Those Who Don't Understand The Value Of Free Information Are Doomed To Fail

from the creative-destruction,-romer-style dept

I've obviously been writing quite a bit about both the music industry and the news industry lately -- as there are tremendous similarities between the two industries -- a point highlighted by Tim Lee, who (at the same time) notes that the one difference is that "piracy" isn't a problem for the news business (though, those who incorrectly blame Google for the downfall of journalism might argue otherwise). Tim's point (and it's one I agree with) is that the basic factors hitting both industries are really the same, and the "piracy" excuse is something of a near total red herring. It's actually the overall dynamics of a changing market when the main output becomes digital.

Lee's piece is a response to James DeLong's article decrying the death of newspapers which pins it on all of us fools who claim that "information wants to be free." DeLong, you may recall, was a bigshot at the Progress & Freedom Foundation -- a DC think tank that has long advocated ever more draconian copyright measures. And, he's effectively doing the same thing here: saying that newspapers will only survive if they charge for every little thing. This is, once again, the same incredibly wrong advice that he spewed out to the entertainment industry for years -- and look where that got them?

The similarities actually remind me of the one time that I actually got to meet DeLong, nearly three years ago, at a Cato Institute symposium on copyright, where I first laid out the details of why "free" isn't a problem in economics, and how it should be a part of the business model, if you follow through on the basic economics. It was actually on the flight to that event, reading a book about the history of the number zero that I realized just how difficult it was for many to get past the zero. It was as if, the second they came across zero, their brain popped out an error and they stopped thinking. It leads to ridiculous claims like "if I give it away for free, I won't make any money!" That's not true if you look at the larger economic ecosystem, understand the economics of information or infinite goods, and recognize how they can play into the overall economic model.

While DeLong was there that day and heard me speak on this, it's pretty clear that he didn't get the message. Instead, he's continuing to focus on how to implement artificial scarcity, believing that markets only work when everything has its price -- and that price isn't zero. But this is a huge mistake from a business perspective. If you understand where the zero fits into the business model, then there are plenty of business models that work great. The problem with the recording industry is that they've never believed the zero fit anywhere. The problem with the newspaper industry is that it recognized the zero, but forgot to figure out where the rest of the business model fit. Instead of figuring that out, reactionaries like DeLong are moving backwards and trying to just ignore the zero again. Unfortunately that's what breaks the model even worse. Ignoring the reality of where a zero fits into a business model is a simple recipe for failure as it tries to go against fundamental economics.

No one has ever said that "everything must be free" (though, angry copyright system defenders repeatedly pretend that's what we are saying). All we've said all along is that it's important to recognize that in the information economy, it makes plenty of economic sense for certain things (i.e., "infinite goods") to be free (that's where the zero goes) and then the scarce goods are what you charge for. The trick is enabling a business model where the infinite goods make the scarce goods you control more valuable. This is absolutely possible for any business -- and, in fact, failing to understand how you do this will most likely doom your overall business.

We'll be talking about this and much more at the Free! Summit in a couple months, and we hope you can join us. However, we have to admit that early interest in the event has been overwhelming, so we've already had to shut down the open registration and opened up a waiting list. We're working hard to see if there are ways we can accommodate a much larger audience (if you have any ideas, let us know -- or if you're interested in sponsoring a live web feed, please let us know), but if you were thinking of going, at least get on the waiting list early.

Filed Under: business models, copyright, economics, free, jim delong, music, newspapers

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  1. identicon
    Weird Harold, 5 Mar 2009 @ 3:52pm

    Re: Re:

    R Miles, you are thinking that everything is an all or nothing proposition. Also, your math skills are a little lacking:

    "Let's do some math, shall we (assuming the average ticket price is $30).
    20,000 fans x $30 x 200 concert venues = $120,000,000

    20,000 fans x ($1 per song - record label fees of .80) * 1 download = $4,000"

    First off, assume the same 20k fans from each city buy the music. So now your little $4000 became $800,000. Now, step further, the concerts are not lost as a result, however, the band is often lucky to touch 25% of the total of a concert, and that is often net and not gross. So divide your 120,000,000 by 5 or 6 (somewhere between 18 and 20% net) and you are looking more like 20,000,000. Then you can take off their manager's commission, their travel expenses, and all those other things... you can guess what the numbers really are.

    Now, net $X million looks bigger than 800k, but the 800k doesn't include airplay, residuals, and 101 other uses for music that will continue in perpetuity for the song writer and artist. I am not current on the number, but larger bands (ie, ones that could pull 20k people to a concert in 200 cities) would also run into the millions each year.

    MATH QUIZ! How many concerts would it take for the average band to make 120,000,000 net? Hint: Madonna won't even make that for her current overpriced tour. The gross might be higher, but the net to the artist sure won't be.

    You have to compare apples to apples. Stacking the math to make your argument look good just makes it look weak.

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