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.

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  1. icon
    Mike (profile), 5 Mar 2009 @ 11:58am

    Re:

    The question of "FREE!" is the question of net bottom line: If you kill a 10 billion dollar a year industry (music) to sell more concert tickets, how much more does each concert ticket have to cost to make it break even? It explains why in part that ticket prices for a 2 hour concert now often well exceed $100 per seat or more - someone is trying to make up on the back end what isn't made up on the front end.

    Heh. Harold, we explained this to you 3 days ago. Apparently for all the commenting you do, you don't bother to read.

    You assume (wrong again!) that the audience is a fixed size. It's not. Giving away the music for free (if the music is good) has been shown to *massively* increase the size of your audience.

    Corey Smith is proof of this. He has a huge follower base now, and he still sells concert tickets for $5.

    Ooops. Harold's been proven wrong again.

    I've yet to see a single comment where he's gotten the facts right. Scary.

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