The Grand Unified Theory On The Economics Of Free
from the have-fun-with-it dept
Ok. I'll be the first to admit that I've taken the long way around in going through my series of posts exploring the economics of goods when scarcity is removed. What I had thought would be a series of 5 or 6 posts, turned into something much longer -- but each week people came up with new questions or discussions or objections, and so I tried to spend some time digging down on various pieces of the economics at hand. However, what I haven't done is tie it all together in one single spot. In the last couple of weeks there's been tremendous confusion among people from Scott Adams to CNN to various others that have made it abundantly clear that the one thing I've failed to do is put the whole concept together in a single place. That's resulted in people being confused about what I'm actually saying -- where they only pick up a tiny piece of the argument or confuse it with the arguments made by others. So, while I still think it was important to go through the details, now is as good a time as any to pull the whole theory together (with some links back to the previous articles in the series).
First off, and this is key, none of what I put forth is about defending unauthorized downloads. I don't download unauthorized content (never have) and I certainly don't suggest you do either. You may very well end up in a lawsuit and you may very well end up having to pay a lot of money. It's just not a good idea. This whole series is from the other perspective -- from that of the content creator and hopefully explaining why they should encourage people to get their content for free. That's because of two important, but simple points:
- If done correctly, you can increase your market-size greatly.
- If you don't, someone else will do it correctly, and your existing business model will be in serious trouble
From a high-level perspective, though, the reason that giving non-scarce products away for free will increase your market size goes back to the same Thomas Jefferson quote that we kicked the series off with:
If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.What Jefferson noted is the wonderful feature of a non-scarce, or infinite, good that it is effectively a free resource. Once created, it costs nothing to give to someone else, and you still retain the original. In fact, economists have finally realized that this is the very key to economic growth and progress. The infinite resource known as an "idea" that improves what was already there is what increases the size of a market. Or, putting it another way, that infinite resource of a new idea makes an existing scarce resource more valuable. It's easy to understand that when it's an idea applied to, say, a machine making it more productive -- but it also applies to any infinite resource appropriately bundled with any scarce resource.
The way it works is actually quite easy and fits in with the same basic economics that's always been in place. Knocking down the barriers of artificial scarcity opens up tremendous new opportunities -- just as knocking down the artificial scarcity known as "protectionism" helps to grow markets by creating new opportunities. In this case, those new opportunities have only increased in number as we've gone digital, making more content infinite in nature. Where some people have trouble is that those new opportunities may be in different places than the existing opportunities -- and those new opportunities may not all be capturable by the creator of the content. Indeed, there will be some externalities created by the free flow of an infinite resource. However, the total amount that any content creator can capture is still much larger than it was before. It's one of those cases where getting 20% of a huge pie is much better than getting 90% of a tiny pie.
You just start by redefining the market based on the benefits of what you're providing, rather than the specific product you're selling. If you're focused on selling the benefits, then discovering a better way to sell those benefits is seen as a good thing, rather than a threat. You then break down the different components that make up those benefits that you're selling -- and you begin to recognize that every bundle of goods and services that make up the benefit you're selling has components that are scare as well as components that are infinite. In fact, if you look closely enough, you realize that any scarce product you buy actually has infinite components while any infinite good you see also tends to have scarce components.
Once you've broken out the components, however, recognizing that the infinite components are what make the scarce components more valuable at no extra cost, you set those free. Not only do you set those free, you have every incentive to create more of them, and encourage more people to get them. You break them into easily accessible bites. You syndicate them. You hand them out. You make them easy to share and embed and distribute and promote. And, yet, all the while, you know exactly what scarce resources those non-scarce goods are tied to, and you're ready to sell those scarce resources, recognizing that the more people who are consuming the infinite goods, the more valuable your scarce resource is.
So, the simple bulletpoint version:
- Redefine the market based on the benefits
- Break the benefits down into scarce and infinite components.
- Set the infinite components free, syndicate them, make them easy to get -- all to increase the value of the scarce components
- Charge for the scarce components that are tied to infinite components
- Redefine the market: The benefit is musical enjoyment
- Break the benefits down (not a complete list...): Infinite components: the music itself. Scarce components: access to the musicians, concert tickets, merchandise, creation of new songs, CDs, private concerts, backstage passes, time, anyone's attention, etc. etc. etc.
- Set the infinite components free: Put them on websites, file sharing networks, BitTorrent, social network sites wherever you can, while promoting the free songs and getting more publicity for the band itself -- all of which increases the value for the final step
- Charge for the scarce components: Concert tickets are more valuable. Access to the band is more valuable. Getting the band to write a special song (sponsorship?) is more valuable. Merchandise is more valuable.
So there you have it. After many months, one single summary of the economics of "free" and how it can be used to anyone's advantage. It's not about defending unauthorized downloads. It's not even about getting rid of copyright -- just recognizing that copyright holders can actually be better off ignoring their own copyrights. It's very much about showing the key trends that are impacting all infinite goods -- and pointing out a clear path to benefiting from it (while making life more difficult on those who refuse to give up their old business models). And we're giving it to you all... for free. So, enjoy.
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
- An Economic Explanation For Why DRM Cannot Open Up New Business Model Opportunities
- Recognizing That Just About Any Product Is A Bundle Of Scarce And Non-Scarce Goods
- Scarcity Isn't As Scarce As You Might Think
Reader Comments (rss)
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Giving Away the Infinate
Perhaps you should print and bind a few hundred copies and send them to the US Patent and Trademark Office. Just this week they issued Google a Patent on counting. Yeah—"counting", like 1, 2, 3, 4, _, 6, 7, _, 9. Cool huh? Think just how long ago you learned that trick. I'm 62 so I learned it 56 years ago. And, I'm told that counting has been going on for a very long time—no really!
