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Kudos to Krugman
In the long run we are all the Grateful Dead.
That's Paul Krugman summarizing the economics of digital information. Damn, I wish I had written that.
Posted by Alex Tabarrok on June 6, 2008 at 01:47 PM in Economics | Permalink
Comments
You will, Alex, you will.
Posted by: Kieran at Jun 6, 2008 1:57:03 PM
The "Why Does Everything Suck?" blog points out some caveats--
http://whydoeseverythingsuck.com/2008/06/paul-krugman-joins-freetards.html
http://whydoeseverythingsuck.com/2008/04/artificial-abundance-and-new-free.html
Mark Cuban might disagree as well....
Posted by: Alex D at Jun 6, 2008 2:38:12 PM
Those models are not sustainable or even just scalable. Data will become too important to be entirely free.
Posted by: at Jun 6, 2008 3:49:47 PM
The Grateful Dead is a great example, but at the same time, why are these loss leader music models still so rare? The Grateful Dead appears to be a real outlier in the music industry, and partly I suspect it is because that model is so labor-intensive. Phish gave up after only 10 years or so, for instance.
Posted by: jason voorhees at Jun 6, 2008 4:21:41 PM
The Grateful Dead and Charles Dickens are obviously quite exceptional. Most of the hype about changing revenue sources only seems to apply to those who already have a following--Radiohead offering an album for donation, for example. How is a young author going to make a living again? Oh, paid admissions readings? I see, very well.
I'm not as upbeat as Krugman.
Posted by: Dedalus at Jun 6, 2008 5:22:35 PM
It took me a solid afternoon before it dawned upon me that he was paraphrasing Keynes.
Posted by: Jeff H. at Jun 6, 2008 5:40:20 PM
The majority of businesses don't give it away for free. Cable TV or computer software providers for example.
It is only when one is faced with piracy or when a product is widely available like news that a business considers free downloads. Essentially, a business must reinvent its business model.
While one can change the medium or method of delivery of a book, it is still essentially a book. I have the feeling that Paul Krugman will not be giving away his work any time soon. A book represents a work of uniqueness with no close equivalent. The nature of the work has not been altered by the method of delivery.
The internet actually leverages the ability of Mr. Krugman to reach a wider, global audience offering him greater economic opportunity to exploit expanded markets.
Posted by: Sophie at Jun 6, 2008 8:24:13 PM
I thought it was cute, and reminded me of the time before, when he actually was an economist.
Posted by: Macneil at Jun 6, 2008 8:38:36 PM
Alex D,
Thanks for the links. I agree with that blogger and disagree with Krugman. Live book readings as a revenue stream replacing books? He can't be serious!
I also don't see how anyone would even try to make a movie like Star Wars on a "free" sales basis.
The Beatles, and other groups, made many (great) songs that they simply couldn't ever hope to play onstage.
By de facto killing the copyright I can easily see how we can kill entire categories of modern entertainment.
Posted by: happyjuggler0 at Jun 6, 2008 8:51:59 PM
Chris "Long Tail" Anderson and Kevin Kelly on the economics of "free". Long, but each is worth reading:
http://www.wired.com/techbiz/it/magazine/16-03/ff_free
http://www.kk.org/thetechnium/archives/2008/01/better_than_fre.php
Posted by: at Jun 6, 2008 9:07:37 PM
Krugman's point about how technology is undermining the monopoly formerly known as intellectual property is a good one.
He fails to note, however, that Dickens was front and center in the copyright monopolists' battle against the "pirates."
He also overlooks the fact that, contrary to the legend he promoted, Dickens was paid royalties by three American publishers, including Harper & Brothers.
Krugman's tag line about the Grateful Dead is clever, but he might have pointed out that the Dead is suing Wolfgang's Vault for copyright infringement. John Perry Barlow, who has penned at least three articles gainsaying copyright, did not respond to an email I sent him last year about this contradiction.
Posted by: Bill Stepp at Jun 6, 2008 9:38:12 PM
Krugman's analysis of the economics of digital information is all wrong.
The problem is really simple: too much competition!
