Supply, Demand, Piracy, and the little lies of Free
One of the more interesting debates I have gotten into recently is one regarding the laws of supply and demand (and cost) for movies and music in the current market. It’s an interesting debate mostly because the “guru of FREE!” Mike Masnick is involved, which means that we are in for some truly fun times. When it comes to bending the basic rules of business, Mike is all over it!
Anyway, the favorite theory of the “FREE!” crowd is that infinite distribution means that supply is infinite, and by the basic rules of supply and demand, that means that the price is zero. It’s a pretty simple concept, and it is exactly what the laws of supply and demand state. It is basic economics, first year, almost first week stuff. Nobody debates the math, but I certainly debate the theory.
First up, the infinite supply is based solely on piracy. Basically, the idea is that once music or a movie is released, it will be made digital and spread all over the torrent and other piracy sites, making it infinite, and thus having no market price anymore. This does fit the in the supply and demand model, but it requires that you accept one simple issue: The control and ownership of copyright materials is moot. It’s an amazing blind spot, one that everyone in this movement seems to be forgetting, that at the base of their idea is hundreds of thousands of people obtaining and trading movies and music that they have no legal rights on. It’s like basing an entire economy only on shoplifted goods, or only on what some guy will sell or give you out of the trunk of his car. Call it the “fell off the truck” economy. So we are basically required to suspend the laws of the world, stop calling it piracy and call it advertising, and everything is good. Wow.
Second, the cost difference in distribution of infinite goods versus physical DVDs or CDs isn’t that great. The market price of a DVD has little to do with the packaging, and everything to do with the content itself. Moving from one delivery method to another does not greatly affect the costs of the product. It is very deceptive to say “movies are free because infinite distribution lowers the marginal costs to nothing”, because of (a) the marginal cost (the cost of producing one more unit) is nothing only in piracy, and (b) marginal costs are only part of the full cost of the product. In a full legal download situation, the cost of bandwidth is still an issue, even if it is pennies per gig. There is no zero cost, unless you are operating illegally.
In the end, the major cost of a movie isn’t in the DVD, it’s in the production of the movie. It is clear that there is very strong demand for movies and music, and that the only reason prices would come to zero would be if infinite supply overwhelmed the marketplace. Even then, the infinite supply (piracy) is entirely dependant on the real supply (movies being produced), thus is not truly supply. It is similar to a store losing 10% of it’s inventory to shoplifting, so they reduce all their prices to zero because that is what the market demands. While it may work out in a classroom discussion about the supply and demand system’s extreme limits, reality says that there is no longer term business to be done giving away your sole product.
The current situation is tenable only because there is still a robust market for DVD and music sales, but in the case of music, the worldwide market in dollars is only at the same levels as it was 10 years ago. At some point, the content producers will change their business models, but I sincerely doubt it will be to giving away their candy for free.