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hi mike...
i'm not sure that alot of people haven't "gotten" your scare resources arguments... but i might be wrong.
so for my sake, and my own opinions.. let me rant for a sec..
i'm an artist.. i create music.. i release music... i say to my customers, if you buy my music, you can't/shouldn't go copying this for 50K of your closest friends.. nor should you put the music you purchase anywhere where someone/50K people can copy it..
my question to you mike, do you think i should have the right to do this?
it appears that you really want me to essentially give up the model that i want to implement, so i can implement a model more in lines with what you want me to create...
there's a demand for my music.. otherwise it wouldn't be copied... there might be a demand for my t-shirts.. but my question back to you.. why can't i produce my music, and sell it as i want, and create tshirts as well..
you see mike. the cenral tenant/thesis to alot of the "conversations" regarding music/content is that the guy creating it, should then let others have it for free, and i should generate revenue via some other means..
you guys are stating that i should somehow use the music/content as a draw for other revenue generating functions. these arguments/conversations, while nice, are not what i'm interested in. i'm interested, as an artist, in making music, and being able to sell my music.
you as a customer, have a right to say to me, go to hell, that you don't choose to buy the music. fair enough. what you don't have the right to do, is to essentially rip the music off...
there is no difference between digital content and physical items...
the blank cd costs $0.05 apiece... it's the software/music/video on the cd that gives the additional value. the bits are worth something!!
i'm pretty sure that i'm in the minority here on this!
peace
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Small suggestion
Mike,
I've read the site for years and contributed a link or two. The economics stuff has been really enjoyable - that's my background, even if it isn't what I do anymore.
Anyway, I have a small observation to offer: you talk about absence of scarcity and infinite supply. These can't ever REALLY be true. Marginal costs can't ever truly be zero, if nothing else there's the opportunity costs, which can be really small, but there's always some alternative use of your resources (time, etc.) that would yield some utility.
Instead, does it make sense to introduce the concept of "Microscarcity"? Where MC tends toward, but does not reach zero. NASA uses "microgravity" instead of "zero gravity" for similar reasons. This allows you to make the analysis you have already, but without a bunch of messy math that ends up in divide-by-zero problems.
Plus, you gotta admit "MicroScarcity" is a catchy name for a book. It's all yours, man, go for it.
-Mark
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Glad to see everything in one place
Well said. It will be very interesting to watch this space in the next couple of years. On the one had we have an industry trying as hard as it can to maintain a poor business model in the face of change, and an IP legal structure that is quickly becoming their last leg standing. On the other we have wave after wave of bad patents and frivolous lawsuits and blatant anticompetetive activity (read: Verizon).
I am hoping we have a "Rubicon" moment where some company does something so blatantly anticompettive and against the spirit of the patent system (to promote innovation) that Congress cannot ignore it and rights the IP ship. It may be naive given the lobbies arrayed against any such movements being truly helpful, but it seems like change is starting to creep into the air.
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Re:
my question to you mike, do you think i should have the right to do this?
Yes. You should have the right to do that. I tried to make that clear above. The point, however, is that as more of your competitors go in the other direction, you won't be able to keep doing this. Your business model will go away.
it appears that you really want me to essentially give up the model that i want to implement, so i can implement a model more in lines with what you want me to create...
No, you misread my argument. I'm saying that the model you want to implement won't be supportable.
there's a demand for my music.. otherwise it wouldn't be copied... there might be a demand for my t-shirts.. but my question back to you.. why can't i produce my music, and sell it as i want, and create tshirts as well..
Because the business model won't be supportable. Your competition will learn to give away stuff for free, and people won't pay attention to you. Demand, by itself, is meaningless. There's a lot of demand for air to breathe, but we don't pay for it because the supply is infinite.
you guys are stating that i should somehow use the music/content as a draw for other revenue generating functions. these arguments/conversations, while nice, are not what i'm interested in. i'm interested, as an artist, in making music, and being able to sell my music.
And you have every right to *try* to do so. What you don't have the right to is have it guaranteed that you'll make money. All I'm trying to do is warn you that your business model is going to go away.
As for the claim that you're just interested in selling music, to me that's the same thing as me saying I'm just interested in selling horse buggy whips. That's great. I can still set up a shop and try to sell horse buggy whips, but it won't take long before I realize that there's no market for them any more.
you as a customer, have a right to say to me, go to hell, that you don't choose to buy the music. fair enough. what you don't have the right to do, is to essentially rip the music off...
Did you actually read my post? I make it clear that I'm not saying anyone should copy music that's unauthorized.
the blank cd costs $0.05 apiece... it's the software/music/video on the cd that gives the additional value. the bits are worth something!!
That's exactly my point. The bits are worth something. They increase the value of the scarce good quite a bit in many cases. But, again, that doesn't mean the business model you want to use will work out.
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Re: Small suggestion
I've read the site for years and contributed a link or two. The economics stuff has been really enjoyable - that's my background, even if it isn't what I do anymore.
Thanks.
Anyway, I have a small observation to offer: you talk about absence of scarcity and infinite supply. These can't ever REALLY be true. Marginal costs can't ever truly be zero, if nothing else there's the opportunity costs, which can be really small, but there's always some alternative use of your resources (time, etc.) that would yield some utility.
Ah, interesting point, though I'm not sure I totally agree. The opportunity cost is actually one of the components of the bundle -- "attention," which is a scarce resource. As you indicate, there's a real cost there, but again that's what you charge for.
So, I think that when you break it down to the component level, what you're saying agrees with my point that every product or service is really a bundle of scarce and non-scarce goods. You're highlighting the attention component which is inevitably tied to the infinite goods. So the components still are infinite and have zero marginal cost, but they're directly attached to things that aren't infinite and do have marginal cost...
nstead, does it make sense to introduce the concept of "Microscarcity"? Where MC tends toward, but does not reach zero. NASA uses "microgravity" instead of "zero gravity" for similar reasons. This allows you to make the analysis you have already, but without a bunch of messy math that ends up in divide-by-zero problems.
Interesting way of looking at it. I'll need to think about it a little more, though my first reaction is to wonder if that obscures the point by blending the scarce and infinite components...
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Re:
Dude,
Don't forget that Mike's specialty is PR
yeah, he wants you to sell t-shirts instead of writing good music
That's all his "theory" is about...
