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The Economist on Oasis

Free doesn't mean worthless

I found this article (The Importance Of Zero In Destroying The Scarcity Myth Of Economics) and the subsequent debate about how to earn revenue from recorded music, quite fascinating:

So, for example, basic economics tells you that a free market will push prices towards their marginal costs. If their marginal costs are zero (as is the case with digital goods and intellectual property), then it says that price will get pushed towards zero. However, this makes people upset, and makes them suggest the model is broken when a zero is applied. They see a result where there is no scarcity, and it doesn't make sense to them since they've always understood economics in the context of scarcity.

However, the point is that if you understand the zero, there's nothing to worry about and the model works perfectly. It just requires a recognition that the scarcity doesn't exist. Instead, you have abundance. You can have as much content as you need -- and in that world, it makes perfect sense that there's no costs, because without scarcity there need not be a cost. Supply is infinite, and price is zero. That does not mean, however, that there's no business. Instead, it just means you need to flip the equation and use the zero to your advantage.

What struck me about many of the comments is that people seem unable to distinguish between cost and value.  The fact that the cost of distributing music (or video) via the Internet is close to zero does not mean that this content has no value. 

What about shareware?  People pay for that voluntarily. Or National Public Radio in the States, which is distributed free of charge, and funded in part by donations.  In other words, people are willing to pay for a service which they could get for free. 

If this works, the record companies really could become redundant.  You have to ask what value they are adding if artists can promote themselves on MySpace and elsewhere and then make music available for download.  Of course those big companies won't give up without a fight, and DRM is one weapon they will use. but perhaps they are just putting off the inevitable.    

Techdirt has a series of posts on this subject, which I think are worth reading:

Perhaps It's Not The Entertainment Industry's Business Model That's Outdated
Saying You Can't Compete With Free Is Saying You Can't Compete Period
Why I Hope The RIAA Succeeds
Step One To Embracing A Lack Of Scarcity: Recognize What Market You're Really In
Infinity Is Your Friend In Economics
History Repeats Itself: How The RIAA Is Like 17th Century French Button-Makers
A Lack Of Scarcity Feeds The Long Tail By Increasing The Pie

Comments

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fernando

A couple of years back I took a distance course with Berklee College and Dave Kusek (the guy who co-created MIDI) and you can read most of the content of that programme in the book The Future of Music.

One thing that stood out for me in going through the material and talking to the other students was that as a musician, if one recalibrated and saw a more realistic role for album sales (e.g., as a supliment to other music activities and a marketing exercise), then there was very little a big label could really offer (even as they try and repackage themselves as marketing and distribution organisations). The musician today can selectively outsource the things a label would provide, from production to mastering, to radio placement to PR as the project requires.

The challenge is still to protect some sort of revenue stream and maybe to come up with better payment methods for the small costs involved.

doug

exactly.

the media model of the future is truth through content, revenue through advertising.

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