The record labels have to deal with all the new distributors in the market that offer their same product for free. The only way to compete with free is too match the price. There are simply too many competitors offering the same product! That's the damn problem, not digital anything.
If the musicians and the RIAA wanted to really solve the digital problem, they'd go after the suppliers, not the consumers. Stop the flow, and you'll see the prices go up again.
This has nothing to do with digital product, it has to do with too many suppliers offering the exact same product for free.
He's got it all wrong.
Posted by: Daniel at Jun 6, 2008 11:43:03 PM
It really has everything to do with perceived value. There's a balance between what's free and what the extended/recurring costs are. If the initial interface is done correctly, i.e., intuitive, there is great back-end potential. Especially if the documentation is good ... good enough to require a commitment of time -- but not quite good enough to cover the advanced features.
Software has evolved to the point where perceived value and market share are the key metrics.
Posted by: SheetWise at Jun 7, 2008 2:02:22 AM
Daniel-- I think you've got the best point of there. Though I'm probably an out lier in that tend to obsess over just a few musicians at any given time, my music listening over the past two or three years has been dominated by a single band no one has ever heard of that gives it music away for free. And this 'band' is more or less just one kid who did his best work in his parents basement and had nothing better to do with it then let people download it for nothing.
I dabble in recording music, and though I lack the necessary natural talent/drive to do much myself, it seems that with a laptop and some cracked software, plus a few hundred for a couple guitars and keyboard, pretty much anyone can create music that is virtually indistinguishable from professional recordings, so long as they're willing to put a chunk of their free time into it.
Posted by: mtc at Jun 7, 2008 4:42:13 AM
"The "Why Does Everything Suck?" blog points out some caveats--"
Well, that just ruined my day. I was planning to write the book on "Why Everything Sucks." Oh well.
Re: Krugman - I guess we are all futurists now.
What the digital does is reduce the cost to near zero of being a competitor. So, it's inextricably linked.
I've thought similar about bands for a long time. They are going to run out of fingers to stick in the dike. Merchandizing. I have a drawer full of shirts and only one or two say "Rush" on them. There is a lot of "allegiance space" in my life that is currently taken up by free T-shirts and athletics brands. It could easily be my favorite bands and authors. Individualization is the post-mass-production trend. Bands need to jump on that. However, the rise of customization will also undermine the network effect of being in on the hot music. Eventually, everyone might even make their own music, who knows. Bands can also tap untapped foreign markets. But, they won't be as able to do so without increasing their time commitments and costs. They need to figure out a way to monetize the fact that they still aren't a commodity and their fans want to support them, even moreso as their fans get older and wealthier. Hint-price discrimination. Free music may actually make some bands richer.
I'm not too concerned about it, though. Maybe there won't as many ultrarich artists putting out highly manufactured music. That wouldn't really put a dent in my music tastes. Maybe the George Lucas's won't be able to make a handful of movies and then just sit back and accumulate insane wealth. Does the typical author or musician make gobs of money today? I think its those we should be worried about? They may get a break. Mass marketing killed local music scenes and video killed the radio star. But the new economy based on personalization could cause a resurgence in local domination.
Posted by: Andrew at Jun 7, 2008 5:00:51 AM
I am surprised at the number of readers who think just because they can't envision the eventual free dissemination of information and entertainment that it will never happen. Russ Roberts had a great pod cast on the economics of "free" a few weeks ago.
Posted by: Billy at Jun 7, 2008 11:48:31 AM
No matter if Krugman is wrong, it was worth it just for the punchline.
Posted by: James Hanley at Jun 7, 2008 1:02:19 PM
'The majority of businesses don't give it away for free.'
Which is why business has such a hard time wrapping its mind around LAMP - Linux/Apache/MySQL/PHP - the combination which pretty much makes the Internet as we know it work. Certainly not Microsoft's pathetic 25% share of the web server market, nor its pathetic showing (basically 0%) in terms of Google's favored OS.
And the fact that humans like to share (ever had a delightful conversation you had to pay for, or billed someone for?) is the sort of reality that businesses in imaginary property fields have to combat at every turn.