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Who's in control of the scarce?
I think your argument is well stated and true. But I do however feel that the real world application of the theory doesn't hold up well.
I do realize that your first point was that you don't encourage, believe in, or practice the downloading of unauthorized music or other "finished works."
But that being said, your argument hinges on the originator controlling the free in order to determine the scarce.
What has the music, movie, and software industry so enraged is that control neither. Bands allow for free downloads of tracks ( infinite ) to promote sales of CDs ( scarce ) They then turn around to discover their scarce is now free. Movie makers create a movie ( scarce ) and hand out movie trailers to any site or theater who will play them ( free ) they then turn around to find their scarce is free. Software makers make demos and trials ( free ) to promote the sale of (scarce) full products, only to find their scarce free.
So when these industries try to control the likes of kazaa, youtube, bittorent, people rush to the defense of of the free. Claiming that the corporation can't see the value of free. But if a content creator can't control if their works are free and scarce, how can they ever leverage the model?
I can understand how one could counter argument that perhaps bands aren't in the music business, but the music experience business and they should forsake the value of music sales for the value of merch, concert, etc sales, and how one can argue studios aren't in the movie business, but in the entertainment experience business but with DVD sales being a major portion of studio revenue and the quality of illegal copies increasing studios will be soon be left with options for zero scarce revenue, and the argument for software makers is even more flimsy because they only make money on the use of their software.
So Mike I agree with you, and you are right that your model works. But its viability in the real world is suspect at best unless creators have more control on whats is scarce and what is free.
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Re:
sam -
You said "there is no difference between digital content and physical items...". But I think it's a very important distinction between the two. The cost (to the publisher) of reproducing a digital item on a grand scale, with the likes of p2p approaches 0. Where as with even the cheapest physical item, there are still constant costs throughout the process, including the physical materials and transport and storage that do not apply to the digital.
I don't think the point is necessarily that you have to do this or Mike will get in your face. I think the point is that it can, and will increase overall market share and then profitability. And If you don't do it, at some point, your competition will.
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Re: @ Sam
Sam:
Mike has been explicitly clear that he does not support breaking the law. His arguments are that you should distribute your music in a way that people don't have to.
Your argument goes wrong here: You can choose to market your music any way you please. If you only want to make and sell music, then that is your right. However, consumers are starting to show very strongly that they do not consider obtaining a song and listening to it to be worth very much. The popularity of file trading underscores this. If the market sets the price of listening to your music at $.00001, you have every right to sell your music as your only revenue source, but don't expect to be very profitable.
The fact is that the music business is changing. The record labels are fighting against it as hard as they can with copyright lawsuits, but that doesn't change the fact that the market is devaluing access to music. Other content is being similarly devalued. Consumers see that it costs next to nothing to create a new copy of a song, so they don't see it as being worth $10-$15/album. That necessitates a change in focus to scarce goods and a business model something like what Mike described.
You can run your business any way you want, but if you do not adapt to the market, you will likely not be successful.
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Re:
Sam, Your point is well-taken. But many artists do not have the opportunity or wherewithal to have their music available to possible listeners through radio/satellite or cable. Allowing at least some of their music to be downloaded and experienced on a free basis, would (on the assumption that they don't suck) create a much wider fan base then they might have had otherwise. This would more likely than not lead to increased sales. It up to the artist as to how much he'd like the opportunity to make from his effort, as Mike said "However, the total amount that any content creator can capture is still much larger than it was before. It's one of those cases where getting 20% of a huge pie is much better than getting 90% of a tiny pie."
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slow day eh?
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Re: Who's in control of the scarce?
But that being said, your argument hinges on the originator controlling the free in order to determine the scarce.
Interesting. What gives you that idea? I actually believe the opposite is true. The model works better when the originator doesn't control the free at all. The more widespread and uncontrolled the free is, the better.
What has the music, movie, and software industry so enraged is that control neither
That's not quite true. They absolutely do control *some* of the scarce -- and that's the scarce parts they need to sell. This is actually a very good point that I perhaps didn't state clearly enough. The thing that you sell isn't "any" scarce good -- but the scarce goods that you control.
Bands allow for free downloads of tracks ( infinite ) to promote sales of CDs ( scarce ) They then turn around to discover their scarce is now free.
How is the scarce now free? The CD itself still costs money. I think what you're trying to say is that the music on the CD is now free. That's true, but you can still put in place plenty of incentives to make the CD worth buying. Make the liner notes especially cool. Make it so having the physical CD lets you access a special website where the musician hangs out with his or her fans. The list can go on forever. You can make the scarce worth buying. You can't just assume the non-scarce makes *any* scarce good more valuable.
Movie makers create a movie ( scarce ) and hand out movie trailers to any site or theater who will play them ( free ) they then turn around to find their scarce is free.
Again, I'm not sure what you're saying here. The market the movie industry is in is entertainment -- and a big part of that is the social experience of the theater (the real scarce good). So the more they can promote the movie and encourage people to go to the theater (get a free DVD of the film you just saw if you go to the theater, make the theater experience more fun and enjoyable, get a chance to appear in the sequel for going to the theater, etc. etc. etc.).
Software makers make demos and trials ( free ) to promote the sale of (scarce) full products, only to find their scarce free.
No, the full product isn't scarce. It's also infinite. So, the mistake there is thinking that an infinite good is scarce.
So when these industries try to control the likes of kazaa, youtube, bittorent, people rush to the defense of of the free. Claiming that the corporation can't see the value of free. But if a content creator can't control if their works are free and scarce, how can they ever leverage the model?
You can always leverage the model. If you understand the benefit provided, understand the infinite components and the scarce components that are tied to them, you can always leverage the infinite to make the scarce more valuable.
how one can argue studios aren't in the movie business, but in the entertainment experience business but with DVD sales being a major portion of studio revenue and the quality of illegal copies increasing studios will be soon be left with options for zero scarce revenue
I already answered much of this above, but there are tons of scarce things associated with the movie business.
the argument for software makers is even more flimsy because they only make money on the use of their software.
