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, 9 Mar 2007 @ 4:02am

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

    ...economists don't do "proofs" in the typical scientific sense...
    You absolutely can do plenty of stuff in econometrics to prove things,

    ....business model that doesn't specifically exist.
    As I've pointed out, this isn't *really* a new business model


    :-) :-) Wow, wow wow... contradictions now come in buckets. Make up your mind - I'll make it easy for you.

    My business model is .... (Check one)
    (..) New. There's no data
    (..) Not (favourite weasel adjective here) new. Here's the data http://__________

    Heh. I know my way around statistics as well. But, even using statistical analysis, you can't control for all variables.

    Heh. You "know your way"?. Obviously you don't. If you did, you'd know that in general you don't need to control ALL variables, just the ones you are trying to check for correlation. Do you know what correlation is? What statistical proof is, as opposed to deductive proof? :-) I can recommend you some books if you want to learn...

    Um. Because making something different allows you to sell more
    Of course Mike, of course. Those who produce verbatim copies of works of art (e.g: paintings) aren't earning a dime, poor beings. They should by all means alter Van Gogh's works, so that they differentiate themselves from him and sell more, Mike dixit
    And of course, the original author "sells more" of his unique work of art than reproducers :-) :-)
    You should write a book with your theories, Mike. I'd like to show it to my students...

    There's absolutely no correlation between "amount of difference" and "amount of sales". A verbatim copy may sell more than an original, and a vastly enhanced copy may sell less that the original. So close, but no cigar.

    So others were able to quickly copy it. That's not a barrier to entry.
    Go back to your economics books. It's so elementary that even wikipedia contradicts you on this.
    http://en.wikipedia.org/wiki/Barriers_to_entry

    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?

    You do understand what a competitive market is? But, again, you're back to some totally random tangent.


    Oh, please do enlighten me as to why the semiconductor market is not a competitive market. That's also a new economic discovery of yours...Aiming for the Nobel Prize, Mike, with so many innovations in economics?

    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.

    Well, give me data (i.e. : numbers, not words.) for the above statement of yours and show that there's a statistical correlation between "amount of piracy" and "sales increase" (so that it's not a mere coincidence that has happened somewhere) and I'd be glad to comply. Ah, when providing data, remember that MPAA data is not valid, as per your own words. Have this in mind when you give me the numbers.

    In the meanwhile, and given the borken and biased examples you've been providing, I don't have to believe your assertion just because you say its true.

    By the way, remember that it's not my duty to prove you wrong. You are the one with the new-but-not-really-new business model, you are the one to prove it right.


    Oh, and you failed to answer my question about why did you dismiss as "not worthy of comment" my MPAA data which didn't bear any relation to piracy, while you yourself pointed to MPAA data.

    And you failed to answer to the issue of the Italian pharmaceutal industry or to any of the research studies I provided. You can accept the example is wrong and stop using it, or act like a crackpot and dismiss all evidence and keep dragging it along, much to your discredit.

    You have now failed FOUR 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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