Economics and Abundance

When you are looking at the issues around publishers, media companies, copyright, and DRM, you are looking at economics. As a former economics professor that is something I like to think about, and I believe there are some interesting implications to the changing economics of these industries.

When I began my graduate studies at the University of Michigan, I remember one of my professors emphasizing that the only problems economists were concerned with were problems of scarcity. While there were situations where scarcity was not a factor, they were not situations where economists had anything to say. When you study how economists do what they do, you realize that it is because economics is about the calculus of choices. Scarcity forces people to choose.

One of the main concepts in economics is competition. This is one of those things that comes right from old Adam Smith, but is frequently misunderstood. That is because a certain type of conservative reads it as a justification for the notion that companies left to their own devices will somehow always do the right thing through the magic of the invisible hand. This is a vile calumny on Adam, who was much smarter than that. But 99% of the people who use Adam as a justification for their nonsense have never actually read what he wrote. And what he wrote is still relevant to the problems we see in the media content industries.

To start with, all of the wonderful benefits that are supposed to come from competition and the invisible hand require that a market exhibit what is called perfect competition. In short, this means that there are many buyers and sellers, with identical products, no barriers to entry or exit, and in general a complete lack of market power on everyone’s part. This will produce results that can be summed up as producing the maximum amount of product at the lowest possible price. It also implies minimal profits for the firms in that market. Not surprisingly, this is an outcome that all firms are completely against.

That is true for all firms, regardless of industry, so when you hear the leader of a major company talk about the benefits of competition, you should understand that all they mean by that is to get rid of any government oversight and get on with acquiring market power and large profits. In the case of the various media companies, they made their profits through control of supply and distribution. If you were a writer, for instance, you needed to could not easily produce and sell your work on your own. If you wanted to make a living from your writing, you needed to get a contract with a publisher. And only the publishers could get books into the stores. If you were a musician, you needed to get on a label, and only if you were on a label could you get radio play and get into the stores. The companies were the gatekeepers, and they used this power to make a lot of money. And that is the problem now.

You see, the Internet came along, and the companies are all finding that they are not necessary any longer. They are framing the issue as one of piracy, and that they are being victimized by theft, but this is largely a smokescreen. These industries are dying, of that there is no doubt, but it is not because of piracy. It is because the Internet has removed the need for gatekeepers. Now if you are a writer, you can post (and sell) your work on a Web site. And you can put your work on Amazon. The key is that you don’t need to actually print a physical book any longer. It is all bits, and bits cost nothing to produce. The writer needs to develop a relationship with her fans, but the Internet gives you a simple way to do that as well. In music something similar is happening. A musician can record their work with inexpensive, or even free software, distribute their MP3s from a web site, put a home-made video on YouTube, and they can make a living without ever going near a record company.

When books and music are bits, there is no longer any scarcity unless you can impose an artificial scarcity, and that is what DRM and the copyright wars are really about. While there is no question that piracy occurs, repeated studies have shown that it is not harming sales. What it does do is get your product out in front of people. And that is the key to understanding where we are now.

If economics is about scarcity, what is scarce now? It isn’t the bits, obviously. Those are infinite in supply. And it isn’t the supply of product. Writers are writing, and musicians are recording, in greater numbers than ever before. The scarce factor now is people’s attention. Precisely because there is so much material available now, getting through to the public is biggest problem artists face. As the writer Cory Doctorow has said, the biggest enemy of the artist is not piracy, it is obscurity. The artists that are already famous don’t have that problem, of course. Steven King does not need publicity to sell books, and the Rolling Stones don’t need help selling albums. But for them the new people coming along are competition , and they don’t have any incentive to help their competitors. The new people though, who are trying to break through, are doing everything possible to get their stuff in front of an audience. One the best stories about that concerns Paulo Coelho. His publisher was complaining about pirated copies of his books, and Paulo agreed it was a terrible shame. Turns out Paulo was the one putting out the copies. He knew that the more people who were exposed to his work, the more he would sell. And this story is multiplied many times over with other musicians and writers. So what we see today is that writers and musicians are frequently at war with the companies that supposedly represent their interests.

The thing is that companies that based their whole business model on controlling scarcity to their profit are completely at sea when it comes to abundance, and it will sink them. Anyone who is trying to make money as a gatekeeper is going to be wiped out by this abundance. We don’t need them. And while some of the first victims are media companies, it is going to affect other companies as well. I read an interesting story the other day about a talk by Simon Hampton of Google who made the point that neither companies nor governments have woken up to this. So the initial response by governments is to try and hold back the emerging regime of abundance in order to help the dying industries. But change is coming. Peter Diamandis’s new book Abundance: The Future is Better Than You Think will explore this in a number of different industries. What we don’t know is what the economics of this will be since we have no very good ideas about that.

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