Again, I think you haven't defined the market appropriately. The benefit isn't "software." It's usually something like "productivity." Take a look at Red Hat. They're making a lot of money thanks to free software. Take a look at IBM. They're making a ton of money thanks to free software. In both cases, they're using that software to make something else a lot more valuable (usually services and sometimes hardware).
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Re: Re: Sam - Mike
Just so I understand, Mike, your telling Sam he needs to change his business model. Bait comsumers with free music that will hopefully motivate them to spend more on concert tickets, T-shirts, etc...
In your post you state that this will cast a bigger net, hopefully grow a larger audience, essentially making a bigger fan base to spend the money on "Sam" related products?
I have to strongly disagree. There's a huge leap of faith your asking Sam to take by not selling music. You're assuming the fanbase will not be content simply downloading and listening to Sam's songs. I might be a little old fashioned, but I don't own a single concert T-Shirt, and most of the people I know don't either (30+ yrs old) The few they own where purchased from overpriced vendors at concerts with already overpriced tickets.
You expect to raise the price of these "Sam" related products and the concerts beyond the already inflated prices (example, Tool concert $40 for LAWN seats!!)and you expect people to redirect "CD" money on their own? Give me a break.
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Re: Re: Re: Sam - Mike
Just so I understand, Mike, your telling Sam he needs to change his business model. Bait comsumers with free music that will hopefully motivate them to spend more on concert tickets, T-shirts, etc...
Not quite. That's a part of it, but there's a lot more to it. It's not about "baiting" them. It's about exposing a much larger market to "Sam" and Sam-related products. Then, putting in place a business model to capture that interest.
I have to strongly disagree. There's a huge leap of faith your asking Sam to take by not selling music. You're assuming the fanbase will not be content simply downloading and listening to Sam's songs. I might be a little old fashioned, but I don't own a single concert T-Shirt, and most of the people I know don't either (30+ yrs old) The few they own where purchased from overpriced vendors at concerts with already overpriced tickets.
Again, I think you're misreading what I've said. I clearly state that there will be a percentage (perhaps a large one) that will do nothing more than consume the free stuff. You see commercials on TV, but you don't buy every product you see advertised, right? Are you somehow "stealing" from those advertisers? No. This is the same thing. The music itself is advertising for Sam-related products. So the fact that you aren't willing to pay for those things right now just means you're not a part of the immediate market. That's fine since the overall market for Sam-related products is much wider.
At the same time, Sam should also be looking at additional scarce products that you might be interested in.
In the meantime, you also ignore the other impact that I describe in the post, which is that if everyone else is giving away their music for free, Sam simply won't be able to sell his music at all, and won't be able to get any attention for it. Then what does he do?
You expect to raise the price of these "Sam" related products and the concerts beyond the already inflated prices (example, Tool concert $40 for LAWN seats!!)and you expect people to redirect "CD" money on their own? Give me a break.
No, that's a really bad example. I'm expecting there to be a lot more people interested in going to any particular event by any particular musician. Picking a musician who already commands a large fee isn't a good example. However, those musicians will have many opportunities to open up other lines of business as well. We've already covered examples where a band with a loyal following made a lot of money by opening up its own travel agency to help fans come see them. I'm not saying focus just on concerts. I'm saying focus on *ALL* of the ancillary scarce products.
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Don't conflate
I think your breakdown is dead on. Totally agree 100%.
But what I think you could clarify more is the difference between what is "smart business", and what is "currently legal". These two are not necessarily the same.
Again and again I've read you lambast Viacom or other content owners for sending takedown notices to YouTube. You clearly show that it's not smart business. But what you don't always make clear is they are legally entitled to do so.
Furthermore, I've heard very strong defenses of YouTube and how they're providing a service that enables smart businesses to get free promotion. But what you don't always make clear is they are quite possibly breaking the law in doing so.
So I entirely agree with and appreciate your excellent breakdown of how to do smart business in this new age. But what I'd like to see is greater attention to where smart business and the law conflict.
Specifically, I want to know how precisely the law should change, and instructions for how to help you in changing it. These items creep into your writing occasionally, but a more crisp and comprehensive review on the necessary legal changes would make a great addition to what you've provided in this article today.
-david
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Re: sam, the starving artist
Sam, you definitely bring up valid concerns that represent the pre-digital mind-set. But you need to break out.
You are right, there is a demand of music, but demand is inversely related to price. That means, since music is practically free to copy and distribute, the demand is high. An artist selling a creation for $20 lowers the demand of his product. (plus you waste resources trying to scare everyone into compliance). Mike is saying that since distributing the creation digitally is free and costs you nothing, it is essentially like an idea, and you will profit more by letting people distribute it for you to increase your fans who will then demand your non-scarce resources, namely YOU, your time, your effort. Your creations are no longer scarce, so you won't thrive if you do business as if they were.
Examples abound, but take Homestarrunner for free entertainment for example. They make money selling t-shirts, etc, but wouldn't have the market for the t-shirts if they had tried to charge to view their cartoons.
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Re: Don't conflate
I don't think there's any confusion that these content owners are entitled to send DMCA takedown notices to YouTube or other hosts of infringing content, as long as the content really is infringing. As far as YouTube breaking the law, I think if you go back and read some of the TD posts on the Viacom/Google suit, you'll see some good analysis of just why YouTube IS operating within the law.
At any rate, Mike and Co aren't lawyers, and this isn't a law blog - although they frequently link to exellent law blogs in their posts.
If you're interested in supporting a great organization that does a lot to protect fair use, internet privacy, etc - you should check out EFF - www.eff.org.
respectfully yours,
emi
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A few ideas
I always thought the best way to make bank in on cd's and such is to release them ahead of time. Release the CD a month before you release the torrent file or direct download or anything like that yourself. One thing people will pay for is exclusivity. Most everyone can catch whatever's on tv last night today on the internet, free. However people still watch it the night before from the couch because they wanted to be among the first to see it so they wouldn't be out of any discussions with their friends the next day at the watercooler.
