Marginal cost of zero or substitute goods – Redux!

(Or how I learned to stop worrying and love economics AGAIN!)


Following my original post – which induced some head scratching in some BBC people – I’ve revisited this idea in more detail:

If I have only a set number of hours in the day to watch/listen/read what you have to offer and I can now carry/sit at/watch a device which allows me to do any or all of these functions, and more, then the scarce resource isn’t the spectrum required to deliver the audio/video or the printing press required to deliver the text – but the scarce resource is my time. Using DRM to try and create a scarce resource (which is what DRM really tries to do) where there is none is flawed – more so, when there is a valid scarce resoruce already to hand!

Why is my time the scarce resource?

If I have a device which lets me treat all of these separate functions like one act – instead of having to decide whether I buy this newspaper or that one, whether to listen to this radio station or that one, whether to watch this programme or that one – I get to decide whether to read this newspaper or watch this programme, whether to listen to this station or read this article, etc. – then I can switch between one digital version of content and another without distinguishing between them as being completely different media. So I can substitute one for another.

Now the guys in the audio business are in competition with the video and text guys as well as the other guys in audio for a limited slice of my time. The video guys are in competition with the audio and text guys as well as the other video guys for a limited slice of my time. The text guys are in competition with the audio and video guys as well as the other text guys for a limited slice of my time.

Once content people start to realise that to make their content compelling they have to ensure that the text they have also has the appropriate audio and video links and vice versa, then they too realise that each bit of content is in some ways a substitute for the other – but by putting it all together in one space it makes the need for me to substitute one for another unnecessary. Make this offering compelling enough and it means I just use you for all my audio, video and text needs (free and paid-for) – thus instead of substituting one content/provider for another I see all your offerings as one complementary piece.

The convergence of electronic devices doesn’t mean I will eventually use only one device for everything but what it does mean is any of the devices I will have will be able to display all the various types of media and either I will swap the digital content between them quite easily or the digital content will live in the cloud and all the devices will be connected continuously to the cloud and to each other.

This gets more disrupted by some of the digital content being free of any economic cost. Therefore, because I can substitute one offering for another – I can read the blog entry which has the YouTube links to what I’m interested in or I can pay to read your article which has links to the official video which I also must pay for (and is in a proprietary format which will only play on one of the platforms I move my media around on) – you had better makes what you have worth paying for because there is no incentive for me to pay, if both cost the same amount of my time.

Now some make the case that all information should be free but that is not what my argument is. Just because something is free doesn’t make it worth spending my time on – but when all digital content (audio/video/text) can be reproduced and put online for little or no cost then your offering must compete with free. There is no point ignoring this concept or hoping to sue it or technologically defeat it out of existence.

What you can do is recognise that free is your starting point and then add value to various offerings that you have that make investing economically worthwhile – so you can have a free low quality version which has a link to the free medium quality (nagging) ad supported version which has a link to the paid-for high quality, personalised download from the content producer’s distribution system.

With the rapid growth in storage capacity, for a much cheaper price per megabyte, then people are making the argument that the cost of a digital reproduction is, in effect, zero – two much repeated examples at the moment are Chris Andersons’s “Free! Why $0.00 Is the Future of Business” and Kevin Kelly’s “Better Than Free”

Both build their arguments implicitly on the demise of geographically restricted rights agreements – which is premature. But what they do correctly show, is that by taking the thing that makes the Internet so scary for rights holders (anyone can copy my stuff) and make that into a virtue (anyone can copy my stuff) then you begin to use the Internet, it’s community and your digital content to great effect.

Another article that gets repeated is a TechDirt one – “Saying You Can’t Compete With Free Is Saying You Can’t Compete Period”. I think the assumptions in this are flawed – but it does use “the marginal cost is zero” argument.

Once your stuff goes digital you have to compete with free.

Free is not a bad/good thing in itself but it is important that you recognise it as your starting point.

Adding value to the experience is where the sweet spot is in terms of being on the upward growth curve.

And that is the argument I was making.

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