Building a market for digital movie rental

Seth Godin has a brief yet thoughtful take on the digital movie rental market.

Just about the first thing you learn in microeconomics is that over time, given competition, the price of a product will come close to its marginal cost. Understood by economists for hundreds of years, but not yet understood by the movie industry. Over time, their machinations will make as much sense as the British red flag laws (mandating a person walking in front of motorcars with a red flag) at the beginning of the 20th century. Until then, it seems the content industries will make the same mistakes – first the music industry, then movies and TV, then book publishing.

Frustrating, yet seemingly inevitable.

One of the things I used to wonder about was what would happen when the theory of disruptive innovation (see various articles by Clayton Christensen) became known. Would the effect disappear, like a Heisenbergian attempt at measurement, because managers now knew how it worked? After all, if you understand and recognize a pattern of development you can anticipate it and create a new business model. That is, if you are smart enough to read theory and willing to apply it to your industry rather than find excuses.

I think we see the answer in what is happening in the media industries – a truly disruptive innovation will ruin your business even if you know about it, because (as Weick phrases it) companies select and enact their environment. In other words, they choose what they want to see and discard anything that indicates a deviation of their prejudices. The death-spiral of the RIAA is but one example, with its desperate attempts to turn back time and preserve an anachronistic business model.

At least we now know that disruption is real, hard to prevent, and, for companies with no current stake in the business, a great opportunity, exploitable less for the novelty of the innovation than for the blinkers of the incumbents. Fun.

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