It's the same with movies. I don't go to them in the theater because I can't get them anywhere else, I certainly can, its that I want to see it now.
I don't really believe its about scarcity or anything like that, but I'm no econimist.
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To the Sams of the World
This whole thing really comes down to the basic points originally made in the post:
1. You can make your market bigger by changing the way you make and sell music
2. If you don't (and you don't have to! - copyright gives you that choice), someone else will.
When someone else starts making money on music whilst giving it away (and they will), you will no longer be able to make money using your current model. It is at that point you adapt or bust. Such is evolution, in markets as it is in life on earth.
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Re: Re:
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Re: To the Sams of the World
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Re: Don't conflate
But what I think you could clarify more is the difference between what is "smart business", and what is "currently legal". These two are not necessarily the same.
Indeed.
Furthermore, I've heard very strong defenses of YouTube and how they're providing a service that enables smart businesses to get free promotion. But what you don't always make clear is they are quite possibly breaking the law in doing so.
On this one, I'm not sure I agree. How is putting your own content on YouTube breaking the law? Or are you saying YouTube itself breaks the law? I don't think they are as I'm pretty sure they're protected by safe harbors (and reasonably so...), but we'll have to see what the courts decide.
But what I'd like to see is greater attention to where smart business and the law conflict.
A good point, but I think part of the point is that businesses can free their content no matter what the law says -- so it's not so much of a matter of the law conflicting with smart business. It's just learning that just because the law is a crutch you can use, it doesn't mean you have to use it.
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Re: Re: Re:
How about it Mike? Angry dude has thrown the gauntlet down and essentially accused you of really wanting something other than what you said. Is that true?
Really not sure how to respond to that. Why would I want worse music out there? The whole point of the post, if you read it, is that this model would allow for a lot more music to be produced and it would likely be a lot better because there are many more ways for musicians to get attention and get money.
As for Angry Dude's other points, he keeps accusing me of being in PR, which I'm not (and never have been). I don't know where he gets that from, and I've told him before that it's wrong, and yet he keeps repeating it.
I've also pointed out that he focuses on insults and he never backs up anything he says. If he actually stopped the insults and had something useful to say then we'd respond. But making some weird claim saying that I want there to be worse music in the world when the whole point of the discussion is the opposite, hardly seems like something that requires a serious response.
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to all you sam haters!!
look, all i really want is for us to agree that i have a right to decide how i want to market/sell my music/content, and that you don't have a right to copy it. if we can agree on this, then who cares about the rest.
i realize that others can give their content away for free. i don't have an issue with that. i stand on a table and loudly support them!!
if their model causes me financial pain, i'm not going to run and tell them they have to sell their content, that they can't give their content away.. of course they can... it's their content...
as long as we all agree that copying someone else's content is wrong/theft, then we're pretty much ok.
now.. the question is, do we all agree on this!
mike, you might be right. an artist might make more $$$ by selling tshirts, and using music as advertsing! who knows. but these kinds of experiments are up to the owner of the content to decide if this is the direction that he/she wishes to go in.
as far as an artist not being able to sell music because someone else is giving their's away for free.. in some cases, maybe... in others, hell no. i don't give a damm who you are giving your music away for free.. if miles davis has a new album, i'm buying it... and let's be real, most of the music by most artists just isn't that good... there are plenty of bands in austin who'd give their music away, i still wouldn't listen to it...
different strokes/different folks!! but i'm 40+ years.
and this is the funny thing.. to be a bit sterotypical, i was probably involved with music/distribution on usenet, when most of you guys were in high school!
so i've been around distribution models for awhile.. the difference now, is that there seems to be a generation that really hasn't developed serious hardcore apps/content, and believes that they have a 'right' to access the content however/whenever they want...
sorry to diverge from the topic!!
peace.
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Some Problems with Mike's Model
Mike,
Very interesting mix of truths and wishful thinking. Reminds me of Internet Bubble 1.0 Thinking 101.
There are several large holes in your blanket theory, but I will try to briefly outline what I think are the two most significant ones:
1) Nothing is infinite. Even downloading mp3s. The marginal costs are small (my guess is a few pennies per song, at most, exclusive of the wait time on the part of the downloader). But fixed costs are fairly significant, including:
(a) technical costs, such as the cost of the server, the time and other resources to maintain the server and its connection to the Internet, programming costs, etc.;
(b) artistic costs, such as the time and effort it takes to write a new song, time taken to maintain or increase proficiency in singing or musical instruments, time taken to record the music and put it into digital format, etc.; and
(c) the opportunity costs, such as the cost of making music rather than spending time to make more money to pay the rent, time not spent with your friends and/or family, time spent not going to school or training to increase your earning power, etc.
As the volume (what you call market size) grows, these fixed costs become less significant. At a very large scale, say when you are selling out concerts at the MCI Center, they become very small. But 99% of artists never get to anywhere near that scale, so your "infinite good" theory does not apply to them.
2) By de-coupling what is charged for from what creates the most value for the most fans, you de-couple the financial incentive from the most valued activity.
I value new music. I would much rather have new music from 100 different bands than t-shirts from 100 different bands. And I will never have the opportunity to see most of the bands whose music I like because of travel costs, schedule conflicts, just being too old for the crowd, or because the band just does not want to play live shows.
Thus, your model essentially completely excludes any kind of significant financial reimbursement for fixed costs for musical artists who do not want to spend their time designing and making t-shirts and touring around the country. And, because your model only works well when the artist's audience gets to a certain size, it also encourages the crass commercialism we all love so much ;->.
While I would agree that "true artists" are not "in it for the money", I have yet to find anyone who prefers not getting paid over getting paid. Some people will create music even if they never make a cent from it. That's easier for trust fund bunnies than it is for the rest of us, but even some poor working stiffs will do this, at least for a while. But the lack of financial incentive for people to actually just create music (as opposed to making t-shirts and touring around the country) will mean that less music gets made. Because making new music is not free. It takes time and effort.
