Using free to sell more

My last post got linked with a very flattering writeup on Techdirt, which is pretty awesome.  The conversation in the comments, however, is a bit disappointing.  A lot of people still think that giving away the infinite goods means you give away everything.  They think that by giving away the content, you make it impossible to make any money on anything related to the content.

This is completely untrue.  There many differences between scarce and non-scarce goods.  The important one here is that the marginal cost (the cost to make one additional unit) of a scarce good is greater than zero, while the marginal cost of a non-scarce good is either zero, or close enough to zero to no longer matter.

Cheap or free goods have always been used to increase the value of more expensive goods.  For example, I worked at Boater’s World in Annapolis in high school.  One of my managers used to tell the young associates, “Whenever someone drinks a soda or a beer on the Chesapeake Bay, I want it to be in a Boater’s World can coozie“.  He gave them away all the time to good customers, or to someone making a large purchase.  The can coozies are cheap – Boater’s World charges 99 cents, so I imagine they cost something like 25 cents.  But sometimes a free coozie is just the thing someone needs to decide to buy that expensive new fishfinder.  And it’s always good to have things out there advertising the name of your business.

Of course, Boater’s World loses some money by giving the coozies away.  But in return, they have a sale on a larger item, and a satisfied customer, and marketing materials out where people can see them.  Even if you make the false assumption that every coozie you give away is a lost sale, meaning the marginal cost to the store is 99 cents rather than 25, it doesn’t take many large purchases by happy customers to recoup the losses.

But does giving away the coozies prevent all sales of anything else?  Of course not.  It also doesn’t force Boater’s World and all of its suppliers out of business.  And this is a situation where the marginal cost of the giveaway item is greater than zero, so the store does take a real loss when it gives them away.  Imagine how much better it would be for Boater’s World if the coozies cost them nothing to produce?

Infinite goods and artificial scarcity

It’s no secret that I read Techdirt a lot. I think they have a lot of good ideas, and a good attitude about things.  A lot of the ideas behind Manfred Macx are ideas that Techdirt talks about all the time.

I was arguing with a friend about this article, which talks about creating artificial scarcity in place of something in infinite supply.  They give an analogy – what if we had Star Trek replicators for food, so everyone in the world could always have enough food, and no one would have to pay for it?  Who, then, would take this food away from the starving?  My friend argued that this would be terrible, taking jobs from everyone who works in the food industry.

Unfortunately, it’s not a very good analogy.  There’s no real substitute for food – people have to eat.  Whether or not you consider  high-fructose corn syrup to be food, you can’t escape the need for calories to survive.  For the analogy to hold, we’d have to replace the entire music industry, or the entire publishing industry, with something free. No one is talking about doing this.

A better analogy would be if the replicator only made tomatoes.  You could have as many tomatoes as you wanted, they’d always be perfect and delicious, and they’d always be free.  This would put tomato farmers out of business. But these tomato farmers could likely start growing something else instead.  And what happens to the rest of the economy?  Pizza and pasta restaurants suddenly find that a major ingredient in many of their dishes just became free.  Now, for the same dish, they can charge less, or buy higher quality ingredients, or make more profit.  And if you’re a really talented cook specializing in tomatoes?  Your skills are now in very high demand.

And there is still a demand for the people who bring the tomatoes from the replicator to your table.  There is still a demand for the person who stews and cans the tomatoes, or dices and seasons them.  And all the other food items, the ones that aren’t in infitnite supply, still need people to produce, process, and distribute them.

This is what’s happening in the music industry, and starting to happen in the publishing industry.  Some parts of the industries are finding their functions obsolete.  Instead of looking at the money they could save with electronic distribution, and what good use they could put that money to, the industry is seeking new laws and regulations to limit the infinite supply so business can continue as usual.

Even if every single song, book, and movie was distributed digitally for free, there would still be a need for the music, publishing, and movie industries.  There would still be demand for editors, producers, marketers, and all sorts of other services that these industries have always provided.

Reasonable people aren’t calling for the abolition of the music, publishing, and movie industries.  They’re just asking these industries to look to the future, and stop trying to limit supply to protect obsolete business models.

Edit to add:  This post has been translated to Spanish by a reader.  My Spanish isn’t good enough to read the whole thing, but the parts I understand look good.

Well, that’s great for a band . . .

Anyone who reads Techdirt regularly will recognize many of the themes here, particularly those dealing with making money in an industry where it doesn’t make sense to charge for your content.  And every time they post about another band succeeding with a new business model, I try and imagine how that model could be applied to writers and books with any degree of consistency.

So far I’ve been frustrated.  Certianly there are opportunities for authors as we move into an age of reading digital books instead of paper ones, but I have yet to see or hear or imagine any model where authors will be compensated for their work at a level that will allow them to live while giving away electronic versions of all their work.  That is not to say that it can’t happen, or won’t, but it means that there is more work to be done, and it means that there is tremendous opportunity for someone who can solve the problem.

There is no question that people will continue to write if they aren’t being paid.  Thousands of fan-fiction sites, Nanowrimo, and any number of other groups, online and off, demonstrate that people like to write for themselves, or just for the sake of writing.

But if we can’t figure out how to pay writers enough to do it full-time, the quality of the writing will go down.  Sure, Nanowrimo has shown that one can write a substantial piece of fiction in a short time.  But to get something equal in quality to your average published novel takes more than a month.  And books like that will be hard to come by if no one can quit their day job and write full-time.

So readers and writers alike are in this boat together, in need of a new plan to compensate writers when people finally realize that it doesn’t make sense to pay for something you can copy instantly and perfectly, as many times as you want.

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