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, 21 Mar 2007 @ 5:43am

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

    I pointed out that *brand* was important, and you immediately said "aha, so now trademark and copyright are important."
    And from this somehow you concude that I consider trademarks and copyrights to be the same...

    Which I had never said. You are focusing on semantics again.
    Well, semantics does matter in your case, because the semantics you put in your words is different from what the rest of the world puts in them. According to your Mike-tionary, for example, trademarks are not IP.

    This isn't some "crackpot" theory. Talk to just about any economist and they'll agree.
    BEEP Argumentum ad Varecundiam logical fallacy (http://en.wikipedia.org/wiki/Appeal_to_authority)
    Of course, no crackpot will ever admit his theory is a crackpot theory. And unfortunately for you, science is not a democracy. Only crackpots do popularity contests when it comes to research. Science works by proof and data, not by "Einstein agrees with me".

    And using weasel words (http://en.wikipedia.org/wiki/Weasel_words) doesn't help your position. "Monopolies tend to... "? What's that? Do they or don't they? When? Under what circumstances?

    "Crackpot: Pigs tend to fly
    Skeptic: hey, look at these real pigs. They don't fly!"
    Crackpot: Well, I didn't say ALL pigs fly.
    Skeptic: So can you define a set of objective, nonambiguous criteria for distinguishing between those who fly and those who don't?
    Crackpot: Pigs tend to fly. I don't think you'll find very many zoologists 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, more generic blah blah blah from you.

    But I'll be clear : If monopolies are so bad, why do you insist on allowing IP-based monopolies? Because trademark protection does establish a monopoly. Or is it that maybe not ALL monopolies are bad? May I use your Techdirt brand and logo in my business? Economic efficiency rules, after all, doesn't it?. Why should I innovate if I can simply use yours?

    You'd benefit from learning some basic logic as well, since your sloppy use of implications is mindboggling From a nonuniversal quantifier you cannot imply anything for your specific object of interest:

    "1. getting rid of monopolies tends to expand the overall market
    2. Let's examine IP Monopolies
    3. For an IP monopoly, getting rid of it will expand the market"

    "1. Cats tend to be gray"
    "2. I have this cat"
    "3. Therefore, it's gray"

    As I said, learn some logic first.

    The test to prove it is for a company to come along and do it
    Hah, like a genuine crackpot you keep answering nonquestions. I didn't ask a test for proving your theory. Don't you know what falsifiability is? Don't worry, crackpots also fail to understand this cornerstone concept the scientific method. It is a test that proves your theory to be false. See http://en.wikipedia.org/wiki/Falsifiability if you have troubles with the concept. So you see, I'm asking for the test that disproves your theory.

    So, you have now failed SEVEN 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, SEVEN times in a row now. Wow! What an ego!. Even Einstein and Newton contemplated the possibility of being wrong and pointed to experiments with a falsifiable outcome, but not Mike. Mike's above such puny earthly beings. His theory "just works".

    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
    Yeah yeah Mike. As I said time and time again, it's easy to "predict success" a posteriori. Wow - According to you anyone who understood basic economics should have seen Ford would be a success, yet somehow it took 15 years for that production model to appear, (and it wasn't applied first by Ford, BTW). How's that? Nobody but Ford in the whole damn world knew basic economics in order to make a business model more efficient? Every year thousands of companies go bankrupt, and many of them have quite a few economists working there at managerial positions. How's that? Don't they know their basic Mike-o-nomics?
    As I said previously, if you have such an ability to know in advance whether a business model will work or not, it's inexplicable that you are not a billionaire. But probably, it's most likely the case that like all would-be future-tellers your crystal ball works only in reverse.

    Past anecdotical examples don't prove anything. Well, your continuing use of them only proves that you have no proof at all. Quoting over and over again that someone succeeded under some circumstances won't make you right. No matter how much you try, it is, and wll remain irrelevant.

    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?"

    BEEP. Undistributed middle logical fallacy (http://en.wikipedia.org/wiki/Fallacy_of_the_undistributed_middle): "You are laughing at me, and you'd have probably laughed at Galileo, too". I'll let Carl Sagan reply: "They laughed at Galileo, they laughed at Copernicus, and they also laughed at Bozo the Clown". Yes I am laughing at your ideas. And MAYBE I would have laughed at Einstein back in 1908, and MAYBE I would have laughed at the aether theory. Einstein was right, and the aether theory was wrong. So what? The problem for you is that whether I laugh or not at someone or whether I would have said something back in time still doesn't prove you right.

