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
    misanthrpic humanist, 1 Mar 2007 @ 5:20pm

    archaic thinking

    John. I believe you really have an enourmous journey ahead of you to start to grasp the concepts being discussed here. Sorry, but you are engaging in a 21st century argument with 20th century ideas and I don't think you realise how different the ideologies discussed on this site are from your position.

    "Properly functioning DRM is a mechanism for recovering value."

    Comple nonsense, unless you are using the word incorrectly. It is a mechanism for extracting profit by creating artificial scarcity and lowering the product value. Please take a look at many of the threads on this site and understand that we draw subtle but very important distinctions between "value", "profit", "wealth" and "money".

    "For artists, it: (1) offers them exposure and a facility that permits potential listeners to access their music"

    It offers no such advantage, in fact it restricts that process. They already have that mechanism which does not require DRM.
    It's called the internet, a system of interconnected servers and routers that provides dissemination of material for practically zero cost.

    " and (2) creates a system for a feedback loop of rewards to artists so that they can make a decent living using their talents so that they continue to make new music."

    Firstly, they already have that. See above. There is simply no incentive for an artists to cripple their work and reduce its interoperability with commonly used standard playback systems.

    You completely fail to understand the motivation of artists, which is not primarily financial. Musicians whos primary motivation is money tend to make shit music. The old system to which you allude is one which selects only a few artists to be the privillaged benefactors of a system that rewards them at the expense of all other musicans, it is exclusive, devisive and an attempt to perpetuate the zero-sum fallacy that we are arguing against here.

    "For users, it provides the opportunity to (1) find music they want to find"

    No. That is a search and refinement problem, it has nothing whatsoever to do with DRM.

    "(2) find out about new music that they haven't heard yet; "

    Again, what possible relevance does DRM have to the task of selection by categorical similarity in genre?

    "(3) listen to new (or not new) music for free; "

    Again, DRM plays no part whatsoever in this process which is accomplished by the available tools of P2P, aggregation and DJ sites, netlables and individual artist site indexes.

    "and (4) buy it if they want to continue using it indefinitely, which I would think would be valuable (otherwise, they wouldn't value it)."

    You are working with an old paradigm of "buy" and "value" which I suspect involves reducing the "song" to a unit product of fixed cost. The modern internet culture is about building relationships between audiences and artists at a peer level. Many successful models are emerging where the audience pay for music directly to the artist or netlable through subscriptions, donations, and other social exchange currencies (such as promoting, hosting, dissemination). In itself data is just bits, 1s and 0s, it has no value whatsoever. The value is a psychological connection, a relationship between the listener and the artists product in regards to its emotional and cultural context.

    "Providing "free" music as the primary method of music distribution in the world isn't sustainable unless some rich guy decides to spend billion of dollars per year to design and host a site for free."

    Absolute nonsense. Go and search the internet for the MILLIONS of artists out there who now manage and administrate their own output. The modern artist is very technologically savvy and sees maintainance of their own site as part and parcel of the business of dissemination and identity. Hosting and bandwidth is virtually a commodity and these days only absolute amateurs have not taken the step to manage their own output.

    "And even then, if artists are not compensated, they will eventually stop producing their art, or at least produce much less of it than they would if they were able to make a decent living off of it."

    Please search the archives and see how many times this erroneous thinking has been shot down in flames. Financial reward is not a precursor to artistic output. There is no one to one or proportional correspondence between cashflow and artistic output. Some of the best bands and solo artists around today have proper day jobs as professionals in other domains. They use this as a platform to make art in their spare time, which eventually becomes an additional income (sometimes exceeding their salary). The old days of the record company sponsored full time artist is virtually dead save for a few plastic manufactured pop acts and touring stadium rock bands from the old guard.

    I hope you can get up to speed on the philosophies and observations under discussion here, but it will mean letting go of a lot of what you think you know about the old music business.

    with respect

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