Recording Industry Testing Out New Theory: It Deserves More Money Because It Lets You Transfer Music

from the the-audacity-of-greed dept

William Patry has a long, but fascinating, discussion on the latest trick being used by the recording industry to try to squeeze more money out of you: telling governments that because it's now willing to let people transfer the music they legally purchased between devices, it deserves extra money for it. To back this up, it's claiming that there's obviously value in being able to transfer music around, otherwise why would people want that ability. The audacity of such a statement from the industry shouldn't be understated. After all, this is the same industry that has, for years, ignored pleas from fans all over the world to get rid of DRM because it would make digital files increase in value. And, now, that the industry has finally been forced to recognize this, it seems to be claiming that all of the value belongs to the industry itself, and it's the government's job to hand over that "value."

The reasoning for this seems to go back to the psychological explanation for why the recording industry keeps getting itself into trouble (and it's similar to the story we had recently about bloggers worrying about a new aggregator). They assume that all of the "value" needs to be captured by them, and not anyone else. In economics, this is effectively an industry telling the government that it needs to be compensated for all of the positive externalities it created -- even if it's better off at an absolute level. Basically, the industry is so overvaluing its own content, that it assumes that any additional value that people get out of music, even if it's through no effort of the recording industry itself, should be entirely converted to more revenue for the industry. As an analogy, it's like your automobile maker demanding an ongoing cut of your salary, since without the automobile, you wouldn't be able to drive to work. Unfortunately, though, unless you're a copyright wonk, you might not even notice that the recording industry is trying to do this. Instead, it presents its case in a logical fashion, focusing on how much "value" it's suddenly creating by "allowing" people to transfer the music they already legally purchased to the device of their choosing.

Filed Under: copyright, externalities, recording industry, taxes, value, william patry

Just Because Content Is Free Doesn't Mean It's Worthless

from the let's-try-this-again dept

A few folks have asked me to comment on a recent post by Jonathan Handel, an entertainment industry lawyer, bemoaning the idea that content has become "worthless." If this sounds familiar, it's because he's merely the latest in a long line of folks to confuse price and value. That's unfortunate, too, because the piece starts off really solidly, with an extremely accurate understanding of the basic economics impacting the content industry. He notes, as we have time and time again here, the reason that price is getting driven to zero. His mistake, though, is equating price with value. He gets really close to recognizing this in his fifth point, where he notes that: "Computers, web services, and consumer electronic devices are more valuable when more content is available." In other words, that content does have value, it's just not reflected in the price (due to the infinite supply).

What's really unfortunate, though, is he then comes to exactly the wrong conclusion out of all of this. Rather than recognizing that the fact that content increases the value of so many other things opens up a ton of new business models, he goes off and makes a bunch of statements that simply aren't true about what's happening in the content industry. First, he claims that there's now less money to be made today in content creation. That's simply untrue. There's a lot more money being made in content creation than ever before -- but it's much more dispersed. It's no longer all being made by a few big content companies. Then he says (and this is almost laughable): "Another effect is that the market for professional content is becoming more concentrated and less diverse." That's simply not true at all. The number of people producing content for money is larger than at any time in history.

The problem seems to be that Handel only considers content made by big content companies as legitimate professional content. This isn't just elitist, it's wrong. What these new models have done is created legitimate ways for totally new forms of professional (and, yes, it is professional) content creation. Professional content is coming from many sources these days, and while that may be a threat to the old infrastructure -- it's not a threat to professional content, which has actually become less concentrated and significantly more diverse. Anyone who thinks there's less diverse content available these days isn't looking very hard.

Finally, he claims, oddly, that "audiences are shifting more of their spending to hit properties" which pretty much goes against everything that most of us are seeing online with "the long tail" and such things. Since Handel seems to only define media as big media and assumes that all content that is free is "worthless" it's no surprise that he'd ignore it in his calculation. But, the simple fact is that he's wrong about what's happening. Content may be becoming free, but that's opening up tremendous value (which drives more content creations) and that content is coming from a much longer tail of diverse and varied content producers. It may be troublesome for the big entertainment infrastructure he's used to dealing with, but it's hardly bad for the real content industry.

Filed Under: content, diversity, free, price, value, worthless

Competition Isn't War

from the scorched-earth dept

Ben Worthen theorizes that Microsoft is acquiring Yahoo not to increase its own profits but to damage Google. Worthen is suggesting that by slashing prices for its ads, Microhoo could "chip into Google’s profit center," slowing down Google's expansion. I haven't talked to Steve Ballmer about this, but I really doubt this what he has in mind. In the first place, it's not clear that aggressive price-cutting by Yahoo! would even hurt Google that much. Aggressive price-cutting only hurts your competition significantly if you've got enough inventory to satisfy the market at the new, lower price. But Yahoo! has significantly fewer eyeballs than Google, so even if Yahoo! gave away its ads for free, there would still be a lot of unmet demand that Google could cater to. Secondly, trying to "chip away at" Google's ad revenue seems like exactly the wrong way to attack Google. Google has plenty of cash on hand, and its still-astronomical share price makes it easy to raise more. Google employees have told me that the limiting factor for the company at the moment isn't money but the ability to recruit new employees.