    And of course, as I keep saying, Ford did it himself, while you preach others to do it. Quite a difference.
    It didn't escape me, by the way, that you didn't answer two very specific questions.

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

    2) 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.

    Not quoting them will not make me forget them.

    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.


    ROTFL :-)
    "Skeptic: You are wrong. Look at this data.
    Crackpot: But the publisher of this data had the intention of proving me wrong! And it is biased! Sorry, that's not interesting data. It's so funny it isn't worth commenting.
    Skeptic: ?!"

    So according to your reasoning, the only data that is 'interesting' is data that proves your point. If I use a dataset X to prove you right, dataset X is correct. If I use it to prove you wrong, the same dataset X is wrong! :-)
    Genuine 100% crackpottery. And Self-confessed, no less!

    In my reality, data is data, which is the good thing about it - that it is not subjective.

    The model I have discussed is pure free market economics -- which is widely accepted as being quite accurate.

    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


    Are you using also your own version of logic?

    1. The business model is not new
    Yet, somehow
    2. There's no data on it.

    "
    Crackpot : If you drink pee you'll get healthier.
    Skeptic : Uh? Is this something new?
    Crackpot: No, many people have already been doing it. They just weren't aware of it.
    Skeptic: ?!!? Do you have any data about this?
    Crackpot: No, there's no direct data. But Ford was healthy! And It's basic mikedicine"

    Sorry, but get your logic together before trying to prove anything.

    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.



    Oh sure, Mike. Just like anything else, we all have to just take your word for your baseless claims. The world is not reduced to URLs. There were books and journals prior to the web, just in case you didn't know. And there was an artifact called "bibliographic reference" that was used in science to quote others. So don't be shy and provide a FULL BIBLIOGRAPHIC REFERENCE to the work instead of just dropping a meaningless name.

    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


    Yes you did. Here:
    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..

    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.

    BEEP. Post-hoc ergo propter-hoc logical fallacy (http://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc).
    Time sequentiality does not imply causation. As I said, get your logic together if you want to be taken seriously.


    "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.


    Do you understand the difference between "patent" and "patent protection"? Seems not. It's even more basic than basic economics: its basic reading comprehension.

    "Protection of X unleashed a wave of X : between year1 and year2, the number of X more than tripled the totals of the previous five years".
    If you think this is tautological, then these are, too:

    "Protection of internet domains unleashed a wave of internet domain registrations; Between year1 and year2 the number of internet domains registered more than tripled the totals of the previous five years".

    "Protection of californian land-claims unleashed a wave of land claims : between year1 and year2 the number of gold-rushers with land claims more than tripled the totals of the previous five years".

    The author is providing data proving that protection of something has increased that something. You may or may not agree with the underlying assumption that "A Patent represents an Innovation", but that doesn't make the statement tautological, because he is not proving that assumption in any way. Look up what tautology means. Given the continued use of logical fallacies in your reasoning, you are in not in a very good position to identify logic artifacts.



    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.


    ROTFL :-)
    Mike: "There *was* plenty of effort put into drug discovery without patents : There were (..drums...) 464 drug companies in Italy producing drugs!"
    Alexander : "Are you saying that all of the 464 drug companies were innovating and profitable?"
    Mike: "I'm not saying that at all! But that's the point!"

    Talk about circular reasoning. May I remind you that we were speaking about innovation and not just production? And sorry, not some of them were copying, but most of them were copying, as acknowledged by the same study you quote over and over. The problem with copying is that someone must make the discovery first, by investing his own money.

    And here you have some more data, although since it proves you wrong, probably it's "not interesting". It definitely shows positive correlation between patent protection and R&D budgets.

    http://levine.sscnet.ucla.edu/archive/grabow-patents_innov.pdf
    http://www.dklevine.com/ archive/refs4122247000000000455.pdf

    Or between patents and innovation in general, and using mathematical models:

    http://personal.cityu.edu.hk/~efedwin/ipprot3k1.pdf
    http://personal.cityu.edu.hk/~efedwi n/iprgrt6a.pdf

    But as I have said many times, even if you don't want to provide any data, simply SHOW US that it works: Get a huge loan for about $800 million (current estimated costs for researching and producing a new drug), and publish the formula and industrial synthesis method for free. Or produce a series of movies (studio quality, and at a reasonable yearly rate)

    Again, I am no longer actively following this thread,

    Run, Mike, Run :-)

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