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), 8 Mar 2007 @ 2:29pm

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

    Oh, I guess it's you the one who should update your books... Seems you've never heard about multivariate statistical analysis.

    Heh. I know my way around statistics as well. But, even using statistical analysis, you can't control for all variables. That's all I meant. You absolutely can do plenty of stuff in econometrics to prove things, but again, you're asking for proof of a business model that doesn't specifically exist.

    But, let's be clear here. As I've pointed out, this isn't *really* a new business model. It's just a new understanding of their existing business model -- which is recognizing that you've never been selling "content" but the scarce goods around the content.

    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?

    Um. Because making something different allows you to sell more, rather than just copying which doesn't add any additional value.

    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?

    Now you're just trying to play games, right? You do understand what a competitive market is? But, again, you're back to some totally random tangent.

    So no, Mike, you are wrong again. Having the government remove all of your competitors and select only you is quite an entry barrier.

    No, Alexander, you are wrong and you're back to your old "prove A, Mike proves A, Alexander says THAT DOESN'T PROVE B!" arguments.

    You said the only differentiation was copyright.

    I pointed out that copyright need not be the only differentiation.

    And you respond that there's some other differentation -- which IS *MY* point. There can always be differentiation, and it need not be copyright -- and in fact, shouldnt' be copyright.

    In this example, the gov't did give it exclusively to one publisher... but there was no copyright. So others were able to quickly copy it. That's not a barrier to entry. So, yes, there was a differentiation, but it WASN'T COPYRIGHT -- which is what you insisted was needed. I was simply proving that the differentiation doesn't need to be copyright.

    I proved that. And you claim I didn't prove some other thing. It's what you've done this entire debate and it's a total waste of time.

    In the meantime, I'll note that in your latest tangent obsession, you fail to explain how movie sales are increasing in places where piracy is a major issue.

    I'm going to stop following this thread now. Normally these debates are informative, and continue to help me and others learn and expand our knowledge. The fact that you keep going around in circles with your tangential arguing is a waste of my time. You want proof, and the way you're going to get proof is when the successful business models show up and your left in the cold. Based on that, my time is better spent proving the business model in the real world then repeatedly pointing out why you ask for one thing and then yell at me about something totally different when I respond to your one thing.

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