Economics of abundance

Great article by Mike (whoever that might be) at Techdirt: If you can’t compete with free, you can’t compete, period. His argument is that there really is no difference selling digital and physical goods as long as scarcity is removed – price will over time move to marginal cost, and whether that cost is 0 or something higher doesn’t matter:

Say I own a factory that cost me $100 million to build (fixed cost) and it produces cars that each cost $20,000 to build (marginal cost). If the market is perfectly competitive, then eventually I’m going to be forced to sell those cars at $20,000 — leaving no profit. Now, let’s look at a different situation. Let’s say that I want to make a movie. It costs me $100 million to make the movie (fixed cost) and copies of that movie each cost me $0 (marginal cost — assuming digital distribution and that bandwidth and computing power are also fixed costs). Now, again, if the market is competitive and I’m forced to price at marginal cost, then the scenario is identical to the automobile factory. My net outlay is $100 million. My profit is zero. Every new item I make brings back in cash exactly what it costs to make the copy — so the net result is the same. It’s no different that the good is priced at $0 or $20,000 — so long as the market is competitive.

On the surface, this has validity from the producers’ point of view, but how about the demand side? If I have to shell out $20,000 for a new car, that is money I could spend om something else, no matter the profit. If I can get all the movies I want for free, I can consume as many of them as I have time for, at zero short-term cost to myself. The relationship between price and demand is not linear, at least not on an individual basis. And here comes the psychology part: If I decide to shell out 20K for a car, I will make a careful decision, compare features, and try to get as much as possible for my money. If the price of a movie is 0, I will just download a lot of movies and keep them around. The only investment will be in actually watching them, meaning that somehow the company selling them has to get value out of my watching the movie rather than purchasing it.

In-line advertising, it seems, coupled with a way to track actual viewings rather than purchases. Google Adsense in movies, click-on-the-hero’s-coat-and-buy-it, instant delivery and on-demand video services delivered over the web, taking responsibility for the whole viewing experience.

Now, if only my broadband service were up to snuff….

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