I think there is a better, more inclusive model that better rewards artists who just want to make music and get some kind of financial reimbursement for his time and effort, even if they cannot make a comfortable living exclusively from creating music.
The model I think would work better would incorporate DRM that kicks in after a certain number of plays (say, 10). This permits people to try music risk-free to the point they can be sure they want to continue to listen to it, before making a decision whether to reward the musician so they can keep listening to it. The basic music-sharing site model would work OK with this, as would a some kind of search engine (think Google) hosted site with a revenue-sharing arrangement with artists.
Mike may argue that, with this model, people will just get DRM-free versions of the songs they like and download those instead. But I think that if true competitive pricing comes into play (and I think it will), I think the per-song costs will settle in the 10 to 20 cent range, which really is not much of an incentive to hunt around the Internet for a DRM-free version of a song.
So in summary: Mike's thinking works for large-scale commercially-oriented artists, but my model (which I have posted here before) works for the other 98% of artists who just want to create music. Oh, and my model works for commercially-oriented artists, too, but just does not overwhelmingly favor them the way Mike's model does.
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Re:
Sam, if I light my candle from yours, have I stolen your fire? And will you thereafter go about in darkness without light so as to keep anyone from stealing your fire?
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Re: Some Problems with Mike's Model
Approaching zero; leading to other things that approach infinity.
Check out the fundamental theorems of calculus, it's all there. Unless you don't believe in calculus either.
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Re: Some Problems with Mike's Model
There are several large holes in your blanket theory, but I will try to briefly outline what I think are the two most significant ones:
Ok.
Nothing is infinite.
This is false. Plenty of things are infinite.
The marginal costs are small (my guess is a few pennies per song, at most, exclusive of the wait time on the part of the downloader)
You don't seem to understand what marginal costs are. The marginal cost is zero for infinite goods.
But fixed costs are fairly significant, including:
Indeed, fixed costs may be significant, but as your basic economics tells you, fixed costs have nothing to do with pricing pressure -- so bringing them up is fairly meaningless. I don't see how that proves anything wrong with my model (especially when you also seem to be confused about marginal costs).
(a) technical costs, such as the cost of the server, the time and other resources to maintain the server and its connection to the Internet, programming costs, etc.;
Right. That's a non-scarce resource. You charge for that part. As per my discussion above. That doesn't invalidate my argument, it supports it.
(b) artistic costs, such as the time and effort it takes to write a new song, time taken to maintain or increase proficiency in singing or musical instruments, time taken to record the music and put it into digital format, etc.; and
Again, these are a non-scarce resource, in fact, it's one of the examples I used in my discussion above. That doesn't invalidate my argument, it supports it. You're doing a good job of breaking apart the components into scarce and infinite resources, but you seem confused about how to then fit them into the model.
(c) the opportunity costs, such as the cost of making music rather than spending time to make more money to pay the rent, time not spent with your friends and/or family, time spent not going to school or training to increase your earning power, etc.
Again, this is discussed above (somewhat in the article, but in more detail in one of my other comments). Opportunity costs are a recognition of attention being a scarce resource. So, yes, you're right, but it fits into my model, which notes that scarce and infinite components make up any good or service. You just need to charge for the scarce ones, rather than the infinite ones.
Your complaint here seems to be that you think I'm saying you should give away the scarce goods too, but that's not what I said at all.
2) By de-coupling what is charged for from what creates the most value for the most fans, you de-couple the financial incentive from the most valued activity.
This is absolutely the opposite of what I say. I do NOT say you de-couple what is charged for with what creates value. I say that you recognize what the bundle is and how the free things increase the value of the non-free things. They're still very much "coupled."
I value new music. I would much rather have new music from 100 different bands than t-shirts from 100 different bands.
I never said you needed to have t-shirts from 100 different bands. You're saying you'd rather have new music from 100 different bands, and I'm saying, why not have music from 1,000 different bands rather than 100 (more value to you). You don't need to buy 100 different t-shirts. You don't have to do anything. But because that music is free, and everyone can have 1,000 different bands in their playlist than 100, you're more likely to find a larger group of people who are willing to pay for a t-shirt, or pay to go to a concert, or pay to get access to the musician, then if you're limited to only being able to afford the music of 100 different bands.
And I will never have the opportunity to see most of the bands whose music I like because of travel costs, schedule conflicts, just being too old for the crowd, or because the band just does not want to play live shows.
You don't have to see the bands. How many times do I need to repeat this: NOT EVERYONE NEEDS TO GO SEE THE BAND. NOT EVERYONE NEEDS TO GO BUY A T-SHIRT. But more people will be likely to, because the music spreads further.
And, it just means that there's more opportunity for them to create *OTHER* products that suit what you like. Say you really like the lyrics that a band comes up with. Perhaps they could set up an exclusive online group where they discuss the lyrics they're working on. Some people would pay to join that. Or perhaps if you pay to join their fanclub there's a chance they'll write a song for you.
You just set up the incentives in a way that more people are willing to pay for something. There are tons and tons of ideas on ways that bands can make additional money from all of this. Don't get so focused on just t-shirts or just concerts. The idea is that you have so many scarce resources (time, attention, which you discussed) and all of those can be charged for.
Thus, your model essentially completely excludes any kind of significant financial reimbursement for fixed costs for musical artists who do not want to spend their time designing and making t-shirts and touring around the country.
No. It absolutely does NOT say that. Perhaps read my post again, because I think you think it said something else. There are MANY MANY ways that you make money by selling the scarce resources. I've listed a few above. Another (and this has been done by a few bands) is to ask the biggest fans to pre-pay for the cost of creating new content. That new content (as you noted) is a scarce resource, so it makes sense to ask people to pay for it. But once it's been created, it becomes infinite, so then you set it free, to get more people interested and willing to pay for the next set of music.
The model I think would work better would incorporate DRM that kicks in after a certain number of plays (say, 10).
Why would you want to limit the audience? That's like saying that you want fewer commercials shown to people, even though the commercials are free.
