Tuesday, July 29, 2008

Unstoppable commodization of information goods

Information goods tend towards zero price for two reasons: one economic, one legal.

The economic argument is that the marginal cost of reproducing information is zero, and thus (as Yannis Bakos famously observed back in 1998) competition will eventually cause producers to sell their products at marginal cost, i.e. free. This is the ultimate outcome of commodization if there is nothing to prevent it — i.e. a cost structure that prevents self-defeating competition.

The same point is at the heart of the excellent treatment of information goods in the Shapiro and Varian book, Information Rules. It is also the nominal moral (and theoretical) justification for the argument “information wants to be free,” which is plaguing the newspaper industry.

However, the second reason for free is more practical: information is given away free because people can steal it. For more than a decade, we’ve called this the “Napsterization” of an information-based industry. New digital representations of technology make copying costless and error free. In this new digital regime, Napster (and Kazaa and BitTorrent) demonstrated that even if there are copyright laws on the books, enforcing them is another matter.

This was a topic of my first published academic paper (back in 1995), where I was thinking about the converse case — societies that didn’t believe in IP laws but might someday:

Societal attitudes toward intellectual property are less easily changed than a mere regulation, and enforcement of intellectual property rights depends as much on moral legitimacy as the enforceability of legal sanctions.
My coworker, Prof. Randy Stross of SJSU, wrote about a new area of copyright enforcement battles in his Sunday New York Times column: college textbooks.

The law is the same, but practical barriers had protected the textbook publishers thus far:
Compared with music publishers, textbook publishers have been relatively protected from piracy by the considerable trouble entailed in digitizing a printed textbook. Converting the roughly 1,300 pages of "Organic Chemistry" into a digital file requires much more time than ripping a CD.
There are even websites dedicated to stealing textbooks, like Textbook Torrents and Scribd.

As Randy points out, the textbook publishers have angered their customers through aggressive monopoly rent-seeking and extortionate practices such as planned obsolescence. While some of their responses (such as renting online textbooks) may reduce the incidence of piracy, others will just make things worse.

So the $100/copy prices are used to subsidize the manifest stupidity and inefficiency of their scattershot marketing process — i.e. the vast majority of losers in their catalogs. I have a dozen of sample copies of entrepreneurship and strategy textbooks on my shelves, sent to me unsolicited by publishers. I am no more likely to use them than I am to recommend the 4th best book on open source licenses.

With high up front costs and (relatively) low marginal costs, textbook publishing is like other media: the big winners are obscenely profitable and the losers have no hope of turning a profit. Thus, textbook publishers are exactly like record labels: they grew accustomed to high profit margins on winners both to cover their losers, but also to transfer wealth to shareholders and executives.

Without practical or legal protection, that business model will be as extinct as the dodo bird. It happened to CDs, it’s happening to textbooks, and movies are next. The publishers’ anti-piracy czar said “It is troubling that there is a culture of infringement out there.” No duh.

I’m really furious at both the publishers and these student self-appointed Robin Hoods, because together they are creating a generation of information pirates. To all these students studying organic chemistry: would you really prefer a world without IP — that instead of having a job producing information, you will instead have a job making things, delivering personal services or digging ditches? Is that really your nirvana?

A few of these pirates are socialists or crypto-anarchists deliberately attempting to destroy societal institutions. But most of these pirates are ahistoric teenagers without regard for economics or the law of unintended consequences.

At this rate, historians will someday look back at the 20th century as the high water mark for the value (and profitability) of information goods.

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