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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 @ 6:07am

    Your scenario is actually farfetched in its own right -- even with perfect "protection" you really have no way of knowing in advance whether a movie will be profitable
    Of course you don't. But I was trying to be benevolent towards Mike by removing subjective issues like quality and such. If a 100% guaranteed movie can't get $10M, how on earth will a real movie get them?

    Also, I never spoke about being profitable. I only said that people "will like it". How do you plan being profitable? After you make your movie, your marginal cost is zero. Anyone can get a copy for free (and you keep your copy, yes). So, how do you plan being profitable (This, assuming that you get the money to make the movie in the first place, which has still not been answered).

    Hire less expensive actors or convince them to accept less upfront in exchange for more of the take. Find cheaper costume suppliers. Hold down on the special effects. Keep looking for ways to economize.

    Excuse me, but that's a different movie. My movie comes with these costumes, that cost X, these actors that cost Y, and special effects that require hardware Z and that's why I'm able to say it will be likable. Or are you saying that people don't care about what appears in a movie? They don't care if instead of Tom Cruise you pick JohnUnknown? If instead of state-of-the-art effects you use soft cork decors built by inexperienced art students on their free time?

    Well, they do. An obvious example : "Abre los ojos" and "Vanilla Sky" are essentially the same story and movie. But one features high-profile actors and effects, and the other doesn't. Results: check for yourself:

    The Blair Witch Project was a successful movie on a tight budget -- what was it, something less than $100K, right?
    So what? Nobody is saying that I cannot make a YouTube video for $5 and become a millionaire because I do something funny or stupid for the first time ever. We are speaking about sustainable business models for all artists. Doing a stupid video is not "sustainable", because my next video doing the same thing or something else will probably not earn me a penny. Blair Witch 2 had many times the initial budget and was a bummer. Obviously curiosity and novelty played a factor in the initial success.

    Oh, and by the way, current movie production average is $60 Million. I'm only asking for $10 Million. I've already some magic cost reduction and am capable of making a 100% guaranteed movie for 1/6th of the real-world cost. Even with this utopic setup, I'm not getting any real answer about where this money is going to come from if I plan letting people get the movie for free.

    How do I knock the costs of computers down? Take a look at what Dell, for example, does -- use cheaper components, optimize the manufacturing process, etc.
    Again, generic nonanswers and hand-waiving. I'm not speaking about Dell, I'm speaking about movie making. How do I, the movie maker and not the computer builder, drive down my computer costs. By picking a cheaper computer? Wow! That's surely something that hasn't occurred to movie industry executives. For some arcane reasons surely they are picking the most expensive computers available, just to keep production costs high.

    I'll be more specific.
    Do you have some concrete cost reduction idea that studios aren't currently using?

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