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, 16 Mar 2007 @ 4:47am

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

    Do not twist my words
    I think it's very difficult to twist someone else's words by quoting him literally :-)

    TRADEMARK is not really intellectual property law. It's a consumer protection law to prevent buyers from being tricked. So I have no problem with trademarks -- which I do not consider to be IP.
    Is this also basic economics? :-) But at least it is a progress. You are not in favour of dropping the concept of IP. Yes, yes, I know your Mikctionary does not define trademark as being IP, but I'm referring to the generally used (i..e : World minus Mike) definition of IP.

    You have now failed FIVE times to anwser a very simple question that every scientist is taught to ask himself: What experiment proves you wrong?

    No, Alexander, I already explained why that question was irrelevant. It's not a scientific experiment. It's an economic question -- and the economics (and reality) will back it up. .

    Blah blah blah....Do you imagine scientific journals filled with pages and pages of stuff like the ones you say, instead of proofs? That's what distinguishes the scientific (and economics AFAIK is a science, now about Mikeonomics I don't know) discourse from the crackpot one.
    The fact that something is happening does not imply it happens for the reasons you say, and even if this were the case, it doesn't mean that a scientifc theory is not falsifiable. Euclid had a falsifiable test about his geometry axioms for about 2 millenia, and reality was showing him to be correct until Lobachevsky came and showed that he was wrong in the general case and then Einstein showed that there was more reality than Euclid was seeing.

    So, you have now failed SIX 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.

    The "experiment" is happening out there in real life every day
    It must have escaped to me that the world is filled with low cost free, studio-quality movies which are making lots of profits ....

    As I said the first time you asked, your question is the equivalent of Henry Ford saying he won't move to an assembly line because there's no "scientific proof" as to why it's better than piecemeal production.

    And as I replied the first time you said that, the only problem with that analogy is that it is irrelevant. Henry Ford did something for what there was no data and succeeded, while Joe Bankrupt did something for which there was no data and went bankrupt. Conclusions? None.

    So, to return to the point: Your business model is .... (Check one)
    (..) New. There's no data
    (..) Not (favourite weasel adjective here) new. Here's the data http://__________

    And the problem with that analogy is that Henry Ford did it himself, while you are preaching to others to do it. Preach when you make a couple of movies.

    but my position remains consistent.
    Your position remains constant, which is somewhat different from consistent :-) Since it seems that - despite previous assertions - you are still monitoring this thread (hmmm.. consistent, did you say?) there are a few pending bits:

    You failed (three times now) 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 (two times now) 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.

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