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, 17 Mar 2007 @ 6:56am

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

    You said trademark was the same as copyright.
    I challenge you to provide a quote in which I say that trademark is the same as copyright. I simply put them under the same generic concept of "IP". As I said, you may consider trademarks not to be IP, but the rest of the world thinks otherwise.

    What I did assume incorrectly (see : no trouble admitting it) is that you were against all kinds of IP. Ok, now I know that for you trademarks are not evil, unlike copyright. Any other kind of IP you don't oppose?

    And we're back to Mike says A, Alexander says "that doesn't prove B!" Mike says "well here's something that proves B" and Alexander says "but that doesn't prove A!"
    Actually, we have never been there because you have never presented anything that even resembled a proof. You just keep on rambling about irrelevant facts and fallacious reasoning. And of course, you never ever provide any data : we have to believe you just because you say so, because it's "basic Mike-o-nomics" and because you've seen the future.

    Yes yes, we know that Ford succeeded for a series of reasons and that Joe Bankrupt went bankrupt. Again, so what? The fact that Ford suceeded is something of a "universal implicator" to you, proving any sort of crackpot business model?

    What "scientific proof" do you set up to disprove free market economics? Or what scientific proof do you set up to prove free market economics?
    Heh. How pompous - putting an identity between your ideas and free market economics. It's like a crackpot saying that his perpetuum mobile works because "physics works".
    "-I have a perpetuum mobile!
    -Prove it (or do it yourself and show that it works)
    -Uh?! What scientific proof do you set up to prove that phyisics works?"

    We are not debating "free market economics". We are debating your specific business model for the movie industry which includes free distribution, producing quality movies at a reasonable rate and remaining profitable, which is something quite different. And it's up to you to come with a nonambiguous experiment that either proves it or disproves it. As I said previously, the burden of proof is on your side, not on mine. But until you do, your theory is not scientific by any means, no matter how you try to twist it. So either admit it and be done with it or provide a test, like all scientific theories do.

    That's an economic lesson that's pretty clear. If you can make something more efficiently economically, while using something else (such as brand) to increase value, you can do quite well against the competition.

    Define "economic efficiency" and "value" nonambiguously, please, because if you have different definitions for what IP is, you might as well have different definitions for these items, too.

    Your business model is .... (Check one)
    (..) New. There's no data
    (..) Not (favourite weasel adjective here) new.

    It's not new at all.


    Ok, since your business model is not new, feel free to provide data about it. Here, use this placeholder :

    "Making quality movies at a reasonable rate per year, and distributing them for free is a profitable business model, as shown by the following DATA: http://________________"


    Economics is predictive.
    Glad that you recognize it. So if economics is predictive and your business model is (basic) economics, I'd be happy to see which is your falsifiable predictive test.

    I already made it clear that I am doing the same thing in other industries. I'm sorry that you want to stick your head in the sand and pretend it doesn't apply to other industries, but the economics go across the board.

    Are you asserting that if a business model works in an idustry sector, this implies it will work in every other industry sector?

    Also, you haven't answered a previous question of mine regarding your specific activity:

    Does your business model in your sector provide more or less profits than those using a different business model that does not rely on giving free content?

    Surely you watch your competitors, you should have no problem answering that.

    Actually, I did answer that question, but once again, you keep switching which question you want people to answer so you can pretend I don't answer it.

    You said "MPAA data on things like losses due to piracy is bogus.". The only small problem is that my data -which you dismissed- had nothing to do with piracy. So no, you haven't answered it. And yes, unfortunately for you that nonanswer as well as my data is there for everyone to see :-)

    So, you failed (four 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.

    Considering the fact that in a 20 year period the entire world only came up with a little over 1000 such entities, I find that difficult to believe.
    Well, wrong as always. During the last 20 years, the FDA approved about 900 NMEs
    (http://www2.gsb.columbia.edu/faculty/flichtenberg/schump.pdf)
    whereas the number of created NMEs that simply don't make it through approval process has been much higher. Do you understand the difference between produce a NME and produce and get approved a NME?

    But anyway, I couldn't care less about that because the point is not whether I can produce lots of NMEs in my garage or not, but whether the Italian industry was producing more new original drugs prior to patent reform than after.

    Especially considering that there was no patent protection, they were doing so solely for one reason: to make drugs that could be sold in the market.
    So what? A NME may or may not become a drug.

    By your own reasoning, without such artificial scarcity, there should have been NO research at all being done.
    I've never claimed such a thing. Feel free to provide a quote if you think otherwise.

    It defines "innovation" as the number of patents issued. If you're going to complain that NMEs are not a decent proxy, you can hardly use the number of patents as a better proxy -- especially given the change in patent law!
    Which is exactly (=quote,please) the sentences in that report that constitute tautological reasoning?

    464 drug companies in Italy in 1976. They weren't just sitting there having fun. They were there for a reason -- knowing they could produce drugs and make money in the market, and they could do so without patent protection.
    Just because they weren't having fun, it still doesn't prove they were innovating and remaining profitable, either. Do you understand the difference between produce drugs and produce new drugs? Between merely being and being profitable? Look up the definition of "new" (in a standard dictionary, that is) if you have any trouble with it. Or are you saying that all of the 464 drug companies (and I'm taking your word for that) were innovating, being profitable and none was just copying existing drugs? If this is your claim, then provide data for it.
    Otherwise your figures are irrelevant to the issue.

    And also, which of these concepts is more important to society:
    - The number of companies
    - The number of employees
    - The amount of profits
    - The amount of revenues
    If you don't agree with any of them, feel free to provide an alternative, or a combination of whatever other numerical indicators you wish.


    If you want additional examples, I'd suggest you look at the history of the Netherlands during the time it banned patents, as well as the industrial growth of Switzerland during the period that it had no (or very limited) patents. Both countries showed tremendous innovation and development (often more than other countries), despite the lack of such artificial controls.

    Well, if you are using these examples I presume you have already seen the data, so it wouldn't be much trouble for you to provide references to it. When you provide the data (=statistics or research, not babbling), I will answer to that.

    Ah, and I remind you that you haven't provided data to back up your assertion that movie ticket sales show positive correlation with increased piracy - a statement you very clearly made previously.

    You keep talking and talking and talking but data is always missing. Any request for data is referred to "basic Mike-o-nomics", "look around yourself" and more fluff of that kind.

    The point remains true: monopolies tend to be inefficient and bad for the marketplace.
    Are you saying that all monopolies are bad? If not, please define a set of objective, nonambiguous criteria for distinguishing.

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