This permits people to try music risk-free to the point they can be sure they want to continue to listen to it, before making a decision whether to reward the musician so they can keep listening to it.
That's a model that makes no economic sense. It simply opens up the opportunity for other musicians to use the model I'm discussing and cut the market out from the model you're discussing.
What are you more likely to do: listen to the band that *wants* you to hear their music and enjoy it, or listen to the band that sets up an annoying tollbooth for you?
So in summary: Mike's thinking works for large-scale commercially-oriented artists
Huh? My model is for any artist, but it works especially well for small scale artists -- the type that are totally cut out of today's ecosystem. The economic realities I'm discussing open up many more opportunities for smaller unknown artists to get noticed and make money for getting noticed.
I don't see how my model "overwhelmingly favors" large scale artists. I actually see it as the reverse. It should, in effect, limit the level of success for the large scale artists, but widen the overall playing field for all the other artists. That's because you no longer have those big artists able to capture the same monopoly rents that they were able to before because there's much more competition in the marketplace.
You make a lot of assumptions in your criticism that suggest what my model is still is not clear to you. I'd suggest you reread it and then if you still have questions, raise them. However, none of the points you made here invalidate my model.
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Re: Re: To the Sams of the World
But in order to control evolution you need to control the ecosystem. That's why they always argue for the need for control.
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Is the math ok?
~ mike pulls out all his hair in frustration and starts thinking about finding a hammer ~
For those who don't understand, another analogy is "An ounce from the many far out-weights a pound from the few". Lets use some simple logic. Where before an artist might have had (simple numbers) 100 fans, with Mike's model, they have the potential for 100,000 fans. If 100% of the 100 fans purchased artist related material at $50/ea, that would add up to $5,000 for the artist/label. Whereas if 10% of the 100,000 purchased artist related material at $50/ea, that would be $500,000. If you were an artist, and you could give away your music for a 1000x increase in fans and make $495,000 more than before, which would you choose?
In addition, labels could sign small artists and do the same thing. Currently a small artist doesn't stand to get as much attention as a mega star. With Mike's distro-model, the labels do the same thing with the little guys and make as much as they did before on the big ones.
In the model, using the 100,000 number, the labels have 90,000 customers to win over. All those customers who may be listening to free music. These the companies have the opportunity of turning into paying customers through merchandising or services or whatever. In the current model they have to make the 100 buying more than $50 worth of "X" each to make more money. In Mike's model, they only have to get a few more of the remaining 90,000 to buy something. This opens the opportunities up of offering a little something different to capture the attention of the other 90%. You have a lot more room to move and maneuver.
To recap, and just so everyone understands - give away the music, create a bigger fan base.
(customers) x (percent who buy) = (customers who will buy) ---
(customers who will buy) x (amount of purchase) = (money made)
100 x 100% = 100 --- 100 x $50ea. = $5,000
100,000 x 10% = 10,000 --- 10,000 x $50ea. = $500,000
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I'd like to point out that NOBODY has ever been sued or charged for DOWNLOADING content - authorized or not.
It's the uploaders they are going after...
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Re: Re:
Mike, dude, if you want to sell your t-shirts you need to feature the link prominently on your website's front page. That's basic website design.
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Re: Re:
Yeah, I'd like to see Mike put his money where his mouth is. Let's see him start up a website where he writes content that he gives away for free. And then let's see him try to make money by using that website as a promotional vehicle to sell ancillary services. Yeah, like that'd ever work.
:)
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Re: Re: Who's in control of the scarce?
Mike said:
"Again, I think you haven't defined the market appropriately. The benefit isn't "software." It's usually something like "productivity." Take a look at Red Hat. They're making a lot of money thanks to free software. Take a look at IBM. They're making a ton of money thanks to free software. In both cases, they're using that software to make something else a lot more valuable (usually services and sometimes hardware)."
Mike, dude, just give me a break, pleeeeze
There is nothing "free" (as in "beer") in this world.
The "free" software isn't quite free...
http://www.infoworld.com/article/03/11/10/HNredhatbalk_1.html
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Re: Re: Re: Who's in control of the scarce?
Oh but it is free. Just can't tell the truth can you?
Actually, the example you cite is an example of giving away a product with a marginal cost approaching zero in order to sell ancillary services. In this case, software support.
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Re: Re: Re: Who's in control of the scarce?
Mike, dude, just give me a break, pleeeeze
First off, angry dude, I think this is the first comment you've made in a long time that actually tries to add value to the conversation, so thanks.
There is nothing "free" (as in "beer") in this world.
You just posted here for free.
The "free" software isn't quite free...
An article from 4 years ago is your proof? Yikes. Have you looked at how well Red Hat has done since then?
Anyway, if you read the post above (which from what you're saying here seems clear you did not), you'd recognize that this article doesn't go against what I said at all. It actually supports it. Everything has scarce components and non-scarce components. The article you link to just shows Red Hat shifting around what they charge for and what's free. That's the model I discuss here. How does the fact that Red Hat is embracing exactly what I describe as a successful model show that I'm wrong?
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Comics
I've had a good time reading these comments but lots of them seem to miss the point. I think maybe a different example will help.
Think about comics. I read 5 different webcomics every day. I will point out that these comics are free and globally available and that I live far far away from those who write them (Australia). As a contented reader and vaguely social person when I find something really funny I can't help but share it. I link the comic to whoever is currently online.
All the writers have to do is be funny (their service) and I'm happy to use some of my resources to promote them. If I target my sharing to people who will enjoy the comic I have potentially increased their readership. This happens. Some of them also advertise scarce stuff. I bought some of it. In a global market there are lots of people willing to play if they know about you. The stuff was reasonably priced so I went for it.
You might be one of those people who just want to consume but that's ok. If you don't share then you're not part of the market. If you do share you're advertising. If your advertising leads other people to buy then it's worked.
Back to music, you use the songs as advertising. If your songs are good people will share them for you: "Have you heard this song? It's great!". It's getting quite common that real people share things faster and better than traditional advertising. I'm happy only listening to a few bands that I know I like and I like to show that I like them by wearing them or using their products.
