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
    Frumious B, 2 Mar 2007 @ 8:40pm

    Re: Re:

    Mike wrote:

    I think there's value in a subscription to *new* content. However, I do not see value in subscribing to previously created content. That's artificially limiting supply where it's not necessary and not helpful.

    I'm just so confused. Scenario: I realized last week I wanted to find the John Prine album that had "Sam Stone" on it. And since I subscribe to an all-you-can-eat music service, in seconds I was listening to the album. I don't care if it vaporizes after I stop subscribing. The John Prine album happens to be old content. The story could just as easily been about Erin McKeown, whose album is new. Why the new/old difference? I value both identically.

    Without quoting lots of economic gobbledeygook which I find incomprehensible, can you concisely explain why I shouldn't value this? I truly don't understand your assertions in the context of what I'm doing with my subscription music service.

    Is the problem that since I can find the same album (maybe?) on a file-sharing service, I'm not acting in my self-interest by paying for what I could get for free (and unencumbered by DRM)? I'd counter by saying I find the catalog, browsing, playing experience superior to file-sharing services. And if DRM on the content is the cheapest and most effective way to get someone offer that service, I'll accept the limitations.

    As a consumer, I want someone to collect the catalog, index it well, and make it super simple to play the music I want. And I want to do that for tons of music while still paying one price per month. I don't understand how I can entice an outfit into doing that unless I pay them. And if others can use the same service without paying, I think the outfit generally won't get paid. Hence DRM helps me get catalog builders / distributors to do what I want.

    Without DRM, how does your "economics of scarcity" jibber jabber get them to do what I want?

    BTW, do you think HBO should be free too?

    Don't misunderstand and take this to mean I love limitations on my media, tolerate rootkits, appreciate being treated like a criminal by my software, etc. Those who make DRM and those who use it are doing a rotten job most of the time. But I think I want them to make it better vs. wanting them to go out of business. Because they're making something I value.


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