April 24th, 2002

bswing

What if the economics of the real world were like the economics of the digital world?

(Note: this was a note I wrote back in October, 2000 in a thread in David K. Levine's Economic and Game Theory Forum. The links below may or may not work.)

Logically, it makes sense that the ability to inexpensively make and
distribute copies of books/movies/music would decrease the incentive
to purchase legal copies, which would in turn decrease the incentive
of the creator to make the intellectual product in the first place. However, I would point out that the empirical evidence to date is mixed on whether Napster has harmed CD sales--for example, see this overview, Does
Napster Harm Music Sales
by About.com's Chris Sherman.

Some quotes of interest:

From the article, Napster
boosts CD sales
by Lisa M. Bowman, ZDNet News, July 21, 2000.


However, the Jupiter study refutes those charges, saying instead that
people who use services such as Napster are 45 percent more likely to
have increased their music buying than non-users.


On the other hand, from the legal brief,
A&M
Records v. Napster, Inc. United States District Court, Northern
District of California
at Gigalaw.com:


However, Jay's overall conclusion was that "[ t]he more songs Napster
users have downloaded," the more likely they are to admit or imply
that such use has reduced their music purchases.


Even if it could be shown that Napster decreases CD music sales, it is
not clear that the majority of citizens are better off with copyright law.

What if, once someone built Disneyland, anyone could recreate the
"Disneyland experience" almost instantly, almost free, of almost equal
quality as the "live" experience anywhere in the
world? (I think this is a better analogy than the "perfect counterfeit
ticket" scenario, since counterfeit ticket holders would impose additional
operating costs (increased parking lot size, litter, lines) beyond the initial
sunk costs; Napster users impose few, if any, additional costs on the
record companies.)

Assuming that this were possible, would we be better off allowing
anyone to recreate and distribute the "Disneyland experience", or
would we be better off by granting to the Disney company a legal
monopoly on the right to recreate and distribute the "Disneyland experience"?

One of the primary reasons that I think the legal recognition of
property rights for physical objects is a good thing is that it helps
prevent costly conflicts over inherently limited resources. I'm glad
that there are generally recognized rules to distinguish between
"proper" and "improper" exchanges of material goods--I would hate to
have to constantly defend my car against attempts to take it. In addition, my cars loss would mean sharp curtailment in my ability to travel, and the loss
of substantial fraction of my income.

However, I would be much more nonchalant, if the car cost me five
cents to begin with, and if a car "thief" could
"steal" my car by pushing a button, and creating an exact
duplicate 2000 miles away. Likewise, intellectual objects, once
created, can be duplicated and distributed at relatively small cost
(bandwidth, hard drive space, and operator time), so the argument from
scarcity is much less compelling.

Let's assume that unlimited copying/distribution were legally allowed. The question then becomes, why would Disneyland (or GM), invest in
development to begin with?

As with costs of music production and distribution, were instant duplication of Disneyland
and GM cars possible, I suspect that the cost of creation and
distribution would be dramatically lower than it is now.

However, that still leaves some initial cost to be paid for. And
certain kinds of intellectual products are quite costly to
create--"Titanic" cost >$500 million.

My suspicion is that such products will continue to be able to derive
revenue sufficient to continue to create from several different
sources. For example, a budding new band gives away their first 3
albums. After a while, assuming they are good, they will have a fan base. I expect that they will
then have several potential revenue streams:


  • advertising (commercial endorsements)
  • live performance (rock concerts)
  • convenience (anything that saves time, or reduces the cognitive complexity
    of getting the music. For example, Amazon can charge more because
    xthey have a reputation for having a wide selection, many people
    already have accounts there, and they're easy to use. Similarly with
    MP3.com.)
  • "Pay now, create later" schemes--a popular band refuses to
    release their next album, unless 100,000 fans send in $10.
  • auxiliary products (hats, t-shirts, etc.)


My prediction:

If downstream licensing were eliminated, while you may see a dramatic
change in the structure of the music industry, the quantity or quality
of music (as measured by samplings of music sales/music downloads, and
consumer surveys) available to the consumer would remain the same, but at much
lower cost and with greater convenience.

Aside:

It would be nice if it were legal to use real money to put one's money
where one's mouth is, via Robin Hanson's idea futures market proposal.
bswing

Business As Usual, During Alterations

Excerpt from an interesting Slashdot discussion:

Imagine that there was a "duplication device" that could clone whatever you put into it - a watch, a TV, a car, whatever. Imagine it only cost $.20 per use....

Interestingly enough, there was a science-fiction short story published in Analog ... exactly along those lines... some alien race dumped a matter duplicater and the plans for it on the human race, with the apparent intent of causing human society to self-destruct. Instead, the humans worked out the obvious solution: since anything could now be duplicated, the only thing that has value is unique originals, and the way to make a living is to design and create unique originals of things.

Ralph W. Slone (writing as "Ralph Williams"), "Business As Usual, During Alterations", Asounding, July, 1958. Great story.