More fundamentally, the war metaphor is misleading in this kind of discussion. In a competitive market like this one, companies make profits by creating value for their customers. Especially in a growing market like this one, there isn't a fixed pie to be divided. So there's no reason to think that lowering Google's profits would improve Microsoft's fortunes. Microsoft should acquire Yahoo! if the combined company will be more profitable than they would be separately. Obviously, competition with Google is a big factor to consider, but it gets things backwards to view hurting Google, in and of itself, as a win for Microsoft.

Filed Under: deals, mergers, value, war
Companies: google, microsoft, yahoo

How 'Free' Has Even More Value Than People Think It Should

from the and-so-it-goes dept

Earlier this year, we pointed to some of the psychological reasoning for those in the RIAA/MPAA's of the world (and their supporters) for arguing against giving stuff away for free, even when there was evidence that they could make more money doing so. In that case, psychological experiments showed that people don't act rationally when they think something is "unfair." That is, they'll take a worse absolute result, just to make sure that they're relatively better off.

Now there's a new book that just came out that highlights a related irrationality. This one is by behavioral economist Dan Ariely. Someone had told me a year ago to look out for Ariely's book, which I had forgotten about, but now that it's out, it appears to include discussions on some very interesting experiments. If you listen to the audio interview at that link, Ariely discusses an experiment he ran with children at Halloween. He first gave them all three Hershey kisses. Then he held up two Snickers bars -- one tiny one and one large one. He offered to trade them the small one for one kiss and the large one for two kisses. Most kids quickly made the trade for the larger Snickers bar -- which is a perfectly rational move.

He then changed the terms of the experiment. He offered to give kids the small Snickers bar for "free" or the large one for one Hershey kiss. Most kids now took the free small Snickers bar -- even though they are worse off in that case. Having two Hersheys kisses and the big Snickers bar providers more chocolate than three kisses and the small bar -- but the impact of "free" got them even more interested. Ariely ran more similar experiments (economist Tyler Cowen wrote about one recently) and found that again and again people overpay for free.

This is certainly an interesting finding, given all that we talk about the use of free in economics. If anything, this (bizarrely, I'll admit) makes the case even stronger for using free as a part of any business model. It suggests that people value something that's offered for free more than they should. That has enormous implications for the promotional value of "free." If you're using it that way, it actually increases the value relative to other things, despite the myth some people still have that if something is "free" it means it has no value. Anyway, Ariely's book, Predictably Irrational is now available. Ariely has also put up a blog about the book, though there's not much info there just yet.

Filed Under: behavioral economics, dan ariely, free, value

News Is Valuable, But Value And Price Are Two Separate Things

from the a-little-economics-lesson dept

This past weekend, David Simon, the executive producer of HBO's The Wire, and a former newspaper reporter, had an opinion piece in the Washington Post decrying the state of the newspaper business, saying:

"Isn't the news itself still valuable to anyone? In any format, through any medium -- isn't an understanding of the events of the day still a salable commodity? Or were we kidding ourselves? Was a newspaper a viable entity only so long as it had classifieds, comics and the latest sports scores? It's hard to say that, even harder to think it. By that premise, what all of us pretended to regard as a viable commodity -- indeed, as the source of all that was purposeful and heroic -- was, in fact, an intellectual vanity."

It's a rather common refrain, but to understand the challenges the newspaper business faces, it's important to dispel some of the myths that are a part of that refrain. The first is a concept that is quite important, but often gets lost: price and value are two separate things. They are not the same. Value drives demand -- but price is set by the intersection of demand and supply. If supply is abundant, it's not going to matter how valuable your product is, price will get pushed towards zero. So, Simon is incorrect in thinking that news isn't valuable or that it was an "intellectual vanity" to think so. News and reporting are valuable. The problem, though, is that it's quite abundant these days, and so the price that people are willing to pay gets pushed towards zero.

That's not necessarily a bad thing. While Simon goes on to complain about the state of news coverage today, the problem isn't that people don't value the news, but that the people who run newspapers haven't figured out how to properly adjust to the marketplace they're facing. We're seeing plenty of evidence that there's lots of money to be made in the news business, for those who understand how the market is changing and how to embrace it. There are plenty of ways to provide news the way people want to consume (and interact with) the news, rather than doing it the same way it was done for decades. It's not that news isn't valuable. It's that newspapers haven't figured out how to adapt to the changing market.

Filed Under: business models, economics, newspapers, value