As your comment shows. Individuals are perfectly capable of giving things away, at least in such areas ideas, music, software, or writing for reasons which seem to have nothing to do with a business model or business logic.
Because they don't.
Posted by: at Jun 8, 2008 4:59:06 AM
Daniel: Which suppliers would that be? Wal-Mart used CDs as a loss leader. They were willing to take a hit in order to attract customers into the store, and more specifically, into the electronics section.
With CD sales declining and CD racks taking up precious floor space, Wal-Mart told the record companies they had to lower their prices or else Wal-Mart would reduce their selection. Guess who blinked first? Hint: it wasn't Wal-Mart.
Andrew: Contrary to popular belief, the music industry is thriving. Too many people equate the recording industry (aka the RIAA) with the music industry. The media hears the whining from the RIAA and assumes that the music industry is not doing well. Fortunately for music lovers, the opposite is true. The record companies are losing some of their control and that means a hit on the bottom line. Time to change your business model.
Posted by: Vincent Clement at Jun 8, 2008 10:53:57 PM
"Daniel: Which suppliers would that be?"
The suppliers are the multitudes of people giving away music for free on p2p file sharing sites and the like. In essence, those people are a music store, and they give away their product for free. That's the problem.
When Radiohead produces a song, they make a digital copy of that song. That digital copy is the same product that can be found on anyone's hard drive. When someone opens up their copy of that product for others to download, they have essentially entered into the music business; they're a music store and their price point for their product is zero dollars.
In any market, whenever you have increased competition, and that competition offers the exact same product that you have, you will have to compete for buyers. If everyone on the block is selling their product for free, guess what, you're not going to survive if you're selling the exact same product for $15.
The only way to compete is for you to offer your product for free, too. And hopefully, they'll visit your site and buy your t-shirt.
That's the problem. Another side to that is increased competition from other musicians. But really, that's not a big of a threat to the musicians as someone offering their product for free.
If you want to increase the price of music, all you have to do is shut down the 'music stores'. Go after the suppliers. Go after the 'music stores' offering the product for free. It's the same thing for any market. Digital doesn't have anything to do with it; it's all about market dynamics.
Posted by: Daniel at Jun 14, 2008 11:40:42 PM
I don’t agree that digital contents should (or will have to) be free. Furthermore, I think if we require content to be free, we lose capitalism. I think idea, not capital, is the defining element of capitalism.
I wrote a blog post.
http://slowblogger.com/2008/06/wrong-paul-krugman-chris-anderson.html
Posted by: hyokon at Jun 24, 2008 9:36:46 AM
hyokon "we lose capitalism". Please read what Hayek has to say on intellectual property:
""" Just to illustrate how great out ignorance of the optimum forms of delimitation of various rights remains - despite our confidence in the indispensability of the general institution of several property - a few remarks about one particuilar form of property may be made. [...]
The difference between these and other kinds of property rights is this: while ownership of material goods guides the user of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it; it seems to me that the case for copyright must rest almost entirely on the circumstance that such exceedingly useful works as encyclopaedias, dictionaries, textbooks and other works of reference could not be produced if, once they existed, they could freely be reproduced.
Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents of invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period."""
The Fatal Conceit: The Errors of Socialism, 1988 (p. 35) Friedrich von Hayek
Posted by: Laurent GUERBY at Oct 13, 2008 7:27:44 AM
@Laurent GUERBY,
I did not say 'the current legal copyright system should be kept.' That's something I don't have a firm opinion about.
I said I think "if we require content to be free", we lose capitalism. Physical products and media contents are thought differently, but I think this is an intellectual error many people are making. You can read my blog post I linked in the previous comment.
I don't like the term capitalism, because I think idea and innovation, not the capital. is the defining factor of the free market.
Posted by: hyokon at Nov 21, 2008 11:25:02 PM
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Posted by: aion kina at Mar 18, 2009 9:34:43 PM
The record labels have to deal with all the new distributors in the market that offer their same product for free. The only way to compete with free is too match the price. There are simply too many competitors offering the same product! That's the damn problem, not digital anything.
Posted by: club penguin at May 19, 2009 9:31:34 PM
