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, 4 Mar 2007 @ 3:20am

    Use the method that was popular from before the Enlightenment until now in Eurpoe. Find a rich benefactor to bankroll your art. Worked for Bach. Worked for Mozart (more or less).
    Except if you consider the 'small' nuance that you can immediately see and judge what Mozart does before you patronize him, but until you have spent a good quantity of your money you can't see the quality of a movie. As an example, the average cost of an 1h pilot episode for a series is in the *millions* range. But hey, if this system goes as back as the middle ages, I'm sure there are plenty of $10M movies from unknown moviemakers that have benefited from it. Feel free to illustrate me on specific examples.

    Method 2) Use the method that replaced that -- used up until the present, which I will call the "Evil Dead" method, since that movie used this method. Find private investors. Convince them you'll make money on your movie.
    Except that you are definitely not going to make money. After all, once the movie is created, marginal cost is zero. Anyone can get it for free. Oh, but you still have it, so be don't worry. Life's good. Abundance. Where can I download a free legal copy of Evil Deeds, by the way?

    Used for the past several hundred years. Start a corporation for the purpose of making your movie. IPO the company. Thereby securing public investing. Go make your movie.
    Same as above. Do you buy shares from companies that do not plan to make money, and whom you do not know? Then I don't know why you expect others to do. By the way, I have an idea for a great movie that won't make any money. Feel free to send me your dollars. Also, feel free to point me examples of freely downloadable movies made this way. I guess there should be lot of them, if the method is so popular and successful and has such a long history.

    It amounts to: start an NPO, accept a lot of free help.
    In 2005 , about 530 new movies were produced. marketed and distributed in the US, at an average cost of $96M per movie. That makes 50 billion dollars in costs. The total charitable donations in the US the same year (which was the year of the asian tsunami donations, by the way) were 250 billion. Good luck achieving a 20% increase in charitable donations for anything, much less movie making. Or are you going to scale down production of movies? We'll have... how many? 10 ,20 movies per year?

    The cost of Production *can* be reduced. $10M is a typical "management"
    Actually, even if you remove marketing and distributionc osts, the average movie costs six times that amount. Today, and that's a fact. Just because you want or think that costs can be reduced to less than 1/6th of their present value doesn't make it so. But if your plan is so good, please do talk to movie companies so that they implement it. After all, I doubt they would have any objections in cutting their costs in 5/6ths, especially if you offer your idea for free (because its marginal cost of thinking of it again is 0). After you are done, I'd be glad to examine your results (as opposed to your whishful thinking)

    Since you mentioned computerized CG, the movie you have in mind is suitable for the "SETI@Home" method. All the CG is free

    Sure. Come work for me, for free, if you don't mind. If you don't work for free, I don't know why you expect others (modellers, artists, animators) to do it. CG is not only *rendering*. Or do you believe models and animations appear out ouf thin air? And Seti@Home has quite a bit of server-side iron and bandwidth which is not free, either. Ironically, Paramount Pictures donated $100,000 to Seti@Home for the project to start

    Method 6) Put up a web site, take donations, make your movie. Currently being tried with "A Swarm of Angels".

    Yeah,well : let's see. Its currently March 2007. The project started at least in January 2006 (there are archived news from that month). So in 15 months they have managed to get 900+ angels @ 50 dollars each = $40.000 WOW! Not bad for a target of $2,500,000.
    May I expect this movie to be released in the next five years? Is this going to be production rate of movies in your economic model?

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