see how you justify the usage of proxy data when the actual data of the industry is available :-)

    But I doubt that you know what you are talking about, giving your previous economic innovations that "fixed costs don't matter and are not factored into price" and "economists don't do "proofs" in the typical scientific sense", among others.

    Genunie crackpots will keep their pet examples no matter how many times they are disproved. Bermuda Triangle fans will still parrot that Flight 19 has not been found, TV images nonwithstanding.

    Basically, you keep on differentiating, and that can include both real and perceived differences, such as brand or that "it looks pretty" or whatever..

    Sure Mike, Sure. So why should I, publisher A, invest in making something different instead of just copying publisher's B book, which already is being sold with profit?

    And how's that there hasn't been a single point in time during which I could buy, say a Pentium III micorprocessor at margin cost price? Why the market hasn't driven its price to MC. After all, it hasn't "differentiated" itself. A PIII is a PIII.

    Look at the example of the 9/11 commission report. It was a huge best seller, but it wasn't under copyright. Anyone could publish it, but the first company that the gov't agreed to let publish it was the overwehlming leader in the market. There were no barriers to entry.

    It seems you have your facts a bit wrong, here. Not anyone could publish it. There were many requests, and the government approved just one, and gave the report to them in advance before posting in on the web. From the New York Times : "The choice of Norton has created consternation among publishing executives whose companies were turned down for the prestigious and potentially lucrative assignment. Those executives said they could not recall a similar arrangement in which a high-profile federal commission turned over the work of its investigators to an outside publisher before public release. Under the agreement, Norton will make no payment to the commission and will be allowed to keep any profits."

    So no, Mike, you are wrong again. Having the government remove all of your competitors and select only you is quite an entry barrier. So don't give me nonsensical examples about how a government-sanctioned monopoly is an example that "noncopyrighted works make profit.". What's next? An example of how the single company authorized to publish a law in print makes a profit?

    I pointed out, I am doing exactly what I'm preaching about -- just not yet in the movie industry.

    You are preaching about what will work in the movie industry, and you are not doing it, even as you say it doesn't require huge budgets. No matter how you try to spin it, it remains a fact.

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

    MPAA data on things like attendance and box office take is valid data. MPAA data on things like "losses due to piracy" are what I was talking about as being bogus.

    Oh, sure. Nice try, but miss.The data I posted:

    as well as the revenue distribution between DVDs and theatres (which was the data you asked for)
    (located at

    do not mention a single time the word "piracy" or "pirate" (except as part of the "Pirates of the caribean" :-). Actually, they don't deal with that issue at all.

    Like a genunie crackpot caught in a contradiction, now you try now to spin your way out of the corner instead of admitting you didn't even bother to check the data. Just the seeing the words MPAA caused you to dismiss the data, because everything the MPAA says is false. False, until they post something that suits your theories, that is.

    So try again. Why did you dismiss the MPAA data I provided if it wasn't related to piracy?

    PD : You have now failed three times 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.

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