February 23, 2007

How to Compete With Free

ipod shuffle

I read Mike’s latest article three times. Not because it’s hard to understand, but because it’s amazing stuff. I read it again and again and then I went through a whole series of his articles.

You must compete with free

Mike argues that “saying you can’t compete with free is saying you can’t compete.” This is mainly directed at the music industry, which refuses to innovate and instead chooses to complain. His contribution is not some opinionated rant: it’s an economic argument that is hard to counter with the usual copyright lament:

In a competitive market, the price of a good is always going to get pushed towards its marginal cost. That actually makes a lot of sense. As competition continues, it puts pressure on profits, but producers aren’t willing [to] (or can’t for very long) keep selling goods at a direct loss. Sunk (or fixed) costs don’t matter, because they’ve already been paid — so everything gets pushed to marginal cost.

If you produce what everyone produces, you don’t have a good chance of making a profit. And that implies that, if you produce something that is reproducible without additional cost, your product value sinks to zero. In order to be able to raise the price, you need to deliver unique value.

It’s not the Internet that is bad, it’s the music industry that is obsolete

Because of the very nature of contemporary sound storage technology and sound distribution, the music industry is forced to innovate and deliver additional benefit. It’s not the Internet that is bad, it’s the music industry that is obsolete. We simply don’t need a middle man between the artist and the consumer any more. The Internet makes it possible to buy music directly from the artist.

Bye bye, music industry. But, no, wait a second:

Companies look to add some value to the goods that makes their goods better than the competition in some way � and that unique value helps them command a profit. But, the nature of the competitive market is that it’s always shifting, so that everyone needs to keep on innovating, or any innovation will be matched (and usually surpassed) by competitors. That’s good for everyone. It keeps a market dynamic and growing and helps out everyone.

The music industry refuses to acknowledge the economic necessity of innovation

If the music industry manages to add unique value to its products, it will manage to stay in the game. Mike has different suggestions about what that value might look like. Yet in a time of irreversible economic change, the music industry refuses to acknowledge the economic necessity of innovation and instead tries to save its old territory. The record companies act like they’re out to protect the artists’ creative rights, but as a matter of fact the music industry is about making money. And so is the film industry, and so is the software industry, and so is the print industry.

Do ideas have any value?

But wait a second. Does that mean that digitally reproducible products don’t have any monetary value? How about inventions? How about ideas? Mike is very generous with his own ideas. In an article he wrote in October 2006, he explains why he doesn’t get upset about the fact that others are more successful with his idea than he is:

Those who keep harping on the importance of “property” and love to say that you can “steal” content might even say that this idea was “stolen.” That, obviously, is ridiculous. These are basic ideas that we have all realized [are] fundamental and a truth of economics.

Thing is, inventions and ideas don’t have any monetary value in and of themselves. Economically, creativity pays off when it adds value to a product. Today, more than ever, you need to be economically creative: you need to sell a good product and you need to constantly improve it in order to survive. You also need a good story to sell yourself. The days where all it took to make money was money are coming to an end.

My thought is your thought

The freedom of thoughts applies to inventions as well. Mike makes a strong point, using Thomas Jefferson to underline that “inventions cannot be a subject of property.” Jefferson, himself a great inventor, stated:

That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation. Inventions then cannot, in nature, be a subject of property.

Intellectual ownership

In times of low reproduction cost for ideas, pictures and sounds, intellectual ownership mainly goes back to authorship as a concept of intellectual integrity. But obviously that doesn’t mean that one can take any thought and sell it as one’s own. You can’t sell it for your own profit without rewarding the true author.

Copying is different to selling

Even though it’s technically possible, you still cannot sell Radiohead’s music or Kant’s texts as your own, as it is dishonest to do so. And in the same way, you cannot copy this text as your own text. You need to find your own words, and you need to reference the source of inspiration.

This is common practice among bloggers, artists, intellectuals and business men. And for a good reason. It is a lot of work.

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