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), 20 Mar 2007 @ 12:55am

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

    I challenge you to provide a quote in which I say that trademark is the same as copyright.

    I pointed out that *brand* was important, and you immediately said "aha, so now trademark and copyright are important." Which I had never said. You are focusing on semantics again. I have no problem debating ideas, but your continued focus on semantics is tiring and not moving the discussion anywhere.

    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?

    Again you shift the subject.

    Let me explain. I have gone through the basic economics to show why getting rid of monopolies tends to expand the overall market. This isn't some "crackpot" theory. Talk to just about any economist and they'll agree.

    I then apply that to intellectual monopoly, and explain why it applies there too. This is taking basic economic theory and showing how it applies to other areas. The test to prove it is for a company to come along and do it. It will happen eventually.

    However, the more interesting point is that many in the industry are already doing it -- just without realizing it. They're already selling the benefits of movie viewing, not the movie itself -- even as they think they're selling the movie itself. However, once they realize that they can use the movie itself to sell more of the benefits of movie watching, they'll be able to make more money -- just like getting rid of monopolies expands any market. The "test" that you keep demanding will be clear when a company does exactly that and really frees the content while attaching to it a business model (I suggested quite a few earlier) that embraces using that content to sell something else.

    The reason I brought up the Henry Ford case was to show why your question for "data" was irrelevant. Anyone who understood basic economics and Adam Smith's concept of division of labor would understand why Henry Ford's model of production was more efficient -- but they wouldn't have the "proof" you seek. So, I used that example to show why your question was irrelevant. Yet in your own wonderful way, you ignore the point of bringing it up and suggest that Henry Ford's success in embracing the basic facts of economics is meaningless to the discussion -- despite my explanation (apparently not clear enough) of why the analogy makes sense.

    You could have made this same argument before Henry Ford came along, and all you'd be saying is "where's the PROOF I should drop my one-by-one manufacturing process of cars and move to assembly line production?"

    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

    Well, then I apologize for not being clear. We are debating free market economics. The model I have discussed is pure free market economics -- which is widely accepted as being quite accurate. All I'm saying is that we should be applying those same economics, which have been shown to expand the pie when it comes to scarce goods, to non-scarce goods. So, yes, the core of the debate is free-market economics. Your position is that government protectionism, in the form of copyrights is a more efficient mechanism. My position is that the evidence throughout history of economic pies expanding thanks to free market economics suggests otherwise.

    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

    I'm not sure why I've been unable to make this clear, and maybe the paragraphs above helped -- but as I said, there's no direct data on this because what we really have is something of a hybrid model, where the industry is falling back on the protections, believing they're necessary, rather than embracing what they're really selling.

    I can see why it's somewhat confusing, and I apologize for that. No one has done the *pure* business model I discuss in the space (though some are close to trying...). But, the way the movie industry has worked since inception isn't really that far off. It's just that it seems like not too many people in the industry actually recognize that.

    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.

    For a fairly simple reason. When you can use a biased data set to prove the opposite point that the publisher of that data intended, that's pretty powerful. When you can only prove the point that the publisher of that data intended, that's not very interesting.

    Well, wrong as always. During the last 20 years, the FDA approved about 900 NMEs

    No, I was referring to the period under discussion. From 1961 to 1980, when 1282 NMEs were discovered. Of those, 119 came from Italy, by the way.

    So what? A NME may or may not become a drug.

    But if there weren't any rewards for creating a new drug, as your argument suggests, why would Italian firms be researching NMEs at all? There shouldn't be any money in it. They should all just be copying drugs from elsewhere as you suggest. The very fact that so many Italian pharmaceutical companies were hard at work on discovering NMEs suggests that they realized that artificial monopolies weren't necessary for building a profitable business.

    That's all the example is designed to highlight. That if companies believe there are additional business models from which they can profit, they don't need artificial, market-distorting, protectionist policies.

    Which is exactly (=quote,please) the sentences in that report that constitute tautological reasoning?

    "Patent protection also unleashed a wave of innovation among Italian pharmaceutical companies; between 1986 and 1991, the number of European patent applications by Italian pharmaceutical companies more than tripled totals of the previous five years."

    In other words, patent protection unleashed innovation, and to prove it, you can see it in the fact that patents increased. That's pretty tautological.

    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?

    No. I'm not saying that at all. Certainly, some of them were copying existing drugs. But, that's the whole point with this type of model. Of course someone will be there copying what you're doing, but there are ways to still build profits above and beyond that (through bundling it with other things and continually innovating). The reason other firms kept innovating was because they recognized that's one way to keep a premium on the firms that just copy.

    There's TONS of research on how competition (without protectionism) drives innovation, so I'm not sure I need to point to any of it, but if you want a decent example of a case where it's true with "intellectual property" that isn't patented, you can look here:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=384822

    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.

    When it comes to the pharmaceutical industry, the most important point to society is none of your list, but its the health of people in the society. That's the market that the companies are in. The healthier they are, the better overall impact on society. If you want a sense of how to put a dollar value on it, there are plenty of places to look, but here's a good place to start:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=742364

    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.

    You can look up Eric Schiff's work, which predates the web, so I can't point you to a URL.

    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.

    I don't believe I made that statement directly -- and if I did, I was mistaken and apologize. What I *meant* was that a coordinated campaign that used the content as a promotional vehicle, in combination with a business model that was designed to profit from related activities would work well together.

    However, there is *some* evidence that high piracy rates do correlate to ticket sales. We've previously discussed here on Techdirt the tremendous number of downloads for the most recent Star Wars movie, followed by record breaking attendance at the theater.

    Are you saying that all monopolies are bad? If not, please define a set of objective, nonambiguous criteria for distinguishing.

    Monopolies tend to decrease economic efficiency. I don't think you'll find very many economists who disagree. I'm not sure what the point of the second half of your question is. It seems like a trolling question designed to make me work for no discernable purpose (much like many of your earlier questions).

    Again, I am no longer actively following this thread, but there have been a few interesting blog posts that have pointed back here, so I answered your questions. I have tried to express my position clearly, and I realize that I have failed in some cases, and the only reason I keep responding is in part to try to clarify where the confusion is. However, it seems clear from your tone in responding, and your repeated need to repeatedly pretend that my explanation for A is problematic because it doesn't explain B, that you are only responding here for a sense of fun, rather than any serious discussion on the topic.

    If you are seriously interested in discussing the topic, then I apologize, but it does not appear that way from your posts. Therefore, I'm not sure how much value there is continuing the conversation if you only are going to continue this line of questioning that is more designed for taunting than any serious look at the topic.

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