Strange Economics at TechCrunch

Posted by: Stephen Wildstrom on October 4, 2007

A post by Michael Arrington on TechCruch today makes a rather odd argument to support the otherwise plausible conclusion that we are inevitably headed for free distribution of downloaded music. Arrington argues: “Like software, it doesn’t cost anything to produce another digital copy that is just as good as the original as soon as the first copy exists, and anyone can create those copies. Unless effective legal (copyright), technical (DRM) or other artificial impediments to production can be created, simple economic theory dictates that the price of music, like its marginal cost, must also fall to zero.”

Neither economic theory nor practice dictate that the cost of something should fall as the marginal cost declines. In fact, the unit variable cost of nearly all products consisting primarily of intellectual property—books, music, software, whatever—is extremely low, whether they of produced in physical form or purely as downloads. And they way businesses price just about everything assumes that margins will increase sharply, with gross margins sometimes approaching 100%, once the initial development cost is recovered. Were Arrington’s argument correct, software should all be free or nearly so and a copy of Harry Potter and the Deathly Hallows should fetch $3 or $4.

The music industry’s problem isn’t any sort of economic determinism but its failure to develop a business model that works. Lot’s of folks, including Radiohead, who are at what the record companies would consider the fringes of the business, are trying to do just that. Let’s hope they find it soon, because if the creators can;t be compensated, we’ll eventually have no music.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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