Mike: you may like to check out www.tmbg.com and see how they fit your example. I might just wear them...
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Your argument was good, your basis of thinking accurate, but if you want people on your side don't use such a crappy example.
The music industry to me is called that for the soul purpose of the music. That's all I want, I don't want to see them, know their names, wear their shirts, scratch their CDs, or even read any commentary about their music. If I didn't understand it, or in it at least find something I identify with, then I wouldn't like it. So, why would I want the writer to explain to me what I understand or don't care about?
Maybe you'll come back at me saying there aren't enough people who think like me, and there probably aren't because too many people care about too much more than the music these days. Apparently it's cool to be a real fan and real fans watch the videos, look at the pictures, and buy the extra useless merchandise.
Your example succeeds completely if, and only if, the band releases tolerable but poor quality (bit rate) songs, and then completely controls the better quality songs. If they can't completely control those, any piracy resulting in court action with an intelligible lawyer will say the protected content of the band is not a bit rate number, it's the artistic effort put into a song that may or may not have a good quality final release. And, that to think something like that would be ludicrous, because to the same measure you buy a book for the words, and the author is paid for the words. You're not paying for, nor is the author responsible for, the font size, type, color, or even the quality of the pages it's being typed on.
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Re: Re: Re: Who's in control of the scarce?
Actually, there is. I have had people give me beer. Yes, that's right; I got free (as in "free beer") beer.
On the other hand, I have got a lot more free software than free beer. I'm currently running SUSE Linux, and I didn't pay one thin dime for it.
Yes it is. See above.
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Re:
That's all I want, I don't want to see them, know their names, wear their shirts, scratch their CDs, or even read any commentary about their music.
Again, that doesn't matter. If you don't want to buy those other things, that's fine. Others will buy stuff. You don't buy everything you see advertised, right?
But nothing in what I said means that the music industry still can't make money off of you. How do you find new music? Well, the music is available in lots of places, but if there's a good one that aggregates the music you like (recognizing that your time and attention are scarce resources), they can advertise on that service and there's money that's made off of your attention.
Again, the idea here is that there are MANY MANY different things related to music that all can make money -- and they make more money if the songs itself are free. The fact that you just want music doesn't change that.
Also, how do you want to listen to music? You probably want a good music player. Do you have an iPod? Yeah, you paid for that, right? It's a scarce good. The more popular the music is, the more popular the iPod is -- so a company like Apple now actually has incentive to pay some money to good musicians to make more good new music. So, by buying an iPod, you're actually indirectly funding musicians. And the model still works...
The point is this list goes on and on. Don't think that just because you don't want to buy a CD or see a concert or wear a t-shirt that you're not paying money into the music industry.
Your example succeeds completely if, and only if, the band releases tolerable but poor quality (bit rate) songs, and then completely controls the better quality songs.
Huh? That goes completely against my example. The songs are infinite, so no matter what the quality, you set them free. I'm not sure why you think my model would ever require anyone to control their songs. It's the opposite. You give it away and find ancillary services.
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Re: Re: Some Problems with Mike's Model
Mike, you are so far out from reality that it is hard to figure out where to begin to pull you back from Never Never Land. This is not 1998, Mike. Your BS does not hold water anymore. But the most basic hole in your whole theory centers around your basic misunderstanding of economics and business:
fixed costs have nothing to do with pricing pressure
Trust me on this, Mike. I have a Masters degree in economics from a good university and I have worked in the field and in business research for 15 years, for companies big and small. I was a student in the second graduate level course in existence on the economics of the Internet. I have worked on websites and marketing them and their digital products and services since 1994. Fixed cost DO matter. They DO impact prices. Any company that ignores fixed costs in their pricing model will fail. Period. I can point to at least 200 examples of companies that used your basic model in the 1990's and tanked. And at least another 100 since then who refused to learn their lesson and also tanked.
God, I hope I have never invested in any company that has listened to you!
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Re: Re: Re: Re: Who's in control of the scarce?
>>There is nothing "free" (as in "beer") in this world.
>You just posted here for free.
Oh, thank you, thank you very much for not charging my credit card...
But isn't it "free" as in "free speech" and not as in "free beer" ?
On a serious note, Linux is predominantly used as a server operating system, as opposed to Windoze
So they just sell it to their corporate and institutional customers, for some good money btw
Given the fact that Red Had didn't spend a dime (well, they spent some money, but not nearly as much as MS) on development, they can just give away their distro to the end users for free (as in "beer") but charge their corporate customers.
So it is not "free" for everyone and every use, it's just targeted to a different market.
Same way MS doesn't care too much about losing billions on end-user pirated copies if they can make huge profits from their corporate user base.
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Raging against the machine...
This paradigm shift may be a little too difficult for some artists to accept, because ( much like one responder who "only likes to make music") it literally forces them to become responsible businessmen.
Success will be determined by the relationship you have with your customers, and how good of a businessman you are in a very competitive market.
Distribution companies will need to accept it as well, and evolve into service providers with innovative marketing, or they too will litigate themselves out of the industry.
Quickly fading are the days of irresponsible primadonna "superstar" with his head in a mountain of blow, and soon-to-be-gone are the days of the behemoth record companies that churn out shitty quality products, screw over their contract artists and their customers.
I can't tell you how many times I've thrown away CD's because the production quality, replication quality, and/or production engineering have been horrendous. (...regardless of good or bad CONTENT)
Quite frankly, I see this as all quite refreshing, because it's all evolving in the right direction:
better availability
better accountability
better quality
better rewards for the artists/businessmen that create REAL art.
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Re:
Honestly, the people that rationalize theft of media-based IP are broke kids/dumb people that have nothing of value to offer in a similar fashion. Period. Alternatively, you have the crowd that thinks that "artists make too much" and that CDs are ripoffs because the content is "free" (as in the watch you stole from the jewelry store is also "free"). It's a backwards economic system brought about by people trying to rationalize their anti-social behavior due